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WASH > SEC Filings for WASH > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for WASHINGTON TRUST BANCORP INC


8-May-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Corporation's consolidated financial statements, and notes thereto, included in the Annual Report on Form 10-K for the year ended December 31, 2012, and in conjunction with the condensed unaudited consolidated financial statements and notes thereto included in Item 1 of this report. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results for the full-year ended December 31, 2013 or any future period.

Forward-Looking Statements
This report contains 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 the Corporation. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Corporation 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 the Corporation's competition, changes in legislation or regulation and accounting principles, policies and guidelines 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, 2012, 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.

Critical Accounting Policies and Estimates Accounting policies involving significant judgments, estimates and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income are considered critical accounting policies. The Corporation considers the following to be its critical accounting policies: allowance for loan losses, review of goodwill and intangible assets for impairment and valuation of investment securities for impairment. There have been no significant changes in the Corporation's critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

Recently Issued Accounting Pronouncements See Note 2 to the Unaudited Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Corporation's consolidated financial position, results of operations or cash flows.

Overview
Washington Trust offers a comprehensive product line of financial services to individuals and businesses including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut, ATMs, and its Internet website at www.washtrust.com.

Our largest source of operating income is net interest income, the difference between interest earned on loans and securities and interest paid on deposits and other borrowings. In addition, we generate noninterest income from a number of sources, including wealth management services, loan sales and commissions on loans originated for others, merchant credit card processing and deposit services and bank-owned life insurance ("BOLI"). Our principal noninterest expenses include salaries and employee benefits, occupancy and facility-related costs, merchant processing costs, technology and other administrative expenses.


Our financial results are affected by interest rate volatility, changes in economic and market conditions, competitive conditions within our market area and changes in legislation, regulation and/or accounting principles. While the regional economic climate has been improving in recent quarters, uncertainty surrounding future economic growth, consumer confidence, credit availability and corporate earnings remains. Management believes that overall credit quality continues to be affected by weaknesses in national and regional economic conditions, including high unemployment levels, particularly in Rhode Island.

Washington Trust opened its fourth mortgage lending office in March 2012 and a new full-service branch in July 2012. We believe the Corporation's financial strength and stability, capital resources and reputation as the largest independent bank headquartered in Rhode Island, were key factors in the expansion of our retail and mortgage banking business and in delivering solid results in the first quarter of 2013. Going forward, we will continue to leverage our strong, statewide brand to build market share in Rhode Island whenever possible and bring select business lines to new markets with high-growth potential while remaining steadfast in our commitment to provide superior service.

Composition of Earnings
Net income for the first quarter of 2013 amounted to $7.4 million or 45 cents per diluted share, compared to $8.4 million, or 51 cents per diluted share, reported for the first quarter of 2012. The returns on average equity and average assets for the first quarter of 2013 were 9.91% and 0.98%, respectively, compared to 11.85% and 1.11%, respectively, for the same quarter in 2012.

Included in the first quarter 2013 results was the recognition of a $2.8 million impairment charge to earnings on a trust preferred collateralized debt obligation investment security. The net after-tax impact of this impairment was $1.9 million, or 11 cents per diluted share. See additional discussion in the "Financial Condition" section under the caption "Securities" below. Excluding this impairment charge, results for the first quarter 2013 primarily reflected continued solid mortgage banking results (net gains on loan sales and commissions on loans originated for others), higher wealth management revenues and a lower provision for loan losses, partially offset by increases in salaries and employee benefit costs.

Net interest income for the three months ended March 31, 2013 amounted to $22.5 million, compared to $22.4 million for the same period in the prior year. The net interest margin (fully taxable equivalent net interest income as a percentage of average interest-earnings assets) for the quarter ended March 31, 2013 was 3.32%, up by 5 basis points from the first quarter a year earlier.

The loan loss provision charged to earnings for the three months ended March 31, 2013 and 2012 amounted to $600 thousand and $900 thousand, respectively. Net charge-offs for the same periods totaled $334 thousand and $657 thousand, respectively. Management believes that the level of the provision for loan losses has been consistent with the trend in asset quality and credit quality indicators.

For the three months ended March 31, 2013, noninterest income, excluding other than temporary impairment ("OTTI") increased by $1.5 million, or 10%, compared to the first quarter 2012. This improvement year over year reflects increases in mortgage banking revenues of $1.1 million, or 35%, and wealth management revenues of $289 thousand, or 4%.

Revenue from wealth management services is our largest source of noninterest income. For the three months ended March 31, 2013 and 2012, wealth management revenues totaled $7.5 million and $7.2 million, respectively. Wealth management assets under administration totaled $4.42 billion at March 31, 2013, up by $220.4 million, or 5%, from the balance at December 31, 2012, largely reflecting net investment appreciation and income resulting from favorable conditions in the financial markets.

Mortgage banking revenues, which are dependent on mortgage origination volume and are sensitive to interest rates and the condition of the housing markets, amounted to $4.2 million and $3.1 million for the three months ended March 31, 2013 and 2012, respectively. To a certain extent, the mortgage origination volume during 2013 reflects an increase in refinancing activity in response to sustained low market rates of interest as well as continued origination volume growth in our residential mortgage lending offices.

Noninterest expenses for the three months ended March 31, 2013 increased by $785 thousand, or 3%, over the comparable 2012 period, primarily due to increases in salaries and employee benefit costs. The increase in salaries and employee benefit costs from 2012 reflected higher staffing levels to support growth and higher levels of business development based compensation in mortgage banking and other areas.


Income tax expense amounted to $3.4 million for the three months ended March 31, 2013, down by $452 thousand from the same period in 2012. The effective tax rate for the three months ended March 31, 2013 and 2012 was 31.6% and 31.5%, respectively.

Results of Operations
Segment Reporting
Washington Trust manages its operations through two business segments, Commercial Banking and Wealth Management Services. Activity not related to the segments, such as the investment securities portfolio, wholesale funding activities, income from BOLI and administrative expenses not allocated to the business lines are considered Corporate. The Corporate unit also includes the residual impact of methodology allocations such as funds transfer pricing offsets. Methodologies used to allocate income and expenses to business lines are periodically reviewed and revised. See Note 14 to the Unaudited Consolidated Financial Statements for additional disclosure related to business segments. The Corporate unit's net interest income for the first quarter of 2013 increased by $195 thousand compared to the first quarter of 2012, due to funding costs declining more than asset yields. The Corporate unit's first quarter 2013 noninterest income decreased by $2.6 million from the comparable 2012 period, largely due to the $2.8 million other-than-temporary impairment charge recognized on a pooled trust preferred investment security during the first quarter 2013. Noninterest expenses for the Corporate unit totaled $3.0 million for the three months ended March 31, 2013, an increase of $214 thousand compared to the same period in 2012.

The Commercial Banking segment reported net income of $7.2 million for the three months ended March 31, 2013 compared to $6.6 million for the same period in 2012. Net interest income for this segment for the first quarter ended March 31, 2013 decreased by $117 thousand, or 1%, from the same period in 2012, reflecting lower yields on loans offset somewhat by the benefit of lower funding costs, as well as growth in average loan balances. The provision for loan losses for the three months ended March 31, 2013 declined by $300 thousand, or 33%, from the comparable 2012 period. Noninterest income derived from the Commercial Banking segment totaled $7.9 million for the three months ended March 31, 2013, up by $1.2 million, or 18%, from the comparable 2012 period, primarily due to higher mortgage banking revenues. Commercial Banking noninterest expenses for the three months ended March 31, 2013, were up by $406 thousand, or 3%, from the same period in 2012, reflecting increases in salaries and employee benefit expenses, largely due to higher staffing levels to support growth and higher levels of business development based compensation in mortgage banking.

The Wealth Management Services segment reported net income of $1.3 million for the three months ended March 31, 2013 compared to $1.2 million for the same period in 2012. Noninterest income derived from the Wealth Management Services segment was $7.5 million, up by 4% when compared to the same period in 2012. Wealth management assets under administration totaled $4.42 billion at March 31, 2013, up by $220.4 million, or 5%, from December 31, 2012. Noninterest expenses for the Wealth Management Services segment totaled $5.4 million for the three months ended March 31, 2013, up by $165 thousand, or 3%, from the same period in 2012, reflecting increases in salaries and employee benefit expenses due to higher levels of business development based compensation.

Net Interest Income
Net interest income continues to be the primary source of Washington Trust's operating income. Net interest income is affected by the level of interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Included in interest income are loan prepayment fees and certain other fees, such as late charges. The following discussion presents net interest income on a fully taxable equivalent ("FTE") basis by adjusting income and yields on tax-exempt loans and securities to be comparable to taxable loans and securities. For more information, see the section entitled "Average Balances / Net Interest Margin - Fully Taxable Equivalent (FTE) Basis" below.

