Washington Trust Bancorp, Inc. — Q1 2020 Form 10-Q
Business context and reporting period
Washington Trust Bancorp is a regional financial holding company serving Rhode Island, eastern Massachusetts and Connecticut through commercial, residential and consumer banking and wealth management. This unaudited filing covers the three months ended March 31, 2020; year-over-year comparisons are with Q1 2019 unless noted. Results reflect the COVID-19 pandemic, lower interest rates and adoption of the CECL expected-credit-loss standard.
Key financial metrics
| Metric | Q1 2020 / March 31, 2020 | Comparison |
|---|---|---|
| Net income | $11.9 million | $17.5 million; down 32% |
| Diluted EPS | $0.68 | $1.00 |
| Net interest income | $32.6 million; FTE net interest margin 2.61% | $34.6 million; 2.93% margin |
| Provision for credit losses | $7.0 million | $0.65 million |
| Noninterest income / expense | $19.9 million / $30.5 million | Income up 30%; expense up 13% |
| Total assets | $5.62 billion | $5.29 billion at December 31, 2019 |
| Total loans / deposits | $4.09 billion / $3.71 billion | $3.89 billion / $3.50 billion at year-end |
| Allowance for credit losses on loans | $39.7 million; 0.97% of loans | $27.0 million; 0.69% at year-end |
| FHLB advances / junior subordinated debentures | $1.20 billion / $22.7 million | $1.14 billion / $22.7 million at year-end |
| Shareholders’ equity | $508.6 million; 9.05% of assets | $503.5 million; 9.51% at year-end |
Cash flow: Operating activities used $2.8 million; investing activities used $201.3 million, primarily reflecting loan growth and securities purchases; financing activities provided $250.9 million, including deposit growth and FHLB advances. Cash and cash equivalents ended the quarter at $185.3 million, versus $91.6 million at March 31, 2019.
Liquidity and capital: Management reported liquidity within internal targets and approximately $1.00 billion of additional borrowing capacity, plus a $40 million unused FHLB line. The company and Bank exceeded regulatory minimums and were “well capitalized”; the company’s total risk-based capital ratio was 12.42% (12.94% at year-end). The quarterly dividend declared was $0.51 per share.
Material changes versus the prior comparable period
- Net income and diluted EPS declined as the credit-loss provision rose sharply and net interest income and margin fell.
- Net interest income fell 6% on an FTE basis. Lower asset yields reduced income more than lower funding costs offset it; loan yields were 4.09% versus 4.60%.
- Noninterest income increased 30%, led by mortgage banking revenues, which rose to $6.1 million from $2.6 million, and loan-related derivative income, which rose to $2.5 million from $0.7 million. Wealth management revenues fell 6%.
- Wealth management assets under administration were $5.34 billion, down 16% year over year and $898 million from year-end, principally reflecting March market declines and prior client outflows.
- Loans increased 5% from year-end, driven by commercial growth and residential mortgage purchases; deposits increased 6%, including a 52% increase in brokered time deposits. FHLB advances increased 5%.
- CECL adoption on January 1 increased the loan allowance by $6.5 million and the allowance for unfunded commitments by $1.5 million, producing a $6.1 million after-tax reduction to opening retained earnings.
Outlook, management commentary, risks and unusual items
- Management provided no specific earnings or financial guidance. It cautioned that pandemic impacts remain uncertain and that first-quarter results are not necessarily indicative of full-year results.
- COVID-19 may reduce net interest income and margins, increase credit losses and collection costs, disrupt lending and operations, and affect wealth management assets and mortgage activity. Management said the CECL allowance incorporated significant deterioration in the economic forecast, but further deterioration could require additional provisions.
- As of May 1, the company reported SBA approval for 1,345 PPP loans totaling $211 million, generally 100% government-guaranteed and bearing 1% interest. Management expected a significant portion to be forgiven; guarantee deficiencies could create risk.
- As of May 1, it had executed 396 short-term loan deferments totaling $406 million, about 10% of March 31 loans. Management identified retail, hospitality and healthcare commercial real estate, and certain commercial and industrial industries, as particularly exposed to pandemic disruption.
- Washington Trust recorded an approximately $800,000 contingency reserve for a potential loss involving counterfeit checks on a commercial customer account; the matter remained under investigation.
- The company suspended its stock repurchase program effective March 25 after repurchasing 124,863 shares for $4.3 million in the quarter. Its goodwill impairment assessment found reporting-unit fair values significantly above carrying values, but further market deterioration could trigger impairment.
- Other risks include regional economic weakness, borrower defaults and collateral values, deposit outflows, interest-rate and securities-market movements, cybersecurity and work-from-home operational risks, PPP-related reputational or litigation exposure, and Massachusetts mortgage forbearance and foreclosure restrictions.
Most important facts for investors to verify
- Whether pandemic-related deferrals—especially in hospitality and retail—and PPP loan performance translate into delinquencies, charge-offs or additional allowance needs.
- How CECL assumptions and subsequent economic forecasts affect the allowance, regulatory capital and earnings; the filing states the allowance estimate is judgmental and uncertain.
- Whether net interest margin remains under pressure from low rates, asset repricing, deposit costs and mortgage prepayments.
- How quickly wealth management assets and related fee revenues recover, and whether client outflows continue.
- The composition and stability of funding, including increased brokered deposits and FHLB advances, and the company’s liquidity and capital under stress.
- The resolution and possible financial impact of the counterfeit-check matter, and any subsequent goodwill impairment or PPP-related claims.