Business context and reporting period
Washington Trust Bancorp, Inc. is a regional bank holding company serving Rhode Island, eastern Massachusetts and Connecticut through commercial, residential and consumer banking and wealth management. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020; amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $57.1 | $51.3 | $166.9 | $151.9 |
| Net interest income | $31.7 | $33.0 | $95.2 | $101.4 |
| Provision for credit losses | $1.3 | $0.4 | $10.6 | $1.6 |
| Noninterest expense | $32.3 | $26.9 | $91.3 | $82.0 |
| Net income | $18.3 | $18.8 | $51.3 | $53.6 |
| Diluted EPS | $1.06 | $1.08 | $2.95 | $3.07 |
- Net interest margin on a fully taxable equivalent basis was 2.31% for Q3 and 2.41% year to date, versus 2.72% and 2.82% in 2019.
- Mortgage banking revenue rose to $12.4 million in Q3 and $33.3 million year to date, largely reflecting higher mortgage origination and sale volumes. Wealth management revenue declined 2% in Q3 and 6% year to date.
- At September 30, total assets were $5.85 billion; loans were $4.28 billion, deposits $4.29 billion, and shareholders’ equity $527.7 million. The loan allowance was $42.6 million, or 1.00% of loans.
- Cash and due from banks was $204.1 million. Nine-month operating cash flow was $18.2 million, investing cash flow was negative $378.2 million, and financing cash flow was positive $433.6 million.
- FHLB advances were $713.9 million, down from $1.14 billion at year-end 2019; PPPLF borrowings were $105.7 million and junior subordinated debentures were $22.7 million. Available additional funding capacity was $1.44 billion, plus a $40 million unused FHLB line.
- The company reported a 13.09% total risk-based capital ratio and stated that it and the Bank exceeded well-capitalized requirements. The quarterly dividend was $0.51 per share.
Material changes versus the prior comparable period
- Q3 revenue increased 11%, but net income decreased 3%; year-to-date revenue increased 10%, while net income decreased 4%.
- Higher mortgage banking revenue more than offset weaker wealth management fees and lower net interest income. Lower market rates compressed asset yields faster than funding costs, reducing FTE net interest margin by 41 basis points in both the quarter and year-to-date comparison.
- Noninterest expenses rose 20% in Q3 and 11% year to date, including higher salaries and mortgage commissions, outsourced services and professional fees. Credit-loss provision increased substantially year to date, reflecting CECL adoption, COVID-19 expectations and loan growth.
- Loans grew 10% and deposits 22% from December 31, 2019. Commercial and industrial loans included $216.8 million of PPP loans; residential mortgage activity also expanded. FHLB advances declined 37%.
- CECL adoption on January 1, 2020 increased the loan allowance by $6.5 million and the unfunded-commitment allowance by $1.5 million, reducing retained earnings by $6.1 million net of tax.
Outlook, management commentary, risks and unusual items
Management provided no specific earnings or financial guidance. It cautioned that interim results are not necessarily indicative of full-year or future performance. Management cited COVID-19 uncertainty and low interest rates as important influences on credit costs, net interest income and profitability.
- As of September 30, 617 loans totaling $685.4 million had received payment deferrals; 253 loans totaling $418.2 million remained in active deferral. By November 2, active deferrals had fallen to 146 loans totaling $252.9 million. Deferrals may still become nonperforming.
- Management identified CRE hospitality, retail and healthcare as segments at risk. At November 2, active deferrals included $78.6 million in hospitality CRE loans and $68.8 million in retail CRE loans.
- Nonperforming assets were $14.7 million, or 0.25% of assets, versus $18.5 million, or 0.35%, at year-end 2019. Nonaccrual loans were $14.7 million; potential problem loans were $6.4 million.
- PPP loans are government-guaranteed, but the company warned that SBA guarantee or forgiveness issues could create credit, litigation and reputational exposure. Management expected a significant portion of PPP loans to be forgiven.
- Other risks include further deterioration in economic conditions, rising credit losses, interest-rate and securities valuation changes, deposit outflows, market-related declines in wealth-management assets, cybersecurity and operational risks, and uncertainty in commercial real estate and housing markets.
- Interest-rate simulations indicated estimated net interest income sensitivity over 12 months of negative 1.69% for a 100-basis-point rate decrease and positive 5.00% for a 100-basis-point increase. These are model estimates, not forecasts.
- The company stated that ordinary-course litigation was not expected to materially affect its financial position or results. The 2019 share-repurchase program was suspended in March and expired October 31, 2020.
Important facts for investors to verify
- How active loan deferrals, especially hospitality and retail CRE exposures, perform as accommodations end and economic conditions evolve.
- Whether the $42.6 million loan allowance and $2.2 million unfunded-commitment allowance adequately reflect future losses under changing economic assumptions.
- The sustainability of elevated mortgage banking revenue and the effect of rate changes on net interest margin, mortgage activity and securities prepayments.
- The composition and durability of deposit growth, including temporary PPP-related balances and increased brokered deposits, and continued access to liquidity sources.
- PPP loan forgiveness and SBA guarantee outcomes, including any servicing, eligibility, litigation or reputational consequences.
- Capital, liquidity and dividend capacity if credit losses or funding needs rise; the filing reports capital ratios but does not provide a specific earnings outlook.