Washington Trust Bancorp, Inc. — 2012 Form 10-K
Business context and reporting period. This is the annual report for the year ended December 31, 2012, not a standalone quarterly filing. Washington Trust is a Rhode Island-based bank holding company operating principally in southern New England, with Commercial Banking and Wealth Management Services segments. At year-end it reported $3.07 billion in assets, $2.31 billion in deposits and $295.7 million in shareholders’ equity.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Net interest income | $90.7 million | $85.0 million |
| Net interest margin, FTE | 3.29% | 3.20% |
| Noninterest income | $65.2 million | $52.8 million |
| Noninterest expense | $102.3 million | $90.4 million |
| Net income | $35.1 million | $29.7 million |
| Diluted earnings per share | $2.13 | $1.82 |
| Return on average assets / equity | 1.16% / 11.97% | 1.02% / 10.61% |
| Net cash from operating activities | $5.5 million | $37.2 million |
Fourth quarter: Net income was $9.0 million, or $0.55 per diluted share, versus $7.8 million, or $0.47 per diluted share, in Q4 2011. Net interest income was $23.2 million versus $22.0 million; noninterest income was $17.9 million versus $14.8 million; and noninterest expense was $27.4 million versus $24.8 million.
Balance sheet and credit: Total loans grew 7% to $2.29 billion, led by commercial lending; commercial loans were 55% of total loans. Deposits increased 9% to $2.31 billion, while FHLBB advances fell $179.3 million to $361.2 million. Total securities declined about 30% to $415.9 million. Nonperforming assets were $25.4 million, or 0.83% of assets, versus $24.8 million, or 0.81%, a year earlier. The allowance for loan losses was $30.9 million, 1.35% of loans; net charge-offs were $1.6 million, or 0.07% of average loans.
Capital and liquidity: The Corporation’s total risk-based, Tier 1 risk-based and leverage ratios were 13.26%, 12.01% and 9.30%, respectively; the Corporation and Bank were categorized as well-capitalized. Cash and cash equivalents were $92.7 million. Management said liquidity remained within internal targets and funding sources were expected to meet anticipated needs. Total reported borrowings comprised $361.2 million of FHLBB advances, $33.0 million of junior subordinated debentures and $1.2 million of other borrowings.
Material changes versus 2011
- Net income rose 18%; diluted EPS rose 17%. Management attributed the improvement mainly to higher net interest income, strong mortgage banking results, lower loan-loss provision and higher wealth-management revenue.
- Net interest income increased 7%, supported by lower funding costs and 8% growth in average loans; the FTE margin improved nine basis points.
- Noninterest income rose 24%, including mortgage loan-sale gains and commissions of $14.1 million, up from $5.1 million, and wealth-management revenue of $29.6 million, up 5%.
- Noninterest expense rose 13%. Salaries and benefits increased 17% to $59.8 million, while $3.9 million of debt-prepayment penalties were recorded, compared with $0.7 million in 2011.
- Provision for loan losses declined to $2.7 million from $4.7 million; net charge-offs also declined. However, nonaccrual commercial mortgages increased, concentrated in two borrower relationships.
- Assets were nearly flat as loan growth was offset by a substantial reduction in securities. Deposit growth reduced reliance on wholesale funding.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management described plans to build market share in Rhode Island and selectively expand into higher-growth markets; it noted an improving regional climate but continued uncertainty in economic growth, consumer confidence and credit availability.
- Interest-rate risk remains important. Modeling estimated that a 100-basis-point rate decrease would reduce net interest income 2.33% over the first 12 months, while a 100-basis-point increase would raise it 3.11%; these are model scenarios, not forecasts. Results depend on deposit behavior, repricing and mortgage prepayments.
- Commercial real estate and other commercial loans make up a majority of the loan portfolio, with significant geographic concentration in southern New England. Management cited regional economic weakness and unemployment as credit risks. Hurricane Sandy-related exposure was assessed as relatively insignificant.
- Investment securities included two pooled trust-preferred securities with $4.0 million amortized cost and $0.8 million fair value, both nonaccrual and below investment grade. The filing reports $3.2 million of unrealized losses and $0.2 million of 2012 impairment losses recognized in earnings. Management expected recovery of remaining cost, but noted potential further losses; a 2013 underlying-issuer prepayment was expected to cause an immaterial additional impairment.
- Other significant items included a $528,000 tax-exempt BOLI gain and a $6.1 million after-tax reduction to accumulated other comprehensive income associated largely with pension remeasurement. Goodwill of $58.1 million passed the 2012 impairment review.
- In February 2013, the Company modified $72.5 million of FHLBB advances, extending maturities and lowering the weighted average rate from 3.68% to 3.09%. Proposed Basel III capital rules remained unsettled; management could not yet determine their effect.
- Off-balance-sheet exposures included $438.9 million of loan commitments, $67.8 million of commitments to originate fixed-rate mortgages for sale, and $116.2 million of commitments to sell such loans. Mortgage-sale representations and warranties generated a $250,000 reserve; repurchased loan principal was $843,000. Management said ordinary-course legal matters were not expected to materially affect the Company.
- The Company reported effective internal controls, and the independent auditor issued unqualified opinions on the financial statements and internal control. The filing provides no specific forward earnings targets.
Most important facts for investors to verify
- Whether mortgage refinancing and loan-sale income can persist after 2012’s unusually strong volume, and how much of earnings growth depended on these activities.
- Performance and collateral coverage of the two large nonaccrual commercial mortgage relationships, alongside trends in criticized loans, troubled restructurings and the allowance.
- Whether the $30.9 million loan-loss allowance remains adequate under weaker regional conditions, higher unemployment or lower property values.
- Valuation, expected cash flows and future impairment risk for pooled trust-preferred securities, including the expected 2013 impairment following the issuer prepayment.
- Deposit stability, concentrations and refinancing of time deposits, and the cost and maturity profile of FHLBB funding and the February 2013 advance modification.
- Potential effects of final capital rules, pension funding needs and interest-rate changes on capital, dividends and profitability.