Washington Trust Bancorp, Inc. — FY 2018 Form 10-K
Business context and reporting period. This annual filing covers the year ended December 31, 2018; quarterly figures are unaudited. Washington Trust is a Rhode Island-based bank holding company serving southern New England through commercial, residential and consumer banking and wealth management. Its results are especially exposed to regional economic conditions, interest rates, real estate and financial markets.
Key financial results
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $194.4 million | $184.3 million | +5% |
| Net interest income | $132.3 million | $119.5 million | +11% |
| Net interest margin | 3.01% | 2.93% | +8 basis points |
| Provision for loan losses | $1.6 million | $2.6 million | −40% |
| Income before taxes | $86.7 million | $77.6 million | +12% |
| Net income | $68.4 million | $45.9 million | +49% |
| Diluted EPS | $3.93 | $2.64 | +49% |
| Return on average assets / equity | 1.46% / 16.20% | 1.04% / 11.23% | Higher |
| Effective tax rate | 21.1% | 40.8% | Lower |
Net income growth exceeded pretax income growth largely because the federal corporate tax rate fell to 21% in 2018. The 2017 comparison included a $6.2 million deferred-tax-asset write-down following enactment of the Tax Act. Higher loan yields and loan growth supported net interest income, while funding costs also rose.
Fourth quarter: Net income was $17.0 million and diluted EPS was $0.98, versus $8.0 million and $0.46 in Q4 2017. Pretax income was $21.6 million versus $21.1 million; the much lower 2018 quarterly tax expense was a major contributor to the net-income comparison.
Balance sheet, cash flow and liquidity
- Total assets were $5.01 billion, up 11% year over year. Loans were $3.68 billion, up 9%; securities were $938.2 million, up 18%.
- Deposits totaled $3.52 billion, up 9%. FHLB advances were $950.7 million, up 20%; junior subordinated debentures were $22.7 million. Shareholders’ equity was $448.2 million, up 8%.
- Operating cash flow was $82.9 million; investing activities used $481.8 million, principally for loan growth and securities purchases; financing activities provided $409.5 million, mainly from deposits and FHLB advances. Cash and cash equivalents increased $10.6 million to $93.5 million.
- Reported unused funding capacity was approximately $1.15 billion, including FHLB, Federal Reserve and unencumbered securities capacity, plus a $40 million unused FHLB line. Management said liquidity remained within internal target ranges and funding sources were expected to meet anticipated needs.
- The Corporation and Bank were described as well capitalized. The Corporation’s total risk-based capital ratio was 12.56%; its leverage ratio was 8.89%. Equity to assets was 8.94%, down from 9.12%.
- Cash dividends declared were $1.76 per share, up 14%; no shares were repurchased in Q4 2018.
Material changes and operating trends
- Loan growth was concentrated in commercial real estate and residential real estate. Commercial loans were 55% of loans; commercial real estate alone was 38%. Approximately 94% of commercial real estate loans and 99% of residential real estate loans were located in Rhode Island, Connecticut or Massachusetts.
- Asset quality improved on several reported measures: nonperforming assets fell to $13.8 million from $15.3 million; nonaccrual loans were $11.7 million versus $15.2 million; and net charge-offs declined to $966,000 from $2.1 million. The allowance was $27.1 million, or 0.74% of loans, versus 0.79%.
- Potential problem loans increased to $14.9 million from $9.7 million; about 90% comprised four commercial relationships, all current on payments at year-end. Past-due residential loans rose, partially offsetting improvement in commercial delinquencies.
- Wealth management assets under administration fell 12% to $5.91 billion. The decline reflected $602.6 million of net client outflows and market depreciation; management attributed approximately 80% of outflows to the loss of client-facing personnel early in 2018. Wealth management revenue fell 3% to $38.3 million.
- Mortgage banking revenue declined 9% to $10.4 million as loans sold fell 19% to $432.9 million. Noninterest expense rose 2%; outsourced services increased 25%, partly offset by lower equipment expense.
- Available-for-sale and held-to-maturity securities had a combined net unrealized loss position of approximately $22.0 million, versus $9.7 million in 2017, primarily attributed to interest-rate movements. Management reported no other-than-temporary impairment in 2018.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings, revenue or margin guidance. Management noted that future results depend on rates, asset and funding mix, loan growth, market conditions, competition and the regional economy. A North Providence branch opened in January 2019.
- Interest-rate simulations estimated that a parallel 100-basis-point increase would raise net interest income 1.94% over months 1–12, while a 100-basis-point decrease would reduce it 3.60%. These are model estimates based on assumptions, not forecasts; management cautioned that actual customer behavior and balance-sheet changes may differ.
- Key risks include rising deposit costs or outflows, reliance on wholesale funding, regional and commercial real estate concentration, loan losses, falling wealth-management assets, mortgage-volume sensitivity, cybersecurity and vendor disruptions, and regulatory changes. LIBOR transition risk was also identified.
- Commercial loan commitments were $533.9 million, home-equity lines $270.5 million and other loan commitments $46.7 million; these are commitments, not funded balances. Total listed commitments, including derivatives and mortgage commitments, were $2.36 billion. The filing states that commitment amounts do not necessarily represent future cash requirements.
- Management said ordinary-course legal proceedings were not expected to materially affect financial position or results. Mortgage representation-and-warranty reserves were $140,000; repurchase demands had been insignificant historically.
- Effective January 1, 2019, lease accounting was expected to add $28.9 million of operating lease right-of-use assets and $30.9 million of lease liabilities. The expected effect on lease expense timing was not material. The expected impact of adopting CECL in 2020 remained under evaluation.
- Other notable items included a $932,000 valuation allowance on a foreclosed commercial property, a $187,000 reduction in contingent-consideration expense, and a $300,000 one-time vendor credit reducing outsourced-services expense.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further pressure on funding costs, margin or capital.
- Developments in the $14.9 million potential-problem-loan pool, commercial real estate concentrations and the adequacy of the allowance.
- Whether wealth-management client outflows and personnel-related attrition persist, and how markets affect fee revenue.
- The scale and recurrence of mortgage-banking, outsourced-services and other noninterest-income and expense changes.
- Actual liquidity use, FHLB borrowing dependence, deposit mix and maturities, and sensitivity to changing rates; compare model assumptions with realized results.
- The company reported unqualified audit opinions on its financial statements and internal controls, and management concluded internal control over financial reporting was effective as of year-end.