Business Context and Reporting Period
Company: Washington Trust Bancorp, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Overview: Washington Trust Bancorp is a bank holding company operating primarily in Rhode Island, Massachusetts, and southeastern Connecticut. The company offers commercial, residential, and consumer lending, deposit products, and wealth management services. The reporting period reflects the impact of the 2009 economic downturn, including increased credit risk, a special FDIC assessment, and the adoption of new accounting standards regarding other-than-temporary impairments.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2008 |
|---|---|---|---|---|
| Net Income | $3.8 million | $6.4 million | $6.1 million | $11.9 million |
| Diluted EPS | $0.23 | $0.40 | $0.45 | $0.88 |
| Net Interest Income | $16.3 million | $32.2 million | $16.2 million | $31.3 million |
| Provision for Loan Losses | $3.0 million | $4.7 million | $1.4 million | $1.9 million |
| Total Assets | $2.92 billion | (Balance Sheet) | $2.73 billion | (Balance Sheet) |
| Total Loans | $1.89 billion | (Balance Sheet) | $1.84 billion | (Balance Sheet) |
| Total Deposits | $1.88 billion | (Balance Sheet) | $1.79 billion | (Balance Sheet) |
| Shareholders' Equity | $242.3 million | (Balance Sheet) | $235.1 million | (Balance Sheet) |
| Net Cash Provided by Operating Activities | N/A | $10.3 million | N/A | $10.9 million |
Material Changes vs. Prior Period
- Profitability Decline: Net income for the six months ended June 30, 2009, decreased by approximately 46% compared to the same period in 2008. This was driven by higher loan loss provisions, increased FDIC costs, and lower wealth management revenues.
- Loan Loss Provision: The provision for loan losses increased significantly to $4.7 million for the first half of 2009, compared to $1.85 million in 2008, reflecting deteriorating credit quality, particularly in the commercial portfolio.
- FDIC Special Assessment: The company recognized a special FDIC assessment of $1.35 million in the second quarter of 2009, contributing to a 754% year-over-year increase in FDIC deposit insurance costs for the quarter.
- Asset Quality Deterioration: Nonaccrual loans rose sharply to $22.7 million (1.20% of total loans) from $7.8 million (0.42%) at year-end 2008. Total nonperforming assets increased to $24.8 million.
- Wealth Management Revenues: Revenues from wealth management services declined by 24% year-over-year for the six-month period, largely due to lower asset valuations in financial markets.
- Loan Portfolio Growth: Despite the economic environment, total loans increased by 3% ($52.1 million) year-to-date, driven by growth in commercial loans.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects the declining credit quality trend to continue for the next few quarters if economic conditions do not improve. They anticipate continued pressure on commercial loan demand.
- Unusual Items:
- FDIC Assessment: A one-time special assessment of $1.35 million ($869k after-tax) was recorded in Q2 2009.
- Accounting Changes: The company early-adopted FSP No. FAS 115-2 and FAS 124-2 regarding other-than-temporary impairments. This resulted in a reclassification of a noncredit-related impairment loss of $1.9 million (pre-tax) from earnings to other comprehensive income, increasing retained earnings.
- Impairment Losses: Net impairment losses of $2.0 million were recognized in the first quarter of 2009 for securities deemed other-than-temporarily impaired. No impairment losses were recognized in the second quarter.
- Risks:
- Credit Risk: Significant exposure to commercial real estate and commercial loans, with nonaccruals rising rapidly.
- Securities Portfolio: Approximately 90% of net unrealized losses in the investment portfolio are concentrated in variable rate trust preferred securities issued by financial services companies. Further deterioration in the financial sector could lead to additional write-downs.
- Interest Rate Risk: The company has a moderately positive exposure to rising rates in Year 1 but negative exposure to falling rates due to the rapid decline in earning asset yields compared to deposit costs.
Key Facts for Investor Verification
- Nonaccrual Loan Concentration: Verify the specific composition of the $22.7 million in nonaccrual loans, which includes two commercial real estate relationships ($5.5 million) and five other commercial relationships ($6.1 million).
- Trust Preferred Securities: Review the status of the $16.9 million in individual name trust preferred securities and $1.9 million in pooled trust preferred securities (CDOs) that are in unrealized loss positions, including the two securities placed on nonaccrual status.
- FDIC Assessment Impact: Confirm the long-term impact of the special FDIC assessment and the trajectory of future assessment rates on noninterest expenses.
- Commercial Loan Growth: Assess the sustainability of the 8% growth in commercial loans during a period of economic contraction and whether underwriting standards have been sufficiently tightened.
- Capital Ratios: Verify that the company remains "well-capitalized" under regulatory standards despite the increase in loan loss provisions and potential future impairments.