Washington Trust Bancorp, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. Washington Trust is a Rhode Island-based bank holding company serving Rhode Island, eastern Massachusetts and southeastern Connecticut, with commercial, residential and consumer banking and wealth management businesses. This unaudited report covers the quarter and six months ended June 30, 2011; balance-sheet comparisons are with December 31, 2010.
Key financial results
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $34.3 million | $30.0 million | $66.4 million | $58.5 million |
| Net income | $7.6 million | $5.3 million | $14.4 million | $10.5 million |
| Diluted earnings per share | $0.46 | $0.33 | $0.88 | $0.65 |
| Net interest income | $21.1 million | $18.8 million | $41.4 million | $36.8 million |
| Provision for loan losses | $1.2 million | $1.5 million | $2.7 million | $3.0 million |
| Noninterest income | $13.3 million | $11.2 million | $25.0 million | $21.6 million |
| Noninterest expense | $22.3 million | $21.0 million | $43.0 million | $40.7 million |
- Margins and profitability: Fully taxable-equivalent net interest margin was 3.21% for Q2 and 3.19% for the first half, up 35 and 37 basis points, respectively, year over year. Management attributed the improvement mainly to lower funding costs. Q2 return on average equity and assets was 10.83% and 1.04%, respectively.
- Balance sheet and lending: Total assets were $2.94 billion. Loans were $2.06 billion, up $61.5 million (3%) from year-end; commercial loans rose $46.4 million. Securities available for sale were $591.6 million, down $2.5 million.
- Cash flow: First-half operating cash flow was $21.2 million; investing activities used $54.5 million and financing activities provided $12.3 million. Cash and cash equivalents ended at $71.7 million, down $21.0 million from year-end.
- Funding and liquidity: Deposits totaled $2.00 billion, down $40.3 million (2%) from year-end. Federal Home Loan Bank advances were $558.4 million, up $59.7 million. Management said liquidity remained within internal target ranges and available funding was expected to meet anticipated needs.
- Capital: Shareholders’ equity was $281.4 million, or 9.6% of assets. The company and bank were categorized as well-capitalized. The Bank’s total risk-based capital ratio was 12.81% and Tier 1 leverage ratio was 8.48%.
Material changes versus comparable periods
- Net income increased 43% in Q2 and 37% in the first half year over year. Management cited higher net interest income and wealth management revenue as primary drivers.
- Wealth management revenue grew 11% in Q2 and 12% in the first half. Assets under administration reached $4.15 billion, up $181 million from year-end, reflecting $147 million in investment appreciation and income and $34 million in net client inflows.
- Noninterest expenses rose 6% in Q2 and first-half periods. Excluding a $221,000 debt prepayment charge, management said expenses increased 5% in both comparisons. Higher salaries, merchant processing and foreclosed-property costs were partly offset by lower FDIC insurance costs.
- Nonperforming assets rose to $24.1 million, or 0.82% of assets, from $23.0 million, or 0.79%, at year-end. Nonaccrual loans increased to $21.0 million, notably due to higher residential mortgage nonaccruals; total past-due loans declined to $24.6 million.
- Potential problem loans increased to $10.4 million from $6.7 million at year-end. Troubled debt restructurings declined to $18.6 million from $22.4 million.
- The allowance for loan losses was $29.4 million, 1.43% of loans, versus $28.6 million and 1.43% at year-end. First-half net charge-offs were $1.9 million, down from $2.4 million a year earlier.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expected seasonal government and other deposits to build again in Q3. It estimated the 2011 FHLB advance maturity extensions would save approximately $156,000 in interest expense.
- Management said national and regional economic weakness, including high unemployment, could persist for the next few quarters and continued to affect credit quality. Loan-loss estimates depend on economic conditions, local property values and borrower performance.
- The securities portfolio included trust-preferred holdings with substantial unrealized losses. Two pooled trust-preferred securities had $4.4 million amortized cost, $934,000 fair value and $3.5 million unrealized losses; both were nonaccrual and had below-investment-grade ratings. Management did not consider the losses other-than-temporary, but warned that further deterioration could lead to additional write-downs. Individual-issuer trust-preferred securities had $5.0 million of unrealized losses; management reported expected payments remained current and expected recovery of amortized cost.
- A Q2 balance-sheet transaction included selling $5.7 million of mortgage-backed securities and prepaying $5.0 million of FHLB advances, generating $226,000 in securities gains and a $221,000 prepayment penalty. A property sale generated a further $203,000 gain.
- Interest-rate simulations showed estimated net interest income changes within company tolerance levels: for a 100-basis-point rate decline, -1.89% over months 1–12 and -6.18% over months 13–24; for a 300-basis-point increase, +6.00% and +8.35%, respectively. Management cautioned that simulations rely on assumptions and may not predict actual results.
- Off-balance-sheet commitments included $380.3 million of commitments to extend credit and $9.2 million of standby letters of credit. Legal proceedings were described as ordinary-course matters that management did not expect to materially affect the company.
Important facts for investors to verify
- Whether rising nonaccrual residential mortgages and potential problem loans translate into higher charge-offs, provisions or allowance needs.
- Credit performance, valuation assumptions and potential impairment risk in the pooled and individual trust-preferred securities portfolio.
- Deposit trends, including the expected seasonal rebound, growth in brokered certificates of deposit and increased reliance on FHLB advances.
- Whether wealth-management assets and fee growth persist as investment markets and client flows change.
- How funding costs, asset repricing and deposit behavior affect net interest margin, particularly in a prolonged low-rate or rising-rate environment.
- The effect of loan-growth and credit commitments on liquidity, capital and future credit quality; confirm the company’s well-capitalized ratios and reported cash-flow trends.