Washington Trust Bancorp, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. 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. This unaudited report covers the quarter and nine months ended September 30, 2013; comparisons are to the corresponding 2012 periods unless otherwise noted.
Financial performance and position
| Metric | Q3 2013 / September 30, 2013 | Comparison |
|---|---|---|
| Net interest income | $23.4 million | Up 3% from Q3 2012; nine-month total was $68.3 million, up 1%. |
| Net interest margin | 3.29% for the quarter and nine months | 3.28% for both comparable 2012 periods. |
| Net income and diluted EPS | $10.0 million; $0.59 | Q3 2012: $8.9 million; $0.54. Nine-month net income was $26.4 million and diluted EPS was $1.58, versus $26.1 million and $1.58. |
| Noninterest income | $17.4 million for Q3; $47.0 million for nine months | Q3 rose 3%; nine-month total fell 1%, including higher securities impairment charges in 2013. |
| Noninterest expense | $25.5 million for Q3; $74.7 million for nine months | Down 3% for Q3 and slightly lower year to date. |
| Loans and deposits | Total loans $2.354 billion; deposits $2.455 billion | Since December 31, 2012, loans increased $59.8 million and deposits increased $142.2 million. |
| Borrowings | FHLB advances $288.5 million; junior subordinated debentures $22.7 million | FHLB advances declined $72.7 million from year-end. The company redeemed $10.3 million of debentures in June. |
| Cash flow, nine months | Operating +$66.0 million; investing −$69.0 million; financing +$50.2 million | Cash and cash equivalents ended at $139.9 million, up $47.3 million from the start of the period. |
| Capital and liquidity | Shareholders’ equity $323.6 million; total risk-based capital ratio 13.44%; leverage ratio 9.41% | Bank and company were categorized as well-capitalized. Management said liquidity remained within target ranges. |
Material changes and credit quality
- Nonperforming assets declined to $20.5 million, or 0.66% of assets, from $25.4 million, or 0.83%, at year-end 2012. Nonaccrual loans were $19.5 million, down from $22.5 million.
- Net charge-offs increased to $4.9 million for the nine months from $1.2 million in 2012, primarily due to a $4.0 million second-quarter charge-off on one commercial mortgage. The allowance for loan losses was $28.0 million, 1.19% of loans, versus $30.9 million, 1.35%, at year-end.
- Troubled debt restructurings rose to $27.2 million from $20.2 million at year-end. Management identified approximately $2.0 million of potential problem loans, down from $6.4 million.
- The company recorded $2.8 million of securities impairment charges in the first quarter, versus $0.2 million in the first nine months of 2012. A pooled trust-preferred CDO was liquidated in August with no proceeds to the company’s subordinated tranche. A remaining pooled holding had a $425,000 fair value and continued to defer interest.
- In September, Washington Trust sold $48.7 million of residential mortgage portfolio loans for a $977,000 gain, partly to reduce interest-rate exposure. It said it had not regularly sold portfolio-loan packages.
- A pension-plan amendment froze benefit accruals after a ten-year transition ending December 2023. Remeasurement reduced pension liabilities by $17.5 million and increased after-tax accumulated other comprehensive income by $11.2 million. Management expected Q4 pension expense to be about $500,000 below pre-amendment quarterly levels.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expected modestly lower net interest margins for the remainder of 2013, as yields on new loans and repricing assets could decline more quickly than funding costs.
- Mortgage refinancing and sales activity began declining as market interest rates rose late in Q2; management noted mortgage banking revenues are sensitive to rates and housing-market conditions. Wealth-management revenue also depends substantially on financial-market values.
- Interest-rate simulations showed projected net-interest-income sensitivity within company tolerance levels; a 100-basis-point rate decrease was modeled to reduce net interest income by 1.75% over months 1–12 and 6.36% over months 13–24. The filing cautions that simulations depend on assumptions, including deposit behavior and prepayments.
- Management cited economic and banking-industry weakness, especially high unemployment in Rhode Island, as continuing credit-quality concerns. Securities values and possible future impairment are exposed to issuer deterioration, illiquid markets and economic or real-estate weakness.
- The company planned to open a new full-service branch in Johnston, Rhode Island, in Q1 2014. It also disclosed that Basel III capital rules apply beginning January 1, 2015 and could affect dividends, business levels or capital needs.
- Ordinary-course legal matters were not expected by management to materially affect results or financial position. Mortgage-loan sale representations and warranties carry potential repurchase or indemnification exposure; the recorded reserve was $250,000.
Important facts for investors to verify
- Whether the improvement in quarterly earnings is sustainable, given lower mortgage activity, asset-yield pressure and the absence of a specific full-year outlook.
- Credit trends behind the elevated year-to-date charge-offs, growing troubled debt restructurings and lower allowance-to-loan ratio.
- Performance and valuation assumptions for remaining trust-preferred securities, particularly the nonaccrual pooled CDO holding and the potential for further impairment.
- Deposit mix and funding costs, including growth in money-market balances and the reliance on FHLB advances and reciprocal deposits.
- Effects of pension-plan changes and future Basel III requirements on expenses, regulatory capital and shareholder distributions.