Washington Trust Announces Record Earnings for Third Quarter 2012

Washington Trust Announces Record Earnings for Third Quarter 2012

Diluted Earnings Per Share up 17% over Third Quarter 2011

WESTERLY, R.I.--(BUSINESS WIRE)-- Washington Trust Bancorp, Inc. (NASDAQ Global Select; symbol: WASH), parent company of The Washington Trust Company, today announced third quarter 2012 net income of $8.9 million, or 54 cents per diluted share. On a diluted earnings per share basis, third quarter 2012 results were up by 1 cent, or 2%, from second quarter 2012 and by 8 cents, or 17%, from third quarter 2011. The returns on average equity and average assets for the third quarter of 2012 were 12.02% and 1.17%, respectively, compared to 11.89% and 1.16%, respectively, for the second quarter of 2012.


"Washington Trust's strong operating performance led to another quarter of record earnings," stated Joseph J. MarcAurele, Washington Trust Chairman, President and CEO. "While all of our business lines performed well, total deposits and total loans reached the highest levels in our 212 year history. These results reflect our success at expanding our branch and mortgage banking footprint, generating new commercial banking and wealth management business, and continuing to build our reputation as one of the premier financial institutions in New England."

Selected financial highlights for the third quarter of 2012 included:

  • Loans totaled $2.3 billion at September 30, 2012, up by $42.9 million, or 2%, from June 30, 2012, led by growth in the commercial loan portfolio.

  • Total deposits amounted to $2.2 billion at September 30, 2012, up $104.2 million, or 5%, from June 30, 2012, with growth in lower cost deposits.

  • Net interest margin was 3.28%, a modest 2 basis point decrease from the previous quarter, reflecting the impact of a sustained low interest rate environment on earning asset yields, which declined at a slightly higher rate than funding costs during the quarter.

  • Due to continued strong mortgage origination volume, mortgage banking revenues (net gains on loan sales and commissions on loans originated for others) totaled $3.5 million for the quarter, a 16% increase over the prior quarter.

  • Nonperforming assets (nonaccrual loans, nonaccrual investment securities and property acquired through foreclosure or repossession) amounted to $21.1 million, or 0.69% of total assets, at September 30, 2012, compared to $18.8 million, or 0.62% of total assets, at June 30, 2012.

Third quarter 2012 results also included the following transactions:

  • A non-taxable gain of $528 thousand was recognized in the quarter resulting from the receipt of bank owned life insurance ("BOLI") proceeds.

  • Balance sheet management transactions, which are expected to result in net interest income enhancement of approximately $319 thousand for the remainder of 2012 with continuing benefits in future years, were conducted in the latter portion of the quarter, including:

    • Federal Home Loan Bank of Boston ("FHLBB") advances totaling $32.4 million were prepaid, which resulted in third quarter 2012 debt prepayment penalty expense of $1.2 million.

    • The terms of $13.0 million of FHLBB advances with original maturity dates in 2014 and 2015 were modified into longer terms maturing in 2017.

  • The net impact of these transactions was a reduction in earnings of 1 cent per diluted share in the third quarter of 2012.

Net Interest Income

The net interest margin for the third quarter of 2012 was 3.28%, down from 3.30% in the second quarter of 2012, reflecting a 7 basis point decline in the yield on interest-earning assets, partially offset by a 6 basis point decline in cost of funds. Third quarter 2012 net interest margin was up by 6 basis points from 3.22% in the third quarter of 2011, largely reflecting a reduction in the cost of funds.

Average interest-earning assets for the third quarter of 2012 increased by $25.8 million, or 1%, from the previous quarter and grew by $103.3 million, or 4%, from the third quarter of 2011, primarily reflecting loan growth.

As a result, third quarter 2012 net interest income of $22.7 million was up by $325 thousand, or 1%, compared to the previous quarter and up by $1.2 million, or 6%, compared to the third quarter of 2011.

Noninterest Income

Third quarter 2012 noninterest income totaled $16.9 million, up by $747 thousand, or 5%, from the previous quarter and up by $4.0 million, or 31%, from the third quarter of 2011. As mentioned above, third quarter 2012 results included a $528 thousand non-taxable gain related to the receipt of BOLI proceeds. There were no sales of securities or other-than-temporary impairment ("OTTI") losses on securities in the third quarter of 2012. Previous quarter noninterest income included net realized gains on securities of $299 thousand, as well as a $348 thousand gain on the sale of bank property. In the third quarter 2011, OTTI losses on securities of $158 thousand were recognized. Excluding these items, noninterest income for the third quarter of 2012 was up by $866 thousand, or 6%, from the previous quarter and up by $3.3 million, or 25%, from the third quarter of 2011.

Significant changes in noninterest income included the following:

  • Mortgage banking revenues increased by $489 thousand from the second quarter of 2012 and by $2.4 million from the third quarter of 2011, due to another strong quarter of mortgage origination activity.

  • Third quarter 2012 wealth management revenues were $7.2 million, down by $280 thousand on a linked quarter basis and up by $402 thousand compared to the third quarter of 2011. The decline on a linked quarter basis reflects a decrease in tax preparation fees, which are typically concentrated in the second quarter. Wealth management assets under administration totaled $4.2 billion at September 30, 2012, up by $162.6 million, or 4%, from June 30, 2012.

  • Merchant processing fees totaled $3.2 million for the third quarter of 2012, up by $475 thousand on a linked quarter basis and comparable with the third quarter of 2011. On a linked quarter basis, the increase reflects a seasonal increase in the volume of transactions processed for customers. See discussion on the corresponding increase in merchant processing costs under the caption "Noninterest Expenses."

Noninterest Expenses

Noninterest expenses totaled $26.3 million for the third quarter of 2012, up by $1.1 million, or 4%, from the previous quarter and up by $3.7 million, or 16%, from the third quarter of 2011. Included in noninterest expenses in the second and third quarters of 2012 were debt prepayment penalties of $961 thousand and $1.2 million, respectively. Also included in second quarter 2012 noninterest expenses was a charge of $131 thousand for the termination of an operating lease, classified in net occupancy expense. Excluding the debt prepayment charges and the operating lease termination charge, noninterest expenses for the third quarter of 2012 increased by $981 thousand, or 4%, from the previous quarter and up by $2.5 million, or 11%, from the third quarter of 2011.

Significant changes in noninterest expense included the following:

  • Salaries and employee benefit costs amounted to $15.2 million in the third quarter of 2012, an increase of $763 thousand, or 5%, from the previous quarter and up by $2.3 million, or 18%, from the third quarter of 2011. These increases reflect higher amounts of commissions paid to mortgage originators, higher staffing levels in support of mortgage origination and other business lines and higher incentive accruals. The increase from 2011 also reflected higher defined benefit plan cost primarily due to a lower discount rate.

  • Merchant processing costs totaled $2.7 million in the third quarter of 2012, up by $387 thousand on a linked quarter basis and comparable with the third quarter of 2011. See the discussion above regarding the corresponding increase in merchant processing fee income.

Income tax expense amounted to $3.9 million for the third quarter of 2012, compared to $4.0 million for the second quarter of 2012 and $3.3 million for the third quarter of 2011. The effective tax rate for the third quarter of 2012 was reduced to 30.3% from 31.7% in the previous quarter, as a result of the non-taxable gain related to the receipt of BOLI proceeds in the quarter.

Asset Quality

Total nonaccrual loans amounted to $17.7 million, or 0.79% of total loans, at September, 30, 2012, up by $2.0 million from June 30, 2012. At September 30, 2012, total past due loans amounted to $23.6 million, or 1.05% of total loans, up by $3.3 million from June 30, 2012. Loans classified as troubled debt restructurings ("TDRs") totaled $20.6 million at September 30, 2012, up by $7.3 million from June 30, 2012. These changes in nonaccrual loans, past due loans and TDRs are largely associated with a small number of larger commercial relationships.

The loan loss provision charged to earnings amounted to $600 thousand for the third quarter of 2012, level with the second quarter of 2012 and down by $400 thousand from the third quarter of 2011. Net charge-offs amounted to $296 thousand in the third quarter of 2012, compared to net charge-offs of $197 thousand in the second quarter of 2012 and $712 thousand in the third quarter of 2011.

The allowance for loan losses was $30.8 million, or 1.36% of total loans, at September 30, 2012 compared to $30.4 million, or 1.38% of total loans, at June 30, 2012.

