WASHINGTON TRUST BANCORP INC annual report, FY2016

Washington Trust Bancorp, Inc. — 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing. Washington Trust is a Rhode Island-based bank holding company operating primarily in southern New England, with Commercial Banking and Wealth Management Services segments.

Key financial metrics

Metric20162015
Net interest income$110.5 million$104.0 million
Noninterest income$65.1 million$58.3 million
Net income$46.5 million$43.5 million
Diluted earnings per share$2.70$2.54
Net interest margin, fully taxable equivalent3.02%3.12%
Return on average assets / equity1.16% / 11.96%1.19% / 12.00%
Net cash from operating activities$58.7 million$51.6 million
Net cash used in investing activities$625.4 million$165.9 million
Net cash from financing activities$576.8 million$131.6 million

At year-end, total assets were $4.38 billion, loans $3.23 billion, deposits $3.06 billion, shareholders’ equity $390.8 million, and cash and cash equivalents $107.8 million. FHLBB advances were $848.9 million and junior subordinated debentures were $22.7 million. The Bank reported $594.5 million of remaining FHLBB borrowing capacity and a separate unused $40 million FHLBB line. Both the Bancorp and Bank were considered well capitalized; the Bancorp’s total risk-based capital ratio was 12.26% and common equity Tier 1 ratio was 10.75%.

Fourth-quarter 2016 net income was $12.2 million and diluted EPS was $0.70. The quarter included a $2.9 million loan-loss provision.

Material changes versus 2015

  • Net income increased 7% and diluted EPS increased 6%. Net interest income rose 6%, supported by loan and securities growth, while the fully taxable equivalent margin declined 10 basis points to 3.02% as asset yields remained under pressure.
  • Noninterest income increased 12%. Wealth management revenue grew 6% to $37.6 million, and mortgage banking revenue rose 33% to $13.2 million. Wealth management assets under administration reached $6.06 billion, up 4% from year-end 2015.
  • Provision for loan losses rose to $5.65 million from $1.05 million; net charge-offs increased to $6.72 million from $2.00 million. Management attributed much of the increase to one commercial mortgage relationship.
  • Assets grew 16%; loans increased 7% and securities rose to $755.5 million from $395.1 million. Deposits increased 4%, while FHLBB advances increased $470.0 million to $848.9 million, primarily funding asset growth.
  • Asset quality was mixed: nonperforming assets declined to 0.53% of assets from 0.58%, but past-due loans rose to 0.76% of loans from 0.58%. The allowance-to-loans ratio fell to 0.80% from 0.90%.
  • Equity-to-assets declined to 8.92% from 9.95%, while shareholders’ equity increased to $390.8 million. Year-end securities moved from a net unrealized gain position in 2015 to a net unrealized loss position in 2016, primarily reflecting interest-rate movements.

Outlook, commentary, risks and unusual items

  • Outlook: The filing provides no quantified earnings or financial guidance. Management expected to open a full-service branch in Coventry, Rhode Island, in 2017. It described growth opportunities in its markets alongside significant competition and credit, interest-rate, market, liquidity and operational risks.
  • Funding and liquidity: Deposits remain the primary funding source, but growth included $109.8 million of out-of-market brokered time deposits. The Bank had brokered deposits exceeding 10% of total deposits. Management said liquidity remained within internal target ranges and funding sources were expected to meet anticipated needs.
  • Credit concentration: Commercial loans were 55% of loans; commercial real estate was 37% of total loans, and 93% of commercial real estate loans were in Rhode Island, Connecticut or Massachusetts. One troubled commercial mortgage relationship drove significant 2016 charge-offs. Management considered the allowance adequate, but stated estimates are judgmental and actual losses may differ.
  • Market and rate exposure: Wealth-management fee revenue depends partly on market values. Interest-rate simulations showed estimated net interest income sensitivity of +2.21% for a 100-basis-point increase and -2.93% for a 100-basis-point decrease over the first 12 months. A 200-basis-point increase implied a $79.5 million decrease in the market value of available-for-sale debt securities.
  • Unusual items: 2016 included $589,000 of nontaxable life-insurance proceeds, $523,000 of severance expense, $431,000 of debt prepayment penalties and an $898,000 expense benefit from remeasuring Halsey acquisition contingent consideration. Management estimated these items collectively increased diluted EPS by $0.04. The comparison year included $989,000 of Halsey acquisition expenses.
  • Contingencies and controls: Management said ordinary-course legal matters were not expected to materially affect financial position or results. Mortgage-sale representations and warranties expose the company to repurchase or indemnification claims; the recorded reserve was $180,000. The company reported effective disclosure controls and internal control over financial reporting; KPMG issued unqualified opinions on the financial statements and internal controls.

Most important facts for investors to verify

  • Whether the concentrated commercial mortgage exposure and higher 2016 charge-offs lead to further credit costs, past-due loans or allowance changes.
  • How loan and deposit growth is funded, particularly the continued use and cost of FHLBB advances and brokered deposits, and the maturity profile of those borrowings.
  • Whether net interest margin stabilizes as rates, asset yields, deposit costs and customer deposit mix change.
  • Whether wealth-management assets and mortgage originations sustain fee growth, given market sensitivity, client flows and regional housing conditions.
  • The effects of securities valuation changes and the company’s capital ratios, including the impact of growth and accumulated other comprehensive losses.
  • Future contingent consideration, pension assumptions and required contributions, and any material developments in litigation, mortgage repurchase claims or regulatory matters.