Washington Trust Bancorp, Inc. — 2021 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless otherwise noted. Washington Trust is a Rhode Island-based bank holding company serving southern New England through commercial, residential and consumer banking and wealth management. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenues | $56.6 | $57.1 | $170.8 | $166.9 |
| Net interest income | $36.1 | $31.7 | $103.7 | $95.2 |
| Provision for credit losses | $0 | $1.3 expense | ($2.0) benefit | $10.6 expense |
| Net income | $18.8 | $18.3 | $56.7 | $51.3 |
| Diluted EPS | $1.07 | $1.06 | $3.24 | $2.95 |
| Net interest margin, FTE | 2.58% | 2.31% | 2.55% | 2.41% |
| Return on average assets | 1.26% | 1.24% | 1.30% | 1.20% |
| Return on average equity | 13.37% | 13.99% | 13.93% | 13.36% |
- Income and margins: Q3 net income increased 2%; year-to-date net income rose 11%. Lower deposit and wholesale funding costs lifted net interest income, partly offset by lower yields on securities and some loan categories. Forgiven PPP loans accelerated $2.0 million of deferred fee amortization in Q3, adding 13 basis points to NIM; management reported Q3 NIM of 2.45% excluding PPP fee acceleration and commercial loan prepayment fees.
- Noninterest revenue and expenses: Q3 noninterest income fell 19% to $20.5 million, mainly because mortgage banking revenue declined 48% to $6.4 million. Wealth management revenue grew 17% to $10.5 million. Nine-month noninterest expense rose 10% to $100.2 million, including $4.2 million in FHLB debt prepayment penalties; salaries and benefits also increased.
- Balance sheet at September 30: Assets were $6.00 billion, up 5% from December 31, 2020. Loans totaled $4.29 billion, up 2%; residential real estate loans grew, while commercial and industrial loans fell, partly due to PPP forgiveness. Available-for-sale securities were $1.05 billion, up 17%.
- Deposits, borrowings and liquidity: Deposits rose 16% to $5.06 billion, including $4.30 billion in-market deposits and $755.0 million in brokered time deposits. FHLB advances declined 63% to $222.6 million. The company reported $2.21 billion in additional funding capacity, plus a $40 million unused FHLB line of credit, and said liquidity remained within internal targets. Nine-month operating cash flow was $106.9 million; investing cash use was $289.8 million and financing cash provided was $281.0 million.
- Credit quality: The loan allowance was $41.7 million, or 0.97% of loans, down from $44.1 million, or 1.05%, at year-end 2020. Nonperforming assets were $11.0 million (0.18% of assets), versus $13.2 million (0.23%). Past-due loans were 0.22% of loans. Management cited improved economic forecasts and stable asset-quality indicators, but identified $12.7 million of potential problem loans tied to three CRE loans in two relationships.
- Capital and shareholder returns: Shareholders’ equity was $555.3 million; book value per share was $32.06. The company and bank exceeded applicable “well capitalized” regulatory thresholds; the company’s total risk-based capital ratio was 13.83%. Dividends declared were $0.52 per share in Q3 and $1.56 year to date.
Material changes and unusual items
- Net interest income rose as funding costs and wholesale borrowings fell; nine-month results also benefited from a $2.0 million credit-loss provision benefit versus a $10.6 million provision expense in 2020.
- Mortgage banking revenue weakened as secondary-market loan sales and sales yields declined. Q3 loans sold to the secondary market were $173.9 million, down 51% year over year.
- Available-for-sale securities shifted from $13.0 million of net unrealized gains at December 2020 to $3.2 million of net unrealized losses at September 2021. The filing attributes the decline mainly to interest-rate movements; management recorded no securities credit-loss allowance.
- Year-to-date other income included a $1.0 million litigation-settlement-related item. Q3 results included no provision for credit losses and no debt-prepayment penalty expense.
- COVID-related deferments had fallen to five active loans totaling $38.0 million at September 30, compared with 654 loans totaling $728 million modified since Q2 2020. PPP loans were $77.4 million at quarter-end; management expected a significant portion of remaining balances to be forgiven.
Outlook, risks and contingencies
- The filing provides no formal earnings or financial guidance. Management said it planned to open a full-service branch in Cumberland, Rhode Island, in 2022.
- Interest-rate simulations estimated that a 100-basis-point rate increase would raise net interest income by 3.00% over months 1–12, while a 100-basis-point decrease would reduce it by 1.14%. These are model scenarios, not forecasts; results depend on balance-sheet and deposit behavior assumptions.
- Principal disclosed risks include COVID-19 effects, credit losses and borrower defaults, regional real-estate and economic conditions, interest-rate and securities-value changes, deposit outflows and liquidity, mortgage and wealth-management market sensitivity, LIBOR transition, competition, regulation, cybersecurity, fraud and operational or reputational events.
- Off-balance-sheet exposures included $962.2 million of commitments to extend credit, $12.1 million of standby letters of credit, and customer interest-rate swaps with $998.5 million notional amount. Notional amounts are not equivalent to expected losses or funding requirements.
- The company reported ordinary-course legal matters; management, after review with counsel, did not expect their disposition to materially affect financial position or results. It reported no material change in the risk factors from its 2020 Form 10-K.
Important facts for investors to verify
- Whether margin and earnings remain resilient as PPP fee accretion fades and funding costs or market rates change.
- Whether the $12.7 million of potential problem CRE loans, active COVID-related deferments and broader regional property exposures resolve without material losses.
- Whether deposit growth and liquidity capacity remain durable, particularly given brokered deposits and potential customer deposit outflows.
- How mortgage banking revenue, wealth-management assets and securities valuations respond to market conditions; review the unrealized securities losses and related capital effects.
- How the $4.2 million debt-prepayment charge, $1.0 million settlement-related income and provision benefit affect comparisons of recurring performance.