Washington Trust(WASH) - 2020 Q1 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements (Unaudited) Unaudited Q1 2020 consolidated financial statements, including balance sheets, income, cash flows, and accounting notes Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Note 1 - Basis of Presentation Note 2 - Recently Issued Accounting Pronouncements Note 3 - Cash and Due from Banks Note 4 - Securities Note 5 - Loans Note 6 - Allowance for Credit Losses on Loans Note 7 - Federal Home Loan Bank Advances Note 8 - Shareholders' Equity Note 9 - Derivative Financial Instruments Note 10 - Fair Value Measurements Note 11 - Revenue from Contracts with Customers Note 12 - Defined Benefit Pension Plans Note 13 - Share-Based Compensation Arrangements Note 14 - Business Segments Note 15 - Other Comprehensive Income (Loss) Note 16 - Earnings Per Common Share Note 17 - Leases Note 18 - Commitments and Contingencies Consolidated Balance Sheet Highlights (March 31, 2020 vs. December 31, 2019) | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Total assets | $5,620,979 | $5,292,659 | $328,320 | 6.2% | | Total loans, net | $4,050,731 | $3,865,985 | $184,746 | 4.8% | | Allowance for credit losses on loans | $39,665 | $27,014 | $12,651 | 46.8% | | Total deposits | $3,706,314 | $3,498,882 | $207,432 | 5.9% | | Total shareholders' equity | $508,597 | $503,492 | $5,105 | 1.0% | Consolidated Statements of Income Highlights (Three months ended March 31, 2020 vs. 2019) | Metric | Three months ended March 31, 2020 (in thousands) | Three months ended March 31, 2019 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :--------- | :--------- | | Total interest and dividend income | $47,116 | $50,194 | ($3,078) | (6.1%) | | Total interest expense | $14,514 | $15,610 | ($1,096) | (7.0%) | | Net interest income | $32,602 | $34,584 | ($1,982) | (5.7%) | | Provision for credit losses | $7,036 | $650 | $6,386 | 982.5% | | Total noninterest income | $19,927 | $15,367 | $4,560 | 29.7% | | Total noninterest expense | $30,453 | $26,964 | $3,489 | 12.9% | | Net income | $11,901 | $17,495 | ($5,594) | (32.0%) | | Diluted earnings per common share | $0.68 | $1.00 | ($0.32) | (32.0%) | - The Corporation adopted ASU 2016-13 (CECL) on January 1, 2020, resulting in a $6.5 million increase in the ACL for loans and a $1.5 million increase for unfunded commitments, which decreased retained earnings by $6.1 million (net of tax)[26][30] - The COVID-19 pandemic has caused significant economic disruption, leading to an increased provision for credit losses and potential adverse impacts on net interest income, wealth management revenues, and asset valuations. The Corporation is offering loan payment deferrals and participating in the SBA's Paycheck Protection Program[22][23][27] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2020 financial performance, focusing on COVID-19, CECL, net interest income, asset quality, and liquidity Forward-Looking Statements Critical Accounting Policies and Estimates Overview Regulatory Developments - The CARES Act Massachusetts COVID-19 Emergency Legislation Risk Management Results of Operations Segment Reporting Financial Condition Sources of Funds Liquidity and Capital Resources Off-Balance Sheet Arrangements Asset/Liability Management and Interest Rate Risk - Net income decreased by 32% year-over-year to $11.9 million, primarily due to a significant increase in the provision for credit losses and lower net interest income, partially offset by higher noninterest income[248] Key Performance Metrics (Three months ended March 31, 2020 vs. 2019) | Metric | 2020 | 2019 | | :------------------------------------------------- | :----- | :----- | | Diluted earnings per common share | $0.68 | $1.00 | | Return on average assets | 0.89% | 1.39% | | Return on average equity | 9.49% | 15.52% | | Net interest income as a percentage of total revenues | 62% | 69% | | Noninterest income as a percentage of total revenues | 38% | 31% | - The provision for credit losses surged to $7.0 million in Q1 2020 from $0.65 million in Q1 2019, mainly due to the significant deterioration in the economic forecast caused by the COVID-19 pandemic and the adoption of CECL[272] - Total loans increased by $197.4 million (5%) to $4.1 billion at March 31, 2020, driven by commercial loan growth and residential real estate mortgage loan purchases. The Corporation executed 396 short-term deferments on $406 million of loan balances (10% of total loans) due to COVID-19[313][315] - Wealth management assets under administration (AUA) decreased by $1.0 billion (16%) year-over-year to $5.3 billion, primarily due to net client outflows in H2 2019 and declines in financial markets in March 2020[278] Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk disclosures refer to Item 2 for asset/liability management and Item 1A for financial condition impacts Item 4. Controls and Procedures Disclosure controls effective March 31, 2020, with internal controls updated for CECL adoption and new model validation - Disclosure controls and procedures were deemed effective as of March 31, 2020[421] - Internal controls over financial reporting were updated to support the adoption of Topic 326 (CECL), introducing new controls such as independent model validation and input review of econometric factors[422] PART II. Other Information Item 1. Legal Proceedings Ordinary course legal proceedings are not expected to materially affect the Corporation's financial position or results - Management believes current legal proceedings will not materially affect the Corporation's financial position or results of operations[424] Item 1A. Risk Factors Updated risk factors highlight significant and uncertain adverse COVID-19 impacts on operations, credit, markets, and regulation - The COVID-19 pandemic is expected to continue adversely impacting employees, customers, business operations, credit quality, financial position, liquidity, and results of operations, with the ultimate impact being highly uncertain[426][427] - Key risks from COVID-19 include: heightened cybersecurity and operational risks from remote work, reduced net interest income due to lower federal funds rates, increased credit losses and allowance for credit losses, reduced loan demand, and volatility in wealth management and mortgage banking revenues[426] - Participation in the SBA's Paycheck Protection Program (PPP) exposes the Corporation to reputational harm, increased litigation risk, and the possibility that the SBA may not fund some or all of the associated loan guarantees[428][429] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Corporation repurchased 124,863 shares for $4.3 million in March 2020, suspending program due to COVID-19 uncertainty Summary of Stock Repurchases (Q1 2020) | Period | Total shares purchased | Average price paid per share | Total shares purchased as part of publicly announced plans | Maximum shares that may yet be purchased under plans | | :-------------------- | :--------------------- | :--------------------------- | :------------------------------------------------------- | :---------------------------------------------------- | | January 1 - 31, 2020 | — | $— | — | 850,000 | | February 1 - 29, 2020 | — | — | — | 850,000 | | March 1 - 31, 2020 | 124,863 | $34.61 | 124,863 | 725,137 | | Total | 124,863 | $34.61 | 124,863 | 725,137 | - The 2019 Stock Repurchase Program, authorizing up to 850,000 shares, was suspended on March 25, 2020, due to economic uncertainty from the COVID-19 pandemic[430] Item 6. Exhibits Exhibits filed with Form 10-Q include award agreements, officer certifications, and Inline XBRL financial statements Signatures The report is duly signed by key executive officers of Washington Trust Bancorp, Inc