Loans

Total loans rose by $42.9 million, or 2%, in the third quarter of 2012, with increases in commercial loans of $27.3 million and residential loans of $13.4 million. Total loans are up by $109.5 million, or 5%, from December 31, 2011, including a $94.7 million, or 8%, increase in total commercial loans.

Investment Securities

The investment securities portfolio amounted to $483.9 million at September 30, 2012, down by $32.3 million from June 30, 2012 and down by $109.5 million from December 31, 2011, primarily due to principal payments received on mortgage-backed securities not being reinvested.

Deposits and Borrowings

Total deposits increased by $104.2 million, or 5%, in the third quarter of 2012 and by $108.3 million, or 5%, since December 31, 2011, reflecting growth in lower cost non-time categories of deposits.

FHLBB advances totaled $417.7 million at September 30, 2012, down by $106.3 million from June 30, 2012 and down by $122.8 million from December 31, 2011. In addition to balance sheet management transactions, this decline reflects less demand for wholesale funding due to the strong deposit growth.

Other borrowings were $229 thousand at September 30, 2012, compared to $481 thousand at June 30, 2012 and $19.8 million at December 31, 2011. The $19.5 million decline in other borrowings from the balance at December 31, 2011, was primarily due to the maturity of securities sold under repurchase agreements.

Capital Management

Capital levels continued to exceed the regulatory minimum levels to be considered well capitalized, with a total risk-based capital ratio of 13.18% at September 30, 2012, compared to 12.86% at December 31, 2011. Total shareholder's equity was $298.4 million at September 30, 2012, up by $17.0 million from the balance at December 31, 2011.

Dividends Declared

The Board of Directors declared a quarterly dividend of 24 cents per share for the quarter ended September 30, 2012. The dividend is a one cent increase over the amount paid in the previous quarter and is the Corporation's second dividend increase in 2012. The dividend was paid on October 12, 2012 to shareholders of record on October 1, 2012.

Conference Call

Washington Trust will host a conference call on Tuesday, October 23, 2012 at 8:30 a.m. Eastern Time to discuss third quarter results and business outlook. This call is being webcast and can be accessed through the Investor Relations section of the Washington Trust web site, www.washtrust.com. Individuals may dial in to the call at 1-877-317-6789. The international dial-in number is 1-412-317-6789 and the Canada dial-in number is 1-866-605-3852. A replay of the call will be posted in this same location on the web site shortly after the conclusion of the call. To listen to the replay, dial 1-877-344-7529. For international access, dial 1-412-317-0088. The Conference Number for replay is 10018650. The replay will be available until 9:00 a.m. on November 7, 2012.

Background

Washington Trust Bancorp, Inc. is the parent of The Washington Trust Company, a state-chartered bank headquartered in Westerly, Rhode Island. Founded in 1800, Washington Trust is the oldest community bank in the nation and is the largest independent bank headquartered in Rhode Island. Washington Trust offers a full range of financial services, including commercial banking, small business 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 The NASDAQ Global Select® Stock Market under the symbol WASH. Investor information is available on the Corporation's web site: www.washtrust.com.

Forward-Looking Statements

This press release contains certain statements that are "forward-looking statements". We may also make written or oral 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 the control of Washington Trust. These risks, uncertainties and other factors may cause the actual results, performance or achievements of Washington Trust 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: continued weakness in general national, regional or international economic conditions or conditions affecting the banking or financial services industries or financial capital markets, volatility and disruption in national and international financial markets, government intervention in the U.S. financial system, 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 of wealth management assets under administration, changes in the value of securities and other assets, reductions in loan demand, changes in loan collectibility, default and charge-off rates, changes in the size and nature of Washington Trust's competition, changes in legislation or regulation and accounting principles, policies and guidelines such as the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 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, 2011, as filed with the Securities and Exchange Commission and as updated by our Quarterly Reports on Form 10-Q, 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 press release, and Washington Trust assumes 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.

