Washington Trust Bancorp, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015. Washington Trust is a Rhode Island-based bank holding company offering commercial, residential and consumer banking and wealth management services in southern New England. Financial amounts below are in U.S. dollars; millions are rounded.
Financial performance and condition
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $26.0 million | $24.9 million | $77.7 million | $73.2 million |
| Provision for loan losses | $0.2 million | $0.6 million | $0.3 million | $1.4 million |
| Noninterest income | $13.9 million | $13.1 million | $43.2 million | $45.3 million |
| Noninterest expense | $24.5 million | $22.0 million | $72.4 million | $73.8 million |
| Net income | $10.2 million | $10.5 million | $32.7 million | $29.6 million |
| Diluted earnings per share | $0.60 | $0.62 | $1.92 | $1.75 |
| Net interest margin, FTE | 3.07% | 3.21% | 3.13% | 3.30% |
- Third-quarter return on average equity and assets was 11.13% and 1.11%, respectively, versus 12.15% and 1.25% a year earlier. Nine-month returns were 12.17% and 1.20%, versus 11.60% and 1.21%.
- At September 30, total assets were $3.675 billion, loans $2.950 billion, deposits $2.836 billion, and shareholders’ equity $370.5 million. Loans grew $90.6 million and deposits $81.5 million from December 31, 2014.
- Cash and cash equivalents at period-end were $110.1 million, compared with $90.0 million a year earlier. Nine-month operating cash flow was $48.2 million, investing cash outflow $59.8 million, and financing cash inflow $41.3 million.
- Federal Home Loan Bank advances were $381.6 million, down from $406.3 million at year-end; junior subordinated debentures were $22.7 million. The Bank reported approximately $610.7 million of remaining FHLB borrowing capacity. Management said liquidity remained within internal target ranges and funding was expected to meet anticipated needs.
- The allowance for loan losses was $27.2 million, or 0.92% of loans, versus $28.0 million, or 0.98%, at year-end. Nonperforming assets were $17.8 million, or 0.48% of assets; nonaccrual loans rose to $16.8 million from $15.9 million, and past-due loans increased to $21.8 million from $18.1 million.
- The Bank’s total risk-based capital ratio was 12.77%; the Bancorp’s was 12.81%. Shareholders’ equity was 10.08% of assets at quarter-end.
Material changes and drivers
- Quarterly net income declined year over year, while nine-month net income increased. Net interest income rose 4% in the quarter and 6% year to date, primarily on loan growth, but net interest margin contracted as asset yields fell in the low-rate environment.
- Wealth management revenue increased 6% in Q3 and 5% year to date. Mortgage banking revenue increased 13% and 56%, respectively, reflecting higher residential loan sales activity. Lower loan-loss provisions also supported year-to-date earnings.
- Noninterest expense increased 11% in Q3, including higher compensation and Halsey acquisition costs. Year-to-date expense declined 2%, largely because the prior-year period included $6.3 million of debt prepayment penalties; 2014 also included a $6.3 million gain on sale of the merchant processing business line.
- On August 1, Washington Trust acquired Halsey Associates, a wealth adviser with approximately $840 million in assets under administration. Consideration included $1.7 million cash, $5.4 million in shares and an estimated $2.9 million contingent earn-out liability. The acquisition added approximately $6.1 million of goodwill and $7.5 million of identifiable intangibles. Management reported acquisition expenses of $0.9 million year to date and expected a small additional amount in Q4.
- Wealth management assets under administration ended the quarter at $5.7 billion, including Halsey’s assets; market depreciation during Q3 partly offset acquisition-related growth.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management described regional credit quality as stable to improving and planned a Providence branch opening in Q1 2016 and a Coventry branch in Q2 2017.
- Management identified interest-rate and margin pressure, economic and market volatility, loan collectibility, competition, regulatory and accounting changes, and the ability to realize expected Halsey acquisition benefits as risks. Its interest-rate simulations showed estimated net interest income down 1.33% under a 100-basis-point rate decline and up 1.56% under a 100-basis-point increase over the first 12 months; the filing notes that simulations rely on assumptions and may not predict actual results.
- The available-for-sale portfolio included $25.7 million fair value of individual-issuer trust preferred securities with $4.1 million gross unrealized losses. Management considered the losses temporary and expected recovery of amortized cost, but noted further credit or market deterioration could lead to write-downs. Some holdings were below investment grade.
- Potential problem loans increased to approximately $3.9 million from $1.2 million at year-end. The allowance depends on management estimates and could require additions if credit conditions deteriorate. The filing also reports $19.1 million of troubled debt restructurings.
- Legal proceedings arose in the ordinary course of business; management did not expect their outcome to materially affect financial position or results. No material changes to previously disclosed risk factors were reported. Halsey’s internal-control documentation, evaluation and testing were still ongoing; management reported no material change in the company’s internal control over financial reporting.
Investor verification priorities
- Assess whether loan growth can continue without further margin compression, given the decline in NIM and the low-rate environment.
- Track nonaccrual, past-due and potential problem loans, especially residential mortgages, and compare subsequent charge-offs and provisioning with the reported allowance.
- Review the performance, integration costs and earn-out assumptions for Halsey, including the valuation of acquired goodwill and intangible assets.
- Monitor trust preferred securities for issuer credit deterioration or impairment, and the sensitivity of earnings and capital to rate changes and market volatility.
- Evaluate the funding mix, wholesale brokered deposits, FHLB advances and contingent commitments alongside management’s liquidity assessment.