Washington Trust Reports Record First Quarter 2018 Earnings

WESTERLY, R.I., April 20, 2018 (GLOBE NEWSWIRE) -- Washington Trust Bancorp, Inc. (Nasdaq:WASH), parent company of The Washington Trust Company, today announced first quarter 2018 net income of $16.2 million, or $0.93 per diluted share, compared to net income of $8.0 million, or $0.46 per diluted share, reported for the fourth quarter of 2017.

The Tax Cuts and Jobs Act ("the Tax Act") was enacted in December 2017 and permanently lowered the corporate tax rate from 35% to 21% effective January 1, 2018.  As previously reported, the enactment of the Tax Act in 2017 required companies to revalue and reassess deferred tax assets and liabilities reflecting the new federal income tax rate.  As a result, in December 2017, Washington Trust's net deferred tax assets were written down by a non-cash charge of $6.2 million, with a corresponding increase to income tax expense.  This write-down adjustment reduced fourth quarter 2017 earnings per diluted share by $0.36.  Net income for the first quarter of 2018 benefited from the lower corporate tax rate.

“Washington Trust started the year on a positive note, reporting record quarterly earnings and earnings per share, for the first quarter of 2018,” stated Edward O. Handy, III, Chairman and Chief Executive Officer.  “Our continued profitability, very good asset quality, and strong capital position provide a solid foundation for future growth.”

Selected highlights for first quarter 2018 include:

• Returns on average equity and average assets were 15.96% and 1.45%, respectively.
• Net interest income amounted to an all-time quarterly high of $31.9 million.
• Consistent with improvement in asset quality metrics and changes in the loan portfolio and loss exposure, no loan loss provision was necessary in the quarter.
• In March, Washington Trust declared a quarterly dividend of 43 cents per share, representing a 4 cent per share, or 10%, increase over the preceding quarter.

Net Interest Income
Net interest income was $31.9 million for the first quarter of 2018, up by $963 thousand, or 3%, from the fourth quarter of 2017.  Included in net interest income in the first quarter of 2018 was loan prepayment fee income of $46 thousand, compared to $174 thousand in the fourth quarter of 2017.  The net interest margin was 3.03% for the first quarter, up by 8 basis points from the preceding quarter.

Significant linked quarter changes included:

• Average interest-earning assets increased by $66 million, reflecting additions to the securities portfolio and loan growth.  The yield on interest-earning assets for the first quarter was 3.84%, up by 14 basis points from the preceding quarter.  The yield benefited from increased market rates of interest.
• Average interest-bearing liabilities increased by $58 million, reflecting increases in average wholesale funding balances (wholesale brokered time deposits and Federal Home Loan Bank advances).  The cost of interest-bearing funds for the first quarter was 1.00%, up by 7 basis points from the preceding quarter, largely due to higher rates on wholesale funding liabilities.

Noninterest Income
Noninterest income totaled $15.7 million for the first quarter of 2018, down by $467 thousand, or 3%, from the fourth quarter of 2017.  Significant linked quarter changes included:

• Wealth management revenues were $10.3 million for the first quarter of 2018, up by $359 thousand, or 4% on a linked quarter basis, largely due to an increase in asset-based revenues.
  Wealth management assets under administration were $6.3 billion at March 31, 2018, down by $371 million, or 6%, from the balance at December 31, 2017.  The decline in wealth management assets primarily resulted from client outflows in the latter portion of the first quarter associated with the loss of certain client-facing personnel.  We estimate that these outflows will reduce future quarterly wealth management revenues by $600 thousand to $700 thousand.
• Mortgage banking revenues were $2.8 million for the first quarter of 2018, down by $259 thousand, or 8%, from the preceding quarter.  These results reflect a decrease in the volume of loans sold, partially offset by a $565 thousand increase in fair value adjustments on mortgage loan commitments and loans held for sale, as well as a higher sales yield.  The increase in fair value adjustments was associated with the commencement of a portfolio-based economic hedging program. Prior to January 2018, Washington Trust economically hedged mortgage loan commitments only on a loan by loan basis.
  Residential mortgage loans sold to the secondary market were $97 million in the first quarter, down by 33% from the $145 million sold in the preceding quarter and down by 9% from the first quarter of 2017.  A higher proportion of residential mortgage loans were originated for retention in portfolio in the first quarter of 2018 than in the fourth quarter of 2017.  Both the volume of residential mortgage loans originated and sold has typically been lower in the first quarter of the year.
• Loan related derivative income was $141 thousand for the first quarter of 2018, down by $329 thousand from the preceding quarter, due to a lower volume of commercial borrower loan related derivative transactions.

