Washington Trust Announces Fourth Quarter 2008 Earnings

Washington Trust Bancorp, Inc. (NASDAQ Global Select^®; symbol: WASH), parent company of The Washington Trust Company, today announced fourth quarter 2008 net income of $4.6 million, or 29 cents per diluted share, compared to fourth quarter 2007 net income of $5.8 million, or 43 cents per diluted share. For the year ended December 31, 2008, net income amounted to $22.6 million, or $1.59 per diluted share, compared to $23.8 million, or $1.75 per diluted share, for the same period in 2007.

During the fourth quarter of 2008, there were several unusual items affecting net income:

• Losses on write-downs of investments to fair value of $2.4 million ($1.7 million after tax; 10 cents per diluted share) were charged to earnings in the fourth quarter of 2008 for securities deemed to be other-than-temporarily impaired.
• Non-core income tax benefits totaling $1.2 million (7 cents per diluted share) were recognized in the fourth quarter of 2008 resulting from the resolution of certain tax positions and adjustments to the overall effective income tax rate based on full year operating results.
• Unrealized losses on interest rate swap contracts of $663 thousand ($468 thousand after tax; 3 cents per diluted share) were recognized in the fourth quarter of 2008, compared to unrealized losses of $24 thousand in the third quarter of 2008 and unrealized gains of $27 thousand in the fourth quarter of 2007.

The combined impact of these unusual items was a reduction in fourth quarter 2008 net income of $973 thousand, or 6 cents per diluted share.

Fourth quarter 2008 highlights include:

• Commercial loan growth continued for the ninth consecutive quarter, amounting to $38.5 million, or 5 percent, in the fourth quarter. Commercial loans have increased $200.0 million, or 29 percent, from the balance at December 31, 2007.

• The loan loss provision charged to earnings in the fourth quarter was $1.850 million, an increase of $850 thousand from the fourth quarter of 2007, largely due to growth in the loan portfolio as well as an ongoing evaluation of credit quality and general economic conditions.
• Nonperforming assets remain at manageable levels at $8.8 million, or 0.30% of total assets, at December 31, 2008.
• The Corporation remains well-capitalized with an estimated total risk based-capital ratio of 12.52% at December 31, 2008. In October 2008, the Corporation issued $50.0 million of its Common Stock, with net proceeds of $46.7 million received on October 7, 2008.
• Wealth management revenues for the fourth quarter of 2008 were down by 14 percent from the third quarter of 2008 and down 17 percent from the fourth quarter of 2007. Assets under administration totaled $3.148 billion at December 31, 2008, down $476.9 million in the fourth quarter and down $866.7 million from the December 31, 2007 balance.

"Washington Trust had a very solid year, despite a national recession, a federal banking crisis and a precipitous decline in the financial markets,” stated John C. Warren, Washington Trust Bancorp, Inc.’s Chairman and Chief Executive Officer.

The Corporation also announced that John F. Treanor, President and Chief Operating Officer, has indicated his intent to elect early retirement, effective in October 2009. Mr. Treanor, age 62, will continue to serve as a member of the Board of Directors. The Corporation’s Chairman and Chief Executive Officer, John C. Warren, is scheduled to retire in April 2010 when he reaches normal retirement age of 65. As a result, the Board of Directors has initiated the succession process under its executive succession plan to assure an effective management transition.

RESULTS OF OPERATIONS

Net interest income for the fourth quarter of 2008 increased $942 thousand, or 6 percent, from the third quarter of 2008 and $2.7 million, or 19 percent, from the fourth quarter a year ago. The increase from the third quarter reflects growth of $112.4 million, or 4 percent, of average interest-earning assets, including the reinvestment of the $46.7 million in net proceeds received from the issuance of Common Stock. The increase from the fourth quarter of 2007 reflects growth in interest-earning assets and lower deposit costs. On a year-to-date basis, net interest income increased $5.6 million, or 9 percent, from 2007.

The net interest margin (annualized tax-equivalent net interest income as a percentage of average earning assets) for the fourth quarter of 2008 was 2.65%, up 3 basis points from the third quarter of 2008 and unchanged from the fourth quarter of 2007. The increase on a linked quarter basis reflects a 6 basis point beneficial impact of the reinvestment of the Common Stock issuance proceeds, offset in part by lower yields on variable rate commercial and consumer loans resulting from Federal Reserve actions to reduce short-term interest rates, with less commensurate reduction in deposit and other funding rates. For the year 2008, net interest margin was 2.64%, down 12 basis points from 2007. This 12 basis point decline in net interest margin was primarily attributable to similar compression of asset yields and funding costs resulting from the 450 basis point aggregate impact of Federal Reserve rate cutting actions from October 2007 through December 2008.

