Washington Trust Bancorp, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Regional bank holding company serving Rhode Island, eastern Massachusetts and Connecticut through commercial, residential and consumer banking and wealth management. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless otherwise indicated.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $50.6 million | $49.1 million | $100.6 million | $96.7 million |
| Net interest income | $33.9 million | $33.1 million | $68.4 million | $65.0 million |
| Provision for loan losses | $0.5 million | $0.4 million | $1.2 million | $0.4 million |
| Noninterest expense | $28.2 million | $26.3 million | $55.1 million | $53.4 million |
| Net income | $17.3 million | $17.7 million | $34.8 million | $33.9 million |
| Diluted EPS | $0.99 | $1.01 | $1.99 | $1.94 |
| Net interest margin, FTE | 2.81% | 3.05% | 2.87% | 3.04% |
- Q2 revenue increased 3%, but net income fell 2% as expense growth and higher loan-loss provision more than offset revenue growth. First-half net income increased 3%.
- Net interest income benefited from loan and securities growth and higher asset yields, but funding costs rose faster: the reported FTE net interest margin declined 24 basis points in Q2 and 17 basis points year to date.
- Mortgage banking revenue rose 24% in Q2 and 9% for the first half, principally reflecting higher secondary-market loan sales. First-half wealth management revenue declined 5%; loan-related derivative income rose 82%.
- Noninterest expense increased 7% in Q2 and 3% for the first half. Management cited salaries, outsourced services and promotional spending; the prior-year first-half comparison included approximately $450,000 of one-time incentive bonuses.
- Q2 return on average assets was 1.34% versus 1.53%; return on average equity was 14.58% versus 16.99%. First-half returns were 1.37% and 15.04%, respectively, versus 1.49% and 16.48%.
Financial position, cash flow and credit
- At June 30, total assets were $5.19 billion, loans $3.73 billion, deposits $3.50 billion, and shareholders’ equity $484.2 million. Loans increased $50.0 million from year-end; deposits declined $19.4 million.
- FHLB advances rose $110.2 million to $1.06 billion. The company reported $119.8 million of cash and cash equivalents at quarter-end. First-half operating cash flow was $18.7 million, investing cash outflow $66.4 million, and financing cash inflow $74.1 million.
- Available-for-sale securities totaled $969.2 million. The net unrealized position improved to a $384,000 gain from a $22.0 million loss at year-end, primarily reflecting interest-rate movements. Management reported no other-than-temporary impairment, but future credit or market deterioration could lead to write-downs.
- Allowance for loan losses was $27.4 million, or 0.73% of loans, versus $27.1 million, or 0.74%, at year-end. First-half net charge-offs were $849,000, largely attributable to one residential real estate relationship.
- Nonperforming assets were $15.0 million, or 0.29% of assets, versus $13.8 million, or 0.28%, at year-end. Nonaccrual loans increased to $12.9 million. Past-due loans rose to $17.9 million; a $2.7 million commercial real estate loan that became delinquent in Q2 returned to current status in early July.
- Potential problem loans increased to approximately $19.2 million from $14.9 million; 94% related to five commercial relationships, all current on payments as of the filing date. Management considered the allowance adequate.
- Liquidity capacity included approximately $1.07 billion of additional funding capacity plus a $40 million unused FHLB line. Management said liquidity remained within internal targets and funding sources were adequate for anticipated needs.
- The company and bank exceeded regulatory minimums to be “well capitalized.” The company’s total risk-based capital ratio was 12.80%, and the Bank’s was 12.74%. The quarterly dividend was $0.51 per share, compared with $0.43 a year earlier.
Outlook, management commentary and risks
- The filing provides no numerical earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Management cited loan growth and higher investment income as support for net interest income, offset by higher deposit and wholesale funding costs. Interest-rate simulations showed estimated net interest income up 2.09% over 12 months for a 100-basis-point increase and down 3.60% for a 100-basis-point decrease; results depend on assumptions and a largely static balance sheet.
- Wealth management assets under administration were $6.48 billion, up 4% year over year at quarter-end. Management warned that the departure of two senior counselors in Q2 could contribute to further outflows; they managed or were associated with approximately $1.0 billion of assets.
- Key risks include interest-rate and funding sensitivity, deposit runoff, loan demand and credit quality, securities valuation, wealth-management asset outflows, mortgage-market conditions, competition, regulation, cybersecurity and other operational risks. Management said there were no material changes to previously disclosed risk factors.
- Adoption of lease accounting added $28.2 million of operating lease right-of-use assets and $30.2 million of lease liabilities at quarter-end; adoption adjustments increased beginning retained earnings by $722,000. The company planned to adopt the expected-credit-loss standard on January 1, 2020 and was still evaluating its effect.
- Ordinary-course legal proceedings were not expected by management to materially affect financial position or results. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether margin pressure from deposit repricing and wholesale funding costs continues, and how it affects net interest income.
- Trends in nonaccrual, past-due and potential problem loans, including the residential relationship behind most first-half net charge-offs.
- Whether the senior-counselor departures lead to wealth-management client outflows and reduced fee revenue.
- The assumptions and potential balance-sheet effects in interest-rate sensitivity simulations, including deposit repricing and runoff.
- The eventual impact of the expected-credit-loss accounting standard on the allowance, retained earnings and disclosures.