Washington Trust Announces Third Quarter 2008 Earnings

Washington Trust Bancorp, Inc. (NASDAQ Global Select; symbol: WASH), parent company of The Washington Trust Company, today announced third quarter 2008 net income of $6.0 million, or 44 cents per diluted share, compared to third quarter 2007 net income of $6.6 million, or 48 cents per diluted share. For the nine months ended September 30, 2008, net income amounted to $18.0 million, or $1.32 per diluted share, substantially the same as the amounts reported for the nine months ended September 30, 2007.

Third Quarter 2008 Highlights:

• Return on average equity for the third quarter and first nine months of 2008 was 12.94% and 12.68%, respectively.
• Commercial loan growth continued at a firm pace for the eighth consecutive quarter, amounting to $46.8 million in the third quarter. Commercial loans have increased $191.8 million, or 30 percent, from the balance at September 30, 2007.
• The loan loss provision charged to earnings in the third quarter was $1.1 million, an increase of $800 thousand from the third 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 $6.8 million, or 0.25% of total assets, at September 30, 2008.
• Impairment charges of $982 thousand ($669 thousand after tax; 5 cents per diluted share) were recognized on FHLMC and FNMA perpetual preferred stock holdings deemed to be other-than-temporarily impaired.
• An income tax benefit of $841 thousand (6 cents per diluted share) was recognized based on an increase in the net deferred tax assets resulting from a recent change in a state corporate income tax rate and calculation method.
• The Corporation remains well-capitalized with a total risk based-capital ratio of 10.43% at September 30, 2008. On October 2^nd the Corporation announced the issuance of $50 million in a private placement of its Common Stock. The net proceeds of approximately $47 million were received on October 7^th.

Commenting on the quarter, John C. Warren, Chairman and Chief Executive Officer, said, "Despite the economic recession and the upheaval in the credit and financial markets, Washington Trust recorded another quarter with solid performance. These are challenging times, and we will remain focused and disciplined as we move forward."

RESULTS OF OPERATIONS

Net interest income for the third quarter of 2008 increased $437 thousand, or 3 percent, from the second quarter of 2008 and $1.3 million, or 9 percent, from the third quarter a year ago. The increase from the second quarter reflects higher earning-asset levels, while the increase from a year ago reflects growth in interest-earning assets and lower deposit costs.

The net interest margin (annualized tax-equivalent net interest income as a percentage of average earning assets) for the third quarter of 2008 was 2.62%, down 9 basis points from the second quarter of 2008 and down 19 basis points from the third quarter of 2007. The decline in net interest margin reflects decreases in yields on variable rate commercial and consumer loans resulting from actions taken by the Federal Reserve to reduce short-term interest rates, with less commensurate reduction in deposit rates paid during the same period. Approximately 5 basis points of the net interest margin decline from the second quarter of 2008 to the third quarter was attributable to several additional factors including the cost of temporarily maintaining lower yielding short-term assets for balance sheet management purposes, a lower amount of loan fee income recognized, and a reduction in the dividend yield earned on the Corporation’s investment in Federal Home Loan Bank of Boston stock.

Noninterest income for the third quarter of 2008 declined $1.6 million, or 13 percent, from the second quarter and $1.3 million, or 11 percent, from the third quarter of 2007. The decline in noninterest income was largely due to the recognition of $982 thousand in write-downs on FHLMC and FNMA perpetual preferred stock holdings deemed to be other-than-temporarily impaired in the third quarter of 2008. The impairment charges were included in net losses on securities in the Consolidated Statements of Income. There were no net gains or losses on securities in the third quarter of 2007.

Excluding net gains and losses on securities, noninterest income amounted to $11.6 million for the third quarter of 2008, down $640 thousand, or 5 percent, from the second quarter and down $278 thousand, or 2 percent, from the third quarter a year ago. Wealth management revenues declined $459 thousand on a linked quarter basis and were essentially flat with the third quarter of 2007. Second quarter 2008 amounts included seasonal tax preparation fee revenues of $335 thousand. The remaining decline in wealth management revenues on a linked quarter basis was generally attributable to the decline in assets under administration. Wealth management assets under administration totaled $3.625 billion at September 30, 2008, down $299.1 million, or 8 percent, in the third quarter of 2008. Assets under administration were down $389.9 million, or 10 percent, from December 31, 2007 and down $401.4 million, or 10 percent, from September 30, 2007. The decline in assets under administration was primarily due to lower valuations in the financial markets.

