Washington Trust Bancorp, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Washington Trust is a bank holding company operating in Rhode Island, eastern Massachusetts, and Connecticut, with commercial, residential, and consumer banking and wealth management businesses.
Financial performance and condition
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net income; diluted EPS | $10.9 million; $0.64 | $11.0 million; $0.65 in Q1 2015 |
| Net interest income | $27.7 million | $25.7 million in Q1 2015 |
| FTE net interest margin | 3.24% | 3.18% in Q1 2015; excluding specified loan fees, 3.12% versus 3.14% |
| Noninterest income / expense | $14.6 million / $25.5 million | $14.0 million / $23.5 million in Q1 2015 |
| Total assets | $3.84 billion | $3.77 billion at December 31, 2015 |
| Total loans; deposits | $3.05 billion; $2.88 billion | Loans $3.01 billion; deposits $2.93 billion at December 31, 2015 |
| FHLB advances; junior subordinated debentures | $487.2 million; $22.7 million | FHLB advances $379.0 million; debentures unchanged at December 31, 2015 |
| Shareholders’ equity; total risk-based capital ratio | $381.3 million; 12.45% | Equity $375.4 million; ratio 12.58% at December 31, 2015 |
Net cash provided by operating activities was $23.1 million; investing activities used $73.7 million; financing activities provided $47.9 million. Cash and cash equivalents ended the quarter at $94.9 million, down $2.7 million from the beginning of the period. The filing reports returns on average equity and assets of 11.50% and 1.16%, respectively, versus 12.54% and 1.23% in Q1 2015.
Material changes and operating drivers
- Net interest income rose 8% year over year, supported by loan growth, lower money-market deposit costs, and $1.1 million of loan prepayment and other fees, versus $341,000 a year earlier. A significant portion of 2016 fee income came from one commercial relationship.
- Loans grew $33.9 million from year-end, primarily from commercial real estate growth. Deposits fell $54.6 million, mainly due to money-market outflows; FHLB advances increased $108.2 million.
- Wealth management revenue grew 9% to $9.2 million, partly reflecting the Halsey acquisition completed in August 2015. Mortgage banking revenue declined 15% to $2.2 million as residential loan sales fell.
- Noninterest expense increased 8%, including higher salaries and benefits, Halsey-related costs, and $431,000 of debt prepayment penalties. The penalty reduced after-tax earnings by approximately $272,000, or $0.02 per diluted share.
- Net charge-offs were $1.4 million, or 0.19% of average loans, versus $213,000, or 0.03%, in Q1 2015; the 2016 amount included a $1.2 million charge-off on one commercial relationship. The allowance was $26.1 million, or 0.86% of loans, versus $27.1 million, or 0.90%, at year-end.
Outlook, risks, and contingencies
- The filing provides no formal earnings or revenue guidance. Management said liquidity remained within internal target ranges and believed funding sources met anticipated needs. It expected $132,000 in net interest savings for the remainder of 2016 from replacing prepaid FHLB advances with lower-rate brokered deposits.
- Management expected full-year 2016 defined-benefit plan costs to decrease by $1.2 million versus 2015, including approximately $515,000 attributable to a revised “spot rate” calculation approach. The company opened a Providence branch in January 2016 and expected to open a Coventry branch in 2017.
- Interest-rate sensitivity simulations estimated first-12-month net interest income changes of +2.05% under a 100-basis-point increase and −2.34% under a 100-basis-point decrease. Management cautioned that modeled results depend on assumptions about deposit pricing and balances, loan and securities prepayments, and a static balance sheet.
- Nonperforming assets were $18.8 million, or 0.49% of assets, down from $21.8 million, or 0.58%, at year-end. Potential problem loans were approximately $8.4 million. Troubled debt restructurings totaled $16.6 million, with 81% concentrated in three relationships.
- Available-for-sale trust preferred securities had $6.7 million of unrealized losses. Management attributed these primarily to wider market spreads, said issuers remained current on payments, and concluded it expected to recover amortized cost and did not consider the securities other-than-temporarily impaired. Further credit or market deterioration could lead to write-downs.
- Off-balance-sheet commitments included $652.1 million to extend credit and $5.7 million of standby letters of credit. The company reported ordinary-course legal proceedings that management did not expect to materially affect financial position or results. No material risk-factor changes were reported.
- Washington Trust and the Bank exceeded regulatory well-capitalized minimums. The company was still evaluating the effects of several newly issued accounting standards, including revenue recognition, financial instruments, leases, and share-based compensation.
Most important facts for investors to verify
- How much of net interest income growth is repeatable after excluding unusually high loan prepayment and other fees, including fees tied to one relationship.
- Whether deposit outflows persist and whether increased FHLB borrowing changes funding costs or liquidity flexibility.
- Credit performance following the large commercial charge-off, including trends in past-due loans, potential problem loans, and the concentrated TDR relationships.
- Whether wealth management growth from Halsey offsets underlying asset-based revenue pressure and higher related expenses.
- The credit outlook and valuation risk for trust preferred securities with substantial unrealized losses, and any resulting impairment or capital effects.
- Whether actual interest-rate, deposit, and prepayment behavior remains consistent with management’s simulations and liquidity expectations.