Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
WASH > SEC Filings for WASH > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for WASHINGTON TRUST BANCORP INC

Form 10-Q for WASHINGTON TRUST BANCORP INC


8-May-2014

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, 2013, 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, 2014 are not necessarily indicative of the results for the full-year ended December 31, 2014 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 national, regional or economies; reductions in net interest income resulting from a sustained low interest rate environment 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, 2013, 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: the determination of the allowance for loan losses, the review of goodwill and intangible assets for impairment and the assessment 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, 2013.

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, its ATM networks, 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 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, deposit services, card interchange fees and bank-owned life insurance ("BOLI"). Our principal noninterest expenses include salaries and employee benefits, occupancy and facility-related costs, technology and other administrative expenses.

Our financial results are affected by interest rate fluctuations, 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, adverse changes in future economic growth, consumer confidence, credit availability and corporate earnings could impact our financial results. Management believes that overall credit quality continues to be affected by the slow pace of recovery in national and regional economic conditions, including comparatively high unemployment levels in Rhode Island.

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 delivering solid results in the first quarter of 2014. We 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. In the second quarter of 2014, Washington Trust plans to open a new full-service branch in Johnston, Rhode Island, in Providence County. This branch will be Washington Trust's nineteenth branch office and its first in Johnston.

Composition of Earnings
Net income for the first quarter of 2014 amounted to $9.3 million, or 55 cents per diluted share, up from $7.4 million, or 45 cents per diluted share, reported for the first quarter of 2013. The returns on average equity and average assets for the first quarter of 2014 were 11.10% and 1.17%, respectively, compared to 9.91% and 0.98%, respectively, for the same quarter in 2013.

The comparison of 2014 earnings to 2013 was significantly impacted by a $2.8 million other-than-temporary impairment loss recognized on a pooled trust preferred debt security in the first quarter of 2013. The net after-tax impact of this impairment loss was $1.9 million, or 11 cents per diluted share.

In addition, the following transactions in the first quarter of 2014 resulted in a net after-tax charge of 1 cent to diluted earnings per share:
On March 1, 2014, the Corporation sold its merchant processing service business line to a third party. The sale resulted in a gain of $6.3 million, after-tax $4.0 million, or 24 cents per diluted share.

In connection with this sale, the Corporation incurred divestiture related costs of $355 thousand, after-tax $227 thousand, or 1 cent per diluted share. These costs included $291 thousand in salaries and employee benefit expenses and $64 thousand in legal expenses.

Washington Trust also prepaid FHLBB advances totaling $99.3 million, resulting in debt prepayment penalty expense of approximately $6.3 million, after-tax $4.0 million, or 24 cents per diluted share. The weighted average rate of these FHLBB advances was 3.01% with a weighted average remaining term of thirty-six months. Other wholesale funding in the form of brokered time deposits, as well as existing on-balance sheet liquidity, were utilized as the funding source for the prepayment of these FHLBB advances. The replacement wholesale funding amounted to $80.0 million, with maturities ranging from 2015 through 2019, a weighted average maturity of thirty-five months and an initial weighted average cost of approximately 0.93%.

The combined impact of the divestiture of the merchant processing service business line and the reduction in interest expense due to the above mentioned borrowing transactions is expected to result in future ongoing pre-tax income enhancement of approximately $1.0 million in the remainder of 2014 and $1.3 million in 2015, with continuing benefits in future years.

Net interest income for the three months ended March 31, 2014 amounted to $23.8 million, up by $1.4 million, or 6%, from the same period in 2013, reflecting growth in average loan balances and continued reduction in funding costs. The net interest margin (fully taxable equivalent net interest income as a percentage of average interest-earnings assets) was 3.34% for the three months ended March 31, 2014, compared to 3.32% for the same period in 2013.

The loan loss provision charged to earnings for the three months ended March 31, 2014 and 2013 amounted to $300 thousand and $600 thousand, respectively. Management believes that the level of provision for loan losses has been consistent with the trends in asset quality and credit quality indicators.

Noninterest income for the three months ended March 31, 2014 and 2013 totaled $19.4 million and $13.2 million, respectively.
Excluding $6.3 million gain on sale of business line recognized in the first quarter of 2014 and the $2.8 million other-than-temporary impairment loss recognized in the first quarter of 2013, noninterest income decreased by $2.8 million, or 18%. Significant year-over-year changes, on this basis, included:
Net gains on loan sales and commissions on loans originated for others ("mortgage banking revenues") were down by $2.9 million, or 70%, reflecting declines in mortgage loan refinancing and sales activity due to higher market interest rates.


Wealth management revenues were up by $591 thousand, or 8%, due to an increase in asset-based wealth management revenues.

Merchant processing fee revenue decreased by $686 thousand, or 35%, as the sale of this business line was consummated on March 1, 2014. See discussion below regarding a corresponding decrease in merchant processing costs.