Noninterest Expenses
Noninterest expenses totaled $27.1 million for the first quarter of 2018, up by $1.4 million, or 5%, from the fourth quarter.  The linked quarter comparison of noninterest expenses was impacted by the following:

• In the fourth quarter of 2017, a reduction to noninterest expenses of $333 thousand was recognized resulting from a nontaxable downward adjustment in the fair value of a contingent consideration liability that was initially recorded upon the completion of a 2015 acquisition.
• In the fourth quarter of 2017, the receipt of a $325 thousand settlement of a claim against another bank related to a previously disclosed dispute was recognized as a reduction to other expenses.
• In the first quarter of 2018, software system implementation expenses of $681 thousand were recognized, an increase of $435 thousand from the amount recognized in the preceding quarter.  These were classified as other expenses and primarily relate to the conversion of our wealth management accounting system, which was completed in April 2018.
• In the first quarter of 2018, as previously announced, one-time cash incentive bonuses of approximately $450 thousand were expensed and paid as part of Washington Trust's employee compensation enhancements that were made in response to the reduction in corporate taxes from the Tax Act.

Excluding the aforementioned items, noninterest expenses were down by $167 thousand, or 1%, on a linked quarter basis, as increases in salaries and employee benefits expense, legal, audit and professional fees and net occupancy costs were partially offset by declines in advertising and promotion expense and foreclosed property costs.

Effective January 1, 2018, we adopted Accounting Standards Update ("ASU") No. 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost."  As a result, we included the service cost component of net periodic benefit cost associated with our defined benefit pension plans in salaries and employee benefits expense and all other components of net periodic benefit cost in other expenses.  Also, as required by this ASU, we restated the historical periods presented reclassifying all other components of net periodic benefit costs from salaries and employee benefits expense to other expenses, with no change to total noninterest expenses.

Income tax expense totaled $4.3 million for the first quarter of 2018, down by $8.9 million from the preceding quarter.  The effective tax rate for the first quarter of 2018 was 20.8%, compared to 62.3% for the preceding quarter.  The linked quarter reduction in income tax expense and in the effective tax rate was due to the enactment of the Tax Act as described above.  Income tax expense was also net of excess tax benefits on the settlement of share-based awards of $207 thousand in the first quarter of 2018 and $94 thousand in the fourth quarter of 2017.

Investment Securities
The securities portfolio totaled $800 million at March 31, 2018, up by $6 million from the balance at December 31, 2017.  During the quarter, debt securities totaling $42 million and with a weighted average yield of 3.03% were purchased.  The purchases were partially offset by a decline in the fair value of available for sale securities, routine principal pay-downs on mortgage-backed securities and a call of a corporate bond.  Investment securities represented 18% of total assets at March 31, 2018.

Loans
Total loans amounted to $3.4 billion at March 31, 2018, up by $13 million from the end of the fourth quarter.  Total residential real estate loans increased by $23 million, or 2%, from the balance at December 31, 2017.  Total commercial loans decreased by $2 million, with an increase of $7 million in the commercial real estate portfolio and a decline of $9 million in the commercial and industrial portfolio.  Total consumer loans were down by $8 million, or 2%, from the end of the fourth quarter, concentrated in the home equity portfolio.

Deposits and Borrowings
Total deposits amounted to $3.3 billion at March 31, 2018, up by $14 million from the end of the preceding quarter.  Included in total deposits were wholesale brokered time deposit balances of $405 million, which increased by $8 million from the balance at December 31, 2017.  Excluding the wholesale brokered time deposits, our in-market deposits increased by $6 million from the end of the preceding quarter.

