Washington Trust Bancorp, Inc. — FY 2013 Form 10-K
Business context and reporting period
Washington Trust Bancorp is a Rhode Island-based bank holding company operating primarily in southern New England. Its businesses are Commercial Banking and Wealth Management Services. This annual filing covers the year ended December 31, 2013; quarterly comparisons below refer to Q4 2013 versus Q4 2012.
Financial performance, balance sheet and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net interest income | $91.8 million | $90.7 million |
| Net interest margin (FTE) | 3.28% | 3.29% |
| Noninterest income | $62.1 million | $65.2 million |
| Noninterest expense | $98.8 million | $102.3 million |
| Net income | $36.2 million | $35.1 million |
| Diluted EPS | $2.16 | $2.13 |
| Return on average assets / equity | 1.17% / 11.65% | 1.16% / 11.97% |
- Q4 net income was $9.8 million, or $0.58 per diluted share, versus $9.0 million, or $0.55 per diluted share, in Q4 2012.
- Total assets were $3.19 billion, up 4%; loans were $2.46 billion, up 7%; deposits were $2.51 billion, up 8%.
- Cash and cash equivalents were $85.3 million. FY operating cash flow was $80.9 million; investing cash outflow was $184.1 million and financing cash inflow was $95.9 million. Cash decreased $7.3 million during the year.
- FHLBB advances were $288.1 million and junior subordinated debentures were $22.7 million. Shareholders’ equity was $329.6 million. Bancorp regulatory ratios included 12.12% Tier 1 risk-based, 13.29% total risk-based and 9.41% leverage; the company and Bank were categorized as well-capitalized.
- Commercial loans were 55% of total loans; residential real estate loans 31%; consumer loans 14%. Wealth-management assets under administration, not included in balance-sheet assets, were $4.78 billion, up from $4.20 billion.
Material changes versus the prior comparable period
- Net income increased 3%, supported by higher wealth-management revenues and net interest income, partly offset by lower mortgage banking revenues and higher securities impairment losses.
- Wealth-management revenue rose 7% to $31.8 million. Mortgage banking revenue fell 7% to $13.1 million as refinancing and loan-sale activity declined with higher market rates.
- Net interest income increased 1%, reflecting loan growth and lower funding costs, while the net interest margin edged down one basis point. Interest expense fell to $24.6 million from $30.4 million.
- Net charge-offs increased to $5.4 million from $1.6 million, including a $4.0 million commercial mortgage charge-off. The allowance declined to $27.9 million, or 1.13% of loans, from $30.9 million, or 1.35%.
- Nonperforming assets improved to $19.8 million, or 0.62% of assets, from $25.4 million, or 0.83%. Troubled debt restructurings rose to $26.3 million from $20.2 million.
- FY noninterest income included $3.5 million of net other-than-temporary impairment losses on securities, compared with $221,000 in 2012; no net securities-sale gains were recorded in 2013, versus $1.2 million in 2012.
Outlook, commentary, risks and unusual items
- Management provided no broad earnings or revenue guidance. It said regional economic conditions were improving but remained uncertain, with unemployment and economic weakness in Rhode Island continuing to affect credit quality. A new Johnston, Rhode Island branch was planned for Q2 2014.
- On March 1, 2014, the company sold its merchant-processing business, recognizing an approximately $6.3 million pretax gain ($4.0 million after tax, or $0.24 per diluted share); it expected $359,000 of pretax divestiture costs. Management cited expected ongoing pretax income enhancement of approximately $1.1 million in 2014 and $1.3 million in 2015 from the sale and funding actions combined.
- In March 2014, the company prepaid approximately $99.3 million of FHLBB advances, incurring an approximately $6.3 million pretax penalty ($4.0 million after tax, or $0.24 per diluted share). Replacement wholesale funding was expected to cost approximately 0.94% initially, versus 3.01% on the prepaid advances.
- Key risks include commercial-credit concentration, regional economic and real-estate conditions, interest-rate and deposit repricing risk, securities valuation and credit exposure, wealth-management fee sensitivity to markets, liquidity, regulatory changes, and operational/cybersecurity risks. The allowance and impairment estimates rely on significant management judgments.
- Management said liquidity remained within internal targets and funding sources were expected to meet anticipated needs. Ordinary-course legal proceedings were not expected by management to materially affect financial position or results. The auditor issued an unqualified opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Review credit trends beneath the improved nonperforming-asset ratio, particularly higher charge-offs, increased troubled debt restructurings and the residential nonaccrual loan balance.
- Assess whether the reduced allowance-to-loans ratio remains appropriate as loans grow and as commercial real-estate and regional economic risks evolve.
- Verify the realized and recurring impact of the merchant-processing sale and FHLBB advance prepayment, including the stated future earnings benefit and replacement-funding costs.
- Evaluate the sustainability of net interest income and margin under changing rates, deposit mix shifts and continued runoff or repricing of higher-yielding assets.
- Monitor trust-preferred securities exposure and the impact of the $3.5 million 2013 impairment charge, as well as potential future securities write-downs.
- Confirm the timing and effect of Basel III capital requirements, dividend capacity, and the company’s dependence on Bank dividends.