Good morning and welcome to the Washington Trust Bancorp Inc.’s conference call. My name is Keith. I will be your operator today. [Operator Instructions] Today’s call is being recorded. And now I will turn the call over to Elizabeth B. Eckel, Senior Vice President, Marketing and Investor Relations. Ms. Eckel?

Thank you, Keith. The topic of today’s call is Washington Trust Bancorp Inc.’s second quarter 2013 results. Washington Trust is traded on the NASDAQ Global Select Market under the symbol WASH. Today’s conference call is being recorded and webcast live. A replay of today’s conference call will be made available shortly after the conclusion of the call through the corporation’s website, washtrust.com, in our Investor Relations section. Please note the information provided during today’s call is accurate only as of this date and you should not rely on these statements after the conclusion of the call. Hosting this morning’s discussion is Joseph J. MarcAurele, Chairman, President and Chief Executive Officer; and David V. Devault, Senior Executive Vice President, Secretary and Chief Financial Officer. I’m pleased to introduce Washington Trust’s Chairman, Joseph MarcAurele.

Thank you, Beth, and good morning and thank you for joining us for today’s call. This morning, David and I will review Washington Trust’s second quarter results, which were released yesterday. We’ll also provide some thoughts on the remainder of the year and answer any questions you may have. I’m pleased to report that Washington Trust posted solid operating results with net income of $9 million or $0.54 per diluted share. The Corporation’s profitability ratios were strong with a return on average equity of 11.84% and return on average assets increasing to 1.18%. Our capital levels continue to exceed regulatory and minimum requirements and we declared a $0.25 cash dividend during the quarter, which was paid to shareholders last week. This performance is a direct result of our continued commitment to achieving our strategic objectives, which include growing key business lines, expanding our market reach, and capitalizing on opportunities to generate additional revenues and operational efficiencies. Our management team understands the economic, regulatory and competitive pressures our industry faces and is meeting these challenges head on. In recent years, we’ve made investments to grow our lending area by hiring talent from larger competitors and opening mortgage lending offices in nearby Massachusetts and Connecticut. That strategy has paid off as total loans were up about 8% from a year ago, reaching an all-time high of 2.4 billion at June 30. This increase is a result of strong commercial lending and healthy mortgage banking activities. What’s important to note is our loan portfolio has grown steadily for 10 consecutive quarters, which is an accomplishment considering the continued weakness in our local economy. Our mortgage refinancing activity has slowed somewhat with recent rate increases, but we are seeing higher volume in mortgages related to purchase transactions than we have seen earlier in the…

Thank you, Joe. Good morning, everyone. Thanks for joining us on our call today. I’ll review our second quarter 2013 operating results and financial position as described in our press release yesterday afternoon. Net income for the quarter amounted to $9 million with diluted earnings per share of $0.54 for the second quarter. This compares to first quarter 2013 net income of $7.4 million or $0.45 per diluted share and second quarter 2012 net income $8.7 million or $0.53 per diluted share. There were certain transactions in the quarter that resulted in an after-tax charge of $0.02 to diluted earnings per share. First, during the quarter, we redeemed $10.3 million in junior subordinated debentures, which resulted in the write-off of $244,000 in unamortized debt issuance costs. This was included in net interest expense for the quarter. In addition, a charge of $270,000 for severance-related matters was included in salaries and employee benefits expense. In viewing the linked quarter comparison, we would also note that the first quarter results included a $2.8 million impairment loss on an investment security. Net of applicable income taxes, this amounted to $0.11 per diluted share in the first quarter. Second quarter net interest income was $22.4 million, essentially unchanged on a linked quarter basis. Excluding the impact of the debt issuance costs expensed in the quarter, net interest income was up about 1%. The net interest margin was 3.26% compared to 3.32% for the first quarter. The debt issuance cost write-off had a 4 basis point impact on the margin, and excluding this the net interest margin declined by 2 basis points on a linked quarter basis. Average interest earning assets increased by $14 million, reflecting growth of $57 million in average loan balances, partially offset by a decline in investment balances due to payments…

Thank you, David. Washington Trust had another good quarter; however, we realize future results could be impacted by environmental challenges, including a slower than predicted economic recovery, renewed competitive pressures, or sharp interest rate increases. Going forward, our management team is focused on continuing to generate business line growth while managing operating expenses, which we believe is important. Washington Trust has a solid foundation and remains committed to enhancing the value of the Company for our shareholders. We thank you for participating on this morning’s call. David and I will now answer any questions you may have.

[Operator Instructions] The first question comes from Damon DelMonte with KBW.

My first question has to do with Mortgage Banking. David, could you talk a little bit about the break-out between refi and purchase activity this quarter? I know you said that the purchase activity was increasing, but if you maybe look at last quarter versus this quarter, what was the break-out in percentages?

I’m not sure I have the breakout of refi versus purchase volume for the quarter. I can tell you that purchase now constitutes more than half of the pipeline, so we have seen a relative increase in purchase and a relative decline in refi.

Okay. And how about the gain on sale that you’re seeing again this quarter versus last quarter?

Could you clarify that question, Damon?

The gain on sale on the mortgages?

Was down from the first quarter because of less sales volume, although mortgages originated for sale were slightly higher in the second quarter than the first quarter.

Okay. And then going forward, how is the pipeline looking as we go into the third quarter here? We had a drop-off from first to second quarter. Are we kind of leveling out here, or do you think there is room for further reduction?

The pipeline at the end of the second quarter is slightly below where it started the second quarter, although it had risen during the quarter with some volume earlier in the second quarter. So it’s likely that we would see a decline in mortgage banking revenues in the next couple of quarters.

Okay. And then with respect to credit quality, could you just talk a little bit more about that, the $4 million charge-off this quarter? Was that a relationship -- and I apologize if you’d said this already -- but was that a relationship that was new to non-performing status, or is that something that was more of a clean-up action?

That was a loan that we had talked about in the first quarter that had been placed into non-accrual status. It’s a single credit relationship and we concluded, based on appraisal information and the status of the underlying borrower, to take that charge-off in the second quarter. There are no other loans with that relationship and we view that as very much putting that behind us. The loan has been current and may even still be current today, but our outlook on that has led us to that action.

Okay. And then with that level of charge-off and the amount of provision this quarter, obviously a decent amount of reserve release, about 17 basis points. How do you think about your reserve going forward from the current level of 117?

While there was that decline that I mentioned and you just referred to on a linked quarter basis, we view the coverage ratio or the coverage level compared to actual loss allocation that we measure in the portfolio to remain fairly constant quarter to quarter. There was the relief but that had been provided for, taking all things into consideration. I think over time, because the trend of asset quality has been improving notwithstanding this single large charge-off, that we would be -- that there would be justification to see some lower allowance level over time, some reduction in the allowance as a percentage of total loans, and we will continue to provide for growth and other things that develop in the portfolio.

The next question comes from Mark Fitzgibbon from Sandler O’Neill & Partners.

First on the commercial loan pipeline, you had said it was healthy and I think it was the largest pipeline you’ve had in the last 4 quarters. Could you share with us how big that is in dollars?

Sure, Mark. It’s hovered in the $100 million-ish level, kind of up and down, give or take a few million for the last several quarters. It now stands at $138 million with a slightly better mix between C&I and commercial real estate, which we are encouraged by. So I think really what we’re seeing here, Mark, is the result of some of the strategic hires that we have made over, particularly over the last year, and the ability of those officers to increase our pipeline, particularly in C&I as the more frequently talk to their former customers.

Okay. And then secondly, following up on the Mortgage Banking discussion, could you talk to us a little bit about what kinds of things you might be able to do to bring the cost structure down in the mortgage business, given the slowdown that you’re starting to see and everybody is starting to see in volumes?

Well, again, Mark, a large part of the cost structure in mortgage is variable, given that it’s mostly commission-based. We have a plan in place to reduce the backroom staff as volumes dissipate, if they do. One of the things that we feel is that, particularly in the stronger markets like greater Boston, if you recall, we opened a mortgage office in Burlington, we’ve had one in Sharon, Mass. for a couple of years. We have another one in Connecticut in Glastonbury that we believe that our purchase volume will get a little better. All that being said, we recognize that this is a cyclical business and we have had in place for a while a plan to effectively reduce cost. The art of that, of course, is to reduce it in a way that is meaningful to us but at the same time isn’t destructive to our ability to provide good service in that business.

Okay. And then lastly, Dave, I wonder if you could share with us your thoughts on the outlook for the margin over the remainder of this year.

I think some of the trends that you saw in the last couple of quarters with declining asset yields, probably declining to a greater extent than the ability to reduce funding costs, will continue in the next couple of quarters, and we are likely to see—we are forecasting slightly lower margin results in the next couple of quarters.

[Operator Instructions] Our next question comes from Matthew Breese with Sterne Agee.

It’s actually Matt Kelley. I was wondering if you could help us understand just how much yields have improved, particularly on pipelines where they stand today. You’ve got the 5-year treasury up basically 50 to 60 basis points off of the first quarter averages, so how much of that are you able to pass through in pricing new loans, and particularly commercial real estate loans in the pipeline? Give us a sense of how much yields have improved after this run-up in overall interest rates.

That’s a fairly recent phenomenon. I’m not sure any substantial portion of the pipeline is reflective of that, but overall competitive pressures continue to be noticeable with yields on commercial loans.

Matt, I would say that this is probably going to be a -— there will be minimal value to that, given the ongoing competitive pressures on the commercial loan side as the pricing situation.

On both commercial real estate and C&I?

Yes.

And one of your in-market competitors noted that, particularly smaller credits, have been much more aggressively bid in terms of loan yields. Is that something you’re seeing as well, say under $3 million to $5 million?

Yes, this is an increasingly competitive market given what I believe are just not very attractive alternative investment opportunities for banks, so I believe that will continue.

Okay. So I guess how are you -- the origination -- the portfolio yields -- excuse me, the pipeline yield, how does that compare to the 458 overall commercial loan yield? Has that spread between origination yield and portfolio yields -- I assume it’s tightened up relative to what you were seeing back in April.

Well, there has been a general trend, if you look back over the past couple of quarters, of declining yield, of new loans coming into portfolio, in the commercial portfolio. It varies from month to month depending on the mix and type of loans that are in there, but we are seeing a continued decline in the yield on newer loans, and that’s what you’re seeing result in the changes we’re seeing in the margin. We think this is a problem facing the entire industry and we’re doing everything we can to manage our way through this.

Okay. Then a second question on your interest rate sensitivity. In your 10-Q for March -- up 200 basis points in a parallel fashion, NII was expected to go up 6%, but what about a non-parallel, plus 50 to 100 basis point type move like we’ve actually seen here? How does that map out on your own modeling for NII sensitivity compared to the parallel type environment?

It’s not as dramatic as the parallel rates change would result in, so you’re not going to see that kind of result with just the long-term rates rising.

Okay, got you. Any way to quantify that at all, or --?

Not on this call. I think we can talk about that in the 10-Q to a greater extent.

Thank you, and there are no more questions at the present time so I’d like to turn the call back over to management for any closing remarks.

This is Joe. First of all, I appreciate everyone participating today. We feel good about the last quarter. We certainly recognize the challenges as we go forward, and we believe that we continue to be well positioned to take advantage of a market that here is dominated by larger players. We continue to believe that our service proposition is superior and we’re hoping to keep creating consistent results. So thank you very much for your attention.

Thank you. This concludes today’s teleconference. You may now disconnect your phone lines. Thank you for participating and have a nice day.