Washington Trust Bancorp, Inc. — 2021 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2021; it does not provide standalone fourth-quarter results. Washington Trust is a Rhode Island-based bank holding company offering commercial, residential and consumer banking, mortgage banking, and wealth management services, principally in southern New England. At year-end, it reported $5.85 billion in assets, $4.98 billion in deposits and $564.8 million in shareholders’ equity.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $228.8 million | $226.9 million |
| Net interest income | $141.4 million | $127.4 million |
| Net income | $76.9 million | $69.8 million |
| Diluted EPS | $4.39 | $4.00 |
| Return on average assets / equity | 1.32% / 14.03% | 1.22% / 13.51% |
| Net interest margin, FTE basis | 2.59% | 2.40% |
| Net cash from operating activities | $100.8 million | $36.5 million |
Revenue was nearly flat as higher net interest income largely offset lower noninterest income. Net income rose 10%. The credit-loss provision was a $4.8 million benefit in 2021, versus a $12.3 million expense in 2020. Cash used in investing was $240.9 million, mainly reflecting securities purchases and loan growth; financing provided $116.3 million. Cash and cash equivalents ended at $178.5 million, down from $202.3 million.
Balance sheet and liquidity. Loans were $4.27 billion, up 2% year over year; excluding PPP loans, they rose 6%. Securities totaled $1.04 billion, up 17%. Deposits increased 14% to $4.98 billion, including 18% growth in in-market deposits; brokered time deposits declined 13% to $515.2 million. FHLB advances fell 76% to $145.0 million. The Bank reported $1.64 billion of remaining FHLB borrowing capacity, $16.9 million of FRB capacity, and $703.0 million of unencumbered securities; total disclosed additional funding capacity was $2.36 billion, plus a $40 million unused FHLB line.
Shareholders’ equity rose 6% to $564.8 million. The total risk-based capital ratio was 14.01% at the Corporation and 13.70% at the Bank; both were reported as well capitalized. The Corporation’s Tier 1 leverage ratio was 9.36%. Total FHLB advances and junior subordinated debentures were $145.0 million and $22.7 million, respectively. The $22.7 million subordinated debt references three-month LIBOR plus 1.45% and matures in 2035.
Material changes versus 2020
- Net interest income increased 11%, benefiting from lower funding costs, reduced average FHLB borrowings, PPP fee amortization and commercial loan prepayment fees. FTE margin rose 19 basis points; excluding PPP fee amortization and loan prepayment fees, it was 2.43% versus 2.39%.
- Noninterest income fell 12%: mortgage banking revenue declined 40% to $28.6 million as market pricing and secondary-market loan sales decreased; wealth management revenue rose 16% to $41.3 million. Wealth management assets under administration reached $7.8 billion, up 13%, primarily from market appreciation.
- Noninterest expense increased 8% to $135.5 million, including $6.9 million of penalties for prepaying higher-yielding FHLB advances, versus $1.4 million in 2020. Salaries and benefits increased 5%.
- The loan allowance declined to $39.1 million, or 0.91% of loans, from $44.1 million, or 1.05%. Net charge-offs were $417,000, or 0.01% of average loans, compared with $1.1 million, or 0.03%.
- Residential real estate loans grew 18%; commercial and industrial loans declined 22%, largely because PPP balances decreased. The securities portfolio had $8.9 million of net unrealized losses at year-end, compared with $13.0 million of net unrealized gains in 2020.
Outlook, commentary, risks and unusual items
No specific earnings, revenue or margin guidance is provided. Management said liquidity remained within internal target ranges and believed funding sources were adequate for anticipated needs. It expected the Bank to continue generating adequate earnings to support quarterly dividends and planned to open a full-service branch in Cumberland, Rhode Island, in 2022. The 2021 dividend was $2.10 per share, up 2%; the payout ratio was 47.84%.
- Earnings quality: 2021 results included a $4.8 million credit-loss benefit, $5.4 million of accelerated PPP fee amortization, $3.2 million of commercial loan prepayment fees, and $1.0 million of litigation-settlement income. These were partly offset by $6.9 million of debt prepayment penalties.
- Credit and concentration: Commercial loans were 53% of loans; CRE was $1.64 billion, with 92% located in Connecticut, Massachusetts and Rhode Island. Nonperforming assets were $14.2 million (0.24% of assets), up from $13.2 million. Management disclosed no potential problem loans at year-end; two hospitality loans totaling $9.7 million remained on payment deferral.
- Interest rates and markets: Management’s model estimated that a 100-basis-point rate increase would raise net interest income by 3.34% over months 1–12, while a 100-basis-point decrease would reduce it by 1.32%. Results depend on assumptions about deposit repricing and customer behavior. A 200-basis-point increase was estimated to reduce available-for-sale securities’ market value by $119.5 million.
- Other risks: The filing emphasizes COVID-19 and regional economic uncertainty, inflation and rate changes, commercial real estate and borrower credit risk, deposit runoff and funding costs, securities valuation, cybersecurity and third-party vendors, and wealth-management revenue sensitivity to markets. The LIBOR transition affected approximately $1.6 billion of on-balance-sheet instruments and $2.4 billion of derivative notional; loan conversions to replacement rates, primarily SOFR, had begun.
- Commitments and contingencies: Commitments to extend credit totaled $1.01 billion and standby letters of credit $11.8 million. Management said ordinary-course legal proceedings were not expected to materially affect financial position or results. The Corporation had $22.7 million of junior subordinated debentures and $36.5 million of undiscounted operating lease payments.
- The Corporation restated prior-year segment information after reallocating activities previously reported in the Corporate Unit to Commercial Banking and Wealth Management Services. Auditors issued unqualified opinions on the financial statements and internal controls; the commercial-loan allowance estimate’s qualitative factors were identified as a critical audit matter.
Most important facts for investors to verify
- How much of earnings growth is repeatable after separating the reserve benefit, PPP fee amortization, prepayment fees, settlement income and debt prepayment costs.
- Whether credit quality and the $39.1 million allowance remain adequate as pandemic-related support and loan deferrals unwind; review CRE exposures, collateral and the disclosed allowance sensitivity.
- The stability and cost of the deposit base, including $1.3 billion of estimated uninsured deposits, and the Bank’s capacity to manage runoff without materially higher-cost funding.
- The effect of rising rates on net interest income, deposit migration and the fair value of securities, and progress on the LIBOR-to-SOFR transition.
- Whether wealth-management growth can offset lower mortgage banking activity, and whether the dividend and authorized repurchases remain consistent with capital and funding needs.