Noninterest expenses for the three months ended March 31, 2014 and 2013 amounted to $29.3 million and $24.2 million, respectively. Excluding the above mentioned debt prepayment penalty expense of $6.3 million and divestiture costs of $355 thousand recognized in the first quarter of 2014, noninterest expenses decreased by $1.5 million, or 6%. Significant year-over-year changes, on this basis, included:
Salaries and employee benefit costs decreased by $1.2 million, or 8%, reflecting lower defined benefit pension plan expenses and lower levels of business development based compensation primarily in mortgage banking.

Corresponding to the decrease in merchant processing fee revenue described above, merchant processing costs decreased by $623 thousand, or 37%.

Income tax expense amounted to $4.3 million and $3.4 million, respectively for the three months ended March 31, 2014 and 2013. The Corporation's effective tax rate for the three months ended March 31, 2014 and 2013 was 31.7% and 31.6%, respectively. The effective tax rates differed from the federal rate of 35% due largely to the benefits of tax-exempt income, income from BOLI and federal tax credits.

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, net gain on sale of business line, income from BOLI and administrative expenses not allocated to the operating segments 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.

Net income attributed to the Corporate unit amounted to $1.2 million for the three months ended March 31, 2014, compared to a net loss of $1.1 million for the same period in 2013. The Corporate unit's net interest income for the three months ended March 31, 2014 increased by $1.2 million, largely due to declining funding costs and an increase in dividend income on the Corporation's investment in FHLBB stock. Noninterest income for the Corporate unit included the $6.3 million gain on sale of business line in the first quarter of 2014 and the $2.8 million other-than-temporary impairment loss recognized on a pooled trust preferred debt security in the first quarter of 2013. Noninterest expenses for the first quarter of 2014 included $6.3 million in debt prepayment penalty expense. See additional discussion regarding these noninterest income and expense items in the "Overview" section under the caption "Composition of Earnings."

The Commercial Banking segment reported net income of $6.6 million for the three months ended March 31, 2014, compared to $7.2 million for the same period in 2013. Net interest income for this operating segment for the three months ended March 31, 2014 increased by $228 thousand, or 1%, from the same period in 2013, principally due to growth in average loan balances and declining cost of funds on deposits. The provision for loan losses for the three months ended March 31, 2014 decreased by $300 thousand compared to first quarter of 2013, reflecting improvements in asset quality and credit quality indicators. Noninterest income derived from the Commercial Banking segment totaled $4.5 million for the three months ended March 31, 2014, down by $3.4 million, or 43%, from the comparable 2013 period. This decline in noninterest income was largely due to lower mortgage banking revenues, which are sensitive to market interest rates. Also contributing to the decline in this operating segment's noninterest income was a decrease in merchant processing fee revenue, as the sale of this business line was consummated on March 1, 2014. The decrease in merchant processing fee revenue corresponded to a decline in merchant processing costs included in this operating segment's noninterest expenses. Commercial Banking noninterest expenses for the three months ended March 31, 2014 were down by $1.6 million, or 10%, from the same period in 2013. This decline in noninterest expenses reflected decreases in salaries and employee benefit costs and a decline in merchant processing costs.

The Wealth Management Services segment reported net income of $1.5 million for the three months ended March 31, 2014, compared to $1.3 million for the same period in 2013. Noninterest income derived from the Wealth Management Services segment was $8.1 million for the three months ended March 31, 2014, up by 8% compared to the same period in 2013, primarily due to an increase in asset-based wealth management revenues. Wealth Management assets under administration stood at $4.81 billion at March 31, 2014, up by 9% from the balance at March 31, 2013. Noninterest expenses for this operating segment


totaled $5.7 million for the three months ended March 31, 2014, up by $259 thousand, or 5%, from the same period a year ago, reflecting an increase in salaries and benefit costs and outsourced services.

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, 2014 and 2013 amounted to $24.5 million and $23.0 million. The increase in FTE net interest income reflects growth in average loan balances and continued reduction in funding costs. The net interest margin was 3.34% for the three months ended March 31, 2014, compared to 3.32% for the same period in 2013.

In the recent interest rate environment, market yields on new loan originations have been 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, interest rates on total earning assets may continue to decline.

Average interest-earning assets for the three months ended March 31, 2014 were up by $163.7 million, or 6%, from the average balance for the same period in 2013. Total average loans for the three months ended March 31, 2014 increased by $145.1 million, or 6%, compared to the average balance for the comparable 2013 period, due to growth in the commercial loan portfolio and in residential real estate loans. The yield on total loans for the three months ended March 31, 2014 decreased by 18 basis points from the comparable 2013 period, reflecting the impact of a sustained low interest rate environment on loan yields. The contribution of loan prepayment fees and other fees to the yield on total loans was 5 basis points and 2 basis points, respectively, for the three months ended March 31, 2014 and 2013. Total average securities for the three months ended March 31, 2014 increased by $12.2 million, or 3%, from the average balance for the same period a year earlier, reflecting purchases of debt securities made in the latter part of 2013 offset, in part, by principal payments received on mortgage-backed securities. The FTE rate of return on securities for the three months ended March 31, 2014 decreased by 14 basis points compared to the same period in 2013, due to maturities and calls of higher yielding securities combined with purchases of lower yielding securities.

