Washington Trust Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Washington Trust is a Rhode Island-based bank holding company providing commercial, residential and consumer banking, and wealth management services in southern New England.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $33.5 million | $37.5 million | $70.7 million | $72.6 million |
| Net interest margin, FTE | 2.03% | 2.71% | 2.18% | 2.64% |
| Total noninterest income | $14.3 million | $15.9 million | $27.6 million | $33.0 million |
| Noninterest expense | $33.0 million | $31.1 million | $66.6 million | $62.3 million |
| Net income | $11.3 million | $20.0 million | $24.1 million | $36.4 million |
| Diluted EPS | $0.66 | $1.14 | $1.41 | $2.08 |
- At June 30, total assets were $7.01 billion, loans $5.38 billion, deposits $5.31 billion, FHLB advances $1.04 billion and shareholders’ equity $459.2 million. Since year-end 2022, assets grew 5%, loans 5% and deposits 6%.
- Q2 average loan yield rose to 4.97% from 3.40%, but average cost of interest-bearing liabilities increased to 3.02% from 0.42%. Management attributed lower net interest income chiefly to funding costs outpacing asset-yield gains.
- First-half operating cash flow was negative $9.9 million, versus positive $51.6 million a year earlier; investing cash flow was negative $306.8 million and financing cash flow positive $326.6 million. Cash and cash equivalents ended the period at $128.3 million.
- Capital remained above regulatory minimums: the Bank’s total risk-based capital ratio was 11.50% and its common equity tier 1 ratio 10.77%; the Bank was categorized as well capitalized. The company’s equity-to-assets ratio was 6.55%.
Material changes versus comparable periods
- Q2 net income declined 44% year over year; first-half net income declined 34%. Revenue fell 10% in Q2 and 7% in the first half, while noninterest expense increased 6% and 7%, respectively.
- Wealth management revenue decreased 10% in Q2 and 14% year to date; mortgage banking revenue decreased 16% and 46%. Management cited client outflows, lower mortgage activity amid higher rates, and reduced loan-related derivative activity.
- Deposits increased by $295.5 million from year-end, including a $243.3 million increase in wholesale brokered deposits. Noninterest-bearing deposits fell by $100.7 million; time deposits rose by $527.4 million.
- The allowance for credit losses on loans increased to $39.3 million from $38.0 million, while reserve coverage edged down to 0.73% of loans from 0.74%. Nonperforming assets were $11.1 million, or 0.16% of assets, compared with $12.8 million, or 0.19%, at year-end.
- Available-for-sale securities had $168.1 million of gross unrealized losses at quarter-end. Management attributed losses primarily to rates and spreads, reported no securities credit-loss allowance, and stated it did not intend or expect to be required to sell before recovery of amortized cost.
Outlook, commentary and risks
- The filing provides no formal earnings or margin guidance. Management said it expects approximately $3.8 million lower full-year 2023 wealth management revenue associated with advisor departures. Cumulative related client withdrawals were $660 million through June 30; management said higher legal expense was offsetting salary savings.
- Management plans additional Rhode Island branches in Smithfield and Providence in late 2023 or early 2024. It opened a Barrington branch in April 2023.
- Liquidity resources included $1.72 billion of contingent liquidity, equal to 125.8% of reported uninsured deposits, plus a $40 million unused FHLB line. Management said liquidity stayed within internal targets and funding sources were adequate for anticipated needs. Uninsured deposits after stated exclusions were $936.9 million, or 18% of deposits.
- Interest-rate exposure is mixed: the company’s model estimated that a 100-basis-point rise would increase net interest income 0.53% over months 1–12 but reduce it 5.74% over months 13–24; a 100-basis-point decline was estimated to reduce it 3.08% and 0.52%, respectively. Results depend on assumptions, including deposit repricing and customer behavior.
- Key risks include deposit competition and outflows, higher funding costs, interest-rate changes, credit deterioration, regional real-estate concentration, market-driven wealth assets, and operational, cybersecurity, regulatory and litigation risks. CRE totaled $1.94 billion; 89% was located in Connecticut, Massachusetts and Rhode Island. Management said ordinary-course legal matters were not expected to materially affect results.
- Other notable items: the company recognized $658,000 of nontaxable BOLI proceeds in 2023; repurchased 200,000 shares for $8.7 million; declared a $0.56 quarterly dividend; and terminated a cash-flow hedge in March, with the remaining loss amortized through May 2026.
Important facts for investors to verify
- Whether deposit retention and mix, especially brokered funding and time-deposit repricing, continue to pressure net interest margin.
- Whether wealth management client outflows persist and whether the projected $3.8 million 2023 revenue impact changes.
- Credit trends in CRE and other regional real-estate exposures, including delinquencies, nonaccrual loans and allowance adequacy.
- How the securities portfolio’s unrealized losses and modeled interest-rate sensitivities affect capital, liquidity and earnings if rates or deposit behavior differ from assumptions.
- Whether loan growth, liquidity capacity, capital ratios, dividends and repurchases remain consistent with the company’s funding and regulatory needs.