Washington Trust Bancorp, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Washington Trust is a regional bank holding company serving Rhode Island, eastern Massachusetts and Connecticut through commercial, residential and consumer banking and wealth management businesses. Comparisons below are with Q1 2017 unless otherwise stated.
Financial performance and condition
- Revenue and earnings: Total revenue was $47.6 million, up 10%; net income was $16.2 million, up 38%; diluted EPS was $0.93 versus $0.68. The effective tax rate fell to 20.8% from 32.7%, primarily reflecting the federal corporate tax-rate reduction under the Tax Act.
- Net interest: Net interest income was $31.9 million, up 11%. Fully taxable equivalent net interest margin increased to 3.03% from 2.87%, supported by loan growth, higher asset yields and growth in lower-cost in-market deposits; higher funding costs partly offset these benefits.
- Noninterest items and expenses: Noninterest income increased 8% to $15.7 million, including wealth management revenue of $10.3 million and mortgage banking revenue of $2.8 million. Noninterest expense rose 7% to $27.1 million, including higher salaries, outsourced services and system implementation costs.
- Balance sheet: Total assets were $4.57 billion, up 1% from year-end 2017. Total loans were $3.39 billion, deposits $3.26 billion, and shareholders’ equity $413.1 million. Loans increased $13.3 million and deposits increased $13.7 million during the quarter.
- Credit quality: No loan-loss provision was recorded, compared with $0.4 million in Q1 2017. Net charge-offs were $0.6 million, versus a $0.04 million net recovery. The allowance was $25.9 million, or 0.76% of loans, compared with $26.5 million, or 0.79%, at year-end. Nonaccrual loans declined to $10.5 million from $15.2 million; nonperforming assets were $13.7 million, or 0.30% of assets.
- Cash flow and liquidity: Operating cash flow was $21.5 million; investing cash flow was negative $39.1 million; financing cash flow was positive $22.6 million. Cash and cash equivalents increased $5.1 million to $88.0 million. The Bank reported $624.8 million of remaining FHLB borrowing capacity and a $40 million unused FHLB line of credit.
- Borrowings and capital: FHLB advances were $808.7 million, up $17.3 million from year-end. The Corporation’s total risk-based capital ratio was 12.56%; the Bank and Corporation were described as well capitalized. The quarterly dividend declared was $0.43 per share, versus $0.38 a year earlier.
Material changes and management commentary
- Earnings growth reflected higher net interest income and noninterest income, no loan-loss provision, and lower income taxes; increased operating expenses partly offset these gains.
- Average loans rose 4% year over year. Residential mortgage balances grew, while consumer and commercial balances declined slightly from year-end. Management attributed the higher margin in part to rising market rates on variable-rate loans and growth in lower-cost in-market deposits.
- Wealth management assets under administration ended the quarter at $6.34 billion, down 6% from year-end, mainly due to client outflows late in the quarter associated with the loss of certain client-facing personnel. Management also cited market appreciation in the prior year and a January 2018 fee increase as contributors to higher year-over-year wealth revenues.
- Available-for-sale securities had a net unrealized loss of $23.4 million, versus $9.7 million at year-end 2017. The decline in securities fair value reduced accumulated other comprehensive income by $10.4 million during the quarter; total comprehensive income was $7.0 million. Management attributed most securities losses to interest-rate and spread movements and did not consider them other-than-temporary impairments at quarter-end.
- Management reported that liquidity remained within internal target ranges and interest-rate simulations were within established tolerances. The simulations indicated positive near-term net interest income exposure to rising rates and negative exposure to falling rates; results depend on assumptions about deposit pricing, deposit mix and balance-sheet behavior.
Outlook, risks and contingencies
- The filing provides no specific earnings, revenue or margin guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Key disclosed risks include economic and financial-market weakness, interest-rate volatility and changes in loan/deposit mix, reduced loan demand or collectibility, competition, regulatory or accounting changes, cyberattacks, and natural disasters.
- Credit risks include potential problem loans of approximately $6.3 million, down from $9.7 million at year-end, and commercial loans classified as special mention. Management stated that future deterioration could require higher reserves or write-downs.
- Interest-rate changes may affect earnings, securities values and capital. Management noted that unrealized securities losses could deepen and that further issuer, economic or real-estate deterioration could lead to impairment charges. Wealth management fees are also exposed to market performance and asset outflows.
- Off-balance-sheet commitments included $525.3 million of commercial loan commitments, $258.7 million of home-equity lines and $6.7 million of standby letters of credit; actual funding needs may be lower because some commitments may expire unused. Operating lease commitments totaled $38.4 million.
- Management said ordinary-course legal matters were not expected to materially affect financial position or results. No material changes to the risk factors in the 2017 Form 10-K were reported. Adoption of several new accounting standards in Q1 had no material financial-statement impact; lease accounting adoption was expected to increase reported assets and liabilities beginning in 2019.
Important facts for investors to verify
- Whether loan growth, deposit costs and FHLB funding levels sustain net interest margin as market rates and competition change.
- Whether client outflows in wealth management persist and how assets under administration and associated fee revenue evolve.
- Developments in nonaccrual, past-due and potential problem loans, charge-offs, and the adequacy of the allowance despite the zero quarterly provision.
- Changes in unrealized securities losses, issuer credit quality and the potential effect of further rate movements on comprehensive income and capital.
- Execution and cost of the wealth-management system implementation, and ongoing expense growth relative to revenue.
- Liquidity and capital capacity, including reliance on wholesale funding, loan commitments and the effect of the scheduled lease-accounting adoption.