Edgar Filing: WASHINGTON TRUST BANCORP INC

form10-q20070630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended JUNE 30, 2007 or

o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______.

Commission file number: 000-13091

WASHINGTONTRUSTBANCORP,INC.

(Exact name of registrant as specified in its charter)

RHODE ISLAND		05-0404671
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

23 BROAD STREET
WESTERLY, RHODE ISLAND		02891
(Address of principal executive offices)		(Zip Code)

(401) 348-1200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

xYes oNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

oYes x No

The number of shares of common stock of the registrant outstanding as of July 31, 2007 was 13,304,518.

Table of Contents

FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended June 30, 2007

TABLE OF CONTENTS
		Page
		Number

PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
	June 30, 2007 and December 31, 2006	3
Consolidated Statements of Income
	Three and Six Months Ended June 30, 2007 and 2006	4
Consolidated Statements of Cash Flows
	Six Months Ended June 30, 2007 and 2006	5
Condensed Notes to Consolidated Financial Statements		7
Report of Independent Registered Public Accounting Firm		21
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		35
Item 4. Controls and Procedures		35
PART II. Other Information
Item 1. Legal Proceedings		36
Item 1A. Risk Factors		36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		36
Item 4. Submission of Matters to a Vote of Security Holders		37
Item 6. Exhibits		37
Signatures		38
Exhibit 15.1 Letter Re: Unaudited Interim Financial Statements
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES	(Dollars in thousands)

CONSOLIDATED BALANCE SHEETS	Unaudited
	June 30,			December 31,
	2007			2006
Assets:
Cash and due from banks	$	36,942		$	54,337
Federal funds sold		19,175			16,425
Other short term investments		1,899			1,147
Mortgage loans held for sale		4,132			2,148
Securities:
Available for sale, at fair value; amortized cost $530,142 in 2007 and $525,966 in 2006		525,688			526,396
Held to maturity, at cost; fair value $150,515 in 2007 and $175,369 in 2006		154,171			177,455
Total securities		679,859			703,851
Federal Home Loan Bank stock, at cost		28,727			28,727
Loans:
Commercial and other		622,988			587,397
Residential real estate		583,392			588,671
Consumer		282,794			283,918
Total loans		1,489,174			1,459,986
Less allowance for loan losses		19,327			18,894
Net loans		1,469,847			1,441,092
Premises and equipment, net		26,293			24,307
Accrued interest receivable		11,145			11,268
Investment in bank-owned life insurance		40,560			39,770
Goodwill		44,558			44,558
Identifiable intangible assets, net		12,100			12,816
Other assets		21,063			18,719
Total assets	$	2,396,300		$	2,399,165
Liabilities:
Deposits:
Demand deposits	$	177,210		$	186,533
NOW accounts		174,715			175,479
Money market accounts		290,046			286,998
Savings accounts		196,105			205,998
Time deposits		831,013			822,989
Total deposits		1,669,089			1,677,997
Dividends payable		2,667			2,556
Federal Home Loan Bank advances		468,827			474,561
Junior subordinated debentures		22,681			22,681
Other borrowings		27,574			14,684
Accrued expenses and other liabilities		31,856			33,630
Total liabilities		2,222,694			2,226,109
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 30,000,000 shares;
issued 13,492,110 in 2007 and 2006		843			843
Paid-in capital		35,734			35,893
Retained earnings		148,485			141,548
Accumulated other comprehensive loss		(6,519	)		(3,515	)
Treasury stock, at cost; 186,972 shares in 2007 and 62,432 shares in 2006		(4,937	)		(1,713	)
Total shareholders’ equity		173,606			173,056
Total liabilities and shareholders’ equity	$	2,396,300		$	2,399,165

The accompanying notes are an integral part of these consolidated financial statements.

