Washington Trust Bancorp, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; the filing also reports unaudited fourth-quarter results. Washington Trust is a Rhode Island bank holding company serving southern New England through commercial, residential and consumer banking and wealth management.
Financial performance and position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $226.9 million | $200.5 million | +13% |
| Net interest income | $127.4 million | $133.4 million | -4% |
| Provision for credit losses | $12.3 million | $1.6 million | +$10.8 million |
| Noninterest income | $99.4 million | $67.1 million | +48% |
| Noninterest expense | $125.4 million | $110.7 million | +13% |
| Net income | $69.8 million | $69.1 million | +1% |
| Diluted EPS | $4.00 | $3.96 | +$0.04 |
| Net interest margin | 2.40% | 2.77% | -37 basis points |
| Return on average assets | 1.22% | 1.34% | -12 basis points |
| Return on average equity | 13.51% | 14.34% | -83 basis points |
At year-end, assets were $5.7 billion, loans $4.2 billion, deposits $4.4 billion and shareholders’ equity $534.2 million. The allowance for credit losses on loans was $44.1 million, or 1.05% of loans, versus $27.0 million, or 0.69%, a year earlier. Total risk-based capital was 13.51%; the Bank was considered well capitalized.
Cash and cash equivalents ended at $202.3 million. Cash from operating activities was $36.5 million, investing activities used $264.2 million and financing activities provided $291.6 million. FHLB advances were $593.9 million, down 48%; junior subordinated debentures were $22.7 million. Available additional funding capacity was $1.585 billion, plus an unused $40 million FHLB line.
Fourth-quarter 2020 net income was $18.6 million, or $1.07 diluted EPS, versus $15.5 million, or $0.89, in fourth-quarter 2019. Q4 provision for credit losses was $1.8 million; net interest income was $32.2 million.
Material changes and drivers
- Net income edged higher despite lower net interest income and a substantially higher credit-loss provision. Lower market rates compressed asset yields faster than funding costs, reducing full-year net interest margin.
- Mortgage banking revenues rose 220% to $47.4 million as lower rates drove refinancing, originations and secondary-market loan sales; loans sold increased 93% to $1.14 billion. Wealth management revenue fell 4% to $35.5 million, while year-end assets under administration increased 10% to $6.87 billion, reflecting market appreciation partly offset by client outflows.
- Loans grew 8% to $4.20 billion, including $199.8 million of PPP loans. Deposits grew 25% to $4.38 billion, with in-market deposits up 18%; wholesale brokered time deposits more than doubled to $591.5 million. The company reduced FHLB advances as deposits increased.
- Washington Trust adopted CECL on January 1, 2020. Adoption increased the loan allowance by $6.5 million and the unfunded-commitment allowance by $1.5 million, reducing retained earnings by $6.1 million net of tax. The 2020 provision also reflected pandemic-related expected losses and loan growth.
- Nonperforming assets declined to $13.2 million from $18.5 million; nonaccrual loans were 0.31% of loans, compared with 0.45%. Net charge-offs were $1.1 million, or 0.03% of average loans.
Outlook, risks and notable items
The filing provides no quantified earnings or revenue guidance. Management said liquidity remained within internal target ranges, believed funding sources were adequate for anticipated needs, and expected the Bank to continue generating adequate earnings to support quarterly dividends. A new East Greenwich, Rhode Island branch was planned for 2021.
- COVID-19 remained the central uncertainty for borrowers, credit quality, operations and earnings. The company had modified 636 loans totaling $717.4 million during 2020; 136 loans totaling $244.7 million remained under active deferment at year-end. Management identified hospitality, retail and healthcare commercial real estate, and selected commercial and industrial industries as vulnerable.
- Low rates pressured net interest margin; management’s simulation showed net interest income sensitivity to both falling and rising rates. Results depend on assumptions about asset repricing, deposit costs, prepayments and customer deposit behavior.
- Mortgage banking gains were unusually strong and rate-sensitive; wealth management fees depend partly on market values and client assets. The filing also identifies credit, liquidity, real estate concentration, cybersecurity, regulatory, competition and LIBOR-transition risks.
- Special items included a $1.4 million gain on sale of a low-income housing tax-credit investment and $1.4 million of FHLB debt-prepayment penalties. The company declared $2.05 per share in dividends for 2020 and authorized repurchases of up to 850,000 shares; none had been repurchased under the new program by year-end.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter because of CECL’s significant estimation and modeling judgments. Management reported effective internal controls.
Important facts for investors to verify
- Whether pandemic-related deferments convert to delinquency, nonaccrual status or losses, and whether the $44.1 million loan allowance adequately reflects expected losses.
- How much of 2020 earnings growth and mortgage banking revenue is sustainable if refinancing and loan-sale activity normalizes.
- Deposit mix and funding costs, including continued reliance on brokered deposits and the company’s ability to manage 2021 time-deposit maturities and FHLB funding.
- Whether wealth management AUA growth translates into recurring fee growth despite prior client outflows.
- Capital, dividends and repurchases after the transition-period effects of CECL and evolving economic conditions.