Noninterest income for the fourth quarter of 2008 declined $3.3 million, or 31 percent, from the third quarter of 2008 and $4.0 million, or 35 percent, from the fourth quarter of 2007. For the year 2008, noninterest income was down $4.4 million, or 10 percent, from 2007. Included in noninterest income were write-downs on certain investment securities deemed to be other-than-temporarily impaired of $2.4 million and $5.3 million, respectively, for the quarter and year ended December 31, 2008. Fourth quarter 2008 impairment charges included $1.9 million on a pooled trust preferred debt security and $494 thousand on common and preferred stocks.

Also included in noninterest income in the fourth quarter of 2008 were realized gains on securities of $315 thousand resulting from a contribution of appreciated equity securities to the Corporation’s charitable foundation. For the year 2008, net realized gains on securities amounted to $2.2 million, as compared to $455 thousand in 2007.

Wealth management revenues for the fourth quarter of 2008 decreased $1.0 million, or 14 percent, on a linked quarter basis and $1.3 million, or 17 percent, from the fourth quarter a year ago. For the year 2008, wealth management revenues were down $743 thousand, or 3 percent, compared to 2007. Wealth management revenues are largely dependent on the value of assets under administration and are closely tied to the performance of the financial markets. Assets under administration totaled $3.148 billion at December 31, 2008, down $476.9 million, or 13 percent, in the fourth quarter of 2008. Assets under administration were down $866.7 million, or 22 percent, from December 31, 2007. The decline in assets under administration was primarily due to lower valuations in the financial markets.

Included in noninterest income for the fourth quarter of 2008 were unrealized losses on interest rate swap contracts of $663 thousand. This amount includes $638 thousand attributable to an interest rate swap contract executed in April 2008 to hedge the interest rate risk associated with variable rate junior subordinated debentures. Under the terms of this swap, Washington Trust agreed to pay a fixed rate and receive a variable rate based on LIBOR. At inception, this hedging transaction was deemed to be highly effective and therefore valuation changes for this derivative were recognized in the accumulated other comprehensive income component of shareholders’ equity. In September 2008, due to a change in the creditworthiness of the derivative counterparty, the hedging relationship was deemed to be not highly effective, with the result that subsequent changes in the derivative valuation are recognized in earnings. The valuation decline in the fourth quarter was attributable to a decline in the swap yield curve during the quarter, which reduced market fixed rates for terms similar to this swap contract. Unrealized gains on other interest rate swap transactions not affected by this matter amounted to $121 thousand for the nine months ended September 30, 2008 and $27 thousand in the year and quarter ended December 31, 2007.

Noninterest expenses amounted to $18.1 million for the fourth quarter of 2008, down $396 thousand, or 2 percent, from the third quarter of 2008 and up $1.350 million, or 8 percent, from the fourth quarter of 2007. Washington Trust made its annual contribution in the amount of $397 thousand to its charitable foundation in the fourth quarter of 2008. Washington Trust made its 2007 annual contribution in the second quarter of that year. The decline in noninterest expenses on a linked quarter basis reflected a seasonal decline in merchant processing expenses and reductions to employee incentive costs. The year over year increase in fourth quarter noninterest expenses reflected an increase of $211 thousand in FDIC deposit insurance costs, higher recruitment costs of $186 thousand associated with executive management positions, increased outsourced services of $152 thousand associated with wealth management platform and product support costs and an increase of $145 thousand related to foreclosed property costs, asset disposals and one-time costs associated with the relocation of a branch office.

For the year ended December 31, 2008, noninterest expenses totaled $71.7 million, up $2.8 million, or 4 percent, from 2007. Noninterest expenses for 2007 included $1.1 million in debt prepayment charges recorded as a result of prepayments of higher cost Federal Home Loan Bank of Boston ("FHLBB”) advances in the first quarter of 2007. There have been no debt prepayment penalty charges recognized in 2008. Excluding 2007 debt prepayment penalties, noninterest expenses for 2008 increased $3.9 million, or 6 percent, from 2007. Approximately 40 percent of the 2008 increase, on this basis, represents costs attributable to our wealth management business, an increase in FDIC deposit insurance costs and operating expenses related to a de novo branch opened in June 2007.

