form10-q20080630.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, 2008 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
 
WASHINGTON TRUST BANCORP, 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, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Mark one)

Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer  o
Smaller reporting company  o
(Do not check if a smaller reporting company)
  

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, 2008 was 13,414,879.
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended June 30, 2008
     
   
Page
   
Number
     
 
   
 
   
 
 
     
 
 
     
 
 
     
   
   
   
   
   
 
   
   
   
   
   
   
   
Exhibit 10.6 Form of Deferred Stock Unit Award Agreement  
   
Exhibit 15.1 Letter re: Unaudited Interim Financial Information  
   
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  
   
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  
   
Exhibit 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  
-2-
 
 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars in thousands)
 
 
Unaudited
  
   
June 30,
    
December 31,
  
   
2008
    
2007
  
Assets:
            
Cash and noninterest-bearing balances due from banks
   $ 39,800     $ 30,817  
Interest-bearing balances due from banks
     575       1,973  
Federal funds sold and securities purchased under resale agreements
     4,959       7,600  
Other short-term investments
     1,236       722  
Mortgage loans held for sale
     2,711       1,981  
Securities available for sale, at fair value;
                
amortized cost $799,938 in 2008 and $750,583 in 2007
     790,064       751,778  
Federal Home Loan Bank stock, at cost
     42,008       31,725  
Loans:
                
Commercial and other
     795,013       680,266  
Residential real estate
     608,351       599,671  
Consumer
     302,286       293,715  
Total loans
     1,705,650       1,573,652  
Less allowance for loan losses
     21,963       20,277  
Net loans
     1,683,687       1,553,375  
Premises and equipment, net
     25,170       25,420  
Accrued interest receivable
     10,617       11,427  
Investment in bank-owned life insurance
     42,262       41,363  
Goodwill
     50,479       50,479  
Identifiable intangible assets, net
     10,781       11,433  
Other assets
     28,640       19,847  
Total assets
   $ 2,732,989     $ 2,539,940  
Liabilities:
                
Deposits:
                
Demand deposits
   $ 187,865     $ 175,542  
NOW accounts
     170,733       164,944  
Money market accounts
     305,860       321,600  
Savings accounts
     177,490       176,278  
Time deposits
     767,594       807,841  
Total deposits
     1,609,542       1,646,205  
Dividends payable
     2,819       2,677  
Federal Home Loan Bank advances
     845,291       616,417  
Junior subordinated debentures
     32,991       22,681  
Other borrowings
     26,484       32,560  
Accrued expenses and other liabilities
     29,440       32,887  
Total liabilities
     2,546,567       2,353,427  
Shareholders’ Equity:
                
Common stock of $.0625 par value; authorized 30,000,000 shares;
                
issued 13,503,876 shares in 2008 and 13,492,110 shares in 2007
     844       843  
Paid-in capital
     34,852       34,874  
Retained earnings
     160,593       154,647  
Accumulated other comprehensive loss
     (7,098 )     (239 )
Treasury stock, at cost; 105,677 shares in 2008 and 137,652 shares in 2007
     (2,769 )     (3,612 )
Total shareholders’ equity
     186,422       186,513  
Total liabilities and shareholders’ equity
   $ 2,732,989     $ 2,539,940  
                 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
  
-3-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars and shares in thousands,
  
except per share amounts)
  
       
   
Unaudited
  
   
Three Months
    
Six Months
  
Periods ended June 30,
  
2008
    
2007
    
2008
    
2007
  
Interest income:
                        
Interest and fees on loans
   $ 24,406     $ 24,414     $ 49,376     $ 48,348  
Interest on securities:
                                
Taxable
     8,302       7,839       16,718       15,631  
Nontaxable
     786       759       1,566       1,427  
Dividends on corporate stock and Federal Home Loan Bank stock
     489       685       1,109       1,403  
Other interest income
     50       184       190       375  
Total interest income
     34,033       33,881       68,959       67,184  
Interest expense:
                                
Deposits
     9,248       13,215       21,147       26,192  
Federal Home Loan Bank advances
     7,794       5,112       15,093       10,080  
Junior subordinated debentures
     509       338       847       676  
Other interest expense
     275       289       589       439  
Total interest expense
     17,826       18,954       37,676       37,387  
Net interest income
     16,207       14,927       31,283       29,797  
Provision for loan losses
     1,400       300       1,850       600  
Net interest income after provision for loan losses
     14,807       14,627       29,433       29,197  
Noninterest income:
                                
Wealth management services:
                                
