Washington Trust Bancorp, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Washington Trust is a regional bank holding company providing commercial, residential and consumer lending, deposits, and wealth management in Rhode Island, eastern Massachusetts and Connecticut. Unless otherwise noted, figures are in U.S. dollars.
Financial performance
- Q2 profit: Net income was $21.0 million, up 22% from $17.3 million a year earlier; diluted EPS was $1.21 versus $0.99.
- First-half profit: Net income was $32.9 million, down 5% from $34.8 million; diluted EPS was $1.89 versus $1.99.
- Revenue: Q2 total revenue was $57.3 million, up 13%; six-month revenue was $109.8 million, up 9%. Mortgage banking revenue drove the increase, while net interest income declined.
- Net interest and margin: Q2 net interest income was $30.9 million, down 9%; six-month net interest income was $63.5 million, down 7%. Fully taxable-equivalent net interest margin fell to 2.31% in Q2 from 2.81% and to 2.46% for the first half from 2.87%, as asset yields repriced down faster than funding costs.
- Credit costs: Provision for credit losses was $2.2 million in Q2 and $9.2 million for the first half, compared with $0.5 million and $1.2 million, respectively, in 2019. The loan allowance was $41.4 million, or 0.97% of loans, versus $27.0 million, or 0.69%, at year-end 2019.
- Cash flow: For the first half, operating activities provided $14.9 million, investing activities used $412.5 million, and financing activities provided $482.5 million. Cash and cash equivalents increased $84.9 million to $223.3 million.
- Balance sheet and funding: Total assets were $5.88 billion, up 11% from year-end; loans were $4.29 billion, up 10%; deposits were $4.10 billion, up 17%. FHLB advances were $1.01 billion, down 12%; PPPLF borrowings were $38.9 million. Shareholders’ equity was $520.2 million.
- Liquidity and capital: Management reported $1.25 billion of additional funding capacity, plus a $40 million unused FHLB line. The company and bank exceeded “well capitalized” thresholds; the company’s total risk-based capital ratio was 12.78%.
Material changes and unusual items
- Mortgage banking revenue rose to $14.9 million in Q2 from $3.6 million, reflecting higher mortgage origination and sale volumes as rates declined. First-half mortgage loans sold to the secondary market were $467.4 million, versus $229.5 million.
- Wealth management revenue declined 10% in Q2 and 8% for the first half. Assets under administration were $6.14 billion, down 5% year over year, affected by market volatility and prior client outflows.
- Washington Trust adopted CECL on January 1, 2020. Adoption increased the loan allowance by $6.5 million and the unfunded-commitment allowance by $1.5 million, reducing retained earnings by $6.1 million after tax. Prior-period figures were not restated.
- The company recorded a $229,000 non-taxable gain from life insurance proceeds in first-half BOLI income. A first-quarter reserve related largely to suspected counterfeit checks was reduced by $170,000 in Q2 after resolution.
Outlook, risks and contingencies
- The filing gives no quantified earnings or margin guidance. Management says the duration and effects of COVID-19 remain uncertain and that operating results for the first half are not necessarily indicative of full-year results.
- As of June 30, the company had executed 583 loan payment deferments covering $652.2 million, about 15% of total loans. A significant portion was expected to reach initial expiration in Q3; management expected some borrowers might seek extensions and said asset quality could worsen.
- Commercial real estate deferments totaled $447.4 million, including 81% of hospitality balances and 38% of retail balances. Management identified retail, hospitality and healthcare CRE, and selected C&I industries including accommodation and food services, education, and entertainment and recreation, as exposed to significant pandemic impacts.
- The $212.2 million PPP portfolio comprised 1,690 loans and was federally guaranteed subject to program requirements. The company noted potential reputational and litigation exposure, and risk that the SBA could deny or reduce a guarantee if loan origination, funding or servicing requirements were deficient.
- Other key risks include further credit-loss provisions, lower net interest income from prolonged low rates, market-related declines in wealth management assets, mortgage-market volatility, collateral valuation uncertainty, and operational or cybersecurity risks associated with remote work. Management’s first-quarter goodwill impairment assessment found fair value significantly above carrying value, but further market deterioration could trigger impairment testing or charges.
- Management said liquidity remained within internal target ranges and capital exceeded regulatory minimums. It also stated that ordinary-course legal proceedings were not expected to materially affect financial position or results.
Investor verification priorities
- Track the performance and extensions of deferred loans, particularly hospitality, retail and healthcare CRE, and the resulting allowance and charge-offs.
- Review CECL assumptions and the adequacy of the $41.4 million loan allowance as economic forecasts evolve.
- Assess whether mortgage banking gains and volumes can persist and how continued margin compression affects core earnings.
- Monitor deposit growth and mix, brokered funding, FHLB borrowing, liquidity capacity, and the transition of PPP loans through forgiveness and PPPLF repayment.
- Verify PPP guarantee compliance and any resulting litigation, reputation, or repayment exposure; monitor wealth management assets and related fee revenue.