Washington Trust Bancorp, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Washington Trust is a Rhode Island bank holding company offering commercial, residential and consumer banking and wealth management services in southern New England. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net interest income | $21.5 | $20.1 | $62.9 | $56.9 |
| Provision for loan losses | $1.0 | $1.5 | $3.7 | $4.5 |
| Total noninterest income | $13.0 | $13.4 | $37.9 | $35.1 |
| Noninterest expense | $22.6 | $22.9 | $65.6 | $63.5 |
| Income before taxes | $10.9 | $9.2 | $31.6 | $24.0 |
| Net income | $7.6 | $6.4 | $21.9 | $16.8 |
| Diluted EPS | $0.46 | $0.39 | $1.34 | $1.04 |
- Q3 net income increased about 19%; nine-month net income increased about 30%. Management attributed the year-to-date improvement mainly to higher net interest income, wealth management revenue growth and lower loan-loss provision.
- Fully taxable-equivalent net interest margin was 3.22% for Q3 and 3.20% for nine months, versus 3.01% and 2.88% in 2010. Lower funding costs were a principal contributor.
- Returns on average assets and equity were 1.03% and 10.67% for Q3, and 1.01% and 10.52% for the nine-month period.
- Cash dividends declared were $0.22 per share for Q3 and $0.66 per share year to date.
Financial position, cash flow and liquidity
- At September 30, total assets were $2.97 billion, loans $2.09 billion, deposits $2.09 billion, and shareholders’ equity $285.5 million. Loans grew $92 million (5%) and deposits grew $50 million (2%) from December 31, 2010.
- Cash and cash equivalents were $67.8 million, down from $92.7 million at year-end 2010. For the nine months, operating cash flow was $18.5 million, investing cash flow was negative $77.1 million, and financing cash flow was positive $33.7 million.
- Federal Home Loan Bank advances were $494.1 million, down $4.6 million from year-end; junior subordinated debentures were $33.0 million. FHLB advances include callable borrowings; the filing reports $8.0 million of unused FHLB credit capacity.
- The company and Bank met the regulatory “well-capitalized” category. At September 30, total risk-based capital ratios were 12.99% for the Corporation and 12.80% for the Bank; Tier 1 leverage ratios were 8.69% and 8.55%, respectively.
- Management said liquidity remained within internal target ranges and funding sources were expected to meet anticipated needs. Deposits funded approximately 70% of average assets during the nine-month period.
Changes, credit quality and unusual items
- Nonperforming assets increased to $24.6 million, or 0.83% of assets, from $23.0 million, or 0.79%, at year-end. Nonaccrual loans rose to $21.6 million, including an increase in nonaccrual residential mortgages; total past-due loans declined to $22.0 million from $25.3 million.
- Potential problem loans increased to approximately $9.3 million from $6.7 million. Troubled debt restructurings declined to $15.6 million from $22.4 million. The allowance for loan losses was $29.6 million, or 1.42% of loans, compared with $28.6 million, or 1.43%, at year-end.
- Wealth management revenue rose 9% year to date, but assets under administration fell 6% from year-end to $3.73 billion, principally from market depreciation during Q3.
- Q3 included $158,000 of additional impairment recognized in earnings on a pooled trust-preferred security. For the nine months, impairment losses recognized in earnings were $191,000. Two pooled trust-preferred holdings had $3.46 million of aggregate unrealized losses and were on nonaccrual; management expected to recover their remaining amortized cost, but acknowledged sensitivity to issuer cash flows and market liquidity.
- Year-to-date expenses included a $221,000 FHLB debt prepayment penalty; the comparable 2010 period included $752,000. A $203,000 gain on sale of bank property was recognized in Q2 2011. Excluding debt prepayment charges, management reported noninterest expense growth of 4% year to date.
- Management cited persistent weakness in national and regional economic conditions, including high unemployment. No specific earnings or financial guidance was provided; management cautioned that interim results are not necessarily indicative of full-year results.
Outlook, risks and contingencies
- Key sensitivities include loan collectibility, local property values, unemployment and broader economic conditions; the allowance depends on management estimates and may need to increase if conditions worsen.
- Interest-rate simulations showed estimated net interest income sensitivity at September 30 of -2.87% for a 100-basis-point rate decline and +2.94% for a 100-basis-point increase over the first 12 months. Management cautioned that model assumptions and actual balance-sheet behavior may differ.
- Residential mortgage originations and wealth management revenues are exposed to interest rates, housing conditions and financial-market performance. Mortgage sales also carry representation-and-warranty repurchase or indemnification obligations; the reserve was described as immaterial.
- Commitments included $227.3 million of commercial lending, $182.1 million of home-equity lines, $8.7 million of standby letters of credit, and $75.9 million of mortgage origination and $97.7 million of mortgage sale commitments. These amounts do not necessarily represent future cash requirements.
- The company reported ordinary-course legal claims, with management believing their disposition would not materially affect financial position or results. It reported no material changes to previously disclosed risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the rise in nonaccrual residential mortgages and potential problem loans leads to higher charge-offs, provisions or allowance needs.
- Performance and valuation of the pooled trust-preferred securities, including the assumptions supporting expected recovery of amortized cost.
- Whether loan growth and deposit mix remain sustainable, and how reliance on FHLB advances and brokered deposits evolves.
- Whether wealth management assets and revenues recover following market depreciation, and whether expense growth remains controlled.
- How actual interest-rate, deposit-mix and mortgage-prepayment behavior compares with management’s simulation assumptions.