Washington Trust Bancorp, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Washington Trust is a Rhode Island-based bank holding company serving Rhode Island, eastern Massachusetts, and Connecticut, with commercial, residential and consumer banking and wealth management businesses. Financial statements are unaudited.
Financial performance and condition
| Metric | Q1 2013 / March 31, 2013 | Comparable / prior period |
|---|---|---|
| Net income; diluted EPS | $7.4 million; $0.45 | Q1 2012: $8.4 million; $0.51 |
| Total revenue (net interest income plus noninterest income) | $35.6 million | Q1 2012: $36.6 million |
| Net interest income; FTE net interest margin | $22.5 million; 3.32% | Q1 2012: $22.4 million; 3.27% |
| Provision for loan losses; net charge-offs | $0.6 million; $0.3 million | Q1 2012: $0.9 million; $0.7 million |
| Noninterest income, excluding securities impairment losses | $15.9 million | Q1 2012: $14.4 million |
| Noninterest expense | $24.2 million | Q1 2012: $23.4 million |
| Total assets; total loans | $3.05 billion; $2.33 billion | December 31, 2012: $3.07 billion; $2.29 billion |
| Deposits; FHLB advances | $2.32 billion; $341.2 million | December 31, 2012: $2.31 billion; $361.2 million |
| Shareholders’ equity; total risk-based capital ratio | $301.3 million; 13.50% | December 31, 2012: $295.7 million; 13.26% |
Operating cash flow was $23.8 million; investing activities used $0.1 million and financing activities used $17.3 million. Cash and cash equivalents ended the quarter at $99.0 million, up $6.4 million. Cash and short-term investments on the balance sheet totaled $99.0 million at quarter-end.
Nonperforming assets were $28.7 million, or 0.94% of total assets, versus $25.4 million, or 0.83%, at year-end. Nonaccrual loans were $25.7 million, compared with $22.5 million. The allowance for loan losses was $31.1 million, or 1.34% of loans. The Bancorp and Bank exceeded regulatory well-capitalized thresholds.
Material changes versus the prior comparable period
- Net income declined about 12%, and diluted EPS fell from $0.51 to $0.45. Results included a $2.8 million securities impairment charge, with an after-tax impact of $1.9 million, or $0.11 per diluted share.
- Excluding securities impairment losses, noninterest income rose 10%, led by mortgage banking revenue, up 35% to $4.2 million, and wealth management revenue, up 4% to $7.5 million. Wealth management assets under administration rose 5% from year-end to $4.42 billion, primarily reflecting investment appreciation and income.
- Noninterest expense increased 3%, mainly from salaries and employee benefits, which rose 7% with higher staffing and business-development compensation.
- Loans increased $31.0 million in the quarter, largely from commercial real estate growth. Securities declined $28.8 million, principally due to mortgage-backed security principal payments not being reinvested.
- Nonperforming assets rose primarily after a $5.1 million commercial real estate loan entered nonaccrual status. Total past-due loans nevertheless declined to $26.2 million from $28.1 million.
Outlook, commentary, risks and unusual items
- Outlook: No specific full-year earnings or revenue guidance is provided. Management anticipated modestly lower net interest margin in the remaining 2013 quarters, as yields on earning assets were expected to decline faster than funding costs.
- Management commentary: Management described regional conditions as improving but noted continuing uncertainty and credit-quality pressure from economic weakness and high unemployment, particularly in Rhode Island. It cited sustained low mortgage rates and expanded mortgage offices as contributors to refinancing activity and loan originations.
- Securities impairment: A liquidation notice for the Tropic CDO prompted a $2.8 million impairment charge and reduced the holding’s carrying value to zero. The remaining pooled trust preferred CDO had a $0.4 million fair value, was nonaccrual, had deferred interest since 2008, and carried a below-investment-grade rating. Management expected recovery of its remaining amortized cost; that estimate depends on uncertain future cash flows and credit conditions.
- Funding and capital: After quarter-end, the company announced its intention to redeem approximately $10 million of trust preferred securities and related debentures at par on or about June 17, 2013, using balance-sheet liquidity. Management said the redemption would reduce regulatory capital by about $10 million while leaving the companies well-capitalized.
- Interest-rate and credit risks: Management identified rate volatility, lower loan yields, deposit mix shifts, mortgage prepayment behavior, regional economic conditions, borrower collectibility, real estate values, and securities-market liquidity as risks. Interest-rate simulation showed exposure within company limits, but relies on assumptions and a static balance sheet.
- Contingencies: The company reported ordinary-course legal matters that management did not expect to materially affect results. Mortgage sale representations and warranties may require loan repurchases or indemnification; a $250,000 reserve was recorded. Off-balance-sheet commitments included $223.2 million of commercial loan commitments, $190.5 million of home equity lines, and $1.2 million of standby letters of credit.
Important facts for investors to verify
- Whether the expected recovery assumptions for the remaining pooled trust preferred security hold, and whether further securities impairments occur.
- Whether commercial real estate nonaccruals, impaired loans and loss allocations stabilize or increase, especially for the newly nonaccrual $5.1 million loan.
- Whether mortgage banking and wealth management revenues remain resilient as refinancing activity, interest rates and market valuations change.
- Whether deposit growth and funding costs offset the expected pressure on asset yields and net interest margin.
- The completion and capital impact of the planned June 2013 trust preferred redemption, and any subsequent changes to liquidity or capital ratios.