Noninterest expenses amounted to $18.5 million for the third quarter of 2008, up $417 thousand, or 2 percent, from the second quarter and up $1.2 million, or 7 percent, from the third quarter a year ago. The increase in noninterest expenses on a linked quarter basis includes a seasonal increase of $259 thousand in merchant processing expenses. Approximately 40 percent of the increase from a year ago represents costs attributable to our wealth management business and an increase in FDIC deposit insurance costs. Washington Trust expects to make its annual contribution to its charitable foundation in the fourth quarter of this year. The cost of this contribution is expected to be approximately $450 thousand. Washington Trust made its 2007 annual contribution in the second quarter of that year.

Income tax expense amounted to $1.6 million for the three months ended September 30, 2008, as compared to $3.0 million for the same period in 2007. In third quarter of 2008, an income tax benefit of $841 thousand was recognized based on an increase in net deferred tax assets resulting from a recent change in a state corporate income tax rate and calculation method. Excluding this income tax benefit, the Corporation’s effective tax rate for the third quarter of 2008 was 32.2%, as compared to 31.6% for the second quarter and 31.3% for the third quarter of last year. The Corporation currently expects the fourth quarter effective tax rate to be approximately 31.8%.

ASSET QUALITY

Nonperforming assets (nonaccrual loans and property acquired through foreclosure) amounted to $6.8 million, or 0.25% of total assets, at September 30, 2008, compared to $6.2 million, or 0.23% of total assets, at June 30, 2008 and $4.3 million, or 0.17% of total assets, at December 31, 2007. Properties acquired through foreclosure amounted to $113 thousand at September 30, 2008. There were no properties acquired through foreclosure on the balance at June 30, 2008 and December 31, 2007.

Nonaccrual loans as a percent of total loans stood at 0.38% at September 30, 2008 compared to 0.36% of total loans at June 30, 2008 and 0.27% of total loans at December 31, 2007. The increase in nonaccrual loans was largely due to certain commercial loan relationships moving into the non-accruing loan classification.

Total 30 day+ delinquencies amounted to $11.2 million, or 0.63% of total loans, at September 30, 2008, down $3.8 million in the third quarter and up $4.2 million in the first nine months of 2008. The decline in 30 day+ delinquencies in the third quarter was primarily due to one commercial mortgage relationship of $3.5 million which was brought current by the borrower. Commercial loans represent $9.0 million, or 80%, of total delinquencies at September 30, 2008.

Washington Trust has never offered a subprime residential loan program. Total residential mortgage and consumer loan 30 day+ delinquencies decreased modestly in the third quarter and first nine months of 2008 and amounted to $2.2 million, or 0.24% of these loans, at September 30, 2008. Total 90 day+ delinquencies in the residential mortgage and consumer loan categories amounted to $188 thousand (three loans) and $48 thousand (one loan), respectively, at September 30, 2008. Total nonaccrual loans, which include the 90 day+ delinquencies, amounted to $962 thousand and $208 thousand in the residential mortgage and consumer loan categories, respectively, at September 30, 2008.

The Corporation’s loan loss provision charged to earnings amounted to $1.1 million for the third quarter of 2008, compared to $1.4 million for the second quarter of 2008 and $300 thousand for the third quarter of 2007. 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 $432 thousand in the third quarter of 2008, as compared to net charge-offs of $161 thousand in the second quarter and $155 thousand for the third quarter of 2007. Included in the third quarter 2008 amount was $385 thousand of commercial loan net charge-offs.

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 $22.6 million, or 1.28% of total loans, at September 30, 2008, compared to $22.0 million, or 1.29% of total loans, at June 30, 2008 and $20.3 million, or 1.29% of total loans, at December 31, 2007.

