Washington Trust Bancorp, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. The Rhode Island-based bank holding company provides commercial, residential and consumer banking and wealth management services in Rhode Island, eastern Massachusetts and Connecticut. This unaudited filing covers the quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods unless otherwise noted. Dollar amounts below are in millions unless stated.
Financial performance and condition
| Metric | Q3 2012 | Nine months 2012 | Comparison |
|---|---|---|---|
| Net interest income | $22.7 | $67.5 | Up 6% and 7%, respectively |
| Net interest margin, FTE | 3.28% | 3.28% | Versus 3.22% and 3.20% in 2011 |
| Noninterest income | $16.9 | $47.3 | Up 31% and 25%, respectively |
| Provision for loan losses | $0.6 | $2.1 | Versus $1.0 and $3.7 in 2011 |
| Noninterest expense | $26.3 | $74.9 | Up 16% and 14%, respectively |
| Net income | $8.9 | $26.1 | Versus $7.6 and $21.9 in 2011 |
| Diluted earnings per share | $0.54 | $1.58 | Versus $0.46 and $1.34 in 2011 |
Third-quarter return on average equity and assets was 12.02% and 1.17%; nine-month returns were 11.95% and 1.15%. The filing attributes stronger earnings chiefly to mortgage banking revenue, higher net interest income and lower loan-loss provision. Mortgage loan-sale gains and commissions were $3.5 million for Q3 and $9.6 million year to date, reflecting refinancing activity and lending-office growth. Wealth management revenue was $7.2 million and $21.9 million, respectively; assets under administration were $4.24 billion at quarter-end, up 9% from year-end 2011.
Balance sheet and credit. At September 30, total assets were $3.05 billion, loans $2.26 billion, deposits $2.23 billion, and shareholders’ equity $298.4 million. Since December 31, 2011, loans rose $109.5 million (5%), deposits rose $108.3 million, and securities fell $109.5 million, mainly as mortgage-backed security principal repayments were not reinvested. Nonaccrual loans were $17.7 million, down from $21.2 million at year-end; nonperforming assets were $21.1 million, or 0.69% of assets, versus $24.8 million, or 0.81%. Total past-due loans were $23.6 million, or 1.05% of loans, compared with $26.3 million, or 1.22%.
The allowance for loan losses was $30.8 million, or 1.36% of loans, compared with $29.8 million, or 1.39%, at year-end. Management considered it adequate. Troubled debt restructurings increased to $20.6 million from $19.6 million; potential problem loans rose to approximately $13.3 million from $7.4 million, principally due to a downgraded commercial mortgage relationship.
Cash flow, liquidity and capital. For the first nine months, operating activities provided $8.8 million, investing activities provided $1.5 million, and financing activities used $43.7 million. Cash and cash equivalents ended the period at $53.5 million. FHLB advances were $417.7 million, down from $540.5 million at year-end; junior subordinated debentures were $33.0 million. Deposits increased while borrowings were reduced. Management said liquidity remained within internal target ranges and funding sources were expected to meet anticipated needs. The Bank had an unused $8.0 million FHLB line of credit. The Bancorp’s total risk-based capital ratio was 13.18% and the Bank’s was 12.97%; both exceeded well-capitalized thresholds. Equity-to-assets was 9.79%, and book value per share was $18.23.
Material changes, outlook and risks
- Funding-cost reductions and loan growth supported net interest income and margin, despite lower loan and securities yields. Average loans increased, while average securities declined.
- Operating costs rose, particularly salaries and benefits, up 18% for Q3 and 19% year to date. Higher mortgage-originator commissions, staffing, incentive accruals and pension costs were cited.
- Debt prepayment penalties were $1.2 million in Q3 and $2.1 million year to date, as the company prepaid or restructured FHLB advances. A $528,000 tax-exempt life-insurance gain also lifted Q3 income; the quarter had no securities impairment loss, versus $158,000 in Q3 2011.
- Management reported no formal earnings guidance in the provided filing text. It expected to contribute approximately $7.0 million more to the qualified pension plan later in 2012, after a $3.0 million contribution in January.
- On October 29, 2012, Hurricane Sandy damaged properties in the company’s market area. The company was assessing affected loans and collateral values; any resulting credit classification or allowance changes were not yet clear.
- Risk exposures include regional economic weakness and unemployment, loan collectibility and real-estate values, interest-rate sensitivity, mortgage origination and refinancing volumes, wealth-management asset values, and securities-market liquidity. Two pooled trust-preferred securities had $3.1 million of unrealized losses and were below investment grade; both were on nonaccrual and had deferred interest. Management expected recovery of amortized cost and did not consider them other-than-temporarily impaired, but noted potential for future write-downs.
- Mortgage-sale representations and warranties create possible repurchase or indemnification exposure. The reserve was $250,000, and a $201,000 Q3 charge increased it. Management said ordinary-course litigation was not expected to materially affect financial position or results.
Important facts for investors to verify
- Whether mortgage banking gains remain strong if refinancing activity or favorable interest rates weaken, and how much earnings growth depended on these gains and the one-time insurance proceeds.
- Trends in potential problem loans, troubled debt restructurings, commercial real-estate concentrations, and the adequacy of the loan-loss allowance, especially following Hurricane Sandy.
- Performance and valuation assumptions for the pooled trust-preferred securities, including deferred payments, issuer credit quality and potential impairment exposure.
- Ongoing expense growth, pension funding needs, and the effect of FHLB advance prepayments and refinancing on future funding costs.
- Liquidity and interest-rate sensitivity assumptions: the filing’s simulation showed estimated net-interest-income declines of 2.46% over 12 months and 7.74% over months 13–24 under a 100-basis-point rate decrease.