Washington Trust Reports First Quarter 2020 Earnings

WESTERLY, R.I., April 27, 2020 /PRNewswire/ -- Washington Trust Bancorp, Inc. (Nasdaq:WASH), parent company of The Washington Trust Company, today announced first quarter 2020 net income of $11.9 million, or $0.68 per diluted share, compared to net income of $15.5 million, or $0.89 per diluted share, reported for the fourth quarter of 2019.  Our results in the first quarter of 2020 reflect the adoption of the Current Expected Credit Losses ("CECL") accounting methodology, as well as the impact of the COVID-19 pandemic.

"Washington Trust reported good balance sheet growth during the quarter, while overall earnings were impacted by several extraordinary factors, including continued Federal Reserve interest rate cuts, the implementation of CECL, and the COVID-19 pandemic," stated Edward O. Handy III, Washington Trust Chairman and Chief Executive Officer.  "We believe our strong financial foundation, solid capital position, disciplined credit culture, and diversified business model will help us navigate through the challenging times ahead."

As the nation's oldest community bank, Washington Trust has managed through numerous economic cycles of varying intensity and has always been there for our employees, customers and communities during difficult financial times.  The COVID-19 pandemic has caused an unprecedented disruption to the economy and the communities we serve.  In response, we are committed to working with and supporting our customers experiencing financial difficulty due to the COVID-19 pandemic, including loan payment deferrals and participation in the Small Business Administration's Paycheck Protection Program.  In addition, we implemented our business continuity plans, which include remote working arrangements for the majority of our workforce, closing our branches and offering drive-through banking or special banking services by appointment only, and promoting social distancing.

Selected financial highlights for the first quarter of 2020 include:

• Returns on average equity and average assets for the first quarter were 9.49% and 0.89%, respectively.
• Total revenues (net interest income plus noninterest income) amounted to $52.5 million for the first quarter, up by $3.9 million, or 8%, from the preceding quarter.
• Residential mortgage loans originated for portfolio or sale amounted to $292 million in the first quarter of 2020, up by $11 million from the preceding quarter and up by $154 million from the first quarter of 2019.
• Total loans amounted to $4.1 billion at March 31, 2020, up by  $197 million, or 5%, from the end of the preceding quarter.  Total loans were up by $352 million, or 9%, from a year ago.
• Total in-market deposits (total deposits less out-of-market wholesale brokered deposits) amounted to $3.3 billion,  up by $60 million, or 2%, from December 31, 2019 and up by $254 million, or 8%, from a year ago.
• In March, Washington Trust declared a quarterly dividend of 51 cents per share.

Net Interest Income

Net interest income was $32.6 million for the first quarter of 2020, up by $608 thousand, or 2%, from the fourth quarter of 2019.  The net interest margin was 2.61% for the first quarter, unchanged from the preceding quarter.

Significant linked quarter changes included:

• Average interest-earning assets increased by $164 million, with increases of $137 million in average loans and $31 million in average investment securities.  The yield on interest-earning assets for the first quarter was 3.76%, down by 10 basis points from the preceding quarter, reflecting the impact of lower market interest rates.
• Average interest-bearing liabilities increased by $167 million, with increases of $49 million in average in-market deposits and $117 million in average wholesale funding balances (wholesale brokered time deposits and Federal Home Loan Bank advances).  The cost of interest-bearing liabilities for the first quarter of 2020 was 1.41%, down by 12 basis points from the preceding quarter, also due to lower market interest rates.

Noninterest Income

Noninterest income totaled $19.9 million for the first quarter of 2020, up by $3.3 million, or 20%, from the fourth quarter of 2019.  Significant linked quarter changes included:

• Wealth management revenues amounted to $8.7 million for the first quarter of 2020, down by $205 thousand, or 2%, on a linked quarter basis.  Asset-based revenues decreased by $376 thousand, or 4%, from the preceding quarter.  This  decrease was partially offset by an increase of $171 thousand in transaction-based revenues on linked quarter basis, largely due to tax reporting and preparation fees, which are generally concentrated in the first half of the year.