Federal Home Loan Bank advances amounted to $809 million at March 31, 2018, up by $17 million from the balance at December 31, 2017.

Asset Quality
Total nonaccrual loans amounted to $10.5 million, or 0.31% of total loans, at March 31, 2018, down from $15.2 million, or 0.45% of total loans, at December 31, 2017.  Total past due loans amounted to $19.4 million, or 0.57% of total loans, at March 31, 2018, down from $20.1 million, or 0.59% of total loans, at December 31, 2017.

The balance and composition of nonaccrual loans and past due loans was impacted by the resolution of two commercial real estate loans in the first quarter of 2018.  In March 2018, a commercial real estate loan with a carrying value of $3.1 million was transferred to other real estate owned as foreclosure actions were completed, and a second commercial real estate loan with a carrying value of $1.8 million was reclassified to loans held for sale as the loan was sold in early April at carrying value.

Based on management's assessment of asset quality metrics, modest loan growth and other favorable changes in loss exposure allocations, management concluded that no loan loss provision was necessary in the first quarter of 2018.  A loan loss provision of $200 thousand was charged to earnings in the preceding quarter.  Net charge-offs totaled $624 thousand in the first quarter of 2018, compared to $1.0 million in the preceding quarter.  The charge-offs recognized in both the first quarter of 2018 and the fourth quarter of 2017 were largely attributable to the two commercial real estate relationships discussed above.  The allowance for loan losses amounted to $25.9 million, or 0.76% of total loans, at March 31, 2018, compared to $26.5 million, or 0.79% of total loans, at December 31, 2017.

Capital and Dividends
Total shareholders' equity was $413 million at March 31, 2018, down by $203 thousand from December 31, 2017, reflecting net income of $16.2 million, offset by $7.5 million in dividends declared and a $10.4 million reduction in the accumulated comprehensive income component of shareholders' equity resulting from a decline in the fair value of available for sale securities.

Capital levels at March 31, 2018 exceeded the regulatory minimum levels to be considered well capitalized, with a total risk-based capital ratio of 12.56% at March 31, 2018, compared to 12.45% at December 31, 2017.  Book value per share amounted to $23.93 at March 31, 2018, compared to $23.99 at December 31, 2017.

The Board of Directors declared a quarterly dividend of 43 cents per share for the quarter ended March 31, 2018, a 10% increase from the preceding quarter.  The dividend was paid on April 13, 2018 to shareholders of record on April 2, 2018.

Conference Call
Washington Trust will host a conference call to discuss its first quarter results, business highlights and outlook on Monday, April 23, 2018 at 10:30 a.m. (Eastern Time).  Individuals may dial in to the call at 1-877-407-9208.  An audio replay of the call will be available, shortly after the conclusion of the call, by dialing 1-844-512-2921 and entering the Replay PIN Number 13678566; the audio replay will be available through May 9, 2018.  Also, a webcast of the call will be posted in the Investor Relations section of Washington Trust's web site, www.washtrustbancorp.com, and will be available through June 30, 2018.

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 www.washtrustbancorp.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: weakness in national, regional or international economic conditions or conditions affecting the banking or financial services industries or financial capital markets; 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; 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 the our competition; changes in legislation or regulation and accounting principles, policies and guidelines; occurrences of cyberattacks, hacking and identity theft; natural disasters; 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, 2017, 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.

1. See the section labeled “SUPPLEMENTAL INFORMATION - Calculation of Non-GAAP Financial Measures” at the end of this document.
2. Annualized based on the actual number of days in the period.
3. Fully taxable equivalent (FTE) net interest income as a percentage of average-earnings assets.

1. Also includes loans originated in a broker capacity.

1. Commercial real estate loans consist of commercial mortgages and construction and development loans.  Commercial mortgages are loans secured by income producing property.
2. Residential real estate loans consist of mortgage and homeowner construction loans secured by one- to four- family residential properties.

The following table presents average balance and interest rate information.  Tax-exempt income is converted to a FTE 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 and renegotiated loans, as well as interest recognized on these loans are included in amounts presented for loans.  Certain previously reported amounts have been reclassified to conform to current year's presentation.

Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: