Washington Trust Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Washington Trust is a regional bank holding company providing commercial, residential and consumer lending, deposit products, and wealth management services, primarily in Rhode Island, eastern Massachusetts and Connecticut. Unless noted, financial amounts below are in millions.
Financial performance and position
- Q3 earnings: Net income was $18.7 million, versus $18.8 million a year earlier; diluted EPS was $1.08, versus $1.07. Nine-month net income was $55.1 million, down 3% from $56.7 million; diluted EPS was $3.16, versus $3.24.
- Revenue and margins: Q3 total revenue was $57.8 million, up 2%; nine-month revenue was $163.5 million, down 4%. Net interest income increased 17% in Q3 and 11% year to date. Net interest margin was 2.82% for Q3 and 2.71% for nine months, up from 2.58% and 2.55%, respectively. Higher asset yields and loan growth supported net interest income, partly offset by higher funding costs.
- Noninterest income and expenses: Noninterest income fell 23% in Q3 and 27% year to date, chiefly from sharply lower mortgage banking revenues; wealth management revenues also declined. Noninterest expense rose 2% in Q3 but fell 5% year to date, partly because 2021 included $4.2 million of debt prepayment penalties and higher mortgage-related compensation.
- Credit costs and asset quality: The company recorded an $0.8 million credit-loss provision in Q3; for nine months it reported a $2.1 million provision benefit. The loan allowance was $36.9 million, or 0.76% of loans, versus $39.1 million, or 0.91%, at year-end 2021. Nonperforming assets were $12.1 million, 0.19% of assets, down from $14.2 million, or 0.24%.
- Balance sheet: Total assets were $6.41 billion, up 10% from year-end 2021. Loans grew 13% to $4.85 billion, led by residential real estate loans. Deposits rose 2% to $5.07 billion; in-market deposits increased 4%, while wholesale brokered deposits fell 14%.
- Funding and liquidity: FHLB advances increased to $700 million from $145 million, supporting loan growth and securities purchases. Reported additional funding capacity was $1.66 billion, including $967 million from the FHLB. Nine-month operating cash flow was $71.8 million; investing cash outflow was $723.8 million and financing cash inflow was $606.3 million.
- Capital and shareholder returns: Shareholders’ equity was $432.3 million, down 23%; equity to assets declined to 6.75% from 9.65%. The principal driver was a $151.8 million increase in accumulated other comprehensive loss, largely reflecting market-rate-related declines in securities and hedge values. The company reported regulatory capital ratios above minimums and stated it remained well capitalized. It declared $1.62 per share in dividends year to date and repurchased 194,162 shares for $9.5 million.
Material changes, outlook and risks
- Securities and interest rates: Available-for-sale securities had a fair value of $982.6 million versus amortized cost of $1.166 billion, with $183.4 million of gross unrealized losses. Management attributed most losses to interest-rate and spread changes, expected recovery of cost, and reported no securities credit-loss allowance. These losses materially reduced GAAP equity and could affect capital if circumstances change.
- Wealth management outflows: Wealth management assets under administration were $6.32 billion at quarter-end, down from $7.78 billion at 2021 year-end, primarily due to market depreciation. Four client-facing advisors resigned; they were associated with about $1.0 billion of AUA. The company reported client withdrawal notifications of approximately $546 million from October 1 through November 4, 2022, estimated an annual revenue decline of approximately $3.2 million, and cautioned that further outflows could occur.
- Mortgage banking: Nine-month mortgage banking revenue fell 69% to $7.6 million, reflecting lower origination and sale activity amid higher rates. Loans sold to the secondary market declined 62% year over year.
- Interest-rate sensitivity: Management’s simulation estimated that a 100-basis-point rate increase would raise net interest income 0.58% over months 1–12 but lower it 2.66% over months 13–24, relative to an unchanged-rate scenario. The filing cautions that simulations rely on assumptions and are not forecasts; funding costs and deposit mix shifts are key sensitivities.
- Expansion and guidance: The company opened a commercial lending office in New Haven and a branch in Cumberland. It announced applications for three additional Rhode Island branches in 2023, subject to approvals. The filing provides no specific earnings or financial guidance.
- Other risks and contingencies: Management cited inflation, changing interest rates, credit performance, market volatility, wealth AUA declines, securities values, competition, regulatory changes, cybersecurity, fraud and other operational risks. It stated ordinary-course legal proceedings were not expected to materially affect financial position or results. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor facts to verify
- Whether the reported $546 million of notified AUA withdrawals were completed, and the scale of any additional client outflows and resulting fee-revenue effects.
- How deposit pricing, deposit mix, brokered funding and FHLB borrowing evolve as rates and liquidity conditions change.
- Whether unrealized securities losses remain interest-rate-driven and recoverable, and how they affect tangible and regulatory capital.
- Whether loan growth, credit quality, allowance coverage and nonperforming loans change materially, particularly in regional real estate markets.
- Whether net interest income and mortgage banking performance track management’s rate and market assumptions; the filing’s simulations are not earnings guidance.