Wealth management assets under administration amounted to $5.3 billion at March 31, 2020, down by $898 million, or 14%, from December 31, 2019.  Of this decrease, $773 million was related to the decline in financial markets in March. The average balance of assets under administration for the first quarter of 2020 decreased by approximately $239 million, or 4%, from the average balance for the preceding quarter.

• Mortgage banking revenues totaled $6.1 million for the first quarter of 2020, up by $2.4 million, or 66%, from the fourth quarter of 2019.  The linked quarter change reflected an increase in the mortgage pipeline and a corresponding increase in the fair value of mortgage loan commitments and loans held for sale as of March 31, 2020.  The increase was partially offset by a lower sales volume and sales yield on loans sold to the secondary market.  Mortgage loans sold to the secondary market totaled $162 million in the first quarter of 2020, down by $15 million from the preceding quarter.

Mortgage banking revenues for the first quarter of 2020 increased by $3.5 million, or 130%, compared to the first quarter of 2019.  This reflected increases in both the sale volume and sales yield on loans sold to the secondary market, as well as an increase in the fair value of mortgage loan commitments and loans held for sale.  Mortgage loans sold to the secondary market were up by $70 million from the first quarter of 2019.

• Loan related derivative income was $2.5 million for the first quarter of 2020, up by $1.3 million, or 120%, reflecting higher gains on commercial borrower interest rate swap transactions.

Noninterest Expenses

Noninterest expenses totaled $30.5 million for the first quarter of 2020, up by $1.7 million, or 6%, from the fourth quarter of 2019.  The linked quarter comparison of noninterest expenses was impacted by the following:

• In the first quarter of 2020, we established a contingency reserve of approximately $800 thousand largely due to a potential loss associated with counterfeit checks drawn on a commercial customer's account, which arose at the end of March and remains under investigation.  This was included in other noninterest expenses.
• In the fourth quarter of 2019, a write-down adjustment on one other real estate owned ("OREO") property of $1.0 million was recognized and classified in other expenses.
• In the fourth quarter of 2019, FDIC assessment credits of $235 thousand were recognized.  The credits were fully utilized in 2019, therefore no such credits were recognized in the first quarter of 2020.

Excluding the impact of the aforementioned items, noninterest expenses for the first quarter of 2020 increased by $1.7 million, or 6%, on a linked quarter basis, reflecting increases in salaries and employee benefits expense and outsourced services expense.  Salaries and employee benefits expense was up by $1.1 million, reflecting payroll tax resets associated with the start of the new calendar year and merit increases.  Outsourced services expense was up by $248 thousand from the preceding quarter, reflecting volume-related increases in third party processing costs largely related to customer loan related derivative transactions.

Income tax expense totaled $3.1 million for the first quarter of 2020, down by $1.2 million from the preceding quarter.  The effective tax rate for the first quarter of 2020 was 20.9%, compared to 21.8% for the preceding quarter.  Based on current federal and applicable state income tax statutes, the Corporation currently expects its full-year 2020 effective tax rate to be approximately 20.5%.

Investment Securities

The securities portfolio totaled $917 million at March 31, 2020, up by $18 million, or 2%, from December 31, 2019, reflecting purchases of U.S. government agency and U.S. government-sponsored debt securities, including mortgage-backed securities, as well as an increase in the fair value of available for sale securities.  These increases were partially offset by routine pay-downs on mortgage-backed securities and calls of debt securities.  First quarter 2020 purchases totaled $116 million, with a weighted average yield of 2.35%.  Securities represented 16% of total assets March 31, 2020 and 17% at December 31, 2019.

Loans

Total loans stood at $4.1 billion at March 31, 2020, up by $197 million, or 5% from the end of the preceding quarter.  Linked quarter changes included:

• Commercial loans increased by $140 million, or 7%, from December 31, 2019, with net increases of $70 million in both the commercial real estate portfolio and the commercial and industrial portfolio.  In the first quarter of 2020, commercial loan originations and construction advances totaled approximately $169 million, and C&I line utilization increased by approximately $25 million.  These increases were partially offset by payoffs and paydowns.
• Residential real estate loans increased by $61 million, or 4%, from December 31, 2019 and included purchases of $51 million of residential mortgage loans with a weighted average rate of 3.38%.  The purchased loans were individually evaluated to our underwriting standards and are predominantly secured by properties in Massachusetts.
• The consumer loan portfolio decreased by $4 million from the balance at December 31, 2019.

