Washington Trust Reports Second Quarter 2020 Earnings

WESTERLY, R.I., July 20, 2020 /PRNewswire/ -- Washington Trust Bancorp, Inc. (Nasdaq:WASH), parent company of The Washington Trust Company, today announced second quarter 2020 net income of $21.0 million, or $1.21 per diluted share, compared to net income of $11.9 million, or $0.68 per diluted share, reported for the first quarter of 2020.

"Washington Trust reported strong second quarter earnings, a testament to our success at executing a business continuity plan that allowed our employees to safely provide banking services and maintain a high level of personal customer service during the COVID-19 pandemic," stated Edward O. Handy III, Washington Trust Chairman and Chief Executive Officer.  "We assisted thousands of borrowers, depositors and wealth clients with their financial needs during these uncertain times and our second quarter performance demonstrated how our diversified business model enables us to generate earnings in a challenging environment.  While there is still uncertainty regarding the severity and duration of the COVID-19 pandemic and its related economic effects, we believe that Washington Trust is well-positioned with strong capital and ample sources of liquidity to handle these challenges as we move forward during this unprecedented time."

As the nation's oldest community bank, Washington Trust remains steadfast in its commitment to our employees, customers and communities.  The COVID-19 pandemic has caused an unprecedented disruption to the economy and the communities we serve.  Washington Trust has responded by working with our valued customers to assist them in these difficult times by providing loan payment deferrals, participating in the Small Business Administration's ("SBA's") Paycheck Protection Program ("PPP") and providing other accommodations.  Remote working arrangements continue for a significant portion of our workforce.  In July, we reopened our branch lobbies to customer foot traffic while adhering to and promoting social distancing guidelines.

Selected financial highlights for the second quarter of 2020 include:

• Returns on average equity and average assets for the second quarter were 16.51% and 1.46%, respectively, compared to 9.49% and 0.89%, respectively, in the preceding quarter.
• The provision for credit losses was $2.2 million in the second quarter, compared to $7.0 million in the preceding quarter.
• Mortgage banking revenues hit an all-time quarterly high, totaling $14.9 million for the second quarter, up by $8.8 million, or 144%, from the preceding quarter.
• Residential mortgage loan originations for portfolio or sale amounted to a quarterly record of $426 million in the second quarter of 2020, up by $134 million, or 46%, from the preceding quarter.
• Total loans amounted to $4.3 billion at June 30, 2020, up by $197 million, or 5%, from the end of the preceding quarter. Total loans were up by $557 million, or 15%, from a year ago.
• Total in-market deposits (total deposits less out-of-market wholesale brokered deposits) amounted to $3.6 billion, up by $299 million, or 9%, from the end of the preceding quarter, and up by $551 million, or 18%, from a year ago.

Net Interest Income
Net interest income was $30.9 million for the second quarter of 2020, down by $1.7 million, or 5%, from the first quarter of 2020.  The net interest margin was 2.31% for the second quarter, down by 30 basis points from 2.61% reported in the preceding quarter.

Significant linked quarter changes included:

• Average interest-earning assets increased by $357 million, with increases of $261 million in average loans and $74 million in average cash and short-term investments balances.  The yield on interest-earning assets for the second quarter was 3.18%, down by 58 basis points from the preceding quarter, reflecting the impact of lower market interest rates.
• Growth in average loans included an increase of $138 million in average balances of PPP loans, which are fully guaranteed by the SBA.  The yield on PPP loans for the second quarter was 2.65%, which included the net amortization of deferred lender processing fees and deferred labor costs associated with the loan originations.
• Average interest-bearing liabilities increased by $208 million, with increases of $115 million in average wholesale funding balances and $94 million in average in-market deposits.  Wholesale funding balances consist of wholesale brokered time deposits and borrowings from the Federal Home Loan Bank and the Federal Reserve.  The cost of interest-bearing liabilities for the second quarter of 2020 was 1.08%, down by 33 basis points from the preceding quarter, due to lower market interest rates.
• Average noninterest-bearing demand deposit balances increased by $134 million from the preceding quarter.

