Washington Trust Bancorp, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; financial statements are unaudited. Washington Trust is a Rhode Island-based bank holding company offering commercial, residential and consumer lending, deposits, and wealth management in Rhode Island, eastern Massachusetts and Connecticut.
Financial performance and condition
Unless otherwise stated, dollar amounts are in millions. Comparisons are with the corresponding 2011 period for operating results and December 31, 2011 for balance-sheet figures.
| Metric | Q2 2012 | Six months 2012 |
|---|---|---|
| Net interest income | $22.4, up 6% | $44.8, up 8% |
| Net interest margin, FTE | 3.30%, versus 3.21% | 3.28%, versus 3.19% |
| Net income | $8.7, versus $7.6 | $17.2, versus $14.4 |
| Diluted EPS | $0.53, versus $0.46 | $1.04, versus $0.88 |
| Provision for loan losses | $0.6, versus $1.2 | $1.5, versus $2.7 |
| Noninterest income | $16.2, versus $13.3 | $30.4, versus $25.0 |
| Noninterest expense | $25.2, up 13% | $48.6, up 13% |
- Revenue drivers: Mortgage banking revenue (loan-sale gains and commissions) rose to $3.0 million for Q2 and $6.1 million for the half-year, reflecting refinancing activity and growth in mortgage origination. Wealth management revenue was broadly flat at $7.5 million and $14.7 million, respectively; assets under administration were $4.1 billion, down 2% year over year.
- Margins and costs: Net interest income and margin improved with loan growth and lower funding costs. Loan yields and securities yields declined, while the average cost of funds fell. Salaries and benefits increased 17% in Q2 and 19% for the half-year, principally from mortgage commissions, higher staffing and pension costs.
- Cash flow: For the first six months, operating activities provided $24.1 million, investing activities used $2.7 million and financing activities used $37.9 million. Cash and cash equivalents ended at $70.6 million, down from $87.0 million at the start of the year.
- Balance sheet and funding: Total assets were $3.04 billion, down $23.0 million from year-end; loans grew $66.7 million to $2.21 billion while securities fell $77.2 million to $516.2 million. Deposits were $2.13 billion, nearly unchanged. FHLB advances were $524.0 million, down $16.5 million; other borrowings fell to $0.5 million following maturity of repurchase agreements. Junior subordinated debentures were $33.0 million.
- Liquidity and capital: Management said liquidity remained within internal target ranges and funding sources should meet anticipated needs. The Bank had an unused $8.0 million FHLB line and reported collateral substantially above required levels. Shareholders’ equity was $292.7 million; the equity-to-assets ratio was 9.63%. The company and Bank were classified as well-capitalized; the company’s total risk-based capital ratio was 13.15%.
- Credit quality: Nonperforming assets declined to $18.8 million, or 0.62% of assets, from $24.8 million, or 0.81%, at year-end. Nonaccrual loans were $15.7 million; total past-due loans were $20.3 million, or 0.92% of loans. The allowance was $30.4 million, or 1.38% of loans. However, potential problem loans increased to $12.6 million from $7.4 million, primarily due to one downgraded commercial mortgage relationship.
- Dividends: Cash dividends declared were $0.23 per share for Q2 and $0.46 for the first half, versus $0.22 and $0.44 in 2011, respectively.
Material changes, outlook and risks
- Higher first-half earnings reflected stronger net interest income, lower loan-loss provision and sharply higher mortgage banking revenue. Credit indicators improved overall, but management noted continued effects from weak national and regional conditions, including high unemployment, particularly in Rhode Island.
- Q2 included $0.961 million of debt prepayment penalties on FHLB advances, compared with $0.221 million a year earlier, and a $0.131 million lease-termination charge related to a branch planned to close in September 2012. Securities-sale gains partly offset these costs. First-half results also included $0.209 million of impairment losses on securities; none were recorded in Q2.
- The filing provides no specific earnings or financial guidance. Management described recent regional economic improvement but emphasized uncertainty around future growth, consumer confidence, credit availability and corporate earnings. It opened a mortgage office in Warwick in February and a Cranston branch in July 2012.
- Interest-rate simulations showed estimated net interest income changes of negative 2.34% under a 100-basis-point rate decline and positive 2.10%, 4.46% and 5.70% under rate increases of 100, 200 and 300 basis points, respectively, over months 1–12. Management cautioned that simulations depend on assumptions and a largely static balance sheet; a sustained low-rate environment, deposit repricing or shifts in deposit mix could affect results.
- Investment risk remains concentrated in trust preferred securities. Two pooled holdings had $4.0 million amortized cost, $0.8 million fair value and $3.3 million unrealized losses; both were nonaccrual and below investment grade. Management expected recovery of remaining cost and did not consider the losses other-than-temporary, but acknowledged that further credit deterioration or illiquidity could lead to additional write-downs.
- Off-balance-sheet commitments included $438.5 million of commitments to extend credit and $8.8 million of standby letters of credit; total listed commitments, including loan-sale and derivative contracts, were $792.1 million. The company also had $20.7 million of future operating lease payments. Management said ordinary-course litigation was not expected to materially affect results; mortgage repurchase representations and warranties remain a contingent exposure, with an immaterial reserve reported.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material changes to the risk factors in the 2011 Form 10-K.
Important facts for investors to verify
- Whether mortgage origination and refinancing revenue can be sustained if rates, housing activity or refinancing demand change.
- Whether expense growth—especially compensation, staffing and pension costs—moderates relative to revenue growth.
- How the $12.6 million potential-problem-loan balance and the large commercial relationships develop, and whether improved nonperforming-loan trends continue.
- Whether the allowance remains adequate if regional economic conditions, property values or borrower performance deteriorate.
- Valuation and collectibility assumptions for the pooled trust preferred securities, including any future payment deferrals, defaults, downgrades or impairment charges.
- Funding costs, time-deposit maturities and liquidity needs, alongside the effect of rate changes and customer deposit shifts on net interest margin.
- Realization of the reported cash flows, capital ratios, contingent commitments and any future mortgage repurchase claims.