Washington Trust Announces First Quarter 2013 Results

Washington Trust Bancorp, Inc. (NASDAQ Global Select; symbol: WASH), parent company of The Washington Trust Company, today announced first quarter 2013 net income of $7.4 million, or 45 cents per diluted share. These results compare to fourth quarter 2012 net income of $9.0 million, or 55 cents per diluted share, and first quarter 2012 net income of $8.4 million, or 51 cents per diluted share.

Included in 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 was $1.9 million, or 11 cents per diluted share. Further information on this matter is provided later in this press release.

“Washington Trust achieved solid commercial loan growth and strong mortgage production in the first quarter of 2013,” stated Joseph J. MarcAurele, Washington Trust Chairman, President, and Chief Executive Officer. “We are continuing to focus on strategies that create business line growth, generate revenues, and enhance company value.”

Selected financial highlights for the first quarter of 2013 included:

• Residential mortgage origination volume and mortgage banking revenues remain strong. Net gains on loan sales and commissions on loans originated for others totaled $4.2 million for the quarter, down by 7% from the record high level in fourth quarter 2012, but up by 35% over the first quarter in 2012.
• Loans totaled $2.33 billion at March 31, 2013, up by $31.0 million from December 31, 2012, primarily due to growth in the commercial real estate loan portfolio of $25.5 million.
• Total deposits amounted to $2.32 billion at March 31, 2013, up by $7.0 million from December 31, 2012, with growth in lower-cost deposits.

Net Interest Income

First quarter 2013 net interest income totaled $22.5 million, a decrease of $697 thousand from the fourth quarter of 2012. Included in fourth quarter 2012 results was a large prepayment penalty fee income item of $357 thousand. Excluding this item, net interest income declined by $340 thousand, or 1%, on a linked quarter basis.

The net interest margin for the first quarter of 2013 was 3.32%, compared to 3.33% for the fourth quarter of 2012 and 3.27% for the first quarter of 2012. Excluding the prepayment penalty fee income item, the fourth quarter 2012 net interest margin was 3.28%. On this basis, the linked quarter increase in net interest margin reflects a reduction in the cost of funds, offset to a lesser extent by a decline of yield on loans.

Average interest-earning assets for the first quarter of 2013 decreased by $20.5 million from the previous quarter and decreased by $9.2 million from the first quarter of 2012, reflecting payments received on mortgage-backed securities in the securities portfolio, offset, in part, by loan growth.

An other-than-temporary-impairment charge to earnings of $2.8 million was recognized in the first quarter of 2013 on a trust preferred collateralized debt obligation (“CDO”) investment security holding. On March 22, 2013, the trustee for the CDO entity issued a notice that a liquidation of the CDO entity, Tropic CDO I, Ltd., will take place at the direction of holders of the CDO tranches that are senior to certain subordinate tranches, of which Washington Trust is a note holder. The estimated proceeds from the liquidation event are expected to be insufficient to satisfy the amount owed to the note holders of the CDO's subordinate tranches. The Corporation had recognized other-than-temporary impairment charges amounting to $2.1 million on this security in years prior to 2013; however, prior to the March 2013 announcement of the liquidation event, the expected future cash flows through the maturity of the CDO in the year 2033 were considered to be sufficient to recover the Corporation's remaining $2.8 million amortized cost. The first quarter impairment loss reduces the Corporation's carrying value in the holding to zero. The security had been classified in nonaccruing status with no interest recognition since 2009. The recognition of the first quarter impairment charge and related reduction of fair value to zero resulted in a modest reduction to equity capital of approximately $400 thousand, which is a reduction of 2 cents in book value per share.

Noninterest Income

Noninterest income totaled $13.2 million, compared to $17.9 million in the previous quarter and $14.2 million in the first quarter of 2012. The fourth quarter 2012 results included net realized gains on sales of securities of $924 thousand and two significant insurance commissions totaling $462 thousand. Excluding the other-than-temporary impairment charges and the fourth quarter 2012 net gains on sales of securities and the insurance commissions, noninterest income declined by 3% on a linked quarter basis. Significant changes in noninterest income included the following:

• Mortgage banking revenues decreased by $310 thousand, or 7%, from the fourth quarter of 2012 and up by $1.1 million, or 35%, from the first quarter of 2012.
• Wealth management revenues were $7.5 million in the first quarter of 2013. Excluding the recognition of the two significant insurance commission items from the fourth quarter, wealth management revenues were up by $146 thousand, or 2%, on a linked quarter basis and up by $289 thousand, or 4%, compared to the first quarter of 2012.
• Merchant processing fees totaled $2.0 million for the first quarter of 2013, down by $255 thousand, or 11%, on a linked quarter basis and remained relatively flat compared to the first quarter of 2012. The decline reflects a seasonal decrease in the volume of transactions processed for customers. See discussion on the corresponding linked quarter decrease in merchant processing costs under the caption “Noninterest Expenses.”

Noninterest Expenses

Noninterest expenses totaled $24.2 million for the first quarter of 2013, down by $3.2 million, or 12%, from the previous quarter and up by $785 thousand, or 3%, from the first quarter of 2012. Included in noninterest expenses in the fourth quarter were debt prepayment penalties of $1.8 million and charitable contribution expense of $400 thousand. Excluding these items, noninterest expenses for the first quarter of 2013 decreased by $1.1 million, or 4%, from the fourth quarter of 2012. Significant changes in noninterest income included the following:

• Salaries and employee benefit costs amounted to $15.4 million in the first quarter of 2013, down by $219 thousand on a linked quarter basis and up by $1.0 million, or 7%, from the first quarter of 2012. The year over year increase reflects higher staffing levels to support growth and higher levels of business development based compensation in mortgage banking and other areas.
• Merchant processing costs totaled $1.7 million in the first quarter of 2013, a decline of $230 thousand, or 12%, on a linked quarter basis but remained relatively flat compared to the first quarter of 2012. See the discussion above regarding the corresponding linked quarter decrease in merchant processing fee income.

Income tax expense amounted to $3.4 million for the first quarter of 2013, compared to $4.0 million for the fourth quarter of 2012 and $3.9 million for the first quarter of 2012. The effective tax rate for the first quarter of 2013 was 31.6%, compared to the overall effective income tax rate for the year 2012 of 31.1%.

Asset Quality

Total nonaccrual loans amounted to $25.7 million, or 1.10% of total loans, at March 31, 2013, up by $3.1 million from December 31, 2012. The increase in nonaccrual loans during the first quarter was principally due to the classification of one commercial real estate loan with a carrying value of $5.1 million into nonaccrual status. This loan was current with respect to contractual payment terms at March 31, 2013. Total past due loans amounted to $26.2 million, or 1.13% of total loans, at March 31, 2013, down by $1.9 million from December 31, 2012.

The loan loss provision charged to earnings amounted to $600 thousand for the first quarter of 2013, level with the fourth quarter of 2012 and down by $300 thousand from the first quarter of 2012. Net charge-offs amounted to $334 thousand in the first quarter of 2013, compared to net charge-offs of $479 thousand in the fourth quarter of 2012 and $657 thousand in the first quarter of 2012.

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.

Loans

Total loans rose by $31.0 million in the first quarter of 2013, with increases in commercial loans of $24.7 million, or 2%, and residential loans of $6.7 million, or 1%. Total loans were up by $169.7 million, or 8%, from March 31, 2012, including a 12% increase in commercial loans.

Investment Securities

The investment securities portfolio amounted to $387.1 million at March 31, 2013, down by $28.8 million from December 31, 2012, primarily due to principal payments received on mortgage-backed securities which were not reinvested in the securities portfolio.

Deposits and Borrowings

Total deposits increased by $7.0 million in the first quarter of 2013, reflecting growth in lower-cost non-time categories of deposits. In the last twelve months, total deposits grew by $174.1 million, or 8%. FHLBB advances totaled $341.2 million at March 31, 2013, down by $20.0 million from December 31, 2012. This decline reflects less demand for wholesale funding due to paydowns on mortgage-backed securities, which have not been reinvested into the securities portfolio and the deposit growth during this period.

Capital Management

Capital levels continued to exceed the regulatory minimum levels to be considered well capitalized, with a total risk-based capital ratio of 13.50% at March 31, 2013, compared to 13.26% at December 31, 2012. Total shareholder's equity was $301.3 million at March 31, 2013, up by $5.6 million from the balance at December 31, 2012.

Dividends Declared

The Board of Directors declared a quarterly dividend of 25 cents per share for the quarter ended March 31, 2013. The dividend was paid on April 12, 2013 to shareholders of record on April 1, 2013. This represented a one cent increase over the dividend paid last quarter and was the Corporation’s third dividend increase since March 2012.

Conference Call

Washington Trust will host a conference call on Monday, April 22, 2013 at 10:30 am Eastern Time to discuss first 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 1-866-250-8117. The international dial-in number is 1-412-317-6011 and the Canada dial-in number is 1-855-669-9657. 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 10027102. The replay will be available until 9:00 a.m. on May 7, 2013.

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 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, 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 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.

The following tables present average balance and interest rate information. Tax-exempt income is converted to a fully taxable equivalent 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. Unrealized gains (losses) on available for sale securities are excluded from the average balance and yield calculations. 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.