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES	(Dollars and shares in thousands,
CONSOLIDATED STATEMENTS OF INCOME	except per share amounts)

	(Unaudited)
	Three Months				Six Months
Periods ended June 30,	2007		2006		2007		2006
Interest income:
Interest and fees on loans	$	24,414	$	23,130	$	48,348	$	45,027
Interest on securities:
Taxable		7,709		8,648		15,501		17,060
Nontaxable		759		371		1,427		699
Dividends on corporate stock and Federal Home Loan Bank stock		685		249		1,403		926
Interest on federal funds sold and other short-term investments		184		150		375		265
Total interest income		33,751		32,548		67,054		63,977
Interest expense:
Deposits		13,215		11,161		26,192		21,399
Federal Home Loan Bank advances		5,063		5,745		10,031		11,104
Junior subordinated debentures		338		338		676		676
Other		289		87		439		166
Total interest expense		18,905		17,331		37,338		33,345
Net interest income		14,846		15,217		29,716		30,632
Provision for loan losses		300		300		600		600
Net interest income after provision for loan losses		14,546		14,917		29,116		30,032
Noninterest income:
Wealth management services
Trust and investment advisory fees		5,252		4,682		10,290		9,309
Mutual fund fees		1,352		1,214		2,614		2,344
Financial planning, commissions and other service fees		889		841		1,459		1,524
Wealth management services		7,493		6,737		14,363		13,177
Service charges on deposit accounts		1,220		1,236		2,345		2,355
Merchant processing fees		1,829		1,656		3,033		2,703
Income from bank-owned life insurance		399		346		790		625
Net gains on loan sales and commissions on loans originated for others		510		336		774		612
Net realized gains on securities		705		765		1,741		824
Other income		372		371		730		671
Total noninterest income		12,528		11,447		23,776		20,967
Noninterest expense:
Salaries and employee benefits		10,285		9,830		20,097		19,449
Net occupancy		1,038		1,018		2,055		1,972
Equipment		861		881		1,693		1,680
Merchant processing costs		1,558		1,407		2,577		2,294
Outsourced services		535		496		1,054		1,014
Advertising and promotion		572		681		1,001		1,118
Legal, audit and professional fees		404		403		854		779
Amortization of intangibles		348		406		716		811
Debt prepayment penalties		-		–		1,067		–
Other		2,274		2,158		3,870		3,867
Total noninterest expense		17,875		17,280		34,984		32,984
Income before income taxes		9,199		9,084		17,908		18,015
Income tax expense		2,889		2,907		5,623		5,765
Net income	$	6,310	$	6,177	$	12,285	$	12,250

Weighted average shares outstanding - basic		13,339.6		13,419.9		13,375.7		13,403.4
Weighted average shares outstanding - diluted		13,616.4		13,703.2		13,667.6		13,699.6
Per share information:
Basic earnings per share	$	0.47	$	0.46	$	0.92	$	0.91
Diluted earnings per share	$	0.46	$	0.45	$	0.90	$	0.89
Cash dividends declared per share	$	0.20	$	0.19	$	0.40	$	0.38

The accompanying notes are an integral part of these consolidated financial statements.

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES			(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
				(Unaudited)
Six months ended June 30,				2007			2006
Cash flows from operating activities:
Net income				$	12,285		$	12,250
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses					600			600
Depreciation of premises and equipment					1,464			1,513
Loss on disposal of premises and equipment					23			–
Net amortization of premium and discount					433			791
Net amortization of intangibles					716			811
Share-based compensation					323			360
Non-cash charitable contribution					520			513
Earnings from bank-owned life insurance					(790	)		(625	)
Net gains on loan sales					(774	)		(612	)
Net realized gains on sales of securities					(1,741	)		(824	)
Proceeds from sales of loans					28,293			18,208
Loans originated for sale					(29,811	)		(18,646	)
Decrease (increase) in accrued interest receivable, excluding purchased interest					137			(51	)
Increase in other assets					(607	)		(1,562	)
(Decrease) increase in accrued expenses and other liabilities					(1,635	)		42
Other, net					(2	)		8
Net cash provided by operating activities					9,434			12,776
Cash flows from investing activities:
Purchases of:	Mortgage-backed securities available for sale				(29,065	)		(23,854	)
	Other investment securities available for sale				(18,865	)		(41,868	)
	Other investment securities held to maturity				(16,011	)		(12,526	)
Proceeds from sale of:		Other investment securities available for sale			9,438			706
		Mortgage-backed securities held to maturity			1,954			–
		Other investment securities held to maturity			9,815			–
Maturities and principal payments of:			Mortgage-backed securities available for sale		29,542			49,168
			Other investment securities available for sale		5,982			–
			Mortgage-backed securities held to maturity		6,232			8,965
			Other investment securities held to maturity		20,940			7,685
Remittance of Federal Home Loan Bank stock					–			1,051
Net increase in loans					(24,880	)		(8,016	)
Purchases of loans, including purchased interest					(4,265	)		(21,592	)
Purchases of premises and equipment					(3,473	)		(2,037	)
Purchases of bank-owned life insurance					–			(8,000	)
Payment of deferred acquisition obligation					(6,720	)		–
Net cash used in investing activities					(19,376	)		(50,318	)
Cash flows from financing activities:
Net (decrease) increase in deposits					(8,908	)		31,541
Net increase (decrease) in other borrowings					19,610			(2,601	)
Proceeds from Federal Home Loan Bank advances					344,719			338,104
Repayment of Federal Home Loan Bank advances					(350,433	)		(339,814	)
Purchases of treasury stock, including deferred compensation plan activity					(4,264	)		(91	)
Proceeds from the issuance of common stock under dividend reinvestment plan					–			610
Proceeds from the exercise of share options					320			523
Tax benefit from share option exercises					242			241
Cash dividends paid					(5,237	)		(4,959	)
Net cash (used in) provided by financing activities					(3,951	)		23,554
Net (decrease) increase in cash and cash equivalents					(13,893	)		(13,988	)
Cash and cash equivalents at beginning of year					71,909			66,163
Cash and cash equivalents at end of period				$	58,016		$	52,175