Trust and investment advisory fees
     5,321       5,252       10,663       10,290  
Mutual fund fees
     1,445       1,352       2,786       2,614  
Financial planning, commissions and other service fees
     884       889       1,459       1,459  
Wealth management services
     7,650       7,493       14,908       14,363  
Service charges on deposit accounts
     1,208       1,220       2,368       2,345  
Merchant processing fees
     1,914       1,829       3,186       3,033  
Income from bank-owned life insurance
     453       399       900       790  
Net gains on loan sales and commissions on loans originated for others
     433       510       924       774  
Net (losses) gains on securities
     (53 )     (700 )     (98 )     336  
Other income
     554       372       1,015       730  
Total noninterest income
     12,159       11,123       23,203       22,371  
Noninterest expense:
                                
Salaries and employee benefits
     10,411       10,285       20,754       20,097  
Net occupancy
     1,064       1,038       2,202       2,055  
Equipment
     977       861       1,921       1,693  
Merchant processing costs
     1,598       1,558       2,666       2,577  
Outsourced services
     742       535       1,378       1,054  
Advertising and promotion
     467       572       853       1,001  
Legal, audit and professional fees
     430       404       973       854  
Amortization of intangibles
     326       348       652       716  
Debt prepayment penalties
     –       –       –       1,067  
Other expenses
     2,039       2,159       3,797       3,755  
Total noninterest expense
     18,054       17,760       35,196       34,869  
Income before income taxes
     8,912       7,990       17,440       16,699  
Income tax expense
     2,817       2,508       5,529       5,242  
Net income
   $ 6,095     $ 5,482     $ 11,911     $ 11,457  
                                 
Weighted average shares outstanding – basic
     13,381.1       13,339.6       13,369.6       13,375.7  
Weighted average shares outstanding – diluted
     13,567.0       13,616.4       13,550.9       13,667.6  
Per share information:
                                
Basic earnings per share
   $ 0.45     $ 0.41     $ 0.89     $ 0.86  
Diluted earnings per share
   $ 0.45     $ 0.40     $ 0.88     $ 0.84  
Cash dividends declared per share
   $ 0.21     $ 0.20     $ 0.41     $ 0.40  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
  
-4-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
  
(Dollars in thousands)
  
     
   
Unaudited
  
Six months ended June 30,
  
2008
    
2007
  
Cash flows from operating activities:
            
Net income
   $ 11,911     $ 11,457  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Provision for loan losses
     1,850       600  
Depreciation of premises and equipment
     1,505       1,464  
Net amortization of premium and discount
     520       354  
Amortization of intangibles
     652       716  
Share-based compensation
     186       323  
Non-cash charitable contribution
     –       520  
Earnings from bank-owned life insurance
     (900 )     (790 )
Net gains on loan sales
     (924 )     (774 )
Net losses (gains) on securities
     98       (336 )
Proceeds from sales of loans
     35,406       28,293  
Loans originated for sale
     (35,563 )     (29,811 )
Increase in accrued interest receivable, excluding purchased interest
     990       137  
Decrease increase in other assets
     (682 )     (987 )
Decrease in accrued expenses and other liabilities
     (4,125 )     (1,635 )
Other, net
     (9 )     (2 )
Net cash provided by operating activities
     10,915       9,529  
Cash flows from investing activities:
                
Purchases of:
Mortgage-backed securities available for sale
     (170,332 )     (113,649 )
 
Other investment securities available for sale
     (1,025 )     (33,896 )
 
Other investment securities held to maturity
     –       (12,882 )
Proceeds from sale of:
Mortgage-backed securities available for sale
     –       47,938  
 
Other investment securities available for sale
     61,237       9,438  
 
Mortgage-backed securities held for sale
     –       38,501  
 
Other investment securities held to maturity
     –       21,698  
Maturities and principal payments of:
Mortgage-backed securities available for sale
     50,125       32,583  
 
Other investment securities available for sale
     7,012       6,432  
 
Mortgage-backed securities held to maturity
     –       3,191  
 
Other investment securities held to maturity
     –       20,940  
Purchase of Federal Home Loan Bank stock
     (10,283 )     –  
Net increase in loans
     (108,041 )     (24,880 )
Proceeds from sale of loans
     18,047       –  
Purchases of loans, including purchased interest
     (42,086 )     (4,265 )
Purchases of premises and equipment
     (1,255 )     (3,450 )
Equity investment in capital trusts
     (310 )     –  
Payment of deferred acquisition obligation
     (8,065 )     (6,720 )
Net cash used in investing activities
     (204,976 )     (19,471 )
Cash flows from financing activities:
                
Net decrease in deposits
     (36,663 )     (8,908 )
Net increase in other borrowings
     1,989       19,610  
Proceeds from Federal Home Loan Bank advances
     705,421       391,719  
Repayment of Federal Home Loan Bank advances
     (476,531 )     (397,433 )
Purchases of treasury stock, including deferred compensation plan activity
     43       (4,264 )
Net proceeds from the issuance of common stock under dividend reinvestment plan
     295       –  
Net proceeds from the exercise of stock options and issuance of other equity instruments
     112       320  
Tax benefit from stock option exercises and issuance of other equity instruments
     192       242  
Proceeds from the issuance of junior subordinated debentures, net of debt issuance costs
     10,016       –  
Cash dividends paid
     (5,355 )     (5,237 )
Net cash provided by (used in) financing activities
     199,519       (3,951 )
Net increase (decrease) in cash and cash equivalents
     5,458       (13,893 )
Cash and cash equivalents at beginning of period
     41,112       71,909  
Cash and cash equivalents at end of period
   $ 46,570     $ 58,016  
   
The accompanying notes are an integral part of these unaudited consolidated financial statements.
  
-5-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
  
(Dollars in thousands)
  
CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)
      
       
   
Unaudited
  
Six months ended June 30,
  
2008
    
2007
  
Noncash Investing and Financing Activities:
            
Loans charged off
   $ 326     $ 370  
Securities proceeds due from broker
     3,084       –  
Supplemental Disclosures:
                
Interest payments
     36,687       37,588  
Income tax payments
     6,868       6,309  
                 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
  
 
 
-6-
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
  
 
 
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 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 period amounts have been reclassified to conform to the current period’s classification.  Such reclassifications have no effect on previously reported net income or shareholders’ equity.

The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America (“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 the review of goodwill, other intangible assets and investments for impairment.

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, 2008 and December 31, 2007, 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 Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007.

(2) New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which 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. SFAS No. 157 is effective as of the beginning of the first fiscal year beginning after November 15, 2007 and interim periods within that fiscal year.  The adoption of SFAS No. 157 for financial assets and liabilities did not have a material impact on the Corporation’s financial position or results of operations.  The required disclosures about fair value measurements for financial assets and liabilities have been included in Note 10.  In accordance with FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157,” the effective date of SFAS No. 157 as it applies to nonfinancial assets, such as goodwill, and nonfinancial liabilities has been delayed to January 1, 2009.  The Corporation is currently evaluating the impact that the adoption of SFAS No. 157 for nonfinancial assets and liabilities will have on the Corporation’s financial position and 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 requirement to measure the plan’s assets and obligations as of the employer’s fiscal year end was adopted effective January 1, 2008.  The adoption of the measurement date provision of SFAS No. 158 did not have a material impact on the Corporation’s financial position or results of operations.  See further discussion in Note 11.
-7-

WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
 
The SEC released Staff Accounting Bulletin (“SAB”) No. 109 in November 2007.  SAB No. 109 provides guidance on written loan commitments that are accounted for at fair value through earnings.  SAB No. 109 supersedes SAB No. 105, which provided guidance on derivative loan commitments pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Transactions”.  SAB No. 105 stated that in measuring the fair value of a derivative loan commitment it would be inappropriate to incorporate the expected net future cash flows related to the associated loan.  SAB No. 109, consistent with the guidance in SFAS No. 156 and SFAS No. 159, requires that expected net future cash flows related to the associated servicing of the loan be included in the measurement of all written loan commitments that are accounted for at fair value through earnings.  The guidance in SAB No. 109 is applied on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007.  The adoption of SAB No. 109 did not have a material impact on the Corporation’s financial position or results of operations.
 
The SEC released SAB No. 110 in December 2007.  SAB No. 110 provides guidance on the use of a "simplified" method, as discussed in SAB No. 107, in developing an estimate of expected term of "plain vanilla" share options in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment”.  SAB No. 107 did not expect a company to use the simplified method for share option grants after December 31, 2007.  At the time SAB No. 107 was issued, the SEC believed that more detailed external information about employee exercise behavior (e.g., employee exercise patterns by industry and/or other categories of companies) would, over time, become readily available to companies.  The SEC understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007. Accordingly, the SEC will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007.  The adoption of SAB No. 110 did not have a material impact on the Corporation’s financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”).  SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities.  Entities are required to provide enhanced disclosures about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedge items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged.  SFAS No. 161 encourages but does not require comparative disclosures for earlier periods at initial adoption.  The Corporation will provide the additional disclosures necessary upon the adoption of SFAS No. 161.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”).  SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP.  The current GAAP hierarchy is set forth in the American Institute of Certified Public Accountants Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.”  The FASB has concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and is issuing SFAS No. 162 to achieve that result.  SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to Interim Auditing Standards AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”.  The FASB does not expect that SFAS No. 162 will result in a change in current practice.
-8-
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

(3) Securities
Securities are summarized as follows:
 
(Dollars in thousands)
                        
   
Amortized
    
Unrealized
    
Unrealized
    
Fair
  
June 30, 2008
  
Cost
    
Gains
    
Losses
    
Value
  
Securities Available for Sale:
                        
U.S. Treasury obligations and obligations
                        
  of U.S. government-sponsored agencies
   $ 82,002     $ 2,448     $ −     $ 84,450  
Mortgage-backed securities issued by U.S.
                                
  government and government-sponsored agencies
     588,967       2,445       (5,298 )     586,114  
States and political subdivisions
     81,645       81       (1,465 )     80,261  
Trust preferred securities
     37,985       −       (7,627 )     30,358  
Corporate bonds
     1,746       −       (13 )     1,733  
Corporate stocks
     7,593       337       (782 )     7,148  
Total securities available for sale
   $ 799,938     $ 5,311     $ (15,185 )   $ 790,064  


(Dollars in thousands)
                        
   
Amortized
    
Unrealized
    
Unrealized
    
Fair
  
December 31, 2007
  
Cost
    
Gains
    
Losses
    
Value
  
Securities Available for Sale:
                        
U.S. Treasury obligations and obligations
                        
  of U.S. government-sponsored agencies
   $ 136,721     $ 2,888     $ (10 )   $ 139,599  
Mortgage-backed securities issued by U.S.
                                
  government and government-sponsored agencies
     469,197       2,899       (2,708 )     469,388  
States and political subdivisions
     80,634       499       (239 )     80,894  
Trust preferred securities
     37,995       −       (3,541 )     34,454  
Corporate bonds
     13,940       161       −       14,101  
Corporate stocks
     12,096       2,974       (1,728 )     13,342  
Total securities available for sale
   $ 750,583     $ 9,421     $ (8,226 )   $ 751,778  

Securities available for sale with a fair value of $691.1 million and $592.7 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, 2008 and December 31, 2007, respectively.  In addition, securities available for sale with a fair value of $8.4 million were collateralized for the discount window at the Federal Reserve Bank at June 30, 2008 and December 31, 2007.  There were no borrowings with the Federal Reserve Bank at either date.  Securities available for sale with a fair value of $8.9 million and $1.9 million were designated in a rabbi trust for a nonqualified retirement plan at June 30, 2008 and December 31, 2007, respectively.  As of June 30, 2008 and December 31, 2007, securities available for sale with a fair value of $525 thousand and $532 thousand, respectively, were pledged as collateral to secure certain interest rate swap agreements.

During the six months ended June 30, 2008, impairment charges of $2.0 million were recognized on four equity security perpetual preferred stock holdings, including FHLMC, FNMA and two other corporate issuers, deemed to be other-than-temporarily impaired based on an analysis of the financial condition and operating outlook of the issuers.  These charges were included in net losses on securities in the Consolidated Statements of Income for the six months ended June 30, 2008.  Also included in net losses on securities in the six months ended June 30, 2008 were realized gains of $232 thousand on the sale of commercial debt securities and realized gains of $1.7 million on the sale of other equity securities.
-9-
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

The following table summarizes temporarily impaired securities as of June 30, 2008, segregated by length of time the securities have been in a continuous unrealized loss position.

(Dollars in thousands)
  
Less than 12 Months
    
12 Months or Longer
    
Total
  
         
Fair
    
Unrealized
          
Fair
    
Unrealized
          
Fair
    
Unrealized
  
At June 30, 2008
     #    
Value
    
Losses
       #    
Value
    
Losses
       #    
Value
    
Losses
  
Mortgage-backed securities
                                                            
issued by U.S. government and government-sponsored agencies
     75     $ 315,997     $ 3,672       19     $ 44,890     $ 1,626       94     $ 360,887     $ 5,298  
States and
                                                                        
political subdivisions
     83       62,326       1,192       4       5,368       273       87       67,694       1,465  
Trust preferred securities
     5       8,704       2,037       8       21,654       5,590       13       30,358       7,627  
Corporate bonds
     1       1,733       13       –       –       –       1       1,733       13  
Subtotal, debt securities
     164       388,760       6,194       31       71,912       7,489       195       460,672       14,403  
Corporate stocks
     3       2,615       473       8       4,115       309       11       6,730       782  
Total temporarily
                                                                        
impaired securities
     167     $ 391,375     $ 7,387       39     $ 76,027     $ 7,798       206     $ 467,402     $ 15,185  

The following table summarizes temporarily impaired securities as of December 31, 2007, segregated by length of time the securities have been in a continuous unrealized loss position.

