Washington Trust Bancorp, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. Washington Trust is a Rhode Island-based bank holding company serving Rhode Island, eastern Massachusetts and Connecticut through commercial, residential and consumer banking and wealth management. This unaudited filing covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods unless noted.
Financial performance and condition
| Metric | Q2 2016 | Six months 2016 |
|---|---|---|
| Net interest income, GAAP | $26.8 million, up 3% | $54.5 million, up 5% |
| Net interest margin, FTE | 3.05%, versus 3.15% | 3.15%, versus 3.16% |
| Net income | $11.1 million, versus $11.5 million | $22.0 million, versus $22.5 million |
| Diluted earnings per share | $0.64, versus $0.68 | $1.28, versus $1.32 |
| Noninterest income | $15.9 million, up 4% | $30.5 million, up 4% |
| Noninterest expense | $26.0 million, up 7% | $51.5 million, up 8% |
Q2 return on average assets was 1.14% and return on average equity was 11.50%, compared with 1.27% and 12.88% in Q2 2015. H1 figures were 1.15% and 11.50%, versus 1.25% and 12.71%. FTE net interest margin excludes the impact of taxable-equivalent adjustments; the filing reports FTE margin of 3.05% for Q2 and 3.15% for H1.
Balance sheet and funding. Total assets were $3.92 billion at June 30, up $145.5 million (4%) from year-end. Loans totaled $3.08 billion, up $67.8 million (2%), with commercial real estate loans up 10% to $1.16 billion. Deposits were $2.79 billion, down $144.9 million (5%); money market accounts fell $147.6 million. FHLB advances rose $261.0 million to $640.0 million. Shareholders’ equity was $388.3 million; book value per share was $22.73. The allowance for loan losses was $25.8 million, or 0.84% of loans, versus $27.1 million, or 0.90%, at year-end.
Cash flow and liquidity. For H1, operating activities provided $20.7 million, investing activities used $102.6 million, and financing activities provided $104.3 million. Cash and cash equivalents increased $22.3 million to $119.9 million. Management said liquidity remained within internal target ranges and funding sources were expected to meet anticipated needs. The Bank reported $523.3 million of remaining FHLB borrowing capacity, in addition to a $40 million unused line.
Capital and credit. The company’s total risk-based capital ratio was 12.43%, versus 12.58% at year-end; the Bank and holding company exceeded applicable regulatory minimums for well-capitalized status. Nonperforming assets declined to $18.8 million (0.48% of assets) from $21.8 million (0.58%). Nonaccrual loans were $17.2 million, down from $21.0 million. H1 net charge-offs were $2.2 million, including a $1.2 million commercial mortgage charge-off in Q1 and a $737,000 commercial and industrial charge-off in Q2. Potential problem loans totaled approximately $7.9 million, primarily one commercial and industrial relationship; management described it as well-secured and current.
Changes, outlook and risks
- Revenue growth was supported by higher net interest income and wealth management fees. Wealth management revenue rose 6% in Q2 and 8% in H1, partly reflecting the Halsey acquisition; mortgage banking revenue declined 1% and 8%, respectively, amid lower mortgage loan sales.
- Expense growth outpaced revenue growth. Salary and benefit costs rose 12% in Q2 and 9% in H1, reflecting Halsey, severance and other business-line costs. Management also cited higher intangible amortization following the acquisition.
- H1 results included a $589,000 tax-exempt gain from life insurance proceeds, $425,000 of Q2 severance costs, and a $431,000 Q1 FHLB debt prepayment penalty. Management said these items together reduced H1 diluted EPS by $0.01. The FHLB prepayment was expected to yield $132,000 of net interest savings for the remainder of 2016.
- Management identified no formal earnings or financial guidance. It described plans to build market share and pursue selected growth markets; a Providence branch opened in January 2016, a Coventry branch was expected in 2017, and a Wellesley mortgage office opened in July 2016.
- Key exposures include interest-rate and funding risk, credit quality and real estate values, market-related wealth management revenue, and mortgage origination volumes. Management’s simulations showed estimated net interest income increases under rising-rate scenarios and declines under falling-rate scenarios; for a 100-basis-point decrease, estimated NII fell 2.97% over months 1–12 and 7.28% over months 13–24. These are model estimates, not forecasts.
- The securities portfolio included $24.5 million fair value of individual-issuer trust preferred securities with $5.3 million of unrealized losses; management considered these temporary and expected to recover amortized cost. The filing cautions that further credit or market deterioration could result in future write-downs. The company reported no material change in previously disclosed risk factors and said ordinary-course legal matters were not expected to materially affect results.
Most important facts for investors to verify
- Whether deposit outflows and increased FHLB borrowing persist, and their effect on funding costs, liquidity and net interest margin.
- Commercial real estate growth and geographic concentration: 93% of commercial real estate loans were in Rhode Island, Connecticut and Massachusetts.
- Performance of nonperforming, restructured and potential problem loans, including the $7.9 million potential-problem balance and the effect of further charge-offs on allowance adequacy.
- Whether wealth management growth excluding Halsey, client asset flows and market performance support recurring fee growth.
- Whether expense growth moderates and how much reported earnings depend on acquisition effects and unusual items.
- Credit ratings, payment performance and valuation of the trust preferred securities, as well as sensitivity of securities values and earnings to interest-rate changes.