Deposits and Borrowings

Total deposits amounted to $3.7 billion at March 31, 2020, up by $207 million, or 6%, from the end of the preceding quarter.  Included in total deposits are out-of-market wholesale brokered time deposits, which increased by $147 million from December 31, 2019.  Excluding wholesale brokered time deposits, in-market deposits at March 31, 2020 were up by $60 million, or 2%, from the end of the preceding quarter, reflecting modest growth across substantially all deposit categories.

Federal Home Loan Bank advances totaled $1.2 billion at March 31, 2020, up by $57 million from December 31, 2019.

Asset Quality

Nonperforming assets amounted to $17.9 million at March 31, 2020, down by $571 thousand from the end of the preceding quarter.  This decline reflected a $1.1 million decrease in OREO, partially offset by a $510 thousand increase in nonaccrual loans.  The decrease in OREO resulted from the first quarter sale of a commercial property essentially at its carrying value.

Asset quality metrics remained at stable levels in the first quarter of 2020.  Total nonaccrual loans amounted to $17.9 million, or 0.44% of total loans, at March 31, 2020, compared to $17.4 million, or 0.45% of total loans, at December 31, 2019.  Total past due loans amounted to $16.5 million, or 0.40% of total loans, at March 31, 2020, compared to $15.7 million, or 0.40% of total loans, at December 31, 2019.  Given the uncertain impact to the economy of the COVID-19 pandemic, Washington Trust continues to actively monitor asset quality as the potential exists for adverse events to impact asset quality trends.

Effective January 1, 2020, Washington Trust adopted Accounting Standards Update No. 2016-13, often referred to as CECL, which requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures.  CECL requires that the allowance for credit losses ("ACL") be calculated based on current expected credit losses over the full remaining expected life of the financial assets and also consider expected future changes in macroeconomic conditions.  Upon adoption of CECL, Washington Trust's ACL on loans (a contra-asset) increased by $6.5 million, or 24%, and the ACL on unfunded commitments (a liability) increased by $1.5 million, or 506%, as compared to December 31, 2019.  This increase in the ACL on loans and unfunded commitments upon the adoption of CECL resulted in a $6.1 million decrease to retained earnings, net of deferred tax balances of $1.9 million.

In the first quarter of 2020, a provision for credit losses of $7.0 million was charged to earnings and was mainly attributable to the significant deterioration in the economic forecast due to the COVID-19 pandemic.  Continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the accounting for credit losses under CECL.  Under the previous incurred loss accounting methodology, no provision was recognized in the fourth quarter of 2019.

In the first quarter of 2020, net charge-offs of $623 thousand were recognized, compared to net recoveries of $17 thousand in the preceding quarter.

The ACL on loans amounted to $39.7 million, or 0.97% of total loans, at March 31, 2020, compared to $27.0 million, or 0.69% of total loans, at December 31, 2019.  The ACL on unfunded commitments, included in other liabilities on the Consolidated Balance Sheets, amounted to $2.0 million at March 31, 2020, compared to $293 thousand at December 31, 2019.

Capital and Dividends

Total shareholders' equity was $508.6 million at March 31, 2020, up by $5.1 million from December 31, 2019.  This included net income of $11.9 million and an increase of $12.2 million in the accumulated other comprehensive income component of shareholders' equity, largely reflecting the change in fair value of available for sale debt securities.  These increases were partially offset by $8.9 million in dividend declarations, the $6.1 million decrease to retained earnings due to the adoption of CECL and a net increase in treasury stock of $3.8 million.

In the first quarter of 2020, Washington Trust repurchased 124,863 shares, totaling $4.3 million, at an average price of $34.61 under its previously announced 2019 Stock Repurchase Program.  Due to the economic uncertainty resulting from COVID-19, Washington Trust suspended its 2019 Stock Repurchase Program effective March 25, 2020.