(Dollars in thousands)
  
Less than 12 Months
    
12 Months or Longer
    
Total
  
         
Fair
    
Unrealized
          
Fair
    
Unrealized
          
Fair
    
Unrealized
  
At December 31, 2007
     #    
Value
    
Losses
       #    
Value
    
Losses
       #    
Value
    
Losses
  
U.S. Treasury obligations
                                                            
and obligations of U.S. government-sponsored agencies
     1     $ 6,996     $ 1       1     $ 3,990     $ 9       2     $ 10,986     $ 10  
Mortgage-backed securities
                                                                        
issued by U.S. government and government-sponsored agencies
     22       108,630       1,028       46       110,348       1,680       68       218,978       2,708  
States and
                                                                        
political subdivisions
     13       12,402       128       10       7,681       111       23       20,083       239  
Trust preferred securities
     8       23,167       2,769       5       11,287       772       13       34,454       3,541  
Subtotal, debt securities
     44       151,195       3,926       62       133,306       2,572       106       284,501       6,498  
Corporate stocks
     5       5,258       1,495       4       1,304       233       9       6,562       1,728  
Total temporarily
                                                                        
impaired securities
     49     $ 156,453     $ 5,421       66     $ 134,610     $ 2,805       115     $ 291,063     $ 8,226  

Unrealized losses on debt securities generally occur as a result of increases in interest rates since the time of purchase, a structural change in an investment or from deterioration in credit quality of the issuer.  Management evaluates impairments in value whether caused by adverse interest rates or credit movements to determine if they are other-than-temporary.

In accordance with applicable accounting literature, Washington Trust must demonstrate an ability and intent to hold temporarily impaired securities until full recovery of their cost basis to classify such losses as temporary.  Management uses both internal and external information sources to arrive at the most informed decision.  This quantitative and qualitative assessment begins with a review of general market conditions and changes to market conditions, credit, investment performance and structure since the prior review period.  The ability to hold temporarily impaired securities will involve a number of factors, including: forecasted recovery period based on average life and Washington Trust’s capital, earnings and cash flow positions, among other things. Washington Trust currently intends to hold all temporarily impaired securities to full recovery of the cost basis, which may be until maturity.
-10-
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

Management assesses a variety of factors in determining if an impairment is other than temporary, including but not limited to, the likelihood of and probable time horizon for recovery of the cost basis, including analyst forecasts, earnings assumptions and other company specific or sector financial performance metrics.

Debt securities in an unrealized loss position at June 30, 2008 consisted of 195 debt security holdings.  The majority of the loss for debt securities reported in an unrealized loss position at June 30, 2008 was concentrated in variable rate trust preferred securities issued by financial services companies and in U.S. agency or government-sponsored agency mortgage-backed securities.

Included in debt securities in an unrealized loss position at June 30, 2008 are 13 trust preferred security holdings.  These holdings represent 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 (“CDO”).  The aggregate unrealized loss position of the 13 trust preferred holdings was $7.6 million, or 20.1% of amortized cost, as of June 30, 2008.  The largest unrealized loss dollar amount of any single issuer was $2.1 million, or 21% of its amortized cost, at June 30, 2008.  Management believes the June 30, 2008 temporary impairment on trust preferred securities, including the trust preferred CDOs, was not a function of underlying credit issues associated with the issuers of the debt obligations and primarily reflected increased investor concerns beginning in the latter part of 2007 and continuing into 2008 about recent losses in the financial services industry related to sub-prime lending and sub-prime exposure.  These concerns resulted in a substantial decrease in market liquidity and increased risk premiums for securities in this sector.  Credit spreads for issuers in this sector widened substantially during recent months, causing prices for these securities holdings to decline.  As recently as September 30, 2007, the aggregate unrealized loss position of the 13 trust preferred holdings was 6.3% of amortized cost and the aggregate unrealized loss position at December 31, 2007 was 9.3% of amortized cost for these holdings.  As of June 30, 2008, the amortized cost and fair value of the two trust preferred CDO holdings was $7.5 million and $5.7 million, respectively.  The CDO holdings consist of trust preferred obligations of banking industry companies and, to a lesser extent, insurance industry companies.  Valuations of the trust preferred CDO holdings are also dependent in part on cash flows from underlying issuers.  Unexpected cash flow disruptions could have an adverse impact on the fair value and performance of these CDOs.  For both of its trust preferred CDO holdings, Washington Trust’s investment is senior to one or more subordinated tranches which have first loss exposure.  The Corporation does not believe it is likely to experience any loss of principal on these CDO investments given the protection that the subordinated classes provide and therefore considers these securities to be temporarily impaired.  All trust preferred debt securities in our portfolio continue to accrue and make payments as expected, and all have credit ratings at or above investment grade minimums.  Washington Trust has the ability and intent to hold these securities to full recovery of the cost basis and management does not consider these investments to be other-than-temporarily impaired.

The unrealized losses on U.S. agency or government-sponsored agency mortgage-backed securities was concentrated in securities purchased during 2003 and 2004, during which time interest rates were at or near historical lows.  The fair value for these and the state and municipal holdings included in this analysis have declined due to the relative increase in short and medium term interest rates since the time of purchase.  The largest unrealized loss percentage amount on any holding in these categories was 5.5% of its amortized cost at June 30, 2008.  Management believes that the nature and duration of impairment on these debt security holdings are a function of changes in investment spreads and interest rate movements.  Washington Trust has the ability and intent to hold these securities to full recovery of the cost basis and management does not consider these investments to be other-than-temporarily impaired.

