Washington Trust Bancorp, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet figures are as of March 31, 2015, compared with December 31, 2014 unless noted. Washington Trust is a Rhode Island-based bank holding company providing commercial, residential and consumer banking and wealth management services in Southern New England.
Financial performance and condition
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior date |
|---|---|---|
| Net income | $11.0 million | $9.3 million in Q1 2014 |
| Diluted earnings per share | $0.65 | $0.55 in Q1 2014 |
| Net interest income | $25.7 million; fully taxable equivalent (FTE) $26.4 million | $23.8 million GAAP; FTE $24.5 million in Q1 2014 |
| Net interest margin | 3.18% FTE | 3.34% FTE in Q1 2014 |
| Noninterest income / expense | $14.0 million / $23.5 million | $19.4 million / $29.3 million in Q1 2014 |
| Cash flow | Operating +$9.3 million; investing −$4.0 million; financing +$3.4 million. Cash and cash equivalents ended at $89.0 million. | Q1 2014: operating +$1.4 million; investing +$23.7 million; financing −$2.3 million. Ending cash and cash equivalents $108.2 million. |
| Total assets / shareholders’ equity | $3.603 billion / $353.9 million | $3.587 billion / $346.3 million at December 31, 2014 |
| Loans / allowance for loan losses | $2.881 billion / $27.8 million; allowance 0.97% of loans | $2.859 billion / $28.0 million; allowance 0.98% at December 31, 2014 |
| Deposits / FHLB advances | $2.783 billion / $386.0 million | $2.755 billion / $406.3 million at December 31, 2014 |
| Capital and returns | Total risk-based capital ratio 12.80%; return on average equity 12.54%; return on average assets 1.23% | Capital ratio 12.56% at year-end; Q1 2014 returns were 11.10% and 1.17% |
Material changes and management commentary
- Net income rose year over year. Management attributed improved profitability, excluding prior-year unusual items and the sold business line, to higher net interest income, no loan-loss provision, increased wealth management revenue and stronger mortgage banking revenue; higher compensation costs partially offset these gains.
- Net interest income increased 8% FTE, supported by loan growth, while the FTE margin declined 16 basis points to 3.18%. Average interest-earning assets grew 13%, but their yield fell 24 basis points amid persistently low rates and runoff of higher-yielding assets.
- Loans increased $21.3 million from year-end, led by commercial real estate. Deposits grew $28.3 million; in-market deposits excluding out-of-market brokered time certificates increased $36.6 million. FHLB advances declined $20.3 million.
- Wealth management revenue increased 5% to $8.4 million; assets under administration reached $5.2 billion, up 7% year over year. Mortgage banking revenue increased 109% to $2.6 million as residential loan sales activity strengthened.
- Credit measures were broadly stable: nonperforming assets were $17.3 million, or 0.48% of assets, versus 0.48% at year-end. Nonaccrual loans were $15.9 million; past-due loans increased to $19.1 million from $18.1 million. Net charge-offs were $213,000, and management recorded no loan-loss provision.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management described regional conditions as improving and credit quality as stable to improving, but cautioned that interim results are not necessarily indicative of full-year performance.
- Management said liquidity remained within internal target ranges and funding sources were expected to meet anticipated needs. The Bank had approximately $613.7 million of remaining FHLB borrowing capacity. The Bank and parent exceeded applicable well-capitalized regulatory thresholds.
- Interest-rate risk is material. Simulations indicated net interest income would change by −1.04% under a 100-basis-point rate decline and +1.36% under a 100-basis-point increase over the first 12 months. The filing notes that model assumptions, deposit behavior, repricing and prepayment speeds could make actual results differ.
- Q1 2014 included the $6.3 million gain on sale of the merchant processing business and $6.3 million of FHLB debt prepayment penalties, as well as related divestiture costs. The business-line sale also removed merchant processing revenue and costs from 2015 results, complicating year-over-year comparisons.
- Available-for-sale securities included $4.5 million of unrealized losses, largely on trust preferred securities of financial-sector issuers. Management considered the losses temporary and expected recovery of amortized cost, but warned that further issuer or market deterioration could lead to write-downs.
- Other disclosed risks include regional and broader economic weakness, loan collectibility and real estate values, competition, regulatory or accounting changes, and declines in wealth management assets. Ordinary-course legal proceedings were not expected by management to materially affect results. No material changes to previously reported risk factors were identified.
Important facts for investors to verify
- Whether loan growth and mortgage banking activity can continue without further pressure on net interest margin or underwriting standards.
- Trends in delinquencies, nonaccrual loans, troubled debt restructurings and the adequacy of the $27.8 million allowance, particularly given the concentrated large restructured commercial mortgage relationships.
- The funding mix and cost, including reliance on brokered deposits and FHLB advances, and the timing and pricing of scheduled maturities.
- Whether unrealized losses on trust preferred securities remain recoverable and whether securities valuation or credit conditions change.
- How rate movements, deposit repricing and asset prepayments affect net interest income and securities values relative to management’s simulations.