Noninterest Income
Noninterest income totaled $26.3 million for the second quarter of 2020, up by $6.4 million, or 32%, from the first quarter of 2020.  Linked quarter changes included:

• Mortgage banking revenues totaled $14.9 million for the second quarter of 2020, up by $8.8 million, or 144%, from the first quarter of 2020, with increases in both realized and unrealized gains associated with mortgage banking activities. Net realized gains increased on a linked quarter basis due to increases in sales volume and sales yield on loans sold to the secondary market. Mortgage loans sold to the secondary market hit an all-time quarterly high of $305 million in the second quarter of 2020, up by $143 million, or 88%, from the preceding quarter. Net unrealized gains also increased on a linked quarter basis, reflecting growth in the mortgage pipeline and a corresponding increase in the fair value of mortgage loan commitments as of June 30, 2020.
• Wealth management revenues amounted to $8.6 million for the second quarter of 2020, down by $84 thousand, or 1%, on a linked quarter basis. This included a decrease in asset-based revenues of $199 thousand, or 2%, correlating to the linked quarter decline in the average balance of wealth management assets under administration ("AUA"). The decrease in asset-based revenues was partially offset by an increase in transaction-based revenues of $115 thousand, or 34%.
• Wealth management AUA amounted to $6.1 billion at June 30, 2020, up by $801 million, or 15%, from March 31, 2020. The increase reflected net investment appreciation of $671.6 million and net client asset inflows of $129.5 million in the second quarter of 2020. The average balance of AUA for the second quarter of 2020 decreased by approximately $157 million, or 3%, from the average balance for the preceding quarter.
• Loan related derivative income was $99 thousand in the second quarter of 2020, down by $2.4 million, or 96%, from the preceding quarter, reflecting a lower volume of commercial borrower interest rate swap transactions.
• Income from bank-owned life insurance totaled $791 thousand in the second quarter of 2020, up by $227 thousand, or 40%, from the preceding quarter. Included in the second quarter was a $229 thousand non-taxable gain due to the receipt of life insurance proceeds.

Noninterest Expenses
Noninterest expenses totaled $28.5 million for the second quarter of 2020, down by $2.0 million, or 6%, from the first quarter of 2020.  The linked quarter comparison of noninterest expenses was impacted by the following item:

• In the first quarter of 2020, a contingency reserve of approximately $800 thousand, largely due to a potential loss associated with counterfeit checks drawn on a commercial customer's account, was included in other noninterest expenses. This matter was resolved in the second quarter of 2020 and resulted in a reduction of $170 thousand from the previously established reserve, which was recognized as a reduction of other noninterest expenses in the second quarter of 2020.

Excluding the impact of the aforementioned item, noninterest expenses for the second quarter of 2020 decreased by approximately$1.0 million, or 3%, from the preceding quarter. Linked quarter changes included:

• Salaries and employee benefits expense, our largest noninterest expense, amounted to $19.5 million, which was essentially flat compared to preceding quarter. Volume-related increases in mortgage commission expense were essentially offset with higher deferred labor (contra-expense) largely associated with PPP loan originations in the second quarter.
• Outsourced services expense was down by $216 thousand from the preceding quarter, largely due to lower volume-related third party processing costs associated with customer loan related derivative transactions.
• FDIC deposit insurance costs were up by $252 thousand from the preceding quarter, largely due to growth in average assets.
• The remaining decline in noninterest expenses reflects modest decreases across a variety of other noninterest expense categories. These categories included net occupancy, employee travel and entertainment and office supplies, which declined due to remote working conditions. Declines in other expense categories such as advertising and promotion and corporate sponsorships were timing-related.

Income Tax
Income tax expense totaled $5.5 million for the second quarter of 2020, up by $2.4 million from the preceding quarter, largely due to a higher level of pre-tax income.  The effective tax rate for the second quarter of 2020 was 20.9%, unchanged from 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 21.0%.

Investment Securities
The securities portfolio totaled $938 million at June 30, 2020, up by $21 million, or 2%, from March 31, 2020, reflecting purchases of U.S. government agency and U.S. government-sponsored debt securities, including mortgage-backed securities.  This increase was partially offset by routine pay-downs on mortgage-backed securities, calls and maturities of debt securities, as well as a temporary decrease in the fair value of available for sale securities.  Second quarter 2020 purchases totaled $132 million, with a weighted average yield of 1.88%.  Securities represented 16% of total assets at both June 30, 2020 and March 31, 2020.

Loans
Total loans stood at $4.3 billion at June 30, 2020, up by $197 million, or 5% from the end of the preceding quarter.  Linked quarter changes included:

• Commercial loans increased by $210 million, or 9%, from March 31, 2020, with a net increase of $197 million in the commercial and industrial portfolio and a net increase of $13 million in the commercial real estate portfolio. Loan growth was due to the origination of PPP loans. As of June 30, 2020, there were 1,690 PPP loans with a carrying value of $212 million included in the commercial and industrial portfolio.
• Residential real estate loans decreased by $2 million from March 31, 2020.
• The consumer loan portfolio decreased by $11 million from the balance at March 31, 2020.