Average interest-bearing liabilities for the three months ended March 31, 2014 increased by $76.2 million, or 3%, from the average balance for the comparable period in 2013, largely reflecting growth in average money market account balances partially offset by decreases in average FHLBB advance balances and time deposits. See additional discussion under the section "Sources of Funds." The weighted average cost of funds for the three months ended March 31, 2014 declined by 18 basis points compared to the same period in 2013, largely due to declines in the rate paid on time deposits. The average balances of FHLBB advances for the three months ended March 31, 2014 were down by $75.3 million, or 22%, compared to the average balance for the same period in 2013. The average rate paid on such advances for the three months ended March 31, 2014 increased 15 basis points from the first quarter of 2013. Total average interest-bearing deposits for the three months ended March 31, 2014 increased by $162.8 million, or 8%, compared to the average balance for the first quarter of 2013. This increase reflected growth in average lower-cost deposit balances, partially offset by a decrease in average time deposit balances. The average rate paid on interest-bearing deposits for the three months ended March 31, 2014 decreased by 9 basis points compared to the same period in 2013, reflecting lower rates on time deposits.

The average balance of noninterest-bearing demand deposits for the three months ended March 31, 2014 increased by $62.1 million, or 17%, compared to the average balances for the same period in 2013.

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,                           2014                                               2013
(Dollars in thousands)            Average Balance      Interest      Yield/ Rate     Average Balance      Interest      Yield/ Rate
Assets:
Commercial loans                       $1,336,798       $14,601          4.43 %           $1,243,716       $14,421          4.70 %
Residential real estate loans,
including mortgage loans held
for sale                                  802,412         8,208          4.15 %              755,528         7,937          4.26 %
Consumer loans                            327,793         3,097          3.83 %              322,668         3,053          3.84 %
Total loans                             2,467,003        25,906          4.26 %            2,321,912        25,411          4.44 %
Cash, federal funds sold and
short-term investments                     62,246            35          0.23 %               53,734            28          0.21 %
FHLBB stock                                37,730           142          1.53 %               39,790            38          0.39 %

Taxable debt securities                   344,009         2,942          3.47 %              323,730         2,845          3.56 %
Nontaxable debt securities                 59,958           884          5.98 %               68,064         1,004          5.98 %
Total securities                          403,967         3,826          3.84 %              391,794         3,849          3.98 %
Total interest-earning assets           2,970,946        29,909          4.08 %            2,807,230        29,326          4.24 %
Noninterest-earning assets                203,335                                            210,338
Total assets                           $3,174,281                                         $3,017,568
Liabilities and Shareholders'
Equity:
Interest-bearing demand deposits          $10,767            $-             - %                   $-            $-             - %
NOW accounts                              304,201            47          0.06 %              283,004            45          0.06 %
Money market accounts                     685,142           609          0.36 %              495,453           351          0.29 %
Savings accounts                          292,809            45          0.06 %              279,536            46          0.07 %
Time deposits                             797,458         2,268          1.15 %              869,576         2,752          1.28 %
FHLBB advances                            269,989         2,241          3.37 %              345,270         2,738          3.22 %
Junior subordinated debentures             22,681           241          4.31 %               32,991           390          4.79 %
Other                                         173             3          7.03 %                1,146             4          1.42 %
Total interest-bearing
liabilities                             2,383,220         5,454          0.93 %            2,306,976         6,326          1.11 %
Demand deposits                           422,975                                            360,851
Other liabilities                          33,057                                             50,305
Shareholders' equity                      335,029                                            299,436
Total liabilities and
shareholders' equity                   $3,174,281                                         $3,017,568
Net interest income                                     $24,455                                            $23,000
Interest rate spread                                                     3.15 %                                             3.13 %
Net interest margin                                                      3.34 %                                             3.32 %

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

Three months ended March 31,  2014     2013
Commercial loans              $317     $188
Nontaxable debt securities     302      345
Total                         $619     $533


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
                                                                   March 31, 2014 vs. 2013
                                                                  Increase (Decrease) Due to
                                                              Volume         Rate       Net Change
Interest on Interest-Earning Assets:
Commercial loans                                               $1,039        ($859 )         $180
Residential real estate loans, including mortgage loans
held for sale                                                     481         (210 )          271
Consumer loans                                                     51           (7 )           44
Cash, federal funds sold and other short-term
investments                                                         4            3              7
FHLBB stock                                                        (2 )        106            104
Taxable debt securities                                           171          (74 )           97
Nontaxable debt securities                                       (120 )          -           (120 )
Total interest income                                           1,624       (1,041 )          583
Interest on Interest-Bearing Liabilities:
Interest-bearing demand deposits                                    -            -              -
NOW accounts                                                        2            -              2
Money market accounts                                             158          100            258
Savings accounts                                                    3           (4 )           (1 )
Time deposits                                                    (218 )       (266 )         (484 )
FHLBB advances                                                   (620 )        123           (497 )
Junior subordinated debentures                                   (113 )        (36 )         (149 )
Other                                                              (6 )          5             (1 )
Total interest expense                                           (794 )        (78 )         (872 )
Net interest income                                            $2,418        ($963 )       $1,455
. . .
  Add WASH to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for WASH - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.