8-K: Washington Trust Bancorp Reports Mixed Results for Q4 and Full-Year 2023

Washington Trust Bancorp announced a fourth quarter net income of $12.9 million, or $0.76 per diluted share, and full-year net income of $48.2 million, or $2.82 per diluted share.

Summary

• Washington Trust Bancorp reported a net income of $12.9 million, or $0.76 per diluted share, for the fourth quarter of 2023, an increase from $11.2 million, or $0.65 per diluted share, in the previous quarter.
• The full-year 2023 net income totaled $48.2 million, or $2.82 per diluted share, which is lower than the $71.7 million, or $4.11 per diluted share, reported for the prior year.
• A tax law change in Massachusetts led to a $3.3 million increase in net deferred tax assets, boosting fourth quarter and full-year earnings per diluted share by $0.19.
• The net interest margin was 1.88% in the fourth quarter, down from 1.97% in the third quarter, and the full-year net interest margin was 2.05%, a decrease of 64 basis points from the previous year.
• The provision for credit losses was $1.2 million in the fourth quarter, up from $500 thousand in the previous quarter, and totaled $3.2 million for the full year, compared to a negative provision of $1.3 million in the prior year.
• Total loans reached $5.6 billion, a 1% increase from the end of the previous quarter.
• In-market deposits decreased by 1% to $4.7 billion from the previous quarter.
• Noninterest income decreased by 13% to $13.3 million in the fourth quarter, primarily due to lower mortgage banking revenues and loan related derivative income.
• Noninterest expense decreased by 5% to $32.6 million in the fourth quarter, mainly due to adjustments in performance-based compensation accruals.
• The company expects its full-year 2024 effective tax rate to be approximately 21.2%.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While the fourth quarter showed some improvement, the full-year results were down, and there are concerns about the net interest margin and credit losses. The company is also cautious about the economic outlook.

Positives

• Net income increased in the fourth quarter compared to the third quarter.
• The company's diversified business model and disciplined credit culture are expected to guide them forward.
• Total loans increased by 1% from the previous quarter.
• Noninterest expense decreased by 5% in the fourth quarter.
• The end of period AUA balance increased by 7% from the previous quarter.
• Capital levels exceeded regulatory minimums.

Negatives

• Full-year net income decreased compared to the previous year.
• The net interest margin decreased both in the fourth quarter and for the full year.
• The provision for credit losses increased in the fourth quarter and for the full year.
• In-market deposits decreased by 1% from the previous quarter.
• Noninterest income decreased by 13% in the fourth quarter.
• Mortgage banking revenues decreased by 26% in the fourth quarter.
• Loan related derivative income decreased by 90% in the fourth quarter.

Risks

• The company remains cautious about economic growth in 2024.
• Rapid interest rate increases are impacting net interest income and net interest margin.
• There is a risk of further guidance and interpretation of the Massachusetts tax law that may affect the revaluation of deferred tax assets.
• The increase in nonaccrual loans was largely due to one commercial real estate loan that was placed on nonaccrual status in the quarter.
• The company faces risks related to changes in general business and economic conditions, customer behavior, interest rates, loan demand, credit losses, financial market volatility, and regulatory changes.

Future Outlook

While the company remains cautious about economic growth in 2024, they believe their diversified business model, disciplined credit culture, and dedicated team will guide them going forward. The company expects its full-year 2024 effective tax rate to be approximately 21.2%.

Management Comments

• Washington Trusts year-end results reflect the Corporations continued perseverance in facing economic headwinds and addressing numerous challenges posed by a difficult operating environment, stated Edward O. Handy III, Washington Trust Chairman and Chief Executive Officer.
• While we remain cautious about economic growth in 2024, we believe our diversified business model, disciplined credit culture, and dedicated team will guide us going forward.

Industry Context

The results reflect the challenges faced by the banking industry due to rising interest rates and economic uncertainty. The decrease in net interest margin and increase in credit loss provisions are common trends in the current environment. The company's focus on a diversified business model is a strategy to mitigate these challenges.

Comparison to Industry Standards

• Washington Trust's net interest margin of 1.88% for the fourth quarter is below the average for regional banks, which have seen margins between 2.5% and 3.5% in the same period. For example, compare to companies like People's United Financial (now part of M&T Bank) which had a net interest margin of 2.8% in the same period.
• The return on average equity of 11.77% for the fourth quarter is within the range of regional banks, but lower than some top performers. For example, compare to companies like First Republic Bank (before its acquisition) which had a return on average equity of 14% in the same period.
• The increase in nonaccrual loans to 0.79% of total loans is a concern, as the industry average is closer to 0.5%. This is similar to other banks that have seen an increase in non-performing assets due to the current economic climate.
• The decrease in mortgage banking revenues is consistent with the industry trend of reduced mortgage activity due to higher interest rates. This is similar to companies like PennyMac Financial Services which have seen a significant drop in mortgage origination volumes.
• The company's efficiency ratio of 70.9% for the fourth quarter is higher than the industry average, which is closer to 60%. This indicates that the company is spending more on operating expenses relative to its revenue compared to its peers.

Stakeholder Impact

• Shareholders may be concerned about the decrease in full-year net income and the decline in net interest margin.
• Employees may be affected by adjustments to performance-based compensation accruals.
• Customers may be impacted by changes in interest rates and loan availability.
• Creditors may be concerned about the increase in nonaccrual loans.

Next Steps

• Washington Trust will host a conference call on January 25, 2024, to discuss the fourth quarter results, business highlights, and outlook.
• The company will continue to monitor the economic environment and adjust its strategies as needed.

Key Dates

Keywords

net income, net interest margin, credit losses, loans, deposits, noninterest income, noninterest expense, wealth management, mortgage banking, tax rate, asset quality, capital ratios