Washington Trust Bancorp, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Washington Trust is a regional bank holding company serving Rhode Island, eastern Massachusetts and Connecticut, with commercial, residential and consumer banking and wealth-management businesses. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $49.1 | $46.7 | $96.7 | $89.9 |
| Net interest income | $33.1 | $29.9 | $65.0 | $58.6 |
| Net income | $17.7 | $13.2 | $33.9 | $25.0 |
| Diluted EPS | $1.01 | $0.76 | $1.94 | $1.44 |
| Provision for loan losses | $0.4 | $0.7 | $0.4 | $1.1 |
- Q2 net income increased 34% year over year; first-half net income increased 36%. Management attributed the improvement principally to higher net interest income and lower income taxes.
- Fully taxable-equivalent net interest margin was 3.05% in Q2 and 3.04% for the first half, versus 2.97% and 2.92%, respectively, in 2017. Reported return on average assets was 1.53% for Q2 and 1.49% for the first half; return on average equity was 16.99% and 16.48%.
- The effective tax rate fell to 21.2% in Q2 and 21.0% for the first half, from 33.0% and 32.9%, reflecting the federal corporate tax-rate reduction enacted in December 2017.
- Noninterest income was down 5% in Q2 to $16.0 million, but up 1% for the first half to $31.7 million. Q2 wealth-management revenue and loan-related derivative income declined; first-half mortgage banking revenue rose 10%.
- Noninterest expense was essentially flat in Q2 at $26.3 million and rose 4% for the first half to $53.4 million. First-half outsourced services expense increased 33%; software-system implementation costs were $0.8 million.
Financial position, cash flow and credit
- At June 30, assets were $4.74 billion, up 5% from year-end 2017. Total loans were $3.49 billion, up $116.2 million (3%); growth was led by residential real estate loans, up $100.2 million.
- Deposits totaled $3.32 billion, up $78.9 million (2%) from year-end. FHLB advances were $901.1 million, up $109.7 million (14%). The quarter-end FHLB advance weighted-average rate was 2.17%.
- Cash and due from banks was $132.1 million; cash and cash equivalents at period-end, as reported in the cash flow statement, were $134.7 million. First-half operating cash flow was $22.8 million, investing cash outflow $143.6 million and financing cash inflow $172.6 million.
- Shareholders’ equity was $421.6 million; the equity-to-assets ratio was 8.90%. The company and bank were reported as well-capitalized; the company’s total risk-based capital ratio was 12.61%. The declared quarterly dividend was $0.43 per share.
- The allowance for loan losses was $26.2 million, or 0.75% of loans, versus $26.5 million, or 0.79%, at year-end. Nonperforming assets were $15.0 million (0.32% of assets), versus $15.3 million (0.34%) at year-end. Potential problem loans were approximately $8.5 million, down from $9.7 million.
Changes, outlook and risks
- Net interest income benefited from loan growth and higher yields as market rates rose, while deposit and wholesale funding costs also increased. Management said the margin benefited from variable-rate lending and growth in lower-cost in-market deposits, but was pressured by higher funding costs.
- Wealth-management assets under administration ended the period at $6.22 billion, down 7% from year-end. Net client outflows were $595.9 million in the first half; management said approximately 85% related to the loss of certain client-facing personnel late in Q1. This is a material business and revenue risk.
- Unrealized losses on securities increased: net unrealized losses on available-for-sale and held-to-maturity securities were $27.6 million at June 30, versus $9.7 million at year-end. The first-half decline in available-for-sale fair value reduced other comprehensive income by $13.5 million after tax. Management attributed most losses to interest-rate and spread changes, and did not consider the securities other-than-temporarily impaired; further deterioration could result in write-downs.
- Management provided no numerical earnings or revenue guidance. It said liquidity remained within internal targets and funding sources were expected to meet anticipated needs. Available FHLB borrowing capacity was $511.2 million, in addition to a $40.0 million unused line of credit.
- Interest-rate simulations showed estimated first-12-month net interest income changes of -3.55% under a 100-basis-point rate decline and +1.83% under a 100-basis-point increase; management said modeled exposures remained within tolerance. These simulations rely on assumptions, including deposit behavior, and are not forecasts.
- Off-balance-sheet commitments included $833.6 million of commitments to extend credit and $8.1 million of standby letters of credit. Future minimum operating-lease payments totaled $37.3 million. The company expected the new lease standard to increase reported assets and liabilities upon adoption in 2019, without a material change in expense timing.
- Management cited economic and market conditions, interest-rate volatility, competition, credit quality, securities values, wealth-asset outflows, regulatory and accounting changes, cyberattacks and natural disasters among factors that could affect results. It reported no material change in previously disclosed risk factors. Ordinary-course legal proceedings were not expected to materially affect financial position or results.
Important facts for investors to verify
- Whether wealth-management client outflows and the loss of client-facing personnel continue, and their effect on assets under administration and fee revenue.
- Whether loan and deposit pricing changes sustain net interest margin as funding costs and deposit mix evolve.
- Whether the growing residential mortgage delinquency exposure, nonaccrual loans and potential problem loans require higher provisions or charge-offs.
- Whether securities unrealized losses recover or result in impairment, and how interest-rate changes affect earnings and capital.
- How deposit growth, wholesale brokered funding and FHLB advances affect liquidity, funding cost and refinancing needs.
- Whether first-half expense increases, including outsourced services and system implementation costs, persist after implementation work is completed.