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Executives

Elizabeth Eckel – IR

John Warren – Chairman & CEO

David Devault – EVP, Secretary and CFO

Analysts

Frank Schiraldi – Sandler O’Niell

Lee Howard – The Day Publishing Company

Laurie Hunsicker – Stifel Nicolaus

Damon DelMonte – KBW

Washington Trust Bancorp, Inc. (WASH) Q4 2008 Earnings Call Transcript January 28, 2009 8:30 AM ET

Operator

Hello, and welcome to the fourth quarter of 2008 Washington Trust Bancorp earnings conference call. All participants will be in a listen-only mode. There’ll be an opportunity for you to ask questions at the end of today’s presentation. (Operator instructions) Please note this conference is being recorded. Now, I would like to turn the call over to Elizabeth Eckel. Ma’am, please begin.

Elizabeth Eckel

Thank you. Good morning, and welcome to the quarterly earnings conference call for Washington Trust Bancorp, NASDAQ global market symbol WASH. Today’s conference call is being recorded and is being webcast live. A webcast replay of the conference call will be available shortly after the conclusion of today’s call through the corporation’s Web site at www.washtrust.com in the Investor Relations section under Presentations.

However, the information we provide during today’s call is accurate only as of this date. And you should not rely on these statements after the conclusion of today’s call. Hosting this morning’s discussion is John C. Warren, Chairman and Chief Executive Officer; and, David V. Devault, Executive Vice President, Chief Financial Officer, and Secretary. And now, I am pleased to introduce Washington Trust’s Chairman and Chief Executive Officer, John C. Warren. John?

John Warren

Thank you, Beth. Good morning. And thank you all for joining us here today. Earlier this morning, we released our earnings for the fourth quarter and the year ended December 31st, 2008. Dave and I will provide an overview of our results, and then answer any questions you may have.

As we look back at 2008, it’s clear that our success for the year can be attributed to our focus. We knew the challenges, which we faced in both the economic environment and the financial markets. But we stuck to our principles, remained focus on our core businesses, and the core businesses that has driven our company for more than 208 years.

Over the past few years, we’ve exited the credit card business, we exited indirect automobile lending. We didn’t get involved in subprime lending. We remained true to our disciplined credit standards. We continue to invest in new talents and technology that will help us to grow our key business lines.

We raised approximately $47 million in new capital through a private issuance, a pipe transaction, all of which is probably trading now with select institutional investors in early October. We chose not to accept any TARP funds through the US Treasury Department’s capital purchase program. All these decisions contributed to our success in 2008, and had made us an even stronger company.

Despite all the turmoil in 2008, including a national recession, a federal banking crisis, a precipitous decline in the financial markets, Washington Trust had a very solid year. For the fourth quarter, net income totaled $4.6 million or $0.29 per diluted share, down from $5.8 million or $0.43 per diluted share for the fourth quarter of ’07. In the year ended 2008, net income was $22.6 million or $1.59 per diluted share, compared to net income of $23.8 million or $1.75 per diluted share in the year 2007.

Our asset quality remains good, which is obviously critical in today’s environment. More importantly, our asset quality has remained strong in light of exceptional double digit growth in our commercial loan portfolio. In that area, our commercial loan area was the highlight of 2008 as total commercial loans were up almost 30% from 2007 levels. We had excellent growth in both C&I and commercial real estate lending. We had good demand in our small business lending area as well, once again serving as one of the top SPA lenders in Rhode Island.

Where did the growth come from? While many financial institutions were tightening up on their credit and actually not making loans, Washington Trust continued to work closely with our accountants, developers, borrowers to assure them that we were ready and willing to lend. The result, our commercial portfolio is comprised of quality credits of all types and sizes throughout our market area. We’ve worked with existing clients, brought in multimillion dollar deals from new clients and financed loans for local small businesses. Washington Trust has earned the reputation as the bank to go for – go to for business banking.

In the wealth management area, while the commercial area benefited from the upheaval in the economy, our wealth management area did not fare as well, as wealth management assets declined 22% in 2008. This was primarily due to the depreciation in finance from markets. As a result, wealth management revenue was down 3% from the prior year. One benefit of the market rest was new business development growth as investors who have lost confidence in much of Wall Street turned to out our wealth management professionals for guidance.

We recently launched new technology that will enable our wealth management division to implement an open architecture overlay program that combines proprietary models, third party managers, neutral funds, fixed income, and exchange rated funds. This technology is critical to growing the wealth management business.

In the residential mortgage area, the turmoil in the market has led may borrowers away from the larger out of state banks in the mortgage brokers down to and coming to the local lenders like Washington Trust. When they come to us, they can actually count on the fact that we’ll be there when it’s time to close the loan. Recently, the refinancing business had been robust as consumers are taking advantages of interest rates that are at their lowest levels in years.

In December 2008, we relocated our existing Providence branch to a new high-tech, high touch branch in the financial district of downtown Providence. It’s a unique off scale branch both comfortable and convenient to the busy professionals in the area. We are also moving forward with our plans to open a second branch in Warwick later this year in 2009.

And at this point, I’d like to ask Dave Devault to provide more detail on our third quarter financials. David?

David Devault

Thank you, John. Good morning, everyone. Thank you for joining us on our call today. I’ll be reviewing the fourth quarter operating results in financial position as described in our press release this morning.

Net income for the fourth quarter of 2008 was $4.6 million or $0.29 per diluted share, compared to $5.8 million or $0.43 per diluted share reported for the fourth quarter of 2007. Return on average equity for the fourth quarter was 7.98%, compared to 12.73% for the same period in 2007.

Full year 2008 results included net income of $22.6 million or $1.59 per diluted share, compared to $23.8 million or $1.75 per diluted share in 2007. The return on average equity for the year 2008 was $11.31%, compared to 13.48% for 2007.

There were a few items, which were unusual for Washington Trust in the fourth quarter that I’d like to mention. We recognize losses on write downs to fair value for certain investment securities deemed to be other than temporarily impaired totaling $2.4 million pre-tax. On an after tax basis this amounted to $1.7 million or $0.10 per diluted share.

Non-core income tax benefits totaling $1.2 million or $0.07 per diluted share were recognized in the fourth quarter. This was attributable to the resolution of certain tax positions and adjustments to overall effective income tax rate based on full year 2008 operating results.

Unrealized losses on interest rate swap contracts of $663,000 were recognized in the fourth quarter, compared to unrealized losses compared of $24,000 in the third quarter of 2008 and unrealized gains of $27,000 in the fourth quarter of 2007. On an after tax basis, the fourth quarter of 2008 charge amounted to $468,000 or $0.03 per diluted share. I’ll comment further on the nature of this matter in a few moments. The combined impact of these unusual items for us was a reduction in fourth quarter 2008 net income of $973,000 or $0.06 per diluted share.

And with that, I’ll now comment on the results of operations. Net interest income for the fourth quarter of 2008 was $17.6 million, up $942,000 or 6% from the third quarter, and up $2.7 million or 19% from the fourth quarter in 2007. The increase from the third quarter reflects growth of $112 million or 4% in 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 was up $5.6 million or 9% over 2007.

The net interest margin for the fourth quarter of 2008 was 2.65%, up three basis points from the third quarter and unchanged from the fourth quarter of 2007. The increase on a linked quarter basis reflects a six basis point beneficial impact of the reinvestment of the net proceeds from the common stock issuance, offset impart 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.

Moving on to our loan loss provision, it was $1.85 million in the fourth quarter, an increase of $850,000 from the fourth quarter of 2007, and up from $1.1 million in the third quarter. That increase is due to growth in the loan portfolio as well as our ongoing evaluation of credit quality and general economic conditions. This brought to total provision for the year to $4.8 million, compared to $1.9 million for all of 2007. And I’ll have additional comments on asset quality later in my remarks.

Non-interest income in the fourth quarter of 2008 declined $3.3 million or 31% from the third quarter and declined $4 million or 35% from the fourth quarter of 2007. For the full year 2008, non-interest income was down by $4.4 million or 10%. The most significant reason for the decline in non-interest income for the quarter were write downs charged to earnings on investment securities deemed to be other than temporarily impaired in the amount of $2.4 million. These fourth quarter impairment charges included $1.9 million on a pooled trust preferred debt security and $494,000 on common and perpetual preferred stocks.

Total impairment charges for the full year 2008 on securities deemed to be other than temporarily impaired were $5.3 million. Also included in non-interest income in the fourth quarter were realized gains on securities of $315,000 related to the annual contribution of appreciated equity securities to our charitable foundation. For the year, net realized gains on securities were $2.2 million as compared to $455,000 in 2007.

Regarding the wealth management business, wealth management revenues are dependent, to a large extent, on the value of assets under administration and that’s closely tied to the performance of the financial markets. Wealth management revenues were down $1.3 million or 17%, compared to the fourth quarter of 2007, and down $1 million or 14% on a linked quarter basis. Wealth management assets were adversely affected by declining values in the financial markets as evidenced by a 22% decline in the S&P 500 index in the fourth quarter. Assets under administration declined $477 million or 13% in the fourth quarter ending the year at $3.15 billion, and they were down 22% from the end of ’07.

Also included in the non-interest income in the fourth quarter of 2008 were unrealized losses on interest rate swap contracts totaling $663,000. The majority of this $638,000 is attributable to an interest rate swap contract executed in April of 2008 to hedge the interest rate risk associated with a variable rate – with variable rate junior subordinated debentures. An exception, this hedging transaction was deemed to be highly effective, and therefore, changes in the value of the swap contracts were recognized as a component of equity.

In September, however, due to a change in the credit worthiness of the swap counter party, the hedging relationship was deemed to be no longer highly effective, with the result that subsequent changes in the value of the swap contract are recognized directly through earnings. The valuation decline in the fourth quarter was due to a decline in the swap yield curve, which reduced market fixed rates returns similar to the swap contracts. Unrealized gains and other interest rates swap transactions not affected by this matter were $121,000 for the nine months ended September 30th, and $27,000 in the year and quarter ended December 31st, 2007.

Looking at non-interest expenses, they amounted to $18.1 million in the fourth quarter, down $396,000 or 2% from the third quarter. We made our annual charitable contribution in the fourth quarter in the amount of $397,000 while the 2007 contribution occurred in the second quarter of that year. The decline in non-interest expenses on a linked quarter basis reflected a seasonal decline in merchant processing expenses and reductions to employee incentive accruals.

Fourth quarter non-interest expenses were up $1.4 million or 8% from the same quarter in 2007. The year-over-year increase included an increase of $211,000 in FDIC deposit insurance costs, higher recruitment costs of $186,000, increased outsourced services costs of $152,000 associated with wealth management platform and product support costs, and $145,000 related to foreclosed property costs, asset disposals, and one time cost associated with the relocation of our branch office.

Earlier, I mentioned the $1.2 million non-core income tax benefit recognized in the fourth quarter, which resulted from the resolution of certain tax positions and adjustments to our overall effective income tax rate based on full year results. Excluding the effect of these matters, our effective tax rate for the fourth quarter of 2008 was 29.4%, compared to 32.2% in the third quarter and 31.1% in the fourth quarter of 2007. We expect our effective tax rate for 2009 to be approximately 30.8%.

Looking now at the balance sheet, total loan growth amounted to $70 million or 4% in the fourth quarter and $266 million or 17% for the year. Commercial loan growth continued at the good pace for the ninth consecutive quarter, increasing $38 million or 5% in the fourth quarter, and $200 million or 29% for the full year 2008. Residential mortgages rose by $24 million or 4% for the quarter. And consumer loans were up $8 million or 3% in the quarter.

The investment securities portfolio stood at $866 million at the end of 2008, up $113 million in the fourth quarter largely due to an increase of $118 million in mortgage backed securities. The total fare value of all mortgage backed securities holdings was $684 million at the end of the year. All of our mortgage backed securities are issued by US Government agencies or US Government sponsored enterprises.

Net unrealized losses, which is unrealized on the investment securities portfolio at December 31, amounted to $3.8 million. This included gross unrealized losses of $23.7 million. Approximately 73% of the gross unrealized losses are concentrated and variable rate of trust preferred securities issued by financial services companies. These trust preferred securities consist of holdings issued by seven individual named financial industry institutions 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.

For both of the pooled trust preferred holdings, our investment is senior to one or more subordinated tranches that have first loss exposure. One of our pooled trust securities holdings continues to accrue and make payments as expected. The other pooled trust security is currently deferring interest payments for our tranche until future periods. And based on the financial condition and operating outlook of the underlying issuers, was deemed to be other than temporarily impaired in the fourth quarter, with a resulting charge to earnings of $1.9 million.

Total deposits increased by $53.6 million or 3% in the fourth quarter, and were up $144.7 million for the full year 2008. Excluding out of market brokerage CDs, in market deposits grew by $86.5 million or 6% for all of 2008. The largest component of fourth quarter growth was time deposits, which grew by $52.7 million or 7.3% in the quarter.

In the fourth quarter, we recognized the liability of $2 million, which was classified in other borrowings, with the corresponding increase to goodwill. This represents the final amount earned under the terms of the 2005 acquisition of Western Financial Group, which provided for contingent annual earn out payments during the three-year period ended December 31st, 2008.

I’ll now comment on asset quality. Non-performing assets include non-accrual loans, non-performing investment securities, and assets acquired through foreclosure or repossession. Non-performing assets were $8.8 million or 0.3% of total assets at the end of 2008, compared to $6.8 million or 0.25% of total assets at the end of the third quarter, and $4.3 million at December 31st, 2007. The increase in the fourth quarter included non-accrual investment securities of $633,000 classified as non-performing assets for the first time.

Assets acquired through foreclosure or repossession stood at $392,000 at the end of the year compared to $113,000 at the end of the third quarter, and there were none in 2007. While these reflect increases in the quarter in year-to-date periods, our ratio of non-performing loans plus accrued troubled debt restructured loans as a percentage of total loans was 0.47% at the end of 2008, which was favorable in comparison to the median level of 0.72% of total loans reported by RBC Capital Markets for all the (inaudible) bank at risk as of September 30th, which is the most recently available information.

Total 30-day plus delinquencies stood at $17.6 million or 0.96% of total loans at the end of the year. That was an increase of $6.4 million in the quarter and an increase of $10.6 million for the full year. Included in that were commercial loan delinquencies of $11.5 million, representing 1.3% of total commercial loans.

In the residential mortgage and consumer loan categories, delinquencies were $6.1 million or 0.64% of those loan categories at the end of 2008, up $3.9 million in the quarter. There were five residential mortgage loans totaling $973,000 in the 90-day category, and two loans totaling $77,000 in the consumer loan category at the end of 2008.

As I indicated earlier, our loan loss provision charge to earnings in the fourth quarter was $1.85 million, and for the full year $4.8 million. This compares to net charge offs, which was $756,000 on the fourth quarter, compared to $232 million of net charge offs in the third quarter, and $195,000 in the fourth quarter of 2007. Fourth quarter 2008 net charge offs included $682,000 in the commercial loan portfolio. For the full year 2008, net charge offs were $1.4 million, compared to $517,000 for 2007. Again, the majority of that was commercial loans with net charge offs in that category of $1.1 million for the full year. The ratio of net charge offs to average loans for 2008 was 0.08%. Our allowance for loan losses was $23.7 million or 1.29% of total loans at the end of 2008, up from $22.6 million or 1.8% of total loans at the end of the third quarter, and $20.3 million or 1.29% of total loans at the end of 2007.

Total shareholders equity was $235.1 million at December 31st, up from $186.5 million at the end of 2007. In the fourth quarter, a charge of $7.6 million to the accumulated other comprehensive income component of shareholders equity was recorded, which represents the periodic recognition of the change in the value of qualified pension assets – qualified pension plan assets in comparison to the change in pension liabilities. This amount was larger than recorded at the end of 2007, primarily due to a decline in the value of the marketable securities held in the pension plan.

The corporation and the subsidiary bank are well capitalized. The corporation’s estimated total risk based capital ratio was approximately 12.5% at the end of 2008. In December, we declared a dividend of $0.21 per share, paid on January 12.

And at this time I turn the call back to John Warren.

John Warren

Thank you, David. On our conference call one year ago, I concluded by stating, there are many words I could use to describe the banking industry in 2007, challenging, difficult, or extraordinary, little did I know. All I can say now is that if 2007 was challenging, then 2008 took it to a whole new level for the financial services industry.

As we look ahead, candidly for everyone, 2009 is a total unknown. No one really knows. It will likely be the end of 2009 and possibly even 2010 before the economy can really get moving again. President Obama does represent change. And we’re certainly hopeful that the new stimulus package will create a little confidence and begin to move the economy forward.

As we enter 2009, which you’ll see from us, we will continue to focus on commercial lending as the larger institutions continue to remain distracted. Our residential lending, largely revised, has shown substantial growth for the recent rate declines. We expect this will continue.

Also in our press release, as we indicated, Jack Treanor, our President and Chief Operating Officer, has indicated his intent to take early retirement in October this year. Jack will remain on the Board, and we’ll continue to have the benefit of both his wisdom and strategic thinking. We’re very thankful for that.

Washington Trust has been a pillar of strength for more than two centuries and we remain one of the premier financial institutions in our region. We’re ready, willing, and able to meet the lending, deposit, and investment needs of our community. That message is getting across. We’re strong, focused, and poised for future growth.

Thank you for your time this morning. And now, at this point, David and I would be happy to answer any questions you might have. Thanks.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from Frank Schiraldi of Sandler O’Niell. I’m sorry if I mispronounced your name. Please go ahead.

Frank Schiraldi – Sandler O’Niell

Good morning

John Warren

Hi, Frank. How are you?

Frank Schiraldi – Sandler O’Niell

Good. How are you doing?

John Warren

Good.

Frank Schiraldi – Sandler O’Niell

Just a couple of questions.

John Warren

Sure.

Frank Schiraldi – Sandler O’Niell

I’m wondering if you can give us any specifics or further color on the commercial loan growth in the quarter as far as geography, and size, and any specifics that you can give, really.

John Warren

It’s really been New England, largely Rhode Island, with a little bit over the Massachusetts and with our branches in Connecticut, a little bit in Connecticut as well.

Frank Schiraldi – Sandler O’Niell

Okay. And I’m assuming, John, from the comments you made just a second ago, what are your thoughts on commercial loan growth next year? I mean based on the pipeline, do you expect next – for instance, 1Q ’09, do you expect sort of similar growth that we saw quarter-over-quarter here.

John Warren

I was going to reference quarter-over-quarter. I mean I think the key is and continues to be the destruction of the largest institutions in our competitive area. That’s been the source of a huge chunk of our lending, (inaudible) organic activity going on. But obviously, the economy has slowed significantly, not just in Rhode Island and New England, but through out the country. So what we really had is, and thankful for, all the major institutions are so distracted that we’ve had business coming to us. So we expect to see it continue growing. It won’t be the 29% growth we saw year-over-year. And we’ll just see how the business environment in Rhode Island and the larger customers come to us.

Frank Schiraldi – Sandler O’Neill

And then, just finally on Wolf Management business, obviously, it’s difficult to control at the market, but as far as flows, what have you seen so far? It’s still early, obviously, but so far this year?

John Warren

The customer base we have has been, I guess, positive, responsive. I think in the information we included in the press release and you probably didn’t have time – Dave put in a stack of numbers and multiple pages to say the least. We did include the new business originations for the four quarters, quarter-by-quarter last year.

David Devault

Yes. I would add that I think there was a bit of a seasonal reduction in the fourth quarter in customer flows. But it’s my understanding that the pipeline for business development is in good shape.

John Warren

Yes. And once again, needless to say, some of the competitors, both banking and – I mean banking as in real bank, competitors and some of the brokerage firms are dramatically different than they used to be. And that’s shuffling the deck, shall we say.

Frank Schiraldi – Sandler O’Neill

Okay. Thank you.

John Warren

You bet.

David Devault

Thanks, Frank.

Operator

Our next question is from Lee Howard of The Day Publishing Company. Please, go ahead.

Lee Howard – The Day Publishing Company

Hi, John. How are you?

John Warren

I’m doing well, Lee. Yourself?

Lee Howard – The Day Publishing Company

Good, good. Thanks. I’ve got a couple of questions here.

John Warren

Sure.

Lee Howard – The Day Publishing Company

I’m curious as to what it’s like to be running a bank these days? Obviously, you have a lot of pressure, a lot of questions that you never had to answer before. You know what kind of pressures are on you to do things that you might not want to do?

John Warren

It’s actually kind of a – I should probably start by saying that if I didn’t already have a full head of grey hair, it would be greyer than it was before. But part of that grey came from the last cycle that we went through in 1989 to ’91, ’92, when New England really had a rocky period. And a lot of the talent that we have here at Washington Trust went through that, experienced it, lived it. Both Jack Treanor and myself were running a bank in Massachusetts at that point, and we saw what happened up there. We handled it. We handled it very well up there to the extent we could.

That team we have down here in Washington Trust, everything that we’re going through now and the quality of the loan portfolio that you see today, is reflective of decisions that were made four, five, six, seven years ago. We put in a structure, we put in a discipline, and we’re pleased with it. We still knock on wood everyday. But we’re certainly pleased with where we are. And as Dave said, our net charge offs were eight basis points, which is statistically about as low as it could go. A slight increase from the last couple of years, but incredibly low compared to just about anybody out there in the banking world.

It’s a challenge, what’s going on in the economy. When the president won the election, there was one shot, just after the inaugural ceremony, that the helicopter was on the lawn of the White House waiting to take President Bush and Laura away. The two presidents and their spouses were saying goodbye. And Bush looked five years younger and had a big smile on his face, and Laura looked happy and great. And there was a close up of Michelle Obama who said – I mean you can just see. You can write the quote underneath there, “Oh my goodness. I can’t believe that they’re leaving and we own it now.”

It’s obvious that ’09 is going to be a difficult year and a challenging year. And as I’ve said, nobody really knows what’s going to go on. I think this is when all the discipline of prior years and the discipline that we’re maintaining today, the focus of being very selective on the kind of business you do, very selective on the kind of lending you do, paying attention to your customers, all those things reflect well on what we currently have on the balance sheet, and will be part of the decision making that we make as we go through ’09.

Lee Howard – The Day Publishing Company

There’s a lot of pressure out there I know to lend, lend, lend. And I hear things like a lot of people can’t get small business administration loans anymore supposedly because the banks aren’t lending. But what’s the situation at Washington Trust? Obviously, it sounds from your statistics you’re bucking the trends here.

John Warren

For sure. Our commercial lending area grew over $200 million just in ’08. That was 29% growth. Our retail and our consumer lending grew about 7%. We’re doing business. We’ve been doing business. And as I had mentioned in the presentation, some of the large banks being distracted and really in position. We’ve had customers telling us they have been told that the large banks are not making loans. So we’re more than happy to invite them to our front door and help them out.

And that’s the kind of business that’s going on. We consciously do not take government money. We had a phone call inviting us to take government money. We raised the $50 million ourselves, net $47 million. In the subsequent events, the people that are basically been told how to run their company, we’re exceptionally glad that we didn’t take the government TARP money.

Lee Howard – The Day Publishing Company

What kinds of strings were attached?

John Warren

Well, they’ve been making –well, trying to force people to make loans. You only should make a loan if it’s a good loan. Some of the politicians’ comments are really pretty ridiculous. But that’s part of what you get when two of the largest banks in the country now have the US government as their largest shareholder. I chuckled when I saw the article in the paper today that one of the largest banks in the country had to send back a $50 million jet.

Lee Howard – The Day Publishing Company

You don’t have one of those?

John Warren

That was the Citigroup article that was in the paper today. You just sort of have to chuckle. Much of it is appearances, but the government tells you what you can do for a dividend. I think it’s not by coincidence that a number of banks have dropped their dividend to a $0.01. The number of banks doing that is too large. And if you went down the list, every one of them has TARP money.

Lee Howard – The Day Publishing Company

What about mortgage loans these people are concerned about? Obviously, their ability to get loans in this environment, and with prices going down, a lot of folks are saying this is an opportunity to throw out a safety net and get the real estate market going again and then maybe get the economy rolling. Obviously, you have a very small slice of the economic pie of the United States, but what kind of thoughts are in your head about how you’re approaching residential loans at this point?

John Warren

We’ve seen some great activity in the residential lending area, especially in the month of January. |And it’s – with rates having dropped as much as they did, there were people out there. It’s challenging. Freddy and Fannie have changed the roles a little bit, that doesn’t get mentioned too much. But the rates are lower, and there are opportunities, and there’s a fair amount of refinancing that’s going on in the market. The vast majority is refinancing. But that, on an overall basis, will help the cash flow of the economy.

Lee Howard – The Day Publishing Company

Can you talk about some of those securities that went bad on you, the trust securities? What kind of companies are we talking about as far as the ones that weren’t able to pay you back?

John Warren

Well, on the trust preferred pool, it’s actually a pool with a large number of individual, primarily banks, but financial entities in the pool. |So it’s diversified. And what’s happened is, with some of the bank failures around the country and some of the banks – other banks having trouble, we’re seeing in that one particular securities situation, we’ve seen several deferrals and at least one default as far as an individual – underneath the umbrella or the pool. So that we don’t necessarily agree with the pricing. But the way the world operates today and the accounting operates, we made the decision, did the evaluation, and decided to write the security down.

We can come back to you. We’ve got a couple of other people, I believe, that are looking to ask a question as well and–

Operator

Our next question is from Laurie Hunsicker of Stifel Nicolaus. Please, go ahead.

Laurie Hunsicker – Stifel Nicolaus

Yes, hi. Good morning. Good morning, gentlemen.

John Warren

Good morning, Laurie. How are you?

Laurie Hunsicker – Stifel Nicolaus

Good, thanks. A couple of questions, I just wondered if maybe we could talk specifically about credit, maybe specifically within the commercial and residential categories. You’ve seen some erosion, especially in the C&I. And then I guess, conversely, your consumer and your commercial constructions seem to be performing brilliantly. If you could just maybe comment on sort of both sides of that.

David Devault

In the commercial category, there were a number of loans that moved into the non-accrual category during the quarter. I don’t think there’s any common characteristic there other than they tend to be small business loans, for the most part, mid-sized, small business loans. And the economy is affecting those kinds of businesses, and that is manifesting itself in what you saw in the increase in delinquencies. And comparatively, the absolute amount of both delinquencies and non-accrual loans we considered to be manageable. And we’re watching it very closely.

John Warren

Yes. In fact, Laurie, I think that the stats that Dave gave in his presentation – our percentage, which was very low what was reflective of December 31st, 2008. The comparative was the best number we could get, which actually was September 30th for the peer group. I think it’s safe to say that when we see the December 31 number from the peer group, our favorable variants in that will be even higher.

Laurie Hunsicker – Stifel Nicolaus

Yes, sure. Your credit numbers are still holding nicely. On the commercial charge offs, the 682 of the 756 charge offs for the quarter, was that all or primarily all in the C&I business?

David Devault

Most of it was, yes.

Laurie Hunsicker – Stifel Nicolaus

Most of it was, okay. Does the trend now make you sort of rethink that portfolio?

John Warren

Well, not really. That’s a core part of our business because the – so many small businesses keep the checking accounts. And they, just from a liquidity point of view, they keep a substantial amount of money in DDA on a relative basis compared to the loans. I think with the economy, with the downturn like we’re seeing right now, and the magnitude of the layoffs right now, you can’t – the small business guy just or woman can’t help but be struggling a little bit. I mean there’s not – there aren’t too many people out there that are boasting about how good business is.

Laurie Hunsicker – Stifel Nicolaus

Right.

John Warren

And the little guy is just taking a hit. This is a handful of small businesses that – in diverse areas that just couldn’t make it.

Laurie Hunsicker – Stifel Nicolaus

Can you just generally talk to us about general economic conditions and, I guess, unemployment as a backdrop? The preliminary numbers out yesterday said Rhode Island’s at 10%.

John Warren

Right.

Laurie Hunsicker – Stifel Nicolaus

And that actually puts you guys at a 30% plus year high on unemployment.

John Warren

Yes. I think that the – in Rhode Island, we only have a million people or a smidge over a million people. So it’s pretty easy to drive the numbers, but there’s no question there are challenges out there economically. And there’s a lot of work being done by the governor and a lot of work being done actually by the business community trying to pull together and find ways to bring some additional jobs and get the employment levels back on the right road here in the state.

Laurie Hunsicker – Stifel Nicolaus

Okay. And then, just to get back over to credit for a second, your commercial construction, your non-performers, how are you all doing that?

John Warren

By paying attention. A lot of that commercial construction is really owner occupied businesses that have been expanding, projects that they’ve been working on or expanding their business. So you’ve got a building going on or moving to a slightly different location. So a lot of that has done well but the–

Laurie Hunsicker – Stifel Nicolaus

What percentage of that is land, just roughly?

David Devault

Well, if I would – pure, undeveloped land, it wouldn’t be in that category. There’s a modest amount of land development loan in there, but it is not significant.

Laurie Hunsicker – Stifel Nicolaus

It’s not significant.

John Warren

No, not at all.

Laurie Hunsicker – Stifel Nicolaus

Okay. And just one more general question, I guess, I would throw out there. Congratulations to Jack.

John Warren

Yes, absolutely.

Laurie Hunsicker – Stifel Nicolaus

Yes. He’s done amazing. Jack, if you’re on the call, congratulations. Generally, if you could comment–

John Warren

He is.

Laurie Hunsicker – Stifel Nicolaus

Jack is on the call? Okay, great. I remember you from your SISC [ph] days. It’s amazing. So Jack, you’re retiring in October, and John, you’re scheduled to transition next April.

John Warren

Right.

Laurie Hunsicker – Stifel Nicolaus

Can you all generally talk in – in harder economic times, if you would sort of weighed on a scale of one to ten, where would you put your consideration, and maybe becoming a part of a larger bank given the succession and so forth and the challenges facing you all, generally?

John Warren

Well, I think that the humor in it, and you can understand this very well, is if you look back over the last couple years when our price of the stock was trading higher. And needless to say, everybody else’s price was trading higher. That if you look over the range of what’s left in the battlefield of larger institutions and where they are price wise, it’s a pretty devastated battlefield. It was a real good thing that nothing ever happened, and we didn’t – and the owning stock that’s now trading at $3.00 a share or $4.00 a share.

So as a further answer to your question, I guess when I look around on the residual, it seems to me like we’re one of the last guys standing. There are not too many people in good shape right now. And they would have to call the US government, since most of them have taken TARP, they would have to call the US government to ask permission to do anything. So we’re staying focused and paying attention to what’s going on, Laurie, and I think the best thing we could do for this institution is to maintain that focus and keep doing a great job on the business that we’re doing.

Laurie Hunsicker – Stifel Nicolaus

Okay, great. Thanks a lot.

John Warren

You’re welcome.

Operator

And your next question comes from Damon DelMonte of KBW. Please, go ahead.

Damon DelMonte – KBW

Hi. Good morning, guys. How are you?

John Warren

Hey, great, Damon. How are you?

Damon DelMonte – KBW

Great, thanks. Just a question on the home equity growth that we saw this quarter, is that more of a function of line utilization or are you adding new loans?

David Devault

It’s both. There has been some new loan growth there. Line utilization is up a little bit, but it’s still very modest, I would say.

Damon DelMonte – KBW

Yes, but a percentage of the utilization rate?

David Devault

Well, yes. Utilization, just as a comparison, was 45% at the end of 2007 and it’s 48.9% at the end of ’08. So it’s up somewhat, but still in the low and conservative side.

Damon DelMonte – KBW

And could you just remind us a little bit about the characteristics of that portfolio? What’s the average LTV, FICO, the borrowers, things like that?

John Warren

Yes. All local and self originated.

David Devault

Right. And with LTV, at time of origination, in the 50’s in that category. And FICO score is, when we’ve look at that, has been averaging well over 700 for that portfolio.

Damon DelMonte – KBW

Okay, okay. And then, just kind of – just getting back to credit, the reserve level this quarter was $129 million. As you kind of go through ’09, I would imagine we’ve seen this trend with a lot of other banks. But are you comfortable at this level or are you kind of bearish enough with the outlook that you feel you need to increase at some level?

John Warren

No. We’re comfortable with the level. We do a regular analysis. Obviously, we look at it every month, but we thoroughly look at it every quarter. And it’s really – if you look at the loan growth that we had in 2008, the biggest chunk of why you saw the kind of provisioning that we did in ’08, the $4.8 million, was really the loan growth that we had in order to keep a $129 million reserve. Every time you put a new loan on, you have to put $129 million against it. So that’s a chunk of money when you grow well over $200 million.

Damon DelMonte – KBW

Right. Okay. That’s all I have. Thank you.

John Warren

Oh, great. Thanks.

David Devault

Thanks, Damon.

Operator

We have no further questions at this time. I would like to turn the conference back over to John Warren for any closing remarks.

John Warren

Once again, we thank you all for attending. And to Jack Treanor who’s on the line as well, we thank him for attending the call. It was good to talk to you all. Any questions, just always feel free to give David and myself a call after call, or Beth a call. And have a great day. Thank you very much.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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Source: Washington Trust Bancorp, Inc. Q4 2008 Earnings Call Transcript
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