FINANCIAL CONDITION

Total loans grew by $63.4 million, or 4 percent, in the third quarter and by $195.4 million, or 12 percent, in the first nine months of 2008. Commercial loans rose by $46.8 million, or 6 percent, in the third quarter of 2008 and by $161.6 million, or 24 percent, in the first nine months of 2008. In the third quarter of 2008, residential loans increased by $10 million, or 2 percent, and consumer loans grew by $6.6 million, or 2 percent.

The investment securities portfolio amounted to $753.5 million at September 30, 2008, down by $36.6 million in the third quarter of 2008, largely due to a decrease of $20.1 million in mortgage-backed securities. The fair value of mortgage-backed securities amounted to $566.0 million at September 30, 2008. All of the Corporation’s mortgage-backed securities are issued by U.S. Government agencies or U.S. Government-sponsored enterprises. At September 30, 2008, the net unrealized losses on the investment securities portfolio amounted to $18.1 million and included gross unrealized losses of $22.8 million. Approximately 54% 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. 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. The respective tranche of the pooled trust preferred securities held by the Corporation continues to accrue and make payments as expected, and have investment grade credit ratings.

Total deposits increased by $127.7 million in the third quarter and increased by $91.0 million in the first nine months of 2008. Excluding out of market brokered certificates of deposit, in-market deposits grew by $53.5 million, or 4 percent, in the third quarter and $32.9 million, or 2 percent, from the balance at December 31, 2007. In-market deposit growth in the third quarter of 2008 reflects increases in certificate of deposit balances, while NOW, savings and money market account balances declined. Federal Home Loan Bank advances totaled $747.4 million at September 30, 2008, down $97.9 million in the third quarter and up $131.0 million from the balance at December 31, 2007. During the third quarter of 2008, the Corporation recognized a liability of $5.6 million, with a corresponding increase in goodwill, related to the acquisition of Weston Financial Group, Inc. in August 2005. This represents amounts earned under the terms of the acquisition agreement, which provides for a contingent payment earn-out in each year during the three-year period ending December 31, 2008.

As previously reported on October 2, 2008, the Corporation announced that it had entered into a purchase agreement with select institutional investors pursuant to which it raised $50 million in a private placement of its own common stock. Net proceeds were approximately $47 million after deducting offering-related fees and expenses. The closing took place on October 7, 2008. The Corporation issued a total of 2.5 million shares of common stock at a price of $20 per share in the private placement. The Corporation has agreed to file, within 30 days of the closing, a registration statement with the Securities and Exchange Commission to register these shares for resale. Approximately $65 thousand in legal costs were incurred in the third quarter in connection with this matter and recorded in noninterest expenses. The Corporation expects to incur and record additional noninterest expenses of approximately $250 thousand in the fourth quarter of 2008. Washington Trust intends to use the net proceeds from the capital raise for general corporate purposes and to support strategic growth initiatives in its commercial and wealth management business lines.

DIVIDENDS DECLARED

The Board of Directors declared a quarterly dividend of 21 cents per share for the quarter ended September 30, 2008. The dividend was paid on October 10, 2008 to shareholders of record on September 30, 2008.

CONFERENCE CALL

Washington Trust Chairman and Chief Executive Officer John C. Warren, and David V. Devault, Executive Vice President, Secretary, Treasurer, and Chief Financial Officer, will host a conference call on Tuesday, October 21, 2008 at 8:30 a.m. (Eastern Time) to discuss the Corporation’s second 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 #: 423534. The replay will be available until 9:00 a.m. on October 29, 2008.

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 or regional economic conditions, 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. The Corporation assumes no obligation to update forward-looking statements or update the reasons actual results, performance or achievements could differ materially from those provided in the forward-looking statements, except as required by law.

(a) Source: Moody’s

(b) We own various series of trust preferred securities issued by seven corporate financial institutions.

(c) We own two pooled trust preferred securities in the form of collateralized debt obligations. There are 73 issuers in one of the trust preferred CDO securities, and 38 issuers in the other. As of September 30, 2008, 3 of the 73 pooled issuers for one security and 2 of the 38 pooled issuers for the other security have invoked their original contractual right to defer interest payments. The respective tranche of the securities held by Washington Trust continues to accrue and make payments as expected, and have investment grade credit ratings.

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. 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.

Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:

Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: