Business context and reporting period
Washington Trust Bancorp, Inc. is a Rhode Island-based bank holding company providing commercial, residential and consumer banking, and wealth management services in Rhode Island, Massachusetts and Connecticut. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless noted.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $33.8m | $42.0m | $104.4m | $114.6m |
| Net interest margin, FTE | 1.97% | 2.82% | 2.11% | 2.71% |
| Total revenue | $49.0m | $57.8m | $147.3m | $163.5m |
| Net income | $11.2m | $18.7m | $35.2m | $55.1m |
| Diluted EPS | $0.65 | $1.08 | $2.06 | $3.16 |
| Net interest income after credit-loss provision | $33.3m | $41.2m | $102.4m | $116.7m |
- Balance sheet at September 30: Assets were $7.18bn; loans $5.61bn; deposits $5.42bn; FHLB advances $1.12bn; and shareholders’ equity $431.4m. Since December 31, 2022, loans grew 10%, deposits 8%, and FHLB advances 14%.
- Cash flow, nine months: Operating cash provided was $20.0m, investing cash used was $523.5m, and financing cash provided was $498.2m. Cash and cash equivalents ended at $113.0m.
- Credit and capital: Loan allowance was $40.2m, or 0.72% of loans, versus $38.0m and 0.74% at year-end 2022. Net charge-offs were $114,000 year to date. The Bank’s total risk-based capital ratio was 11.36%; management reported capital above regulatory well-capitalized thresholds.
- Funding and liquidity: Wholesale brokered deposits were $668.0m, 12% of deposits, versus $358.2m, 8%, at year-end. Contingent liquidity totaled $1.80bn, equal to 134.1% of reported uninsured deposits. The filing states liquidity remained within internal target ranges.
Material changes versus the prior comparable period
- Q3 net income fell 40% and nine-month net income fell 36%. Higher asset yields and loan growth were outweighed by higher funding costs: FTE net interest income declined $8.4m in Q3 and $10.3m year to date.
- Noninterest income declined 4% in Q3 and 12% year to date. Year-to-date wealth management revenue fell 11%, and mortgage banking revenue fell 33%; management cited lower assets under administration, client withdrawals and weaker mortgage activity.
- Noninterest expense rose 4% in Q3 and 6% year to date, including higher FDIC deposit insurance costs, legal fees, staffing-related costs and branch expansion. The year-to-date credit-loss provision was $2.0m, compared with a $2.1m release in 2022.
- Nonaccrual loans rose to $33.7m from $12.8m at year-end, principally due to two CRE loans placed on nonaccrual in Q3. Nonperforming assets were $34.3m, or 0.48% of assets, versus $12.8m, or 0.19%. Potential problem loans increased to $20.1m from $0.9m; the identified loans were current on payments.
- Available-for-sale securities had $211.1m of net unrealized losses at September 30, versus $172.4m at year-end. Accumulated other comprehensive loss was $178.7m. Management attributed securities losses primarily to interest-rate and market-spread changes and said it did not expect to sell the securities before recovery.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management said its credit-loss forecast reflected relatively stable economic factors and a lower probability of recession, with a potential “soft-landing” assumption.
- Management highlighted continued funding-cost pressure, deposit migration toward higher-cost products, possible deposit outflows, interest-rate exposure, and sensitivity to loan demand, credit quality and real estate values. The loan portfolio is concentrated in southern New England; CRE office loans were $289.0m, 14% of CRE loans, with 10% classified at quarter-end.
- In September, the Bank agreed to a DOJ fair-lending settlement concerning Rhode Island lending from 2016–2021, approved by the court October 31. The Bank committed $7.0m in loan subsidies and $2.0m for outreach and marketing over five years, and to open two branches in specified census tracts. No civil penalty was imposed.
- In the fourth quarter, the Board approved termination of the qualified pension plan; asset distribution is expected in fiscal 2025, subject to regulatory approvals. Management also reported plans to open branches in Smithfield late in Q4 2023 and Olneyville in early 2024.
- Interest-rate simulations showed potential net interest income sensitivity ranging from a 6.88% decline under a 200-basis-point rate decrease to an 8.56% increase under a 300-basis-point increase in months 1–12; modeled exposure turns negative in months 13–24 in the rate scenarios shown. Results depend on assumptions and a largely static balance sheet.
Important facts for investors to verify
- Whether deposit pricing, brokered funding and FHLB borrowing continue to pressure net interest margin and earnings.
- Developments in the two CRE credits driving higher nonaccrual balances, the $20.1m of potential problem loans, and related allowance adequacy.
- Deposit retention, uninsured-deposit trends and the availability of contingent liquidity under stressed conditions.
- Wealth-management client flows and assets under administration, mortgage activity, and the expected revenue effects of advisor departures.
- The effects of securities valuation losses and the pension-plan termination on equity, capital and future earnings, plus the timing and cost of DOJ settlement commitments.