Washington Trust Bancorp, Inc. — Q2 2014 Form 10-Q
Business context and period. Regional bank holding company serving Rhode Island, eastern Massachusetts and Connecticut through commercial, residential and consumer lending, deposits and wealth management. This unaudited report covers the quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods unless stated otherwise. Dollar amounts below are in millions except per-share data.
Key financial results
| Metric | Q2 2014 | Six months 2014 | Comparable period |
|---|---|---|---|
| Net interest income | $24.5 | $48.3 | $22.4 and $44.9 |
| Net interest margin, FTE | 3.35% | 3.34% | 3.26% and 3.29% |
| Net income | $9.8 | $19.1 | $9.0 and $16.4 |
| Diluted EPS | $0.58 | $1.13 | $0.54 and $0.99 |
| Provision for loan losses | $0.45 | $0.75 | $0.70 and $1.30 |
| Noninterest income | $12.8 | $32.2 | $16.4 and $29.6 |
| Noninterest expense | $22.4 | $51.7 | $25.0 and $49.2 |
At June 30, 2014, total assets were $3.32 billion, up 4% from year-end 2013; loans were $2.58 billion, up 5%; deposits were $2.59 billion, up 3%; and shareholders’ equity was $343.5 million. The allowance for loan losses was $27.3 million, or 1.06% of loans, versus $27.9 million, or 1.13%, at year-end.
Cash and cash equivalents ended the six-month period at $149.2 million, up $63.9 million. Operating activities provided $0.9 million; investing activities used $43.1 million; and financing activities provided $106.0 million. FHLB advances stood at $322.1 million, up from $288.1 million at year-end; junior subordinated debentures were $22.7 million. The company reported a 13.24% total risk-based capital ratio and 9.62% Tier 1 leverage ratio, and stated that it and the Bank were well-capitalized. Management said liquidity remained within target ranges and funding was expected to meet anticipated needs; unused FHLB borrowing capacity was approximately $524.2 million.
Material changes and management commentary
- Net interest income rose 9% in Q2 and 8% year to date, reflecting loan growth and lower funding costs. Average interest-earning assets grew, while their yield declined 14 basis points year over year in both periods; lower deposit and borrowing costs more than offset the pressure.
- Wealth management revenue increased 8% to $8.5 million in Q2 and $16.6 million year to date. Assets under administration reached $5.01 billion, up 5% from year-end and 13% from a year earlier.
- Mortgage banking revenue fell 51% in Q2 and 61% year to date, amid lower refinancing and loan-sale activity as market rates rose. Residential mortgage originations for sale also declined.
- On March 1, 2014, the company sold its merchant processing business, recording a $6.3 million pretax gain ($4.0 million after tax, or $0.24 per diluted share) and $0.355 million of divestiture costs. Related fee revenue and processing costs fell after the sale; referral revenue may be earned for ten years.
- The company prepaid $99.3 million of FHLB advances in March, incurring approximately $6.3 million in pretax penalties ($4.0 million after tax, or $0.24 per diluted share). Brokered time deposits and existing liquidity funded the repayment. The first-half results therefore include both a material sale gain and a material debt-prepayment charge.
Credit, risks, contingencies and outlook
- Nonperforming assets declined to $13.8 million, or 0.42% of assets, from $19.8 million, or 0.62%, at year-end; nonaccrual loans decreased to $12.5 million from $18.3 million. Total past-due loans were $21.1 million, or 0.82% of loans. Potential problem loans increased to $1.4 million from $0.9 million.
- Management described credit trends as stable and favorable and considered the allowance adequate. However, loan-loss estimates depend on economic conditions, collateral values, borrower performance and management judgment; adverse changes or regulatory review could require higher reserves.
- Available-for-sale securities had $4.1 million of gross unrealized losses, concentrated in trust preferred securities issued by financial companies. Eleven holdings from seven issuers had a combined $4.1 million unrealized loss; some were below investment grade. Management expected full recovery and did not consider them other-than-temporarily impaired, but warned further credit or market deterioration could lead to write-downs.
- Interest-rate simulation showed estimated net interest income sensitivity of -0.70% for a 100-basis-point rate decline and +0.83% for a 100-basis-point rise over months 1–12. Management cautioned that model assumptions, deposit behavior, prepayments and future balance-sheet changes may cause actual results to differ.
- Off-balance-sheet commitments included $319.4 million of commercial loan commitments, $198.3 million of home-equity lines and $3.1 million of standby letters of credit. Ordinary-course litigation was not expected by management to materially affect results. Mortgage-sale representations and warranties carry possible repurchase or indemnity exposure; a $0.275 million reserve was recorded.
- No specific earnings or financial guidance was provided. Management cited ongoing exposure to low interest rates, regional economic weakness and unemployment, competition, loan demand and collectibility, securities values, regulation and market-related wealth-management revenue. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Underlying earnings excluding the merchant-processing sale gain, FHLB prepayment penalties and other identified unusual items, and the sustainability of net interest margin improvement.
- Loan growth and funding mix, particularly the use and cost of brokered deposits and short-term FHLB advances.
- Trends in mortgage banking revenue, wealth-management assets and fees, and the effect of market movements on those businesses.
- Credit quality, including the increase in potential problem loans, restructured credits, collateral values and the adequacy of the loan-loss allowance.
- Fair value and credit performance of trust preferred securities, and the assumptions underlying interest-rate and liquidity sensitivity analyses.