Washington Trust Bancorp, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter report. Washington Trust is a Rhode Island-based bank holding company providing commercial, residential and consumer banking, mortgage banking, and wealth management services, primarily in southern New England.
Financial results and condition
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenues | $218.6 million | $228.8 million | Down 4% |
| Net interest income | $156.0 million | $141.4 million | Up 10% |
| Net income | $71.7 million | $76.9 million | Down 7% |
| Diluted earnings per share | $4.11 | $4.39 | Down 6% |
| Net interest margin, FTE | 2.69% | 2.59% | Up 10 basis points |
| Return on average assets | 1.17% | 1.32% | Down 15 basis points |
| Return on average equity | 14.49% | 14.03% | Up 46 basis points |
- Revenue and earnings: Higher net interest income was more than offset by a steep decline in noninterest income. Noninterest income fell 28% to $62.6 million, chiefly as mortgage banking revenue fell 69% to $8.7 million. Noninterest expense declined 5% to $128.7 million.
- Credit and margins: The company recorded a $1.3 million benefit from provision for credit losses, compared with a $4.8 million benefit in 2021. Net recoveries were $368,000. The loan allowance was $38.0 million, or 0.74% of loans, versus $39.1 million, or 0.91%, a year earlier. NIM excluding PPP loan fee amortization and loan prepayment fees was 2.67%, compared with 2.43%.
- Balance sheet: Assets rose 14% to $6.66 billion. Loans increased 20% to $5.11 billion, led by residential real estate lending. Deposits edged up 1% to $5.02 billion; in-market deposits rose 4%, while brokered deposits declined 30%.
- Funding and liquidity: FHLB advances increased to $980 million from $145 million. The company reported $1.39 billion of additional funding capacity at year-end, including $668.3 million through the FHLB, $27.1 million through the Federal Reserve Bank, and $691.9 million in unencumbered securities, plus a $40 million unused FHLB line. Management said liquidity remained within internal target ranges and funding sources were adequate for anticipated needs. Uninsured deposits were estimated at $1.5 billion.
- Cash flow: Operating activities provided $113.0 million; investing activities used $999.0 million, largely reflecting $832.5 million of net loan growth; financing activities provided $826.0 million. Cash and cash equivalents decreased $60.1 million during the year.
- Capital and shareholder returns: Shareholders’ equity fell 20% to $453.7 million, mainly reflecting a $137.8 million after-tax other comprehensive loss tied principally to interest-rate-driven valuation declines in securities and cash flow hedges. The total risk-based capital ratio was 12.37%, and the Bank and Bancorp were described as well capitalized. The company declared $2.18 per share in dividends, with a 53.0% payout ratio.
Material changes and notable items
- Rising interest rates helped lift asset yields and net interest income, but increased deposit and wholesale funding costs. The company’s year-end interest-rate simulations showed that a 100-basis-point rate increase could reduce net interest income by 0.78% over months 1–12 and 5.45% over months 13–24, relative to an unchanged-rate scenario.
- Available-for-sale securities had $172.4 million of net unrealized losses at year-end, compared with $8.9 million in 2021. Management attributed the decline primarily to interest rates, stated it did not intend to sell the securities, and reported no credit-loss allowance on them.
- Wealth management assets under administration declined 23% to $6.0 billion, reflecting market depreciation and net client outflows. Four client-facing advisors resigned late in the third quarter; related withdrawals were $604 million in the fourth quarter, with a further $76 million notified through February 14, 2023. Management estimated about $3.4 million of lower 2023 wealth management revenue associated with withdrawals through that date and noted possible additional outflows and related legal expenses.
- Residential mortgage originations and secondary-market sales weakened as rates rose and housing markets changed. Loans sold to the secondary market fell 64% to $339.7 million, and 2022 mortgage banking revenue declined to $8.7 million from $28.6 million.
- Fourth-quarter unusual expense comparisons include $6.9 million of debt prepayment penalties in 2021, with none in 2022. Other income in 2021 included a $1.0 million litigation settlement. The 2022 results included a $600,000 charitable foundation contribution.
- The company adopted a 2023 repurchase program authorizing purchases of up to 850,000 shares, subject to market and regulatory considerations. It repurchased 194,162 shares for $9.5 million during 2022.
Outlook, risks and contingencies
- The filing gives no specific earnings, revenue, or margin guidance. Management described plans to expand its Rhode Island branch footprint, with proposed offices subject to approvals; it also opened a Cumberland branch and a New Haven commercial lending office in 2022.
- Key risks include higher funding costs and deposit migration or runoff, sensitivity to interest rates, regional economic and real-estate weakness, commercial loan concentrations, and potential deterioration in credit quality or collateral values. Commercial loans were 49% of loans; CRE was 36% of total loans.
- Other material risks include market declines affecting wealth management assets and fees, advisor-related client withdrawals, mortgage-market volatility, cybersecurity and third-party operational exposure, regulatory and compliance demands, and the remaining transition of LIBOR-linked contracts to alternative rates. At year-end, approximately 200 LIBOR-linked financial instruments had $1.0 billion in on-balance-sheet amounts, and approximately 250 derivative instruments had $2.0 billion in notional amounts.
- Commitments to extend credit totaled $1.31 billion, and standby letters of credit totaled $9.0 million. Management said ordinary-course legal matters were not expected to materially affect the company’s financial position or results. Mortgage representation-and-warranty reserve was $265,000.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified the qualitative factors used in estimating the commercial loan allowance as a critical audit matter.
Important facts for investors to verify
- Track deposit pricing, uninsured-deposit levels, deposit retention, and the company’s increased reliance on FHLB advances and remaining borrowing capacity.
- Monitor the size and duration of unrealized securities losses, the impact of any securities sales, and the resulting effects on tangible and regulatory capital.
- Assess whether the lower allowance coverage remains appropriate as loans grow and economic forecasts change, particularly for commercial real estate and commercial borrowers.
- Follow wealth management client withdrawals and advisor-related legal costs against management’s estimated 2023 revenue impact.
- Review subsequent mortgage banking results and net interest margin as rates, loan demand, and deposit costs evolve; the filing’s interest-rate simulations rely on assumptions and a static balance sheet.
- Confirm completion and financial effects of the LIBOR transition, and check regulatory approvals and execution of the announced branch and share repurchase plans.