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
| Metric | 2016 | 2015 |
|---|---|---|
| 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 equivalent | 3.02% | 3.12% |
| Return on average assets / equity | 1.16% / 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.