Washington Trust Bancorp, Inc. — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. Washington Trust is a Rhode Island-based bank holding company serving Rhode Island, eastern Massachusetts, and Connecticut through commercial, residential, and consumer banking and wealth-management businesses.
Financial results and key metrics
Unless otherwise stated, dollar amounts are in millions.
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net interest income | $22.4 | $20.3; up 10% |
| Net interest margin, FTE | 3.27% | 3.16%; up 11 basis points |
| Noninterest income | $14.2 | $11.7 |
| Noninterest expense | $23.4 | $20.7; up 13% |
| Provision for loan losses | $0.9 | $1.5 |
| Net income | $8.4 | $6.8 |
| Diluted earnings per share | $0.51 | $0.42 |
| Cash dividends declared per share | $0.23 | $0.22 |
| Net cash from operating activities | $14.4 | $20.9 |
- Revenue and earnings: Total income was $36.6 million, versus $32.0 million a year earlier. Return on average equity was 11.85% and return on average assets was 1.11%, compared with 10.04% and 0.94%, respectively.
- Growth and margin: Average interest-earning assets rose 5% to $2.82 billion; average loans increased $149.6 million year over year. Loan yields fell 17 basis points, but lower funding costs supported margin expansion.
- Cash flow: Investing activities provided $20.3 million and financing activities used $37.8 million. Cash and cash equivalents ended the quarter at $84.0 million, down $3.0 million during the quarter.
- Balance sheet and liquidity: Total assets were $3.03 billion, down $35.4 million from year-end. Loans totaled $2.16 billion; deposits were $2.15 billion, up $19.2 million. FHLB advances were $504.9 million, down $35.5 million; other borrowings fell $18.9 million, primarily on maturity of repurchase agreements.
- Capital: Shareholders’ equity was $287.9 million; equity-to-assets was 9.51%. The company’s total risk-based capital ratio was 13.22%, and management reported that the company and bank remained well-capitalized under applicable regulatory standards.
Material changes versus comparable periods
- Net income increased 24% year over year, supported by higher net interest income, a lower loan-loss provision, and a sharp increase in mortgage banking revenue.
- Mortgage loan-sale gains and commissions rose to $3.1 million from $0.5 million. Residential mortgage originations, including brokered loans, increased to $170.7 million from $63.8 million.
- Compensation expense increased $2.6 million, mainly due to mortgage commissions, additional staffing, and higher pension costs. Total noninterest expense rose $2.7 million.
- Nonperforming assets decreased to $23.6 million, or 0.78% of assets, from $24.8 million, or 0.81%, at year-end. Nonaccrual loans declined to $19.4 million from $21.2 million; total past-due loans fell to $21.1 million from $26.3 million.
- Despite improving headline asset-quality measures, identified potential problem loans increased to approximately $11.8 million from $7.4 million, including a commercial mortgage relationship downgraded based on concerns about future property cash flow.
Outlook, commentary, risks, and unusual items
- Management said economic conditions had been improving but remained uncertain, with high unemployment and national and regional economic weakness continuing to affect credit quality. No specific earnings or revenue guidance was provided; management cautioned that interim results are not necessarily indicative of full-year results.
- The company opened a mortgage office in Warwick in February 2012 and planned to open a full-service branch in Cranston later in 2012. It expected approximately $239,000 of interest expense savings in both 2012 and 2013 from extending maturities on $31.1 million of FHLB advances.
- Mortgage banking revenue depends on origination volumes, interest rates, and housing-market conditions; wealth-management fees depend in part on asset values and financial-market performance. Management also identified interest-rate, credit, funding, competition, regulatory, and economic risks.
- The securities portfolio included $10.8 million of gross unrealized losses, nearly all concentrated in variable-rate trust-preferred securities. Two pooled trust-preferred securities were nonaccrual; one generated a $209,000 credit impairment charge in Q1. Management warned that further deterioration or market illiquidity could lead to additional write-downs.
- Interest-rate simulations showed estimated net interest income declines of 2.43% in the first 12 months and 7.60% in months 13–24 under a 100-basis-point rate decrease; a 300-basis-point increase showed estimated gains of 6.56% and 7.45%, respectively. These are model estimates based on assumptions, not forecasts.
- Management expected an additional approximately $3 million contribution to the qualified pension plan later in 2012. Ordinary-course litigation was not expected by management to materially affect financial position or results. The filing reported no material changes to previously disclosed risk factors and effective disclosure controls.
Important facts for investors to verify
- Whether elevated mortgage banking gains can be sustained and how related compensation costs affect future profitability.
- Whether growth in potential problem loans reverses, and whether nonperforming assets and loan-loss provisions remain controlled amid economic and property-market risks.
- The underlying cash-flow assumptions and credit performance supporting the valuation and recoverability of trust-preferred securities, including the two nonaccrual pooled holdings.
- Deposit mix, reliance on FHLB funding, scheduled advance maturities, and the company’s liquidity and interest-rate sensitivity under changing market conditions.
- Whether planned branch expansion and pension contributions proceed as expected and what their effects are on expenses, capital, and liquidity.