Washington Trust Bancorp, Inc. — FY2017 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2017, with year-end balance-sheet comparisons to 2016. Washington Trust is a Rhode Island-based financial holding company operating primarily in southern New England through Commercial Banking and Wealth Management Services. It reported $4.53 billion in assets, $3.24 billion in deposits and $413.3 million in shareholders’ equity at year-end.
Key financial metrics
| Metric | FY2017 / Dec. 31, 2017 | Prior comparable period |
|---|---|---|
| Total revenue | $184.3 million | $175.6 million in 2016; up 5% |
| Net interest income | $119.5 million | $110.5 million in 2016; up 8% |
| Net income | $45.9 million | $46.5 million in 2016; down 1% |
| Diluted EPS | $2.64 | $2.70 in 2016 |
| FTE net interest margin | 2.93% | 3.02% in 2016 |
| Return on average assets / equity | 1.04% / 11.26% | 1.16% / 11.96% in 2016 |
| Total assets / loans / deposits | $4.53 billion / $3.37 billion / $3.24 billion | Assets up 3%, loans up 4%, deposits up 6% year over year |
| FHLB advances / junior subordinated debentures | $791.4 million / $22.7 million | FHLB advances were $848.9 million in 2016; debentures unchanged |
| Cash and cash equivalents | $82.9 million | $107.8 million in 2016 |
| Cash flows | Operating $59.4 million; investing use $179.7 million; financing inflow $95.4 million | Cash declined $24.9 million during 2017 |
| Credit quality | Nonperforming assets $15.3 million; nonaccrual loans 0.45% of loans; allowance $26.5 million, or 0.79% of loans | Nonperforming assets were $23.1 million; nonaccrual loans were 0.68% in 2016 |
| Regulatory capital | Total risk-based capital ratio 12.45%; Tier 1 leverage ratio 8.79% | 12.26% and 8.67%, respectively, in 2016 |
Material changes versus 2016
- Pre-tax income increased 13% to $77.6 million, supported by higher net interest income and a lower loan-loss provision. Net income nevertheless declined because income tax expense rose 42% to $31.7 million.
- The Tax Act required a noncash $6.2 million write-down of net deferred tax assets, reducing 2017 diluted EPS by $0.36. Excluding that write-down and the $508,000 share-based compensation tax benefit, the effective tax rate was 33.6%, versus 32.5% in 2016.
- Net interest income benefited from loan and securities growth, including portfolio purchases made in 2016. The FTE net interest margin narrowed 9 basis points to 2.93%; higher funding costs and relatively lower-yielding purchased assets contributed to pressure.
- Loans grew $139.7 million, principally from residential real estate growth. Deposits increased $179.0 million, while FHLB advances fell $57.6 million. Securities increased $38.0 million to $793.5 million.
- Provision for loan losses declined to $2.6 million from $5.7 million; net charge-offs fell to $2.1 million from $6.7 million. Nonaccrual loans and nonperforming assets also declined. Potential problem loans, however, rose to $9.7 million from $6.8 million.
- Wealth management revenue increased 5% to $39.3 million, with assets under administration rising 11% to $6.7 billion. Mortgage banking revenue declined 14% to $11.4 million, alongside lower secondary-market loan sales.
Outlook, commentary, risks and unusual items
- Management estimated an approximately 21.5% effective tax rate for 2018 under tax laws in effect at filing. The filing provides no broader earnings or revenue guidance.
- Management said liquidity remained within internal target ranges and funding sources were expected to meet anticipated needs. At year-end, remaining FHLB borrowing capacity was $449.9 million, plus an unused $40 million FHLB line. The Bank had brokered deposits exceeding 10% of total deposits.
- Interest-rate simulations showed estimated net interest income increases of 3.02% for a 100-basis-point rate rise and decreases of 3.88% for a 100-basis-point decline over the first 12 months. The filing cautions that simulations rely on assumptions and a largely static balance sheet.
- Credit exposure is concentrated in commercial lending and southern New England: commercial loans were 54% of total loans, and 94% of commercial real estate loans were located in Rhode Island, Connecticut or Massachusetts. Two commercial mortgage relationships accounted for most nonaccrual commercial mortgage exposure; foreclosure proceedings on one collateral property began in early 2018.
- Other key risks include interest-rate and funding-cost sensitivity, borrower and collateral deterioration, securities valuation, wealth-management market exposure, competition, regulatory change, cybersecurity and third-party service-provider disruption. Management’s risk disclosures also highlight regional economic and real-estate conditions.
- Unusual items included the $6.2 million Tax Act deferred-tax charge; a $150,000 goodwill impairment at broker-dealer subsidiary WSC after reduced business activities; and a $570,000 customer check-fraud loss claim, partly offset by a $325,000 settlement received in the fourth quarter.
- WSC’s affiliated mutual funds were dissolved and liquidated in the third quarter of 2017. Management said this did not significantly affect Weston Financial’s assets under management. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective internal controls after migrating loan and deposit accounting systems to an externally hosted environment in Q4.
Important facts for investors to verify
- Reconcile the $6.2 million deferred-tax revaluation charge and its $0.36 per-share effect with reported and normalized earnings; assess the expected 2018 tax rate.
- Track net interest margin, deposit pricing and mix, brokered-deposit reliance, FHLB funding needs and available borrowing capacity as rates and competition change.
- Review developments in the two nonaccrual commercial mortgage relationships, the $9.7 million potential-problem-loan group, and allowance adequacy and charge-offs.
- Assess whether loan and deposit growth can be funded while preserving liquidity and capital; note that 2017 investing cash use exceeded operating cash generation.
- Monitor wealth-management asset flows and market-driven fee income, mortgage originations and sales, and ongoing expenses from technology and outsourced services.
- Review securities unrealized losses and credit-sensitive trust preferred holdings, including below-investment-grade ratings, alongside management’s recoverability assumptions.