Washington Trust Bancorp, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. Washington Trust is a Rhode Island-based bank holding company providing commercial, residential and consumer banking and wealth-management services in Rhode Island, eastern Massachusetts and Connecticut. This unaudited report covers the quarter and six months ended June 30, 2017; balance-sheet comparisons are to December 31, 2016.
Financial results and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $46.7 million | $42.7 million | $89.9 million | $85.1 million |
| Net interest income | $29.9 million | $26.8 million | $58.6 million | $54.5 million |
| Noninterest income | $16.8 million | $15.9 million | $31.3 million | $30.5 million |
| Net income | $13.2 million | $11.1 million | $25.0 million | $22.0 million |
| Diluted EPS | $0.76 | $0.64 | $1.44 | $1.28 |
| Cash dividends declared per share | $0.38 | $0.36 | $0.76 | $0.72 |
- Q2 net interest margin on a fully taxable-equivalent basis was 2.97%, versus 3.05% a year earlier; first-half margin was 2.92%, versus 3.15%. Reported return on average assets was 1.21% for Q2 and 1.15% for the first half; return on average equity was 13.06% and 12.47%, respectively.
- At June 30, total assets were $4.38 billion, loans $3.20 billion, securities $763.4 million and shareholders’ equity $406.0 million. The allowance for loan losses was $26.7 million, or 0.83% of loans.
- Deposits were $3.02 billion and FHLB advances $869.7 million. Junior subordinated debentures were $22.7 million. Total equity was 9.28% of assets; the company and Bank exceeded regulatory well-capitalized thresholds. The Bank had a $40 million unused FHLB line and $657.9 million of additional borrowing capacity.
- For the first half, operating cash flow was $21.8 million, investing cash flow was $25.3 million and financing cash flow was negative $35.0 million; cash and cash equivalents ended at $119.9 million.
Changes versus comparable periods
- Q2 net income rose 19% and first-half net income rose 14%. Revenue increased 9% in Q2 and 6% in the first half, driven primarily by higher net interest income. Higher provision expense partly offset revenue growth.
- Average loans grew year over year, led by residential real estate lending; period-end loans nevertheless declined $34.3 million from year-end as commercial loan balances fell. Commercial loans were 53% of loans, residential 37% and consumer 10%.
- Wealth-management revenue increased 5% in Q2 and 4% for the first half. Assets under administration reached $6.4 billion, up 8% year over year, mainly reflecting market appreciation; first-half net client flows were negative $43.1 million.
- Deposits declined $42.6 million from year-end, including seasonal money-market outflows; FHLB advances increased $20.8 million. Shareholders’ equity rose $15.2 million.
- Nonperforming assets declined to $21.5 million, or 0.49% of assets, from $23.1 million, or 0.53%, at year-end. Net charge-offs were $0.4 million for the first half, versus $2.2 million in the prior-year period.
Outlook, risks and unusual items
- No quantified earnings or financial guidance is provided. Management said liquidity remained within internal targets and funding sources were expected to meet anticipated needs. The company planned to open a full-service branch in Coventry, Rhode Island, in Q4 2017.
- Management attributed higher net interest income to loan and securities growth, but noted lower net interest margins as new securities and residential loans carried lower yields. Its interest-rate simulations indicated that a 100-basis-point rate decrease could reduce net interest income by 3.26% over 12 months and 7.80% over months 13–24; a 100-basis-point increase could raise it by 3.43% and 3.68%, respectively. These are model estimates based on stated assumptions, not forecasts.
- Q2 included a $150,000 goodwill impairment charge after a decision to reduce activities at a wealth-management broker-dealer subsidiary. First-quarter results included a $310,000 noncash benefit from reducing contingent consideration. Prior-year Q2 included $589,000 of tax-exempt bank-owned life insurance proceeds; first-quarter 2016 included $431,000 of debt prepayment penalties.
- Credit considerations include $20.2 million of nonaccrual loans, $19.1 million of troubled debt restructurings, and $6.6 million of potential problem loans. Management considered the allowance adequate, but stated that deterioration in borrowers or economic conditions could require additional provisions. A $400,000 charge-off was recorded on a troubled commercial mortgage in Q2.
- Available-for-sale securities had $12.1 million of gross unrealized losses, which management attributed primarily to interest-rate and spread movements and did not consider other-than-temporary impairment. Trust-preferred holdings include below-investment-grade securities; further credit or market deterioration could result in write-downs.
- Principal disclosed risks include economic and market weakness, interest-rate and funding-mix changes, loan demand and credit quality, securities and wealth-management asset values, competition, regulatory or accounting changes, and cyberattacks. The filing reports no material change in previously disclosed risk factors and says ordinary-course legal matters are not expected to materially affect results or financial position.
Important facts for investors to verify
- Whether loan growth, deposit retention and funding costs sustain net interest income while margins remain under pressure.
- Trends in nonaccrual, restructured and potential problem loans, charge-offs, and allowance adequacy.
- Wealth-management asset values and client flows, and the sensitivity of fee income to financial markets.
- Interest-rate simulation assumptions and actual deposit repricing or migration, particularly if rates change.
- Liquidity and capital headroom, including reliance on FHLB advances and wholesale brokered time deposits.
- Potential effects of securities credit or valuation changes, the broker-dealer activity reduction, and adoption of forthcoming accounting standards.