Washington Trust Announces Third Quarter 2013 Earnings

Washington Trust Bancorp, Inc. (NASDAQ Global Select; symbol: WASH), parent company of The Washington Trust Company, today announced net income of $10.0 million, or 59 cents per diluted share, for the third quarter 2013. These results compared favorably to second quarter of 2013 net income of $9.0 million, or 54 cents per diluted share, and third quarter of 2012 net income of $8.9 million, or 54 cents per diluted share.

"Washington Trust's third quarter results mark our highest quarterly earnings in 213 years," stated Joseph J. MarcAurele, Washington Trust Chairman, President & CEO. "We also continued to lay the foundation for future growth, naming Edward "Ned" Handy, III as President and Chief Operating Officer, breaking ground for our new Johnston branch, and announcing a second 2013 dividend increase."

Highlights for the quarter include:

• Third quarter net income and earnings per share results were record quarterly highs for Washington Trust.
• The returns on average equity and average assets for the third quarter of 2013 were 12.82% and 1.29%, respectively. Comparable amounts for the second quarter of 2013 were 11.84% and 1.18%, respectively.
• Deposits totaled $2.45 billion at September 30, 2013, up by $150.2 million from June 30, 2013, with continued growth in money market and demand accounts. Total deposits were up by $220.2 million, or 9.9%, in the last twelve months.

Third quarter results also included the following balance sheet management transactions, which were conducted near the end of September:

• Residential mortgage portfolio loans totaling $48.7 million were sold at a gain of $977 thousand, including $456 thousand attributable to mortgage servicing rights retained. This gain was included in net gains on loan sales and commission on loans originated for others.
• $24.5 million of Federal Home Loan Bank of Boston ("FHLBB") advances were prepaid, resulting in debt prepayment penalty expense of $1.1 million.

Net Interest Income

Net interest income totaled $23.4 million for the third quarter of 2013, up by $1.0 million from the second quarter of 2013. The net interest margin for the third quarter of 2013 was 3.29%, compared to 3.26% for the second quarter of 2013. Included in net interest income were:

• A relatively large level of commercial loan prepayment penalty fee income of $457 thousand received in the third quarter of 2013, which had a 6 basis point impact on the net interest margin and a 7 basis point impact on the yield on interest-earning assets.
• As a result of the second quarter 2013 redemption of certain junior subordinated debentures, unamortized debt issuance costs of $244 thousand were expensed and classified as interest expense in that quarter. This had a 4 basis point impact on both the net interest margin and the cost of funds for the second quarter.

Excluding these items, the net interest margin declined from 3.30% for the second quarter of 2013 to 3.23% for the third quarter of 2013. Significant linked quarter changes, on this basis, included the following:

• Average interest-earning assets for the third quarter of 2013 increased by $67.0 million, reflecting an increase of $42.4 million in average interest-bearing cash and short-term investments largely resulting from seasonal deposit inflows and growth of $22.3 million in average loan balances, primarily concentrated in the residential loan portfolio.
• Average interest-bearing liabilities for the third quarter of 2013 increased by $46.8 million, excluding the impact of the second quarter redemption of junior subordinated debentures, reflecting a $44.7 million increase in average interest-bearing deposits. Average demand balances for the third quarter of 2013 rose by $18.9 million.
• The yield on interest-earning assets declined by 12 basis points from the previous quarter, while the cost of funds improved by 6 basis points.

Noninterest Income

Noninterest income totaled $17.4 million for the third quarter of 2013, compared to $16.4 million for the previous quarter. Excluding the third quarter gains of $977 thousand related to the residential mortgage portfolio loan sale, noninterest income for the third quarter of 2013 was essentially flat compared to the previous quarter. Other significant linked quarter changes included the following:

• Wealth management revenues were down by $283 thousand, or 4%, due to a decline of $290 thousand in tax preparation fees, which are typically concentrated in the second quarter.
• Net gains on loan sales and commission on loans originated for others, excluding the portfolio loan sale gain described above, decreased by $579 thousand, or 17%, on a linked quarter basis, reflecting a lower level of mortgage loan refinancing activity due to rising market interest rates. Residential mortgage loans sold to the secondary market, excluding the $48.7 million sold from portfolio, amounted to $114 million, compared to $132 million in the previous quarter.
• Merchant processing fee revenue rose by $746 thousand, or 29%, on a linked quarter basis, reflecting an increase in the volume of transactions processed for customers. See discussion regarding a corresponding increase in merchant processing costs described below.

Noninterest Expenses

Noninterest expenses totaled $25.5 million for the third quarter of 2013, compared to $25.0 million for the previous quarter. Included in noninterest expenses were:

• Debt prepayment penalties of $1.1 million recognized in the third quarter of 2013. There were no debt prepayment penalties in the previous quarter.
• A pension plan expense decrease of $124 thousand in the third quarter of 2013 due to the pension plan amendment and remeasurement described under the caption "Other Liabilities."

Excluding these items, noninterest expenses for the third quarter of 2013 decreased by $458 thousand, or 2%, compared to the previous quarter. Other significant linked quarter changes included the following:

• Salaries and employee benefits expense, excluding the impact of the pension plan amendment and remeasurement, decreased by $778 thousand on a linked quarter basis largely due to decreases in business development-based compensation in the mortgage banking area.
• Merchant processing expenses rose by $651 thousand, or 29%, on a linked quarter basis. See the discussion above regarding the corresponding increase in merchant processing fee income.

