Washington Trust Bancorp, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Washington Trust is a regional bank holding company providing commercial, residential and consumer lending, deposit and wealth-management services, principally in Rhode Island, eastern Massachusetts and Connecticut. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $50.0 million | $47.6 million in Q1 2018 |
| Net interest income | $34.6 million; FTE net interest margin 2.93% | $31.9 million; margin 3.03% in Q1 2018 |
| Provision for loan losses | $0.65 million | None in Q1 2018 |
| Net income | $17.5 million; diluted EPS $1.00 | $16.2 million; diluted EPS $0.93 in Q1 2018 |
| Noninterest income / expense | $15.4 million / $27.0 million | $15.7 million / $27.1 million in Q1 2018 |
| Loans / deposits | $3.74 billion / $3.50 billion | $3.68 billion / $3.52 billion at December 31, 2018 |
| FHLB advances | $1.06 billion | $950.7 million at December 31, 2018 |
| Shareholders’ equity | $469.8 million; equity/assets 9.11% | $448.2 million; 8.94% at December 31, 2018 |
| Cash flows | Operating +$21.0 million; investing −$100.5 million; financing +$77.6 million | Operating +$21.5 million; investing −$39.1 million; financing +$22.6 million in Q1 2018 |
Net income increased 8% year over year, driven mainly by higher net interest income. Return on average assets was 1.39% versus 1.45%; return on average equity was 15.52% versus 15.96%. The quarterly dividend declared was $0.47 per share, up from $0.43.
Material changes and operating trends
- Net interest income rose 9%, supported by 10% average loan growth and higher loan yields. The benefit was partly offset by higher funding costs: total interest expense increased to $15.6 million from $8.6 million, and FTE net interest margin declined 10 basis points.
- Loans grew 2% from year-end, mainly from commercial real estate growth. Securities increased 6%, to $994.9 million. Total assets grew 3%, to $5.15 billion.
- Wealth-management revenue fell 10% to $9.3 million, primarily reflecting lower asset-based fees; average assets under administration were down 8% year over year. Quarter-end assets under administration were $6.35 billion, up 7% from year-end, largely due to market appreciation.
- Mortgage-banking revenue declined 7% to $2.6 million. Loan-related derivative income increased to $0.7 million from $0.1 million. BOLI income included a $91,000 gain on tax-exempt life-insurance proceeds.
- Deposits declined 1% from year-end, including a $26.8 million decrease in in-market deposits, while FHLB advances rose 11%. Operating cash flow was nearly flat year over year; investing outflows increased mainly from loan growth and securities purchases.
Liquidity, capital, risks and unusual items
- Management reported $1.10 billion of additional funding capacity at quarter-end, including FHLB and Federal Reserve borrowing capacity and unencumbered securities, plus a $40 million unused FHLB line. Management said liquidity remained within internal targets and funding sources met anticipated needs.
- The Bank and Bancorp exceeded regulatory minimums to be considered “well capitalized.” Bancorp total risk-based capital was 12.59%; common equity tier 1 was 11.25%. These figures are not measures of cash liquidity.
- Credit measures: allowance for loan losses was $27.6 million, or 0.74% of loans, versus $27.1 million and 0.74% at year-end. Nonperforming assets were $14.5 million, or 0.28% of assets. Past-due loans rose to $14.7 million from $13.6 million; potential problem loans increased to approximately $17.3 million from $14.9 million, with about 85% concentrated in four current commercial relationships.
- Available-for-sale securities had a $7.5 million net unrealized loss at quarter-end, improved from $22.0 million at year-end. Management attributed most gross unrealized losses to interest-rate and spread movements, did not consider the securities other-than-temporarily impaired, and said it did not intend to sell them. Further market or credit deterioration could nevertheless lead to write-downs.
- Interest-rate simulations estimated that a 100-basis-point decrease could reduce net interest income by 3.34% over months 1–12 and 4.74% over months 13–24; a 200-basis-point increase could raise it by 5.67% and 2.63%, respectively. These are model estimates under stated assumptions, not forecasts; management cautioned that actual deposit and asset behavior may differ.
- Adoption of lease accounting in 2019 added $28.9 million of right-of-use assets and $30.9 million of lease liabilities, and increased opening retained earnings by $0.7 million. The expected-credit-loss standard was scheduled for adoption January 1, 2020; its financial impact was still being evaluated.
- The filing provides no specific earnings or balance-sheet guidance. Management cited economic, market, competition, credit, interest-rate, regulatory, operational and cybersecurity risks. It reported no material change in the prior 10-K risk factors; ordinary-course legal matters were not expected to materially affect results or financial position.
Most important facts for investors to verify
- Whether loan and deposit pricing trends sustain net interest income growth despite the margin decline and increased reliance on FHLB funding.
- Developments in past-due, nonaccrual and potential problem loans, particularly the four commercial relationships and residential mortgage exposures, and whether the allowance remains adequate.
- Whether wealth-management asset values and client flows recover, and the resulting effect on asset-based fee revenue.
- Interest-rate, securities-valuation and liquidity assumptions, including the availability and cost of collateralized borrowing capacity.
- The eventual impact of the expected-credit-loss standard and whether operating costs, including outsourced services, continue to change.