The equity securities in an unrealized loss position at June 30, 2008 consisted of 11 holdings of financial and commercial entities with unrealized losses of $782 thousand, or 10% of their aggregate cost.  During the six months ended June 30, 2008, Washington Trust recorded $2.0 million in impairment charges on four perpetual preferred stock holdings, including FHLMC, FNMA and two other corporate issuers, based on an analysis of the financial condition and operating outlook of the issuers.  As of June 30, 2008, the Corporation had two perpetual preferred stock holdings of FHLMC and FNMA with a total fair value of $1.0 million and unrealized losses of $34 thousand and seven perpetual preferred stock holdings of financial and utility companies with a total fair value of $4.6 million and unrealized losses of $478 thousand.  Causes of conditions whereby the fair value of 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
-11-
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
 
contributing factor.  Management believes that a portion of the June 30, 2008 temporary impairment on its equity securities holdings was not a function of the financial condition and operating outlook of the issuers and reflected increased investor concerns beginning in the latter part of 2007 and continuing into 2008 about recent losses in the financial services industry related to sub-prime lending and sub-prime exposure.  These concerns resulted in greater volatility in market prices for both common and preferred stocks in this market sector.  Washington Trust has the ability and intent to hold these investments to full recovery of the cost basis and considers the unrealized losses on these equity securities to be temporary.

Should current market conditions continue and should these unrealized losses on these securities continue, they may, in the future, be deemed to be other than temporarily impaired.

(4) Loan Portfolio
The following is a summary of loans:
 
(Dollars in thousands)
  
June 30, 2008
    
December 31, 2007
  
   
Amount
    
%
    
Amount
    
%
  
Commercial:
                        
Mortgages (1)
   $ 361,623       21 %   $ 278,821       18 %
Construction and development (2)
     60,606       4 %     60,361       4 %
Other (3)
     372,784       22 %     341,084       21 %
Total commercial
     795,013       47 %     680,266       43 %
                                 
Residential real estate:
                                
Mortgages (4)
     593,995       35 %     588,628       37 %
Homeowner construction
     14,356       1 %     11,043       1 %
Total residential real estate
     608,351       36 %     599,671       38 %
                                 
Consumer:
                                
Home equity lines
     152,339       9 %     144,429       9 %
Home equity loans
     94,316       6 %     99,827       6 %
Other
     55,631       2 %     49,459       4 %
Total consumer
     302,286       17 %     293,715       19 %
Total loans (5)
   $ 1,705,650       100 %   $ 1,573,652       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 Federal Home Loan Bank borrowings (See Note 7 for additional discussion of Federal Home Loan Bank borrowings).
 (5)
Includes net deferred loan origination costs of $1 thousand and net discounts on purchased loans of $301 thousand at June 30, 2008, compared to net deferred fees of $100 thousand and net premiums on purchased loans of $297 thousand at December 31, 2007.

Nonaccrual Loans
The balance of loans on nonaccrual status as of June 30, 2008 was $6.2 million, compared to $4.3 million at December 31, 2007.  The $1.9 million increase in nonaccrual loans was largely due to certain commercial loan relationships moving into the non-accruing loan classification.
-12-
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

(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,
  
2008
    
2007
    
2008
    
2007
  
Balance at beginning of period
   $ 20,724       19,360     $ 20,277     $ 18,894  
Provision charged to expense
     1,400       300       1,850       600  
Recoveries of loans previously charged off
     58       13       162       203  
Loans charged off
     (219 )     (346 )     (326 )     (370 )
Balance at end of period
   $ 21,963     $ 19,327     $ 21,963     $ 19,327  

(6) Goodwill and Other Intangibles
The changes in the carrying value of goodwill and other intangible assets for the three and six months ended June 30, 2008 are as follows:
 
Goodwill
 
(Dollars in thousands)
        
Wealth
        
   
Commercial
    
Management
        
   
Banking
    
Service
        
   
Segment
    
Segment
    
Total
  
Balance at December 31, 2007
   $ 22,591     $ 27,888     $ 50,479  
Additions to goodwill during the period
     –       −       −  
Impairment recognized
     –       –       –  
Balance at June 30, 2008
   $ 22,591     $ 27,888     $ 50,479  

Other Intangible Assets
 
(Dollars in thousands)
  
Core Deposit
    
Advisory
    
Non-compete
        
   
Intangible
    
Contracts
    
Agreements
    
Total
  
Balance at December 31, 2007
   $ 510     $ 10,743     $ 180     $ 11,433  
Amortization
     60       568       24       652  
Balance at June 30, 2008
   $ 450     $ 10,175     $ 156     $ 10,781  