Income tax expense amounted to $375 thousand for the three months ended December 31, 2008, as compared to $2.6 million for the same period in 2007. Non-core income tax benefits of $1.2 million were recognized in the fourth quarter of 2008 resulting from the resolution of certain tax positions and adjustments to the overall effective income tax rate based on full year operating results. Excluding these non-core factors, the Corporation’s effective tax rate for the fourth quarter of 2008 was 29.4%, as compared to 31.1% for the fourth quarter of last year. Based on the current status of federal and applicable state income tax statutes, the Corporation currently expects the first quarter 2009 effective tax rate to be approximately 30.8%.

ASSET QUALITY

Nonperforming assets (nonaccrual loans, nonaccrual investment securities and property acquired through foreclosure) amounted to $8.8 million, or 0.30% of total assets, at December 31, 2008, compared to $6.8 million, or 0.25% of total assets, at September 30, 2008 and $4.3 million, or 0.17% of total assets, at December 31, 2007. Nonaccrual investment securities totaled $633 thousand at December 31, 2008. There were no nonaccrual investment securities as of September 30, 2008 and December 31, 2007. Property acquired through foreclosure or repossession amounted to $392 thousand at December 31, 2008, compared to $113 thousand at September 30, 2008. There was no property acquired through foreclosure on the balance sheet at December 31, 2007.

While these results reflect increases in the quarter and year-to-date periods, Washington Trust’s ratio of nonperforming loans plus accruing troubled debt restructured loans to total loans was 0.47% at December 31, 2008, which was favorable in comparison to the median of 0.72% of total loans as reported by all New England bank and thrift institutions as of September 30, 2008, the most recent date for available statistics.

Total 30 day+ delinquencies amounted to $17.6 million, or 0.96% of total loans, at December 31, 2008, up $6.4 million in the fourth quarter of 2008 and up $10.6 million from the balance at December 31, 2007. Commercial loan delinquencies amounted to $11.5 million, or 1.31% of total commercial loans, at December 31, 2008. Washington Trust has never offered a subprime residential loan program. Total residential mortgage and consumer loan 30 day+ delinquencies amounted to $6.1 million or 0.64% of these loans, at December 31, 2008, an increase of $3.9 million in the fourth quarter of 2008. Total 90 day+ delinquencies in the residential mortgage and consumer loan categories amounted to $973 thousand (five loans) and $77 thousand (two loans), respectively, at December 31, 2008.

The Corporation’s loan loss provision charged to earnings amounted to $1.850 million for the fourth quarter of 2008, compared to $1.1 million for the third quarter of 2008 and $1.0 million for the fourth quarter of 2007. For the year ended December 31, 2008 and 2007, the loan loss provision totaled $4.8 million and $1.9 million, respectively. The provision for loan losses was based on management’s assessment of various factors affecting the loan portfolio, including, among others, growth in the portfolio, ongoing evaluation of credit quality and general economic conditions. Net charge-offs amounted to $756 thousand in the fourth quarter of 2008, as compared to net charge-offs of $432 thousand in the third quarter of 2008 and $195 thousand in the fourth quarter of 2007. For the year ended December 31, 2008 and 2007, net charge-offs totaled $1.4 million and $517 thousand, respectively. Commercial loan net charge-offs amounted to $682 thousand and $1.1 million for the quarter and year ended December 31, 2008, respectively.

The Corporation will continue to assess the adequacy of its allowance for loan losses in accordance with its established policies. The allowance for loan losses was $23.7 million, or 1.29% of total loans, at December 31, 2008, compared to $22.6 million, or 1.28% of total loans, at September 30, 2008 and $20.3 million, or 1.29% of total loans, at December 31, 2007.

FINANCIAL CONDITION

Led by growth in commercial loans, total loans grew by $70.1 million, or 4 percent, in the fourth quarter of 2008 and by $265.5 million, or 17 percent, during the year. Commercial loans rose by $38.5 million, or 5 percent, in the fourth quarter of 2008 and by $200.0 million, or 29 percent, in the year 2008. The commercial loan portfolio consists of commercial mortgages, construction and development (together, "commercial real estate”) and other commercial loans. Other commercial loans are largely collateralized and in many cases the collateral consists of real estate occupied by the business as well as other business assets.

The investment securities portfolio amounted to $866.2 million at December 31, 2008, up by $112.8 million in the fourth quarter of 2008. The fair value of mortgage-backed securities amounted to $683.6 million at December 31, 2008. All of the Corporation’s mortgage-backed securities are issued by U.S. Government agencies or U.S. Government-sponsored enterprises. At December 31, 2008, the net unrealized losses on the investment securities portfolio amounted to $3.8 million and included gross unrealized losses of $23.7 million. Approximately 73% of the gross unrealized losses on the investment securities portfolio were concentrated in variable rate trust preferred securities issued by financial services companies. These trust preferred securities holdings consist of seven individual name issuers in the financial industry, including, where applicable, the impact of mergers and acquisitions of issuers subsequent to original purchase, and two pooled trust preferred securities in the form of collateralized debt obligations. All of these trust preferred securities holdings have investment grade credit ratings. The pooled trust preferred holdings consist of trust preferred obligations of banking industry companies and, to a lesser extent, insurance industry companies. For both of its pooled trust preferred holdings, Washington Trust’s investment is senior to one or more subordinated tranches that have first loss exposure. One of the pooled trust preferred securities held by the Corporation continues to accrue and make payments as expected. The other pooled trust preferred security began deferring interest payments until future periods and based on the financial condition and operating outlook of the issuers, was deemed to be other-than-temporarily impaired in the fourth quarter of 2008.

Total deposits increased by $53.6 million in the fourth quarter of 2008 and increased by $144.7 million during the year. Excluding out-of-market brokered certificates of deposit, in-market deposits grew by $53.6 million, or 3 percent, in the fourth quarter and $86.5 million, or 6 percent, from the balance at December 31, 2007. Deposit growth was largely concentrated in in-market time deposits, which grew by $52.7 million, or 7 percent, in the fourth quarter of 2008 and $101.4 million, or 15 percent, during the year.

Federal Home Loan Bank advances totaled $829.6 million at December 31, 2008, up $82.2 million in the fourth quarter and up $213.2 million from the balance at December 31, 2007. During the fourth quarter of 2008, Washington Trust recognized a liability of $2.0 million classified in Other Borrowings, with a corresponding increase to Goodwill, related to the 2005 acquisition of Weston Financial Group, Inc. This represents an amount earned under the terms of the acquisition agreement, which provided for a contingent annual earn-out payment during the three-year period ending December 31, 2008. Also in the fourth quarter of 2008, Washington Trust paid approximately $7.1 million, in settlement of a portion of the 2008 earn-out liability. The balance of the 2008 earn-out liability will be paid in the first quarter of 2009.

DIVIDENDS DECLARED

The Board of Directors declared a quarterly dividend of 21 cents per share for the quarter ended December 31, 2008. The dividend was paid on January 12, 2009 to shareholders of record on January 5, 2009.

CONFERENCE CALL

Washington Trust Chairman and Chief Executive Officer John C. Warren, and David V. Devault, Executive Vice President, Chief Financial Officer and Secretary, will host a conference call on Wednesday, January 28, 2009 at 8:30 a.m. (Eastern Time) to discuss the Corporation’s fourth quarter results. This call is being webcast by SNL IR Solutions and can be accessed through the Investor Relations section of the Washington Trust website, www.washtrust.com. A replay of the call will be posted in this same location on the website shortly after the conclusion of the call. You may also listen to a replay by dialing (877) 344-7529 and entering Conference ID #: 426606. The replay will be available until 9:00 a.m. on February 12, 2009.

BACKGROUND

Washington Trust Bancorp, Inc. is the parent of The Washington Trust Company, a Rhode Island state-chartered bank founded in 1800. Washington Trust offers personal banking, business banking and wealth management services through its offices in Rhode Island, Massachusetts and southeastern Connecticut. Washington Trust Bancorp, Inc.’s common stock trades on the Nasdaq Global Select^® 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 certain statements that may be considered "forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, including statements regarding our strategy, effectiveness of investment programs, evaluations of future interest rate trends and liquidity, expectations as to growth in assets, deposits and results of operations, success of acquisitions, future operations, market position, financial position, and prospects, plans, goals and objectives of management are forward-looking statements. The actual results, performance or achievements of the Corporation could differ materially from those projected in the forward-looking statements as a result of, among other factors, changes 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, 2007, as filed with the Securities and Exchange Commission, 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 the Corporation assumes no obligation to update forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.