The accompanying notes are an integral part of these consolidated financial statements.

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES		(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

		(Unaudited)
Six months ended June 30,		2007		2006
Noncash Investing and Financing Activities: Loans charged off		$	370	$	151
Supplemental Disclosures:	Interest payments		37,539		32,588
	Income tax payments		6,309		6,400

The accompanying notes are an integral part of these consolidated financial statements.

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WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

General

Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company and financial holding company. The Bancorp owns all of the outstanding common stock of The Washington Trust Company (the “Bank”), a Rhode Island chartered commercial bank founded in 1800. Through its subsidiaries, the Bancorp offers a complete product line of financial services to individuals and businesses including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its branch offices in Rhode Island, Massachusetts and southeastern Connecticut, ATMs, and its Internet web site (www.washtrust.com).

(1) Basis of Presentation

The consolidated financial statements include the accounts of the Bancorp and its subsidiaries (collectively, the “Corporation” or “Washington Trust”). All significant intercompany transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year classification. Such reclassifications have no effect on previously reported net income or shareholders’ equity.

The accounting and reporting policies of the Corporation conform to U.S. generally accepted accounting principles (“GAAP”) and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to near-term change are the determination of the allowance for loan losses and tax estimates.

In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) and disclosures necessary to present fairly the Corporation’s financial position as of June 30, 2007 and December 31, 2006, respectively, and the results of operations and cash flows for the interim periods presented. Interim results are not necessarily reflective of the results of the entire year. The unaudited consolidated financial statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Washington Trust’s Annual Report on Form 10-K for the year ended December 31, 2006.

In the Corporation’s quarterly report on Form 10-Q for the quarter ended March 31, 2007, a $6.7 million deferred acquisition obligation payment was misclassified as a financing activity, in the line item “Net increase in other borrowings,” in the Consolidated Statements of Cash Flows. The Consolidated Statement of Cash Flows for the six months ended June 30, 2007 has been corrected to properly report this first quarter payment as an investing activity, in the line item “Payment of deferred acquisition obligation.”

The following table presents the impact of the misclassification on the Consolidated Statements of Cash Flows for the three months ended March 31, 2007:

(Dollars in thousands)

Three Months ended March 31, 2007	As Reported			Reclass			As Adjusted
Net cash used in investing activities	$	(11,849	)	$	(6,720	)	$	(18,569	)
Net cash (used in) provided by financing activities		(4,886	)		6,720			1,834

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WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES	(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(2) New Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140,” (“SFAS No. 155”). This Statement eliminates the exemption from applying SFAS No. 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. This Statement also allows a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have to be bifurcated. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. Prior periods should not be restated. The adoption of SFAS No. 155 did not have a material impact on the Corporation’s financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140,” (“SFAS No. 156”). This Statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value. SFAS No. 156 permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. An entity that used derivative instruments to mitigate the risks inherent in servicing assets and servicing liabilities is required to account for those derivative instruments at fair value. SFAS No. 156 is effective as of the beginning of the first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 156 did not have a material impact on the Corporation’s financial position or results of operations.

Effective January 1, 2007, the Corporation adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes." FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN 48 did not have a material impact on the Corporation’s financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures of fair value measurements. SFAS No. 157 applies to the accounting principles that currently use fair value measurement, and does not require any new fair value measurements. The expanded disclosures focus on the inputs used to measure fair value as well as the effect of the fair value measurements on earnings. This Statement is effective as of the beginning of the first fiscal year beginning after November 15, 2007 and interim periods within that fiscal year. The Corporation believes the adoption of SFAS No. 157 will not have a material impact on the Corporation’s financial position or results of operations.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans (an amendment of FASB Statements No. 87, 88, 106 and 132R)” (“SFAS No. 158”). The recognition and disclosure provisions of SFAS No. 158 were adopted by the Corporation for the fiscal year ended December 31, 2006. Upon adoption, the funded status of an employer’s postretirement benefit plan was recognized in the statement of financial position and the changes in funded status of the defined benefit plan, including actuarial gains and losses and prior service costs and credits were recognized in comprehensive income. The requirement to measure the plan’ assets and obligations as of the employers fiscal year end is effective for fiscal years ending after December 15, 2008. The Corporation is currently evaluating the impact the measurement date provisions of SFAS No. 158 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities – Including an amendment to FASB No. 115” (“SFAS No. 159”). This Statement permits entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument-by-instrument with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and

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WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES	(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(iii) is applied only to entire instruments and not to portions of instruments. This Statement is effective as of the beginning of the first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157, “Fair Value Instruments.” Retrospective application is allowed for early adopters, prohibited for others. The choice to adopt early must be made within 120 days of the beginning of the fiscal year of adoption, provided the entity has not yet issued financial statements. This Statement permits application to eligible items existing at the effective date (or early adoption date). The Corporation is currently evaluating the impact that SFAS No. 159 will have on its consolidated financial statements. The Corporation believes the adoption of SFAS No. 159 will not have a material impact on the Corporation’s financial position or results of operations.

(3) Securities

Securities available for sale are summarized as follows:

(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2007
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies	$	161,415	$	19	$	(1,114	)	$	160,320
Mortgage-backed securities issued by
U.S. government-sponsored agencies		297,302		720		(6,724	)		291,298
Trust preferred securities		33,317		206		(192	)		33,331
Corporate bonds		24,968		33		(142	)		24,859
Corporate stocks		13,140		3,063		(323	)		15,880
Total		530,142		4,041		(8,495	)		525,688
December 31, 2006
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies		157,383		778		(876	)		157,285
Mortgage-backed securities issued by
U.S. government-sponsored agencies		298,038		923		(5,174	)		293,787
Trust preferred securities		30,571		208		(205	)		30,574
Corporate bonds		24,998		83		(47	)		25,034
Corporate stocks		14,976		4,915		(175	)		19,716
Total	$	525,966	$	6,907	$	(6,477	)	$	526,396

Securities held to maturity are summarized as follows:

(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2007
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies	$	12,000	$	–	$	(83	)	$	11,917
Mortgage-backed securities issued by
U.S. government-sponsored agencies		60,998		331		(1,944	)		59,385
States and political subdivisions		81,173		6		(1,966	)		79,213
Total		154,171		337		(3,993	)		150,515
December 31, 2006
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies		42,000		–		(422	)		41,578
Mortgage-backed securities issued by
U.S. government-sponsored agencies		69,340		440		(1,604	)		68,176
States and political subdivisions		66,115		88		(588	)		65,615
Total	$	177,455	$	528	$	(2,614	)	$	175,369

During the second quarter of 2007, in conjunction with a potential early adoption of an accounting pronouncement, two held to maturity securities with an amortized cost of $12.1 million were sold resulting in a realized loss of $261 thousand.

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WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES	(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Securities available for sale and held to maturity with a fair value of $527.8 million and $557.4 million were pledged in compliance with state regulations concerning trust powers and to secure Treasury Tax and Loan deposits, borrowings, and certain public deposits at June 30, 2007 and December 31, 2006, respectively. In addition, securities available for sale and held to maturity with a fair value of $8.7 million and $9.6 million were collateralized for the discount window at the Federal Reserve Bank at June 30, 2007 and December 31, 2006, respectively. There were no borrowings with the Federal Reserve Bank at either date. Securities available for sale with a fair value of $2.0 million and $2.1 million were designated in a rabbi trust for a nonqualified retirement plan at June 30, 2007 and December 31, 2006. As of June 30, 2007, securities available for sale with a fair value of $20.8 million were pledged as collateral to secure securities sold under agreements to repurchase.

At June 30, 2007 and December 31, 2006, the available for sale and held to maturity securities portfolio included $8.1 million and $1.7 million of net pretax unrealized losses, respectively. Included in these net amounts were gross unrealized losses amounting to $12.5 million and $9.1 million at June 30, 2007 and December 31, 2006, respectively.

The following tables summarize, for all securities in an unrealized loss position at June 30, 2007 and December 31, 2006, respectively, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position.

(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
			Fair		Unrealized				Fair		Unrealized				Fair		Unrealized
At June 30, 2007		#	Value		Losses			#	Value		Losses			#	Value		Losses
U.S. Treasury obligations
and obligations of U.S. government-
sponsored agencies		10	$	91,357	$	378		12	$	72,661	$	819		22	$	164,018	$	1,197
Mortgage-backed securities
issued by U.S. government-sponsored agencies		20		75,349		740		65		200,024		7,928		85		275,373		8,668
States and
political subdivisions		91		70,674		1705		12		6,648		260		103		77,322		1,965
Trust preferred securities		3		10,477		63		5		11,927		129		8		22,404		192
Corporate bonds		4		14,092		133		1		3,000		9		5		17,092		142
Subtotal, debt securities		128		261,949		3,019		95		294,260		9,145		223		556,209		12,164
Corporate stocks		6		7,027		226		4		1,462		97		10		8,489		323
Total temporarily
impaired securities		134	$	268,976	$	3,245		99	$	295,722	$	9,242		233	$	564,698	$	12,487

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WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES	(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
			Fair		Unrealized				Fair		Unrealized				Fair		Unrealized
At December 31, 2006		#	Value		Losses			#	Value		Losses			#	Value		Losses
U.S. Treasury obligations
and obligations of U.S. government-
sponsored agencies		8	$	52,751	$	211		14	$	94,393	$	1,087		22	$	147,144	$	1,298
Mortgage-backed securities
issued by U.S. government-sponsored agencies		7		20,620		122		69		240,457		6,656		76		261,077		6,778
States and
political subdivisions		61		45,948		419		12		6,747		169		73		52,695		588
Trust preferred securities		–		–		–		7		14,840		205		7		14,840		205
Corporate bonds		2		6,130		34		1		3,006		13		3		9,136		47
Subtotal, debt securities		78		125,449		786		103		359,443		8,130		181		484,892		8,916
Corporate stocks		5		5,823		110		4		1,494		65		9		7,317		175
Total temporarily
impaired securities		83	$	131,272	$	896		107	$	360,937	$	8,195		190	$	492,209	$	9,091

For those debt securities whose amortized cost exceeds fair value, the primary cause is related to the movement of interest rates. The Corporation believes that the nature and duration of impairment on its debt security holdings are primarily a function of interest rate movements and changes in investment spreads, and does not consider full repayment of principal on the reported debt obligations to be at risk. The Corporation has the ability and intent to hold these investments to full recovery of the cost basis. The debt securities in an unrealized loss position at June 30, 2007 consisted of 223 debt security holdings. The largest loss percentage of any single holding was 6.28% of its amortized cost.

Causes of conditions whereby the fair value of corporate stock equity securities is less than cost include the timing of purchases and changes in valuation specific to individual industries or issuers. The relationship between the level of market interest rates and the dividend rates paid on individual equity securities may also be a contributing factor. The Corporation believes that the nature and duration of impairment on its equity securities holdings are considered to be a function of general financial market movements and industry conditions. The equity securities in an unrealized loss position at June 30, 2007 consisted of 10 holdings of financial and commercial entities.

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WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES	(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4) Loan Portfolio

The following is a summary of loans:

(Dollars in thousands)	June 30, 2007					December 31, 2006
	Amount		%			Amount		%
Commercial:
Mortgages (1)	$	265,560		18	%	$	282,019		19	%
Construction and development (2)		43,755		3	%		32,233		2	%
Other (3)		313,673		21	%		273,145		19	%
Total commercial		622,988		42	%		587,397		40	%

Residential real estate:
Mortgages (4)		572,321		38	%		577,522		39	%
Homeowner construction		11,071		1	%		11,149		1	%
Total residential real estate		583,392		39	%		588,671		40	%

Consumer:
Home equity lines		139,256		9	%		145,676		10	%
Home equity loans		97,253		7	%		93,947		6	%
Other		46,285		3	%		44,295		4	%
Total consumer		282,794		19	%		283,918		20	%
Total loans (5)	$	1,489,174		100	%	$	1,459,986		100	%

(1) Amortizing mortgages, primarily secured by income producing property.

(2) Loans for construction of residential and commercial properties and for land development.

(3) Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.

(4) A substantial portion of these loans is used as qualified collateral for FHLB borrowings (See Note 8 for additional discussion of FHLB borrowings).

(5) Net of unamortized loan origination fees, net of costs, totaling $65 thousand and $277 thousand at June 30, 2007 and December 31, 2006, respectively. Also includes $112 thousand and $342 thousand of premium, net of discount, on purchased loans at June 30, 2007 and December 31, 2006, respectively.

(5) Allowance for Loan Losses

The following is an analysis of the allowance for loan losses:

(Dollars in thousands)
	Three Months						Six Months
Periods ended June 30,	2007			2006			2007			2006
Balance at beginning of period	$	19,360		$	18,247		$	18,894		$	17,918
Provision charged to expense		300			300			600			600
Recoveries of loans previously charged off		13			46			203			113
Loans charged off		(346	)		(113	)		(370	)		(151	)
Balance at end of period	$	19,327		$	18,480		$	19,327		$	18,480

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WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES	(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(6) Goodwill and Other Intangibles

The changes in the carrying value of goodwill and other intangible assets for the six months ended June 30, 2007 are as follows:

Goodwill

Wealth

(Dollars in thousands)

Commercial

Management

Banking

Service

Segment

Total

Balance at December 31, 2006

22,591

21,967

44,558

Additions to goodwill during the period

–

Impairment recognized

–

Balance at June 30, 2007

22,591

21,967

44,558

Other Intangible Assets

	Core Deposit		Advisory		Non-compete
	Intangible		Contracts		Agreements		Total
Balance at December 31, 2006	$	650	$	11,937	$	229	$	12,816
Amortization		80		612		24		716
Balance at June 30, 2007	$	570	$	11,325	$	205	$	12,100

Amortization of intangible assets for the six months ended June 30, 2007 totaled $716 thousand. Estimated annual amortization expense of current intangible assets with finite useful lives, absent any impairment or change in estimated useful lives, is summarized below.

(Dollars in thousands)
	Core		Advisory		Non-compete
Estimated amortization expense:	Deposits		Contracts		Agreements		Total
2007 (full year)	$	140	$	1,194	$	49	$	1,383
2008		120		1,111		49		1,280
2009		120		1,040		49		1,209
2010		120		922		49		1,091
2011		120		768		33		921

The components of intangible assets at June 30, 2007 are as follows:

(Dollars in thousands)
	Core		Advisory		Non-compete
	Deposits		Contracts		Agreements		Total
Gross carrying amount	$	2,997	$	13,657	$	1,147	$	17,801
Accumulated amortization		2,427		2,332		942		5,701
Net amount	$	570	$	11,325	$	205	$	12,100

(7) Income Taxes

Effective January 1, 2007, the Corporation adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The adoption of FIN 48 did not result in any adjustment to retained earnings as of January 1, 2007.

As of the adoption date, the Corporation had gross tax affected unrecognized tax benefits of $1.2 million. If recognized, this amount would be recorded as a component of income tax expense. There have been no significant changes to this during the six months ended June 30, 2007.

The Corporation recognizes potential accrued interest related to unrecognized tax benefits in income tax expense in the Consolidated Statements of Income. As of the adoption date of January 1, 2007, accrued interest amounted to

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WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES	(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$70 thousand. To the extent interest is not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision. Penalties, if incurred, would be recognized as a component of income tax expense.

The Corporation files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Corporation is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2003. With a few exceptions, the Corporation is no longer subject to state income tax examinations by tax authorities for years before 2000.

(8) Borrowings

Federal Home Loan Bank Advances

Advances payable to the Federal Home Loan Bank (“FHLB”) are summarized as follows:

(Dollars in thousands)	June 30,		December 31,
	2007		2006
FHLB advances	$	468,827	$	474,561

During the first quarter of 2007, the Corporation prepaid $26.5 million in advances payable to the FHLB resulting in a debt prepayment penalty charge, recorded in noninterest expense, of $1.1 million. See additional discussion in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Noninterest Expense.”

In addition to outstanding advances, the Corporation also has access to an unused line of credit amounting to $8.0 million at June 30, 2007. Under an agreement with the FHLB, the Corporation is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and market values, has a value equal to the aggregate amount of the line of credit and outstanding advances (“FHLB borrowings”). The FHLB maintains a security interest in various assets of the Corporation including, but not limited to, residential mortgages loans, U.S. government or agency securities, U.S. government-sponsored agency securities, and amounts maintained on deposit at the FHLB. The Corporation maintained qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at June 30, 2007. Included in the collateral were securities available for sale and held to maturity with a fair value of $403.0 million and $451.5 million that were specifically pledged to secure FHLB borrowings at June 30, 2007 and December 31, 2006, respectively. Unless there is an event of default under the agreement with the FHLB, the Corporation may use, encumber or dispose of any portion of the collateral in excess of the amount required to secure FHLB borrowings, except for that collateral that has been specifically pledged.

Other Borrowings

The following is a summary of other borrowings:

(Dollars in thousands)	June 30,		December 31,
	2007		2006
Treasury, Tax and Loan demand note balance	$	3,868	$	3,863
Deferred acquisition obligations		3,810		10,372
Securities sold under repurchase agreements		19,500		–
Other		396		449
Other borrowings	$	27,574	$	14,684

In the first quarter of 2007, securities sold under repurchase agreements of $19.5 million were executed. The securities sold under agreements to repurchase are callable at the issuer’s option, at one time only, in one year and mature in five years. The securities underlying the agreements are held in safekeeping by the counterparty in the name of the Corporation and are repurchased when the agreement matures. Accordingly, these underlying securities are included in securities available for sale and the obligations to repurchase such securities are reflected as a liability.

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WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES	(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Stock Purchase Agreement for the August 2005 acquisition of Weston Financial Group, Inc. (“Weston Financial”) provides for the payment of contingent purchase price amounts based on operating results in each of the years in the three-year earn-out period ending December 31, 2008. Contingent payments are added to goodwill and recorded as deferred acquisition liabilities at the time the payments are determinable beyond a reasonable doubt. Deferred acquisition obligations amounted to $3.8 million at June 30, 2007 compared to $10.4 million at December 31, 2006. In the first quarter of 2007 the Corporation paid approximately $6.7 million in earn-out payments.

(9) Shareholders’ Equity

Stock Repurchase Plan:

Under the Corporation’s 2006 Stock Repurchase Plan, 149,700 shares of stock were repurchased at a total cost of $3.9 million during the six months ended June 30, 2007. In addition, 13,717 shares were acquired in the same period pursuant to the Nonqualified Deferred Compensation Plan.

Regulatory Capital Requirements:

The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios at June 30, 2007 and December 31, 2006, as well as the corresponding minimum regulatory amounts and ratios:

(Dollars in thousands)	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2007:
Total Capital (to Risk-Weighted Assets):
Corporation	$	165,216		10.79	%	$	122,467		8.00	%	$	153,083		10.00	%
Bank	$	166,697		10.90	%	$	122,391		8.00	%	$	152,988		10.00	%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation	$	144,842		9.46	%	$	61,233		4.00	%	$	91,850		6.00	%
Bank	$	146,334		9.57	%	$	61,195		4.00	%	$	91,793		6.00	%
Tier 1 Capital (to Average Assets): (1)
Corporation	$	144,842		6.20	%	$	93,433		4.00	%	$	116,791		5.00	%
Bank	$	146,334		6.27	%	$	93,391		4.00	%	$	116,739		5.00	%

As of December 31, 2006:
Total Capital (to Risk-Weighted Assets):
Corporation	$