Asset Quality

Total nonaccrual loans totaled $19.5 million, or 0.83% of total loans, at September 30, 2013, compared to $20.0 million, or 0.84%, at June 30, 2013. Total past due loans amounted to $24.0 million, or 1.02% of total loans, at September 30, 2013, compared to $26.1 million, or 1.09%, at June 30, 2013.

The loan loss provision charged to earnings in the third quarter of 2013 remained unchanged from the previous quarter level of $700 thousand. Net charge-offs amounted to $576 thousand in the third quarter of 2013, compared to $4.0 million in the second quarter of 2013, which was comprised primarily of a $4.0 million charge-off on one commercial mortgage loan. The allowance for loan losses was $28.0 million, or 1.19% of total loans, at September 30, 2013, compared to $27.9 million, or 1.17% of total loans, at June 30, 2013.

Loans

Total loans declined by $31.2 million from June 30, 2013. This decline was largely due to the sale of residential mortgage portfolio loans totaling $48.7 million with a weighted average interest rate of 3.94% and a weighted average remaining maturity of 24 years. This sale resulted in a gain of $977 thousand, which was included in net gains on sales of loans and commissions on loans originated for others in the third quarter of 2013. The purpose of this sale was primarily to reduce the interest rate risk exposure associated with holding longer term fixed rate assets in a rising rate environment. Total loans were up by $59.8 million, or 3%, from December 31, 2012.

Investment Securities

The investment securities portfolio increased by $68.8 million from June 30, 2013. During the third quarter of 2013, $90.5 million of mortgage-backed securities and U.S. government agency debt securities with a weighted average yield of 2.80% were purchased to redeploy excess liquidity from deposit growth, add to on-balance sheet liquidity and to provide a source of collateralization for public and institutional deposits. The investment securities portfolio increased by $3.5 million from December 31, 2012.

Deposits and Borrowings

Total deposits grew by $150.2 million, or 7%, from June 30, 2013, including an increase of $61.4 million, or 9%, in demand deposits and NOW account balances. Total deposits were up by $142.2 million, or 6%, from December 31, 2012.

FHLBB advances decreased by $84.9 million, or 23%, from June 30, 2013 and by $72.7 million, or 20%, from December 31, 2012. In the third quarter of 2013, $24.5 million of FHLBB advances with a weighted average interest rate of 2.48% and a weighted average remaining maturity of 42 months were prepaid and as a result, debt prepayment penalty expense of $1.1 million was recognized.

Junior subordinated debentures declined by $10.3 million from the balance of $33.0 million at December 31, 2012, reflecting the June 2013 redemption of certain junior subordinated debentures.

Other Liabilities

Other liabilities decreased by $15.5 million from June 30, 2013 and by $26.6 million from December 31, 2012, reflecting a decline in pension plan liabilities. Effective September 19, 2013, the Corporation amended its defined benefit pension plan to freeze benefit accruals after a ten-year transition period ending in December 2023. Due to the amendment, a remeasurement of the value of pension plan liabilities was conducted and as a result:

• Pension plan liabilities were reduced by $17.5 million and the accumulated other comprehensive income component of shareholders' equity was increased by $11.2 million, after tax. The remeasurement impact also reflected an increase in the discount rates used to measure the present value of pension plan liabilities as a result of an increase in market rates of interest.
• Pension plan expense in the third quarter was reduced by $124 thousand.
• Fourth quarter 2013 pension plan expense is expected to be approximately $500 thousand lower than pre-amendment quarterly expense levels.

Capital Management

Capital levels continued to exceed the regulatory minimum levels to be considered well capitalized, with a total risk-based capital ratio of 13.44% at September 30, 2013, compared to 13.06% at June 30, 2013 and 13.26% at December 31, 2012.

Total shareholder's equity was $323.6 million at September 30, 2013, up by $20.2 million from June 30, 2013, including $10.0 million of earnings retention, the $11.2 million after tax beneficial impact of the change in pension plan liabilities described above and a reduction of $4.3 million for the quarterly dividend declaration. Total shareholder's equity increased by $27.9 million from the balance at December 31, 2012.

Dividends Declared

The Board of Directors declared a quarterly dividend of 26 cents per share for the quarter ended September 30, 2013. This represents a one cent increase over the dividend paid last quarter and is the Corporation’s second dividend increase in the past year. The dividend was paid on October 11, 2013 to shareholders of record on September 30, 2013.

Conference Call

Washington Trust will host a conference call to discuss third quarter results, business highlights and outlook on Tuesday, October 22, 2013 at 8:30 am (Eastern Time). Individuals may dial in to the call at 1-888-317-6016. An audio replay of the call will be available by dialing 1-877-344-7529 and entering Conference Number 10034144; the audio replay will be available until 9:00 a.m. on November 6, 2013. A webcast of the call will be posted in the Investor Relations section of Washington Trust's web site, www.washtrust.com, shortly after the conclusion of the call and will be available through December 31, 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, additional 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.

(1) Commercial real estate loans consist of commercial mortgages and construction and development loans. Commercial mortgages are loans secured by income producing property.

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.