Capital levels at March 31, 2020 exceeded the regulatory minimum levels to be considered well capitalized, with a total risk-based capital ratio of 12.42% at March 31, 2020, compared to 12.94% at December 31, 2019.  Washington Trust has elected the CECL phase-in option provided by regulatory guidance, which delays the estimated impact of CECL on regulatory capital and phases it in over a three year period beginning in 2022.

Book value per share amounted to $29.48 at March 31, 2020, compared to $29.00 at December 31, 2019.

The Board of Directors declared a quarterly dividend of 51 cents per share for the quarter ended March 31, 2020.  The dividend was paid on April 9, 2020 to shareholders of record on April 1, 2020.

Conference Call

Washington Trust will host a conference call to discuss its first quarter results, business highlights and outlook on Monday, April 27, 2020 at 11:30 a.m. (Eastern Time).  Individuals may dial in to the call at 1-888-317-6016.  An audio replay of the call will be available, shortly after the conclusion of the call, by dialing 1-877-344-7529 and entering the Replay PIN Number 10142316; the audio replay will be available through May 11, 2020.  Also, a webcast of the call will be posted in the Investor Relations section of Washington Trust's web site, http://ir.washtrust.com, and will be available through June 30, 2020.

Background

Washington Trust Bancorp, Inc. is the parent of The Washington Trust Company.  Founded in 1800, Washington Trust is the oldest community bank in the nation, the largest state-chartered bank headquartered in Rhode Island and one of the Northeast's premier financial services companies.  Washington Trust offers a full range of financial services, including commercial banking, mortgage banking, personal banking and wealth management and trust services through its offices located in Rhode Island, Connecticut and Massachusetts.  The Corporation's common stock trades on NASDAQ under the symbol WASH.  Investor information is available on the Corporation's web site at http://ir.washtrust.com.

Forward-Looking Statements

This press release contains statements that are "forward-looking statements".  We may also make forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees.  You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and other expressions that predict or indicate future events and trends and which do not relate to historical matters.  You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control.  These risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

Some of the factors that might cause these differences include the following: the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; the length and extent of the economic contraction as a result of the COVID-19 pandemic; continued deterioration in local, regional, national or international economic conditions or conditions affecting the banking or financial services industries, financial capital markets and the customers and communities we serve; changes in consumer behavior due to changing business and economic conditions or legislative or regulatory initiatives; continued volatility in national and international financial markets; reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits; reductions in the market value or outflows of wealth management assets under administration; decreases in the value of securities and other assets; reductions in loan demand; changes in loan collectibility, increases in defaults and charge-off rates; changes in the size and nature of our competition; changes in legislation or regulation and accounting principles, policies and guidelines; operational risks including, but not limited to, cybersecurity breaches, fraud, natural disasters and future pandemics; reputational risk relating to our participation in the Paycheck Protection Program and other pandemic-related legislative and regulatory initiatives and programs; and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under "Risk Factors" in Item 1A of our Annual Report on  Form 10-K for the fiscal year ended December 31, 2019, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC, may result in these differences. You should carefully review all of these factors and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

Supplemental Information - Explanation of Non-GAAP Financial Measures

In addition to results presented in accordance with generally accepted accounting principles ("GAAP"), this press release contains certain non-GAAP financial measures.  Washington Trust's management believes that the supplemental non-GAAP information, which consists of measurements and ratios based on tangible equity and tangible assets, is utilized by regulators and market analysts to evaluate a company's financial condition and therefore, such information is useful to investors.  These disclosures should not be viewed as a substitute for financial results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures which may be presented by other companies.  Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names.

The following table presents average balance and interest rate information.  Tax-exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit.  Unrealized gains (losses) on available for sale securities and fair value adjustments on mortgage loans held for sale are excluded from the average balance and yield calculations.  Nonaccrual loans, as well as interest recognized on these loans, are included in amounts presented for loans.

SOURCE Washington Trust Bancorp, Inc.