Washington Trust Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited consolidated results. Washington Trust provides commercial, residential and consumer lending, deposit products, and wealth management services, primarily in Rhode Island, Massachusetts and Connecticut.
Financial performance and position
| Metric | Q1 2023 | Comparable period / balance |
|---|---|---|
| Total revenue | $50.5 million | $52.3 million in Q1 2022; down 3% |
| Net interest income | $37.2 million | $35.1 million in Q1 2022; up 6% |
| Net interest margin | 2.33% | 2.57% in Q1 2022 |
| Net income | $12.8 million | $16.5 million in Q1 2022; down 22% |
| Diluted EPS | $0.74 | $0.94 in Q1 2022 |
| Cash from operating activities | $11.1 million | $38.6 million in Q1 2022 |
| Total assets | $6.86 billion | $6.66 billion at Dec. 31, 2022 |
| Loans / deposits | $5.23 billion / $5.27 billion | Loans up 2%; deposits up 5% from year-end |
| FHLB advances | $925 million | $980 million at Dec. 31, 2022 |
| Shareholders’ equity | $465.0 million | $453.7 million at Dec. 31, 2022 |
Margins and costs: Higher average earning-asset balances and yields lifted net interest income, but funding costs rose faster than asset yields. FTE net interest margin was 2.33%, down from 2.57% a year earlier. Noninterest expense increased 8% to $33.6 million, including higher employee costs and FDIC deposit insurance expense.
Cash flow: Investing activities used $167.4 million, principally reflecting $116.6 million of net loan growth and securities purchases. Financing activities provided $176.1 million, including $249.6 million of net deposit growth, partly offset by net FHLB advance repayments, dividends and share repurchases. Cash and cash equivalents ended the quarter at $138.3 million, versus $228.1 million a year earlier.
Credit, liquidity and capital: The allowance for credit losses was $38.8 million, or 0.74% of loans, unchanged as a percentage from year-end; Q1 provision was $0.8 million. Nonaccrual loans were $14.0 million and total nonperforming assets were $14.7 million, or 0.21% of assets. Contingent liquidity totaled $1.60 billion, equal to 114.5% of uninsured deposits. The company’s total risk-based capital ratio was 12.01%; management reported capital above applicable well-capitalized thresholds. Unprotected deposits were $1.07 billion, or 20% of deposits.
Material changes versus the prior period
- Net income declined 22%, as higher net interest income did not offset lower wealth management and mortgage banking revenue, greater expenses and a higher credit-loss provision.
- Wealth management revenue fell 18% to $8.7 million. Quarter-end assets under administration were $6.16 billion, down 18% year over year; the filing attributes outflows in part to four advisor departures.
- Mortgage banking revenue fell 64% to $1.2 million; loans sold to the secondary market fell 77% to $29.3 million amid higher rates and weaker mortgage activity.
- Deposits rose $249.6 million from year-end, primarily due to a $250.4 million increase in wholesale brokered deposits; in-market deposits were nearly flat. Time deposits increased to $1.53 billion from $1.12 billion.
- Available-for-sale securities had $155.0 million of net unrealized losses at quarter-end, down from $172.4 million at year-end. The filing says management did not intend, and was not more-likely-than-not required, to sell the securities before recovery; it recorded no securities credit-loss allowance.
- Total equity increased by $11.3 million, partly reflecting a $16.0 million improvement in other comprehensive income, while dividends and $8.7 million of repurchases reduced equity. The company repurchased 200,000 shares at an average $43.70.
Outlook, commentary and risks
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Management estimates the advisor-related client withdrawals will reduce full-year 2023 revenue by approximately $3.9 million. It reported $29 million of additional client withdrawals notified from April 1 through April 28, 2023. Associated salary savings were then being offset by higher legal expenses.
- On March 31, the company terminated a cash-flow hedge tied to variable-rate commercial loans. The related $26.5 million pre-tax loss in accumulated other comprehensive loss is to be amortized as a reduction of interest income through May 1, 2026.
- Interest-rate simulations show potential pressure from funding costs and deposit mix shifts. For a 200-basis-point rate increase, modeled net interest income changes were +3.14% over months 1–12 and -5.46% over months 13–24 versus an unchanged-rate scenario. These are model estimates, not forecasts.
- Management identifies deposit runoff, higher funding costs, loan collectability, economic conditions, market volatility, securities values, wealth-management asset flows, cybersecurity and other operational risks. The filing specifically discusses industry liquidity concerns and the March failures of Silicon Valley Bank and Signature Bank, as well as First Republic Bank’s May 1 receivership.
- Management stated that liquidity remained within internal target ranges and that available funding was expected to meet anticipated needs. It also reported no material effect expected from ordinary-course legal proceedings and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposit retention and the mix and cost of wholesale, brokered and in-market funding change materially after quarter-end.
- Whether advisor-related client withdrawals and associated legal expenses track the company’s stated revenue-impact estimate.
- How unrealized securities losses, deposit behavior and interest-rate changes affect liquidity, capital and net interest income.
- Whether nonaccrual commercial loans, particularly CRE and C&I, or other credit-quality measures deteriorate.
- Whether the disclosed hedge-loss amortization, share repurchases and dividend policy have a material effect on future earnings and capital.