Business Context and Reporting Period
Washington Trust Bancorp, Inc. is a Rhode Island-based bank holding company providing commercial, residential and consumer banking and wealth management services in Southern New England. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013; comparisons are to the corresponding 2012 periods unless stated otherwise.
Financial Performance and Position
| Metric | Q2 2013 | Six months 2013 |
|---|---|---|
| Net income | $9.0 million, versus $8.7 million | $16.4 million, versus $17.2 million |
| Diluted EPS | $0.54, versus $0.53 | $0.99, versus $1.04 |
| Net interest income, GAAP | $22.4 million, essentially unchanged | $44.9 million, versus $44.8 million |
| Net interest margin, FTE | 3.26%, versus 3.30% | 3.29%, versus 3.28% |
| Noninterest income | $16.4 million, up 1% | $29.6 million, down 3% |
| Noninterest expense | $25.0 million, down 1% | $49.2 million, up 1% |
| Provision for loan losses | $0.7 million, versus $0.6 million | $1.3 million, versus $1.5 million |
- At June 30, total assets were $3.06 billion, loans $2.38 billion, deposits $2.30 billion and shareholders’ equity $303.4 million. Loans increased $91 million and deposits declined $8 million from year-end 2012.
- Allowance for loan losses was $27.9 million, or 1.17% of loans, compared with $30.9 million, or 1.35%, at year-end. First-half net charge-offs were $4.3 million, including a $4.0 million charge-off on one commercial mortgage loan.
- Nonperforming assets fell to $21.7 million, or 0.71% of assets, from $25.4 million, or 0.83%, at year-end. Nonaccrual loans were $20.0 million. Troubled debt restructurings increased to $23.5 million from $20.2 million.
- Six-month cash from operations was $36.8 million; investing activities used $31.4 million and financing activities used $14.4 million. Cash and cash equivalents ended at $83.7 million, versus $70.6 million a year earlier.
- FHLB advances were $373.3 million, up from $361.2 million at year-end. Junior subordinated debentures were $22.7 million, down from $33.0 million after a June redemption. The company and bank remained well-capitalized; the company’s total risk-based capital ratio was 13.06%.
- Book value per share was $18.40. Cash dividends declared were $0.25 per share in Q2 and $0.50 for the first half.
Material Changes Versus Prior Period
- First-half earnings declined year over year, despite modest Q2 growth. Higher wealth-management and mortgage-banking revenue and a lower first-half loan-loss provision were offset by the $2.8 million first-quarter securities impairment and higher compensation costs.
- Wealth-management revenue rose 6% in Q2 and 5% for the first half; assets under administration reached $4.43 billion. Mortgage-banking revenue increased 16% in Q2 and 25% for the first half, though refinancing activity slowed late in Q2 as market rates rose.
- The securities portfolio fell $65.4 million from year-end to $350.5 million, mainly as mortgage-backed securities matured or paid down without reinvestment. Available-for-sale securities recorded a $4.5 million after-tax net valuation loss in the first half; accumulated other comprehensive loss widened to $12.7 million from $10.5 million.
- Washington Trust redeemed junior subordinated debentures in June, expensing $244,000 of unamortized issuance costs. Q2 also included $270,000 of executive-severance expense. First-half 2013 included a $2.8 million OTTI charge on the Tropic pooled trust-preferred security; no securities impairment was recorded in Q2.
- The 2013 Q2 comparison benefits from the absence of 2012 balance-sheet management costs, including $961,000 of debt prepayment penalties. The 2012 comparison also included a $348,000 gain on bank property sale.
Outlook, Commentary, Risks and Contingencies
- Management expects modestly lower net interest margin in the remaining 2013 quarters: yields on new loans and repricing assets are expected to decline, with asset-yield pressure potentially exceeding funding-cost relief. No full-year earnings guidance is provided.
- Management said liquidity remained within internal target ranges and expected available funding sources to meet anticipated needs. Unused FHLB borrowing capacity was approximately $470.5 million at June 30.
- Interest-rate simulations showed net interest income sensitivity of -1.63% over 12 months under a 100-basis-point rate decrease and +1.83% under a 100-basis-point increase. These are model estimates and depend on deposit behavior, prepayments and balance-sheet assumptions.
- Key risks include weak regional economic conditions and unemployment, loan collectibility and real-estate values, interest-rate and securities-market volatility, mortgage-origination sensitivity to rates, and competition. Trust-preferred securities remain exposed to issuer deterioration and illiquid markets; further impairment charges are possible.
- Management planned to open a Johnston, Rhode Island branch in Q1 2014. The filing identifies no legal proceeding expected to materially affect financial condition or results. The company warned that Basel III capital requirements, applicable by January 1, 2015, could affect dividends, compensation, repurchases or business levels.
Important Facts for Investors to Verify
- Whether the $4.0 million commercial mortgage charge-off is isolated and whether credit trends, nonaccrual loans and troubled restructurings continue to improve.
- Whether declining refinancing activity and higher market rates reduce mortgage-banking revenue and whether loan growth can sustain net interest income amid margin pressure.
- Performance and valuation assumptions for the remaining pooled trust-preferred holding, including the $867,000 unrealized loss on PreTSL, and any further securities impairment risk.
- Deposit mix, time-deposit maturities, FHLB funding reliance and liquidity as loan growth continues.
- Capital implications of the debenture redemption and forthcoming Basel III requirements, including any effect on dividend capacity.