Amortization of intangible assets for the six months ended June 30, 2008 totaled $652 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
  
2008 (full year)
   $ 120     $ 1,111     $ 49     $ 1,280  
2009
     120       1,040       49       1,209  
2010
     120       922       49       1,091  
2011
     120       768       33       921  
2012
     30       727       −       757  

-13-
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
 
The components of intangible assets at June 30, 2008 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
     2,547       3,482       991       7,020  
Net amount
   $ 450     $ 10,175     $ 156     $ 10,781  
 
(7) 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,
  
   
2008
    
2007
  
FHLB advances
   $ 845,291     $ 616,417  

In addition to outstanding advances, the Corporation also has access to an unused line of credit amounting to $8.0 million at June 30, 2008.  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, 2008.  Included in the collateral were securities available for sale with a fair value of $565.7 million and $476.8 million that were specifically pledged to secure FHLB borrowings at June 30, 2008 and December 31, 2007, 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.

Junior Subordinated Debentures
Junior subordinated debentures are summarized as follows:

(Dollars in thousands)
  
June 30,
    
December 31,
  
   
2008
    
2007
  
Junior subordinated debentures
   $ 32,991     $ 22,681  

In April 2008, the Bancorp sponsored the creation of Washington Preferred Capital Trust (“Washington Preferred”).  Washington Preferred is a Delaware statutory trust created for the sole purpose of issuing trust preferred securities and investing the proceeds in junior subordinated debentures of the Bancorp.  The Bancorp is the owner of all of the common securities of Washington Preferred.  In accordance with FASB Interpretation 46-R, “Consolidation of Variable Interest Entities—Revised”, Washington Preferred will be treated as an unconsolidated subsidiary.  The common stock investment in the statutory trust will be included in “Other Assets” in the Consolidated Balance Sheet.

On April 7, 2008, Washington Preferred issued $10 million of trust preferred securities (“Capital Securities”) in a private placement to two institutional investors pursuant to an applicable exemption from registration.  The Capital Securities mature in June 2038, are redeemable at the Bancorp’s option beginning after five years, and require quarterly distributions by Washington Preferred to the holder of the Capital Securities, at a rate of 6.2275% until June 15, 2008, and resets quarterly thereafter at a rate equal to the three-month LIBOR rate plus 3.50%.  The Bancorp has guaranteed the Capital Securities and, to the extent not paid by Washington Preferred, accrued and unpaid distributions on the Capital Securities, as well as the redemption price payable to the Capital Securities holders.  The proceeds of the Capital Securities, along with the proceeds of $310 thousand from the issuance of common securities by Washington Preferred to the Bancorp, were used to purchase $10,310,000 of the Bancorp's junior subordinated deferrable interest notes (the “Washington Preferred Debentures”) and constitute the primary asset of Washington Preferred.  The Bancorp will use the proceeds from the sale of the Washington Preferred Debentures for general
-14-
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
 
corporate purposes.  Like the Capital Securities, the Washington Preferred Debentures bear interest at a rate of 6.2275% until June 15, 2008, and resets quarterly thereafter at a rate equal to the three-month LIBOR rate plus 3.50%.  The Washington Preferred Debentures mature on June 15, 2038, but may be redeemed at par at the Bancorp’s option, subject to the approval of the applicable banking regulator to the extent required under applicable guidelines or policies, at any time on or after June 15, 2013, or upon the occurrence of certain special qualifying events.

Also in April 2008, the Bancorp entered into a five-year interest rate swap contract with a notional amount of $10 million.  Under the terms of this contract, Washington Trust will pay a fixed rate of 6.97% and receive a rate equal to three-month LIBOR plus 3.50%.  See additional discussion on interest rate risk management agreements in Note 9.

Other Borrowings
The following is a summary of other borrowings:
 
(Dollars in thousands)
  
June 30,
    
December 31,
  
   
2008
    
2007
  
Treasury, Tax and Loan demand note balance
   $ 4,669     $ 2,793  
Deferred acquisition obligations
     1,946       9,884  
Securities sold under repurchase agreements
     19,500       19,500  
Other
     369       383  
Other borrowings
   $ 26,484     $ 32,560  

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 $1.9 million and $9.9 million at June 30, 2008 and December 31, 2007, respectively.  In the first quarter of 2008 the Corporation paid approximately $8.1 million pursuant to the Stock Purchase Agreement, which represented the 2007 earn-out payment.

