Washington Trust Bancorp, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Washington Trust is a Rhode Island-based bank holding company offering commercial, residential and consumer banking and wealth management in Southern New England.
Financial results and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $24.9 million | $23.4 million | $73.2 million | $68.3 million |
| Net income | $10.5 million | $10.0 million | $29.6 million | $26.4 million |
| Diluted EPS | $0.62 | $0.59 | $1.75 | $1.58 |
| FTE net interest margin | 3.21% | 3.29% | 3.30% | 3.29% |
| Provision for loan losses | $0.6 million | $0.7 million | $1.4 million | $2.0 million |
| Cash dividends declared per share | $0.32 | $0.26 | $0.90 | $0.76 |
- Q3 noninterest income was $13.1 million, down from $17.4 million, principally reflecting lower mortgage banking revenue and the absence of merchant-processing revenue after the business sale. Noninterest expense fell to $22.0 million from $25.5 million, including lower merchant-processing costs and no Q3 2014 debt-prepayment penalty.
- For the first nine months, noninterest income was $45.3 million versus $47.0 million, while noninterest expense was $73.8 million versus $74.7 million. The 2014 comparison includes a $6.3 million gain on the merchant-processing business sale and $6.3 million of FHLB advance prepayment penalties.
- Total assets were $3.42 billion at September 30, up 7% from year-end 2013. Loans rose 9% to $2.67 billion, led by residential mortgages; deposits increased 9% to $2.74 billion.
- Cash and cash equivalents were $90.0 million at September 30. Nine-month operating cash flow was $0.3 million; investing activities used $189.4 million and financing activities provided $193.8 million. Net cash increased $4.7 million during the period.
- FHLB advances were $261.7 million, down from $288.1 million at year-end; junior subordinated debentures were $22.7 million. The company reported $674.3 million of remaining FHLB borrowing capacity and a $20.0 million unused line of credit.
- Shareholders’ equity was $348.6 million, or 10.20% of assets. The company’s total risk-based capital ratio was 13.26%; the company and bank exceeded regulatory well-capitalized thresholds.
Changes, outlook and risks
- Net interest income increased 7% in both the quarter and year-to-date periods, reflecting loan growth and lower funding costs. The quarterly margin declined from 3.29% to 3.21%; management cited lower asset yields in the low-rate environment. Average interest-earning assets grew, but yields on loans and securities fell.
- Wealth management revenue rose 10% in Q3 and 8% year to date; assets under administration were $4.98 billion, up 4% from year-end. Mortgage banking revenue declined 55% in Q3 and 59% year to date, largely due to reduced mortgage sales activity.
- The March 2014 merchant-processing sale generated a $6.3 million pretax gain and $4.0 million after tax, or $0.24 per diluted share. The company may also earn referral revenue for ten years. The company prepaid $99.3 million of FHLB advances and incurred $6.3 million of penalties.
- Nonperforming assets were $18.0 million, or 0.53% of assets, compared with $19.8 million, or 0.62%, at year-end. Nonaccrual loans were $17.0 million; past-due loans were $19.9 million. Potential problem loans increased to approximately $2.0 million from $0.9 million. The allowance was $27.8 million, equal to 1.04% of loans.
- Management said liquidity remained within internal targets and funding sources were expected to meet anticipated needs. Its interest-rate simulations remained within stated tolerance levels; a 100-basis-point rate decrease was estimated to reduce 12-month net interest income 1.11%, while a 100-basis-point increase was estimated to increase it 0.88%. These are model estimates, not forecasts.
- Management cited sustained low rates, economic weakness and comparatively high Rhode Island unemployment as factors that could pressure results and credit quality. Other stated risks include loan demand and collectibility, market and securities values, competition, regulation, and changes in wealth-management assets. A new Rumford, Rhode Island branch was expected to open in Q1 2015. No earnings guidance was provided.
- Seven financial-sector issuers’ trust preferred securities had $3.5 million of unrealized losses; some were below investment grade. Management expected recovery of amortized cost and did not consider them other-than-temporarily impaired, but noted further deterioration could lead to write-downs. Routine legal proceedings were not expected by management to have a material effect; the filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Separate recurring performance from the merchant-processing sale gain, divestiture costs and FHLB prepayment penalties when assessing 2014 earnings.
- Track deposit composition: total deposits grew, including a $113.2 million increase in out-of-market wholesale brokered time deposits; assess refinancing and funding-cost exposure.
- Monitor mortgage credit, the newly nonaccrual restructured commercial loan, and the rise in potential problem loans against the allowance and charge-offs.
- Review trust preferred security valuations and issuer credit quality, as well as modeled sensitivity to interest rates and possible deposit migration.
- Assess cash-flow interpretation alongside loan growth and mortgage-banking activity; operating cash flow was low despite positive net income.