Washington Trust continues to work with and support our customers experiencing financial difficulty due to the COVID-19 pandemic.  Depending on the demonstrated need of the borrower, Washington Trust has provided loan payment deferrals for up to six months.  As of June 30, 2020, we have executed 583 short-term deferments on loan balances of $652 million, which represented 15% of total loan balances as of June 30, 2020.  In accordance with regulatory guidance and GAAP, eligible short-term deferments are not required to be classified as troubled debt restructured loans and will not be reported as past due provided that they are performing in accordance with the modified terms.  See additional discussion under the Asset Quality section below.

Deposits and Borrowings
Total deposits amounted to $4.1 billion at June 30, 2020, up by $395 million, or 11%, from the end of the preceding quarter.  Included in total deposits are out-of-market wholesale brokered time deposits, which increased by $97 million, or 22%, from March 31, 2020.  Excluding wholesale brokered time deposits, in-market deposits at June 30, 2020 were up by $299 million, or 9%, from the end of the preceding quarter, largely due to increases in noninterest-bearing demand deposit balances and NOW account balances.  Growth included PPP loan fundings made into customer accounts at Washington Trust.  These funds are expected to decrease as customers use them for business needs.

Federal Home Loan Bank advances totaled $1.0 billion at June 30, 2020, down by $193 million from March 31, 2020.

In June 2020, Washington Trust began participating in the Federal Reserve's Paycheck Protection Program Liquidity Facility ("PPPLF"), which extends credit to depository institutions with a term of up to two years at a fixed interest rate of 0.35%.  Only PPP loans can be pledged as collateral to access the facility.  As of June 30, 2020, PPPLF borrowings amounted to $39 million.

Asset Quality
Nonperforming assets amounted to $16.0 million at June 30, 2020, down by $1.9 million from the end of the preceding quarter. This decline reflected a $1.9 million decrease in nonaccrual loans, largely in the residential real estate portfolio.  At of June 30, 2020 there were no properties held in OREO.

Total nonaccrual loans amounted to $16.0 million, or 0.37% of total loans, at June 30, 2020, compared to $17.9 million, or 0.44% of total loans, at March 31, 2020.  Total past due loans amounted to $14.7 million, or 0.34% of total loans, at June 30, 2020, compared to $16.5 million, or 0.40% of total loans, at March 31, 2020.  Total troubled debt restructured ("TDR") loans amounted to $6.5 million as of June 30, 2020, up by $5.6 million from March 31, 2020 due to 12 short-term deferments on loans that were delinquent before the pandemic and did not qualify for TDR regulatory relief.  Approximately 80% of TDR balances at June 30, 2020 were in the residential and consumer loan portfolios.  Given the continued 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.

In the second quarter of 2020, a provision for credit losses of $2.2 million was charged to earnings, compared to a provision for credit losses of $7.0 million in the preceding quarter.  The second quarter of 2020 provision for credit losses reflects management's assessment of loss exposure, including continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects.

In the second quarter of 2020, net charge-offs of $308 thousand were recognized, compared to $623 thousand in the preceding quarter.

The allowance for credit losses ("ACL") on loans amounted to $41.4 million, or 0.97% of total loans, at June 30, 2020, compared to $39.7 million, or 0.97% of total loans, at March 31, 2020.  The ACL on unfunded commitments, included in other liabilities on the Consolidated Balance Sheets, amounted to $2.2 million at June 30, 2020, compared to $2.0 million at March 31, 2020.

Capital and Dividends
Total shareholders' equity was $520.2 million at June 30, 2020, up by $11.6 million from March 31, 2020.  This increase included net income of $21.0 million, which was partially offset by $8.9 million in dividend declarations.

Capital levels at June 30, 2020 exceeded the regulatory minimum levels to be considered well capitalized, with a total risk-based capital ratio of 12.78% at June 30, 2020, compared to 12.42% at March 31, 2020.

Book value per share amounted to $30.14 at June 30, 2020, compared to $29.48 at March 31, 2020.

The Board of Directors declared a quarterly dividend of 51 cents per share for the quarter ended June 30, 2020.  The dividend was paid on July 10, 2020 to shareholders of record on July 1, 2020.

Conference Call
Washington Trust will host a conference call to discuss its second quarter results, business highlights and outlook on Tuesday, July 21, 2020 at 8:30 a.m. (Eastern Time).  Individuals may dial in to the call at 1-888-243-4451.  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 10146147; the audio replay will be available through August 4, 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 September 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 political, business and economic conditions, including increased unemployment, or legislative or regulatory initiatives; 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 incidents, 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.