Washington Trust Bancorp, Inc. — Q1 2017 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016, and income-statement comparisons with Q1 2016. The Rhode Island-based bank holding company provides commercial, residential and consumer banking and wealth-management services in Rhode Island, eastern Massachusetts and Connecticut.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $28.7 million | $27.7 million, Q1 2016 |
| Net interest margin, FTE | 2.87% | 3.24%, Q1 2016 |
| Noninterest income / expense | $14.5 million / $25.3 million | $14.6 million / $25.5 million, Q1 2016 |
| Net income / diluted EPS | $11.8 million / $0.68 | $10.9 million / $0.64, Q1 2016 |
| Return on average assets / equity | 1.08% / 11.87% | 1.16% / 11.50%, Q1 2016 |
| Total assets | $4.39 billion | $4.38 billion, December 31, 2016 |
| Total loans / allowance for loan losses | $3.225 billion / $26.4 million | $3.234 billion / $26.0 million, December 31, 2016 |
| Deposits / FHLB advances | $3.116 billion / $798.7 million | $3.064 billion / $848.9 million, December 31, 2016 |
| Shareholders’ equity | $397.8 million | $390.8 million, December 31, 2016 |
Net interest income rose 3% year over year; excluding loan prepayment and other fees, management reported a 6% increase. The FTE margin contracted 37 basis points, or 27 basis points excluding those fees, primarily because of a shift toward lower-yielding securities and, to a lesser extent, lower loan yields. Average interest-earning assets increased 17%, while funding costs rose 9 basis points. The Q1 2016 comparison included $1.1 million of loan prepayment and other fees, versus $207,000 in Q1 2017.
Cash provided by operations was $16.9 million, compared with $23.1 million in Q1 2016. Investing used $6.2 million and financing used $4.5 million; cash and cash equivalents increased $6.2 million to $114.0 million. The quarterly dividend declared was $0.38 per share, versus $0.36 a year earlier. Total capital ratio was 12.38% at March 31, and management reported that the company and bank exceeded “well-capitalized” regulatory thresholds.
Material changes and operating drivers
- Net income increased 8%; diluted EPS increased from $0.64 to $0.68. Wealth Management Services net income rose 35% to $1.6 million, supported by higher asset-based fees and lower expenses. Assets under administration reached $6.24 billion, up 6% year over year, although quarterly net client flows were negative $40.4 million.
- Commercial Banking net income increased 2% to $8.3 million. Loan growth and a more favorable deposit mix supported segment net interest income, while lower loan-related derivative income and higher compensation costs weighed on results.
- Total deposits increased $51.8 million during the quarter; in-market deposits, excluding out-of-market brokered time deposits, rose $81.6 million. FHLB advances declined $50.2 million. Total loans fell $9.5 million, including a decline in commercial and consumer balances partly offset by residential mortgage growth.
- Noninterest expense included a $310,000 benefit from reducing the estimated Halsey acquisition contingent-consideration liability. Q1 2016 included $431,000 of FHLB debt prepayment penalties. Excluding these items, expenses increased $577,000, or 2%, year over year.
Outlook, risks and contingencies
- No quantitative earnings or financial guidance is provided. Management said it expected to open a full-service branch in Coventry, Rhode Island, in 2017, and reported liquidity within internal target ranges with funding sources expected to meet anticipated needs.
- Credit quality indicators were mixed: nonperforming assets increased to $23.5 million, or 0.54% of assets, from $23.1 million, or 0.53%; past-due loans declined to 0.65% of loans from 0.76%. Nonaccrual loans were $22.1 million. Potential problem loans were approximately $6.4 million, primarily one commercial and industrial relationship. Management considered the $26.4 million allowance adequate; actual credit losses may differ.
- The securities portfolio was $769.4 million, heavily weighted to agency mortgage-backed securities. Gross unrealized losses were $15.1 million; management considered them temporary and reported no intention or expected requirement to sell before recovery. Six individual financial-sector trust-preferred issuers included below-investment-grade ratings; further credit deterioration could result in write-downs.
- Interest-rate modeling showed estimated net interest income changes versus an unchanged-rate case of -3.97% for a 100-basis-point decline and +3.54% for a 100-basis-point increase over months 1–12. Results depend on assumptions about deposit repricing, balances and prepayments and are not forecasts.
- Off-balance-sheet commitments included $480.5 million to extend commercial credit, $241.0 million in home-equity lines and $7.1 million in standby letters of credit; commitments may expire undrawn. Ordinary-course legal matters were not expected by management to materially affect results. The filing reported no material change in previously disclosed risk factors.
- Management identified the allowance for loan losses, goodwill and intangibles, securities impairment, and pension accounting as critical estimate areas. Adoption of the share-based compensation standard generated $195,000 of excess tax benefits in Q1; management said adoption had no material overall impact. The filing also describes expected future accounting-standard adoptions whose impacts were not yet determined or were expected not to be material.
Important facts for investors to verify
- Whether margin pressure persists as securities and loan yields, deposit costs and wholesale funding needs change.
- Trends in nonaccrual, criticized and potential problem loans; collateral values; and allowance adequacy, especially for commercial real estate and the identified commercial borrower relationship.
- Performance and credit ratings of below-investment-grade trust-preferred holdings, and whether unrealized losses remain temporary.
- Wealth-management asset values and flows, and the contingent-consideration estimate tied to Halsey’s future revenue growth.
- Funding mix, liquidity availability and the effect of the reported interest-rate sensitivity assumptions on actual earnings and capital.