Washington Trust Bancorp, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. Regional bank holding company serving Rhode Island, eastern Massachusetts, and Connecticut through commercial, residential, and consumer banking and wealth management. This unaudited report covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are to December 31, 2020 unless stated otherwise.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $34.8 million | $30.9 million | $67.6 million | $63.5 million |
| Noninterest income | $20.6 million | $26.3 million | $46.6 million | $46.2 million |
| Noninterest expense | $33.0 million | $28.5 million | $67.7 million | $58.9 million |
| Net income | $17.5 million | $21.0 million | $37.9 million | $32.9 million |
| Diluted EPS | $1.00 | $1.21 | $2.17 | $1.89 |
| FTE net interest margin | 2.55% | 2.31% | 2.53% | 2.46% |
Q2 return on average assets was 1.20% (1.46% in Q2 2020), and return on average equity was 12.92% (16.51%). For the first half, the respective measures were 1.32% and 14.22%.
- Balance sheet: Assets were $5.85 billion; loans $4.30 billion, net of a $41.9 million allowance; securities $1.05 billion; deposits $4.73 billion; shareholders’ equity $547.9 million.
- Funding and liquidity: Deposits rose $347.3 million (8%) from year-end, while FHLB advances fell $185.3 million (31%) to $408.6 million. Reported additional borrowing capacity and unencumbered securities totaled $1.95 billion, plus a $40 million unused FHLB line.
- Cash flow, first half: Operating activities provided $59.4 million; investing used $273.1 million; financing provided $143.6 million. Cash and cash equivalents decreased $70.1 million to $132.2 million.
- Capital: Total risk-based capital ratio was 13.65%; the company reported that it and the Bank remained “well capitalized.” Equity-to-assets was 9.36%.
Material changes versus comparable periods
- Q2 net income fell 17% year over year, despite 12% higher net interest income, as noninterest income declined 22% and expenses rose 16%. First-half net income increased 15%, mainly reflecting a $2.0 million credit-loss provision benefit versus a $9.2 million provision expense in the first half of 2020.
- Q2 mortgage banking revenue decreased $8.9 million year over year to $6.0 million, reflecting lower secondary-market sales yields and lower loan-sale volume. First-half mortgage banking revenue was down $3.0 million to $17.9 million.
- Wealth management revenue rose 21% in Q2 and 18% in the first half. Assets under administration reached $7.44 billion, up 21% from June 2020, primarily due to investment appreciation; first-half net client flows were slightly negative.
- Loan balances grew 2% from year-end, led by an 8% increase in residential real estate loans; commercial and industrial loans declined 6%, partly due to PPP forgiveness. Deposits increased while wholesale FHLB borrowing declined.
Outlook, commentary, risks, and unusual items
- No specific earnings or financial guidance is provided. Management said liquidity remained within internal target ranges and that funding sources were expected to meet anticipated needs.
- Management attributed stronger net interest income to lower funding costs, reduced wholesale funding, and accelerated PPP fee amortization. PPP forgiveness-related amortization added $1.0 million in Q2 and $2.2 million in the first half. Loan prepayment fees also supported margin.
- Expenses included FHLB debt prepayment penalties of $0.9 million in Q2 and $4.2 million in the first half, following repayment of higher-yielding advances. First-half other income included a $1.0 million litigation settlement.
- Credit quality indicators improved: nonaccrual loans were $10.5 million (0.24% of loans), down from $13.2 million at year-end; past-due loans were 0.20% of loans. Active COVID-related deferrals were $93.4 million across 22 loans at June 30, down to $54.0 million across 13 loans by July 31. The allowance was 0.97% of loans, versus 1.05% at year-end.
- Key exposures include COVID-19 effects on borrowers and the regional economy, commercial real estate and industry concentrations, credit-loss estimate uncertainty, interest-rate and deposit-mix sensitivity, mortgage prepayment and market risks, and operational and cybersecurity risks. CRE deferrals were concentrated in hospitality, retail, and healthcare. Available-for-sale securities had $9.3 million of gross unrealized losses; management attributed these largely to rates and spreads and recorded no securities credit-loss allowance.
- Interest-rate simulations estimated that a 100-basis-point increase would raise net interest income 4.11% over months 1–12, while a 100-basis-point decrease would reduce it 1.61%. These are model estimates based on assumptions, not forecasts. Ordinary-course claims and proceedings were not expected by management to materially affect results.
Important facts for investors to verify
- Whether lower mortgage banking revenue and higher operating costs persist, and how they affect earnings beyond this quarter.
- How quickly PPP balances are forgiven and how much of recent net interest income and margin benefited from fee acceleration and loan prepayment fees.
- Performance of COVID-affected borrowers and remaining deferrals, particularly commercial real estate borrowers in hospitality, retail, and healthcare.
- Sensitivity of net interest income, securities values, and deposit funding costs to changing rates and customer deposit behavior.
- Whether credit-loss assumptions, capital ratios, and available liquidity remain adequate as economic conditions and loan balances change.