Washington Trust Bancorp, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Washington Trust is a regional bank holding company operating in Rhode Island, eastern Massachusetts, and Connecticut, with commercial, residential and consumer lending, deposit-taking, and wealth management businesses. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $26.0 | $24.5 | $51.7 | $48.3 |
| Net interest margin, FTE | 3.15% | 3.35% | 3.16% | 3.34% |
| Provision for loan losses | $0.1 | $0.45 | $0.1 | $0.75 |
| Noninterest income | $15.3 | $12.8 | $29.3 | $32.2 |
| Noninterest expense | $24.3 | $22.4 | $47.8 | $51.7 |
| Net income | $11.5 | $9.8 | $22.5 | $19.1 |
| Diluted EPS | $0.68 | $0.58 | $1.32 | $1.13 |
Q2 diluted EPS increased from $0.58 to $0.68; six-month diluted EPS rose from $1.13 to $1.32. Q2 returns on average equity and assets were 12.88% and 1.27%, respectively; six-month returns were 12.71% and 1.25%. Cash dividends declared were $0.34 per share in Q2 and $0.68 per share for the first half.
Revenue drivers included loan growth, higher wealth management fees, increased mortgage banking activity, and higher gains on interest rate swaps. Q2 wealth management revenue grew 4% to $8.9 million; mortgage banking revenue rose 61% to $2.7 million. Six-month figures increased 5% and 81%, respectively. Higher salaries and benefits, occupancy, equipment, and outsourced services partly offset revenue growth.
Balance sheet, credit, and liquidity
- Assets and lending: Total assets were $3.64 billion at June 30, up $57.6 million from year-end 2014. Loans totaled $2.93 billion, up $69.3 million (2%); commercial real estate growth was a major contributor.
- Deposits and borrowings: Deposits were $2.74 billion, down $15.7 million from year-end. FHLB advances were $471.3 million, up $65.0 million. The company reported approximately $537 million of remaining FHLB borrowing capacity and a separate unused $40 million line of credit.
- Cash flows: First-half operating cash flow was $28.9 million, investing cash outflow was $64.3 million, and financing cash inflow was $39.1 million. Cash and cash equivalents ended the period at $84.1 million.
- Credit quality: Nonperforming assets were $16.5 million, or 0.45% of assets, versus $17.1 million and 0.48% at year-end. Nonaccrual loans declined to $15.1 million. Total past-due loans increased to $24.0 million, or 0.82% of loans, from $18.1 million and 0.63% at year-end.
- Allowance: The allowance for loan losses was $27.6 million, 0.94% of loans, versus $28.0 million and 0.98% at year-end. First-half net charge-offs were $0.5 million. Management considered the allowance adequate; estimates depend on credit conditions, collateral values, and management judgments.
- Capital: Shareholders’ equity was $359.2 million; the equity-to-assets ratio was 9.86%. The company’s total risk-based capital ratio was 12.78%; the Bank’s capital ratios exceeded the regulatory thresholds for “well-capitalized.”
Changes, outlook, and significant items
- Net interest income increased, supported by loan growth and lower funding costs, but FTE net interest margin declined 20 basis points year over year in Q2. Management attributed margin pressure to the low-rate environment, lower asset yields, and runoff of higher-yielding assets. It noted that asset yields could continue to decline as loans reprice and higher-yielding balances run off.
- Management described regional credit quality as stable to improving and liquidity as within internal target ranges. No formal earnings or revenue guidance was provided.
- Interest-rate simulations estimated net interest income would increase 1.40% over the first 12 months under a 100-basis-point rate rise and decline 1.08% under a 100-basis-point fall, relative to an unchanged-rate scenario. The filing cautions that model assumptions, deposit behavior, prepayments, and future balance-sheet changes may cause actual outcomes to differ.
- The August 1, 2015 acquisition of Halsey Associates, a wealth manager with approximately $850 million in assets under management and about $4.0 million in annualized revenue, occurred after quarter-end. Consideration included $1.7 million cash, $5.4 million in shares, and an estimated $3.0 million in future earn-outs. Management expected the transaction to be modestly accretive to EPS beginning in late 2015; approximately $600,000 of additional acquisition expenses were expected in Q3.
- Comparability with first-half 2014 is affected by the merchant-processing business sale: 2014 included a $6.3 million pretax gain, related merchant-processing revenues and costs, and $6.3 million of FHLB debt-prepayment penalties. The company also received a $250,000 settlement in Q2 2015 related to a trust-preferred security.
- Unrealized losses on trust-preferred securities were $4.1 million at June 30, concentrated in financial-sector issuers; some holdings were below investment grade. Management expected recovery of amortized cost and did not consider them other-than-temporarily impaired, but warned that deterioration could lead to future write-downs.
- Other disclosed risks include interest-rate and market volatility, loan demand and credit losses, regional economic conditions, competition, regulatory or accounting changes, and the market value of wealth-management assets. Legal proceedings were described as ordinary-course matters not expected to materially affect results. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether loan growth can continue without a further deterioration in delinquencies, nonaccrual loans, or credit-loss provisions.
- Whether deposit funding and FHLB borrowing remain adequate and cost-effective as deposits declined and advances increased.
- How continued low rates, asset repricing, and deposit competition affect net interest margin and earnings.
- Whether the Halsey acquisition delivers the expected growth and modest EPS accretion, including earn-out and integration costs.
- Whether trust-preferred security valuations or issuer credit quality worsen enough to require impairment charges.
- Underlying year-over-year performance after accounting for the 2014 business-sale gain, associated costs, and debt-prepayment penalties.