Washington Trust Bancorp, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (unaudited)

(Dollars in thousands, except par value)

Sep 30,
2012

Dec 31,
2011

Assets:

Cash and due from banks

$49,935

$82,238

Short-term investments

3,599

4,782

Mortgage loans held for sale, at fair value; amortized cost $33,737 in 2012 and $19,624 in 2011

35,409

20,340

Securities:

Available for sale, at fair value; amortized cost $424,194 in 2012 and $524,036 in 2011

440,289

541,253

Held to maturity, at cost; fair value $45,031 in 2012 and $52,499 in 2011

43,569

52,139

Total securities

483,858

593,392

Federal Home Loan Bank stock, at cost

40,418

42,008

Loans:

Commercial and other

1,219,327

1,124,628

Residential real estate

715,412

700,414

Consumer

321,958

322,117

Total loans

2,256,697

2,147,159

Less allowance for loan losses

30,752

29,802

Net loans

2,225,945

2,117,357

Premises and equipment, net

27,482

26,028

Investment in bank-owned life insurance

54,344

53,783

Goodwill

58,114

58,114

Identifiable intangible assets, net

6,346

6,901

Other assets

63,418

59,155

Total assets

$3,048,868

$3,064,098

Liabilities:

Deposits:

Demand deposits

$352,330

$339,809

NOW accounts

267,495

257,031

Money market accounts

459,671

406,777

Savings accounts

268,191

243,904

Time deposits

886,972

878,794

Total deposits

2,234,659

2,126,315

Federal Home Loan Bank advances

417,675

540,450

Junior subordinated debentures

32,991

32,991

Other borrowings

229

19,758

Other liabilities

64,920

63,233

Total liabilities

2,750,474

2,782,747

Shareholders' Equity:

Common stock of $.0625 par value; authorized 30,000,000 shares; issued and outstanding 16,371,272 shares in 2012 and 16,292,471 shares in 2011

1,023

1,018

Paid-in capital

90,829

88,030

Retained earnings

208,639

194,198

Accumulated other comprehensive loss

(2,097

)

(1,895

)

Total shareholders' equity

298,394

281,351

Total liabilities and shareholders' equity

$3,048,868

$3,064,098

Washington Trust Bancorp, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(Dollars and shares in thousands, except per share amounts)

Three Months

Nine Months

Periods ended September 30,

2012

2011

2012

2011

Interest income:

Interest and fees on loans

$25,840

$25,069

$76,547

$74,035

Interest on securities:

Taxable

3,672

4,640

12,118

14,282

Nontaxable

660

746

2,035

2,273

Dividends on corporate stock and Federal Home Loan Bank stock

52

64

207

197

Other interest income

27

15

64

52

Total interest income

30,251

30,534

90,971

90,839

Interest expense:

Deposits

3,391

3,808

10,210

12,040

Federal Home Loan Bank advances

3,726

4,539

11,809

13,956

Junior subordinated debentures

393

393

1,176

1,175

Other interest expense

5

245

244

728

Total interest expense

7,515

8,985

23,439

27,899

Net interest income

22,736

21,549

67,532

62,940

Provision for loan losses

600

1,000

2,100

3,700

Net interest income after provision for loan losses

22,136

20,549

65,432

59,240

Noninterest income:

Wealth management services:

Trust and investment advisory fees

5,877

5,547

17,474

17,045

Mutual fund fees

1,024

1,035

3,051

3,293

Financial planning, commissions and other service fees

292

209

1,326

1,043

Wealth management services

7,193

6,791

21,851

21,381

Service charges on deposit accounts

833

821

2,356

2,662

Merchant processing fees

3,207

3,223

7,927

7,849

Card interchange fees

675

597

1,844

1,665

Income from bank-owned life insurance

1,006

488

1,969

1,446

Net gains on loan sales and commissions on loans originated for others

3,504

1,077

9,616

2,139

Net realized gains on securities

299

197

Net gains (losses) on interest rate swap contracts

63

(47

)

87

(6

)

Equity in earnings (losses) of unconsolidated subsidiaries

27

(144

)

114

(433

)

Other income

413

308

1,473

1,229

Noninterest income, excluding other-than-temporary impairment losses

16,921

13,114

47,536

38,129

Total other-than-temporary impairment losses on securities

(85

)

(54

)

Portion of loss recognized in other comprehensive income (before tax)

(158

)

(124

)

(137

)

Net impairment losses recognized in earnings

(158

)

(209

)

(191

)

Total noninterest income

16,921

12,956

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