Washington Trust Bancorp, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Washington Trust is a Rhode Island-based bank holding company providing commercial, residential and consumer banking and wealth management services in Rhode Island, eastern Massachusetts and Connecticut. Dollar amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior date |
|---|---|---|
| Net interest income | $23.8 | $22.5, Q1 2013 |
| Net interest margin (FTE) | 3.34% | 3.32%, Q1 2013 |
| Net income | $9.3 | $7.4, Q1 2013 |
| Diluted EPS | $0.55 | $0.45, Q1 2013 |
| Provision for loan losses | $0.3 | $0.6, Q1 2013 |
| Cash from operating activities | $1.4 | $23.8, Q1 2013 |
| Total assets | $3,194.1 | $3,188.9, December 31, 2013 |
| Total loans / allowance for loan losses | $2,478.6 / $27.0 | $2,462.9 / $27.9, December 31, 2013 |
| Total deposits | $2,591.7 | $2,505.3, December 31, 2013 |
| FHLB advances / junior subordinated debentures | $203.4 / $22.7 | $288.1 / $22.7, December 31, 2013 |
| Shareholders’ equity | $335.9; total risk-based capital ratio 13.56% | $329.6; 13.29%, December 31, 2013 |
Reported noninterest income was $19.4 million, including a $6.3 million gain on the merchant-processing business sale; noninterest expense was $29.3 million, including a $6.3 million FHLB advance prepayment penalty. Return on average assets was 1.17% and return on average equity was 11.10%, compared with 0.98% and 9.91%, respectively, in Q1 2013. Cash and due from banks was $104.7 million at quarter-end; cash and cash equivalents were $108.2 million. Investing activities provided $23.7 million and financing activities used $2.3 million of cash. Management reported approximately $654.7 million of remaining FHLB borrowing capacity.
Changes versus Q1 2013 and year-end 2013
- Net income increased to $9.3 million from $7.4 million. Comparisons were substantially affected by Q1 2013’s $2.8 million securities impairment loss and Q1 2014’s $6.3 million business-sale gain and $6.3 million debt prepayment penalty. The sale gain and prepayment penalty each had an after-tax impact of about $4.0 million; divestiture costs were $0.36 million before tax. Management described the combined transactions as a net after-tax charge of about $0.01 per diluted share.
- Net interest income rose 6%, reflecting loan growth and lower funding costs. Average loans grew 6%, while the loan yield fell 18 basis points; average funding cost declined 18 basis points.
- Noninterest income excluding the sale gain and the prior-year impairment was down $2.8 million, or 18%. Mortgage banking revenue fell 70% as refinancing and loan-sale activity declined; wealth management revenue rose 8%.
- Loans increased $15.7 million, led by residential real estate growth, while securities declined $32.9 million. Deposits rose $86.3 million and FHLB advances fell $84.7 million.
- Nonperforming assets declined to $14.3 million, or 0.45% of assets, from $19.8 million, or 0.62%, at year-end. Nonaccrual loans fell to $13.6 million from $18.3 million. Net charge-offs were $1.1 million, versus $0.3 million in Q1 2013.
Outlook, management commentary and risks
- Management expected the sale of merchant processing and lower funding costs from the borrowing transactions to enhance pretax income by approximately $1.0 million for the remainder of 2014 and $1.3 million in 2015, with benefits continuing thereafter. No broader earnings or revenue guidance was provided.
- The company planned to open a full-service branch in Johnston, Rhode Island, in Q2 2014. Wealth management assets under administration were $4.81 billion, up 9% year over year.
- Management said credit quality indicators had improved overall but remained affected by a slow economic recovery and comparatively high Rhode Island unemployment. Potential problem loans increased to approximately $1.5 million from $0.9 million at year-end. The allowance was 1.09% of loans, down from 1.13%.
- Management identified sustained low interest rates, loan and deposit mix, mortgage prepayments, competition, economic conditions, credit quality, securities values and regulatory or accounting changes as risks. Interest-rate simulations showed estimated net interest income changes of -1.07% for a 100-basis-point decline and +1.56% for a 100-basis-point increase over the first 12 months; these are model estimates, not forecasts.
- Eleven trust preferred securities from seven financial-sector issuers had $5.3 million of unrealized losses; three holdings were below investment grade. Management expected recovery of cost and did not consider them other-than-temporarily impaired, but warned that further credit or market deterioration could lead to future write-downs.
- Off-balance-sheet commitments included $515.6 million of commitments to extend credit and $2.9 million of standby letters of credit. Management said ordinary-course litigation was not expected to materially affect results; the filing reported no material change in previously disclosed risk factors.
Key facts for investors to verify
- How recurring earnings compare after separating the merchant-processing sale gain, debt prepayment penalty, divestiture costs and prior-year securities impairment.
- Whether reduced mortgage refinancing and loan-sale activity continues, and how it affects fee income and loan growth.
- Credit trends, especially the rise in potential problem loans, residential nonaccruals and charge-offs, and the adequacy of the allowance.
- The cost, maturity and continued use of brokered time deposits, which increased as replacement funding for prepaid FHLB advances.
- Performance and valuation of trust preferred securities and sensitivity of earnings and securities values to interest rates.