Washington Trust Bancorp, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; quarterly comparisons below refer to Q4 2014 versus Q4 2013. Washington Trust is a Rhode Island-based bank holding company serving southern New England through Commercial Banking and Wealth Management Services.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Net income | $40.8 million | $36.2 million |
| Diluted EPS | $2.41 | $2.16 |
| Net interest income | $99.5 million | $91.8 million |
| Net interest margin, FTE | 3.28% | 3.28% |
| Noninterest income | $59.0 million | $62.1 million |
| Noninterest expense | $96.8 million | $98.8 million |
| Return on average assets / equity | 1.23% / 11.87% | 1.17% / 11.65% |
Q4 2014 net income was $11.2 million, or $0.66 diluted EPS, compared with $9.8 million, or $0.58, in Q4 2013. Quarterly net interest income was $26.3 million versus $23.5 million.
- Balance sheet: Assets were $3.59 billion, up 12%; loans were $2.86 billion, up 16%; deposits were $2.75 billion, up 10%. Shareholders’ equity was $346.3 million.
- Credit quality: Nonperforming assets were $17.1 million, or 0.48% of assets, versus $19.8 million, or 0.62%, a year earlier. Nonperforming loans were 0.56% of loans. The allowance was $28.0 million, or 0.98% of loans; net charge-offs were $1.7 million, or 0.07% of average loans.
- Funding and capital: FHLBB advances were $406.3 million, compared with $288.1 million. Regulatory capital ratios were 9.14% Tier 1 leverage, 11.52% Tier 1 risk-based and 12.56% total risk-based; the company and Bank were considered well capitalized. Unused FHLBB borrowing capacity was approximately $569.4 million.
- Cash flow: Operating activities provided $2.7 million; investing activities used $357.4 million; financing activities provided $349.7 million. Cash and cash equivalents declined $5.0 million to $80.4 million.
- Other: Wealth management revenue was $33.4 million, 22% of total revenue; assets under administration were $5.07 billion, up 6%. Dividends declared were $1.22 per share versus $1.03 in 2013.
Material changes and unusual items
- Net income increased 13%. Loan growth and lower funding costs drove higher net interest income; the FTE margin was unchanged. The provision for loan losses declined by $0.6 million.
- Noninterest income fell 5%, reflecting lower mortgage banking revenue and the March 2014 sale of the merchant processing business. Wealth management revenue rose 5%, largely on higher asset-based fees.
- The merchant processing sale generated a $6.3 million gain ($4.0 million after tax). Divestiture costs were $0.4 million ($0.2 million after tax). Prepaying $99.3 million of FHLBB advances generated $6.3 million of penalty expense ($4.0 million after tax). Together, the identified 2014 transactions reduced net income by $0.2 million, or about $0.01 per diluted share.
- 2013 included $3.5 million of securities impairment losses and other items; management estimated those identified transactions reduced 2013 net income by $2.7 million, or $0.15 per diluted share.
- Other comprehensive loss was $7.3 million, primarily reflecting an $8.6 million after-tax pension obligation adjustment. Pension liabilities increased following a lower discount rate and revised mortality assumptions.
Outlook, risks and contingencies
The filing provides no quantified earnings or growth guidance. Management described regional economic recovery as gradual and cited comparatively high Rhode Island unemployment. It planned to open two full-service branches in the greater Providence area in 2015. In February 2015, it modified $69.2 million of FHLBB advances, extending maturities and reducing the weighted-average rate from 4.06% to 3.50%.
Key risks include commercial and real-estate credit concentration, interest-rate and funding sensitivity, competition, regional economic weakness, market-driven wealth management fees, cybersecurity and third-party operational risks, and regulatory change. Management reported liquidity within internal target ranges and believed funding sources met anticipated needs. A $4.9 million restructured commercial mortgage was placed on nonaccrual in 2014 and had an $854,000 loss allocation. Potential problem loans were approximately $1.2 million. Management stated ordinary-course legal matters were not expected to materially affect financial position or results. The company disclosed mortgage-loan repurchase and indemnification exposure and a $280,000 reserve.
The 10-K describes Basel III capital requirements effective January 1, 2015 and states that the Bancorp intended to elect to exclude accumulated other comprehensive income from regulatory capital. The company and its auditor reported effective internal controls; the auditor issued an unqualified opinion on the consolidated financial statements.
Important facts for investors to verify
- How much of reported earnings growth is sustainable after separating the merchant processing gain, debt prepayment penalties, and other unusual items.
- Whether rapid loan growth—particularly in commercial lending and residential mortgages—maintains underwriting quality, and whether the allowance remains adequate as portfolio mix changes.
- Deposit composition and funding costs, especially the increase in out-of-market brokered time deposits, and the refinancing or rollover of near-term FHLBB advances and certificates of deposit.
- Exposure to interest-rate moves, including the effect of adjustable-rate mortgage repricing, deposit migration and securities valuation changes.
- Progress on planned branches and growth in wealth management assets and fee revenue; these assets are not included in reported balance-sheet assets.
- Capital and dividend capacity under the new capital rules, including the stated AOCI election and the effect of pension-related changes.