FTE net interest income for the three months ended March 31, 2013 increased by $134 thousand, or 1%, from the same period in 2012. The net interest margin was 3.32% for the three months ended March 31, 2013, compared to 3.27% for the same period in 2012. While there has been growth in average loan balances, in the current historically low interest rate environment, market yields on new loan originations are below the average yield of the existing loan portfolio. Due to the combined effect of new loan growth and the runoff of higher yielding loan balances, we anticipate that interest rates on total earning assets will continue to decline. The impact of this trend is likely to exceed the benefit to be realized in reduced funding costs, with the resulting effect of modestly lower net interest margin results in the remaining quarters of 2013.


Average interest-earning assets amounted to $2.81 billion for the three months ended March 31, 2013, up by $9.2 million from the average balances for the same period in 2012. Total average loans for the three months ended March 31, 2013 increased by $159.6 million compared to the average balances for the comparable 2012 period, with increases in both the commercial and residential real estate loan portfolios. The yield on total loans for the three months ended March 31, 2013 decreased by 30 basis points from the comparable 2012 period. These declines reflect the impact of a sustained low interest rate environment on loan yields.

Total average securities for the three months ended March 31, 2013 decreased by $168.4 million from the average balances for the same period a year earlier, primarily due to principal payments received on mortgage-backed securities which were not reinvested in the securities portfolio. The FTE rate of return on securities for the three months ended March 31, 2013 increased slightly by five basis points compared to the same period last year, primarily reflecting maturities and pay-downs of lower yielding mortgage-backed securities.

Average interest-bearing liabilities for the three months ended March 31, 2013 decreased by $61.2 million, or 3%, from the comparable period in 2012, with growth in lower-cost deposit balances and declines in the average outstanding balance of FHLB advances. The weighted average cost of funds for the three months ended March 31, 2013 declined by 27 basis points compared to the same period in 2012, primarily due to declines in the rate paid on time deposits.

The average balance of FHLBB advances for the three months ended March 31, 2013 was down by $178.5 million, or 34%, compared to the average balance for the same period in 2012. The average rate paid on such advances for the three months ended March 31, 2013 increased slightly by seven basis points from the comparable period in 2012. See additional discussion under Sources of Funds section.

Total average interest-bearing deposits for the three months ended March 31, 2013 increased by $135.1 million compared to the average balances for the same period in 2012. This increase reflected growth in lower-cost deposit balances, partially offset by a decrease in time deposits. The average rate paid on interest-bearing deposits for the three months ended March 31, 2013 decreased by 12 basis points compared to the same period in 2012, primarily due to declines in the rate paid on time deposits. The average balance of noninterest-bearing demand deposits for the three months ended March 31, 2013 increased by $29.6 million, or 9%, compared to the average balance for the same period in 2012.

Average Balances / Net Interest Margin - Fully Taxable Equivalent (FTE) Basis The following tables present 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. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Average balances and yields for securities available for sale are based on amortized cost. Nonaccrual and renegotiated loans, as well as interest earned on these loans (to the extent recognized in the Consolidated Statements of Income) are included in amounts presented for loans.


Three months ended March 31,                           2013                                               2012
(Dollars in thousands)            Average Balance      Interest      Yield/ Rate     Average Balance      Interest      Yield/ Rate
Assets:
Commercial loans                       $1,243,716       $14,421          4.70 %           $1,121,684       $14,298          5.13 %
Residential real estate loans,
including mortgage loans held
for sale                                  755,528         7,937          4.26 %              720,706         8,075          4.51 %
Consumer loans                            322,668         3,053          3.84 %              319,948         3,097          3.89 %
Total loans                             2,321,912        25,411          4.44 %            2,162,338        25,470          4.74 %
Cash, federal funds sold and
short-term investments                     53,734            28          0.21 %               52,313            20          0.15 %
FHLBB stock                                39,790            38          0.39 %               41,606            52          0.50 %

Taxable debt securities                   323,730         2,845          3.56 %              486,448         4,377          3.62 %
Nontaxable debt securities                 68,064         1,004          5.98 %               71,908         1,059          5.92 %
Corporate stocks                                -             -             - %                1,854            33          7.16 %
Total securities                          391,794         3,849          3.98 %              560,210         5,469          3.93 %
Total interest-earning assets           2,807,230        29,326          4.24 %            2,816,467        31,011          4.43 %
Noninterest-earning assets                210,338                                            220,803
Total assets                           $3,017,568                                         $3,037,270
Liabilities and Shareholders'
Equity:
NOW accounts                             $283,004           $45          0.06 %             $246,251           $46          0.08 %
Money market accounts                     495,453           351          0.29 %              412,053           225          0.22 %
Savings accounts                          279,536            46          0.07 %              248,853            70          0.11 %
Time deposits                             869,576         2,752          1.28 %              885,344         3,093          1.41 %
FHLBB advances                            345,270         2,737          3.21 %              523,766         4,085          3.14 %
Junior subordinated debentures             32,991           390          4.79 %               32,991           392          4.78 %
Other                                       1,146             5          1.77 %               18,903           234          4.98 %
Total interest-bearing
liabilities                             2,306,976         6,326          1.11 %            2,368,161         8,145          1.38 %
Demand deposits                           360,851                                            331,224
Other liabilities                          50,305                                             53,084
Shareholders' equity                      299,436                                            284,801
Total liabilities and
shareholders' equity                   $3,017,568                                         $3,037,270
Net interest income                                     $23,000                                            $22,866
Interest rate spread                                                     3.13 %                                             3.05 %
Net interest margin                                                      3.32 %                                             3.27 %

Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:
(Dollars in thousands)

Three months ended March 31,  2013     2012
Commercial loans              $188     $107
Nontaxable debt securities     345      366
Corporate stocks                 -        8
Total                         $533     $481


Volume / Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent
Basis)
The following table presents certain information on a FTE basis regarding
changes in our interest income and interest expense for the period
indicated. The net change attributable to both volume and rate has been
allocated proportionately.
(Dollars in thousands)                                                   Three Months Ended
                                                                      March 31, 2013 vs. 2012
                                                                     Increase (Decrease) Due to
                                                               Volume          Rate         Net Change
Interest on Interest-Earning Assets:
Commercial loans                                                $1,488        ($1,365 )           $123
Residential real estate loans, including mortgage loans
held for sale                                                      383           (521 )           (138 )
Consumer loans                                                      25            (69 )            (44 )
Cash, federal funds sold and other short-term investments            1              7                8
FHLBB stock                                                         (2 )          (12 )            (14 )
Taxable debt securities                                         (1,427 )         (105 )         (1,532 )
Nontaxable debt securities                                         (57 )            2              (55 )
Corporate stocks                                                   (17 )          (16 )            (33 )
Total interest income                                              394         (2,079 )         (1,685 )
Interest on Interest-Bearing Liabilities:
NOW accounts                                                         9            (10 )             (1 )
Money market accounts                                               50             76              126
Savings accounts                                                     7            (31 )            (24 )
Time deposits                                                      (52 )         (289 )           (341 )
FHLBB advances                                                  (1,404 )           56           (1,348 )
Junior subordinated debentures                                       -             (2 )             (2 )
Other                                                             (136 )          (93 )           (229 )
Total interest expense                                          (1,526 )         (293 )         (1,819 )
Net interest income                                             $1,920        ($1,786 )           $134

Provision and Allowance for Loan Losses
The provision for loan losses is based on management's periodic assessment of the adequacy of the allowance for loan losses which, in turn, is based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics; the level of nonperforming loans and net charge-offs, both current and historic; local economic and credit conditions; the direction of real estate values; and regulatory guidelines. The provision for loan losses is charged against earnings in order to maintain an allowance for loan losses that reflects management's best estimate of probable losses inherent in the loan portfolio at the balance sheet date.

The provision for loan losses charged to earnings for the three months ended March 31, 2013 amounted to $600 thousand, compared to $900 thousand for the same period in 2012. The decline in the provision for loan losses from 2012 was based on our analysis of the trends in asset quality and credit quality indicators, as well as the absolute level of loan loss allocation. Net charge-offs for the three months ended March 31, 2013 totaled $334 thousand compared to $657 thousand for the same period a year earlier.

The allowance for loan losses was $31.1 million, or 1.34% of total loans, at March 31, 2013, compared to $30.9 million, or 1.35% of total loans, at December 31, 2012. Management will continue to assess the adequacy of its allowance for loan losses in accordance with its established policies. See additional discussion under the caption "Asset Quality" below for further information on the Allowance for Loan Losses.


Noninterest Income
Noninterest income is an important source of revenue for Washington Trust. For
the three months ended March 31, 2013, noninterest income represented 37% of
total revenues. The principal categories of noninterest income are shown in the
. . .
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