Washington Trust Bancorp, Inc. — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; the filing also reports fourth-quarter results. Washington Trust is a Rhode Island-based bank holding company operating primarily in southern New England, offering commercial, residential and consumer banking, mortgage banking, and wealth management services.
Financial performance and condition
- Revenue and earnings: Total revenue was $200.5 million, up 3% from $194.4 million in 2018. Net income was $69.1 million, up 1%; diluted EPS was $3.96 versus $3.93.
- Interest income and margins: Net interest income increased 1% to $133.4 million. Net interest margin compressed 24 basis points to 2.77%, as funding costs rose faster than asset yields. Interest expense increased to $64.2 million from $44.1 million.
- Noninterest income and costs: Noninterest income rose 8% to $67.1 million, led by mortgage banking revenue, up 43% to $14.8 million, and loan-related derivative income, up 62% to $4.0 million. Wealth management revenue declined 4% to $36.8 million. Noninterest expense increased 4% to $110.7 million, including higher compensation and outsourced services.
- Profitability: Return on average assets was 1.34% (1.46% in 2018); return on average equity was 14.34% (16.20%). The effective tax rate was 21.6%, compared with 21.1%.
- Loans and credit: Loans grew 6% to $3.89 billion. Commercial loans were 55% of the portfolio, residential real estate 37%, and consumer 8%. Nonperforming assets rose to $18.5 million from $13.8 million; nonaccrual loans increased to $17.4 million, mainly from residential mortgages. The allowance was $27.0 million, or 0.69% of loans, versus $27.1 million, or 0.74%, in 2018. Net charge-offs were $1.6 million, or 0.04% of average loans.
- Cash flow: Operating activities provided $73.4 million; investing activities used $160.1 million, primarily for loan growth and asset purchases; financing activities provided $131.7 million, mainly from net increases in FHLB advances. Cash and cash equivalents ended at $138.5 million, up from $93.5 million.
- Funding, debt and liquidity: Deposits totaled $3.50 billion, down 1%; in-market deposits increased 5% to $3.21 billion, while brokered time deposits declined 40% to $284.8 million. FHLB advances increased 20% to $1.14 billion; junior subordinated debentures were $22.7 million. Additional disclosed funding capacity was $1.02 billion, plus an unused $40 million FHLB line.
- Capital and shareholder returns: Total assets were $5.29 billion; equity was $503.5 million. The equity-to-assets ratio was 9.51%, and the company’s total risk-based capital ratio was 12.94%; the Bancorp and Bank were considered well capitalized. The annual dividend was $2.00 per share, up 14%. A program authorizing repurchase of up to 850,000 shares was approved in December; no shares had been repurchased by year-end.
Material changes and notable items
- Loan growth, higher mortgage banking and derivative revenues, and increased interest income supported earnings; higher funding costs, lower wealth management revenue, and higher operating expenses offset some gains.
- Fourth-quarter net income was $15.5 million and diluted EPS was $0.89, compared with $17.0 million and $0.98 in fourth-quarter 2018. Fourth-quarter net interest income was $32.0 million, versus $33.9 million a year earlier; the quarter recorded no loan-loss provision, compared with $0.8 million in Q4 2018.
- Washington Trust recognized approximately $1.1 million of FDIC assessment credits in 2019, fully used during the year; FDIC insurance expense was $618,000, net of credits.
- Adoption of lease accounting standards brought operating lease right-of-use assets and liabilities onto the balance sheet. At adoption, the company recorded $28.9 million of lease assets and $30.9 million of lease liabilities.
Outlook, risks and contingencies
- Guidance: The filing provides no formal earnings or growth guidance. Management said liquidity remained within internal target ranges and funding sources were expected to meet anticipated needs.
- Expected credit-loss accounting: The company planned to adopt CECL on January 1, 2020 and estimated an increase of $5.5–$8.5 million in loan and off-balance-sheet credit-loss allowances, with a $4.2–$6.5 million after-tax reduction to retained earnings. It expected no material effect on regulatory capital and planned to use the available three-year capital transition relief.
- Principal risks: Exposure includes regional economic and real-estate conditions, commercial lending concentration, interest-rate and funding-cost changes, deposit competition and liquidity, wealth-management market performance and client outflows, mortgage volumes, regulation, cybersecurity and third-party systems, and the transition away from LIBOR. Interest-rate simulations showed estimated net interest income down 3.71% under a 100-basis-point decline over 12 months, and up 2.88% under a 100-basis-point increase.
- Contingencies and controls: Management stated ordinary-course legal matters were not expected to materially affect results. The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective. The allowance for collectively evaluated loans was identified as a critical audit matter.
Important facts for investors to verify
- Whether the rise in residential nonaccrual loans and nonperforming assets persists, and whether allowance coverage remains appropriate.
- How loan and deposit pricing trends affect net interest margin, funding costs, and reliance on FHLB advances.
- Whether wealth-management client outflows and adviser departures continue to weigh on assets under administration and fee revenue.
- The actual CECL adoption adjustment compared with management’s estimated ranges.
- How much of the authorized share-repurchase program is used and whether dividends remain supported by Bank earnings and regulatory capital.