(8) Shareholders’ Equity
Stock Repurchase Plan:
The Corporation’s 2006 Stock Repurchase Plan authorizes the repurchase of up to 400,000 shares of the Corporation’s common stock in open market transactions.  There were no shares repurchased under the Corporation’s 2006 Stock Repurchase Plan during the six months ended June 30, 2008.  As of June 30, 2008, a cumulative total of 185,400 shares have been repurchased at a total cost of $4.8 million.

Pursuant to the Amended and Restated Nonqualified Deferred Compensation Plan (“Deferred Compensation Plan”), 3,423 shares were acquired during the six months ended June 30, 2008.
-15-
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
 
Regulatory Capital Requirements:
 
The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios at June 30, 2008 and December 31, 2007, as well as the corresponding minimum and well capitalized 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, 2008:
                                    
Total Capital (to Risk-Weighted Assets):
                                    
Corporation
   $ 184,998       10.69 %   $ 138,383       8.00 %   $ 172,979       10.00 %
Bank
   $ 185,701       10.75 %   $ 138,259       8.00 %   $ 172,824       10.00 %
Tier 1 Capital (to Risk-Weighted Assets):
                                                
Corporation
   $ 163,368       9.44 %   $ 69,191       4.00 %   $ 103,787       6.00 %
Bank
   $ 164,090       9.49 %   $ 69,130       4.00 %   $ 103,694       6.00 %
Tier 1 Capital (to Average Assets): (1)
                                                
Corporation
   $ 163,368       6.32 %   $ 103,320       4.00 %   $ 129,150       5.00 %
Bank
   $ 164,090       6.36 %   $ 103,249       4.00 %   $ 129,062       5.00 %
                                                 
As of December 31, 2007:
                                                
Total Capital (to Risk-Weighted Assets):
   $ 167,061       10.39 %   $ 128,648       8.00 %   $ 160,810       10.00 %
Corporation
   $ 174,750       10.87 %   $ 128,574       8.00 %   $ 160,717       10.00 %
Bank
                                                
Tier 1 Capital (to Risk-Weighted Assets):
   $ 146,393       9.10 %   $ 64,324       4.00 %   $ 96,486       6.00 %
Corporation
   $ 154,093       9.59 %   $ 64,287       4.00 %   $ 96,430       6.00 %
Bank
                                                
Tier 1 Capital (to Average Assets): (1)
   $ 146,393       6.09 %   $ 96,088       4.00 %   $ 120,110       5.00 %
Corporation
   $ 154,093       6.42 %   $ 96,042       4.00 %   $ 120,053       5.00 %
Bank
                                                
 
(1)  
Leverage ratio

As of June 30, 2008, Bancorp has sponsored the creation of three statutory trusts for the sole purpose of issuing trust preferred securities and investing the proceeds in junior subordinated debentures of the Bancorp.  In accordance with FASB Interpretation 46-R, “Consolidation of Variable Interest Entities – Revised” (“FIN 46-R”), these statutory trusts created by Bancorp are not consolidated into the Corporation’s financial statements; however, the Corporation reflects the amounts of junior subordinated debentures payable to the preferred shareholders of statutory trusts as debt in its financial statements.  The trust preferred securities qualify as Tier 1 capital.

The Corporation’s capital ratios at June 30, 2008 place the Corporation in the “well-capitalized” category according to regulatory standards.  On March 1, 2005, the Federal Reserve Board issued a final rule that would retain trust preferred securities in Tier 1 capital of bank holding companies, but with stricter quantitative limits and clearer standards.  Under the proposal, after a five-year transition period that would end on March 31, 2009, the aggregate amount of trust preferred securities would be limited to 25% of Tier 1 capital elements, net of goodwill.  The Corporation has evaluated the potential impact of such a change on its Tier 1 capital ratio and has concluded that the regulatory capital treatment of the trust preferred securities in the Corporation’s total capital ratio would be unchanged.

(9) Financial Instruments with Off-Balance Sheet Risk and Derivative Financial Instruments
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates.  These financial instruments include commitments to extend credit, standby letters of credit, financial guarantees, interest rate swap agreements and commitments to originate and commitments to sell fixed rate mortgage loans.  These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Corporation’s Consolidated Balance Sheets.  The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.  The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.  The contractual and notional amounts of financial instruments with off-balance sheet risk are as follows:
-16-
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

(Dollars in thousands)
  
June 30,
2008
    
December 31, 2007
  
Financial instruments whose contract amounts represent credit risk:
            
Commitments to extend credit:
            
Commercial loans
   $ 163,584     $ 149,465  
Home equity lines
     180,322       176,284  
Other loans
     22,765       20,770  
Standby letters of credit
     8,111       8,048  
Financial instruments whose notional amounts exceed the amount of credit risk:
                
Forward loan commitments:
                
Commitments to originate fixed rate mortgage loans to be sold
     3,279       3,495  
Commitments to sell fixed rate mortgage loans
     6,012       5,472  
Customer related derivative contracts: