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.

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

-2-

 
 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars in thousands)

 
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.
               
-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,
 
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.
 
-4-

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES  
 (Dollars in thousands)
 
   
   
(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.
               
-5-

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.
               
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 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
 
 
-7-

 
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
-8-

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.
-9-

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
 
 
-10-

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.
-11-

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
 

-12-

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
   
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
-13-

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.
-14-

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
  $
161,076
      10.96 %   $
117,538
      8.00 %   $
146,922
      10.00 %
Bank
  $
168,235
      11.46 %   $
117,465
      8.00 %   $
146,832
      10.00 %
Tier 1 Capital (to Risk-Weighted Assets):
                                               
Corporation
  $
140,568
      9.57 %   $
58,769
      4.00 %   $
88,153
      6.00 %
Bank
  $
147,738
      10.06 %   $
58,733
      4.00 %   $
88,099
      6.00 %
Tier 1 Capital (to Average Assets): (1)
                                               
Corporation
  $
140,568
      6.01 %   $
93,487
      4.00 %   $
116,858
      5.00 %
Bank
  $
147,738
      6.32 %   $
93,437
      4.00 %   $
116,797
      5.00 %
 
(1)  
Leverage ratio

The Corporation’s capital ratios at June 30, 2007 place the Corporation in the “well-capitalized” category according to regulatory standards.

(10) 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, 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
-15-

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

(Dollars in thousands)
 
June 30,
2007
   
December 31, 2006
 
Financial instruments whose contract amounts represent credit risk:
           
Commitments to extend credit:
           
Commercial loans
  $
149,090
    $
122,376
 
Home equity lines
   
181,477
     
185,483
 
Other loans
   
11,542
     
10,671
 
Standby letters of credit
   
9,210
     
9,401
 
Financial instruments whose notional amounts exceed the amount of credit risk:
               
Forward loan commitments:
               
Commitments to originate fixed rate mortgage loans to be sold
   
3,544
     
2,924
 
Commitments to sell fixed rate mortgage loans
   
7,498
     
5,066
 

Commitments to Extend Credit
Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any conditions established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Each borrower’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained is based on management’s credit evaluation of the borrower.

Standby Letters of Credit
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  Under the standby letters of credit, the Corporation is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary contingent upon the customer’s failure to perform under the terms of the underlying contract with the beneficiary.  Standby letters of credit extend up to five years.  At June 30, 2007 and December 31, 2006, the maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered, totaled $9.2 million and $9.4 million, respectively.  At June 30, 2007 and December 31, 2006, there was no liability to beneficiaries resulting from standby letters of credit.  Fee income on standby letters of credit for the six months ended June 30, 2007 and 2006 totaled $51 thousand and $58 thousand, respectively.

At June 30, 2007, a substantial portion of the standby letters of credit were supported by pledged collateral.  The collateral obtained is determined based on management’s credit evaluation of the customer.  Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required.

Forward Loan Commitments
Commitments to originate and commitments to sell fixed rate mortgage loans are derivative financial instruments.  Accordingly, the fair value of these commitments is recognized in other assets on the balance sheet and changes in fair value of such commitments are recorded in current earnings in the income statement.  The carrying value of such commitments as of June 30, 2007 and December 31, 2006 and the respective changes in fair values for the six months ended June 30, 2007 and 2006 were insignificant.
-16-

WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
(11) Defined Benefit Pension Plans

Components of Net Periodic Benefit Costs:
 
(Dollars in thousands)
 
Qualified
   
Non-Qualified
 
   
Pension Plan
   
Retirement Plans
 
Six months ended June 30,
 
2007
   
2006
   
2007
   
2006
 
Service cost
  $
1,005
    $
1,034
    $
172
    $
176
 
Interest cost
   
924
     
825
     
260
     
233
 
Expected return on plan assets
    (992 )     (900 )    
-
     
-
 
Amortization of transition asset
    (3 )     (3 )    
-
     
-
 
Amortization of prior service cost
    (17 )     (17 )    
31
     
32
 
Recognized net actuarial loss
   
94
     
159
     
109
     
107
 
Net periodic benefit cost
  $
1,011
    $
1,098
    $
572
    $
548
 

Assumptions:
The measurement date and weighted-average assumptions used to determine net periodic benefit cost for the six months ended June 30, 2007 and 2006 were as follows:
 
   
Qualified
   
Non-Qualified
 
   
Pension Plan
   
Retirement Plans
 
   
2007
   
2006
   
2007
   
2006
 
Measurement date
 
Sept. 30, 2006
   
Sept. 30, 2005
   
Sept. 30, 2006
   
Sept. 30, 2005
 
Discount rate
    5.90 %     5.50 %     5.90 %     5.50 %
Expected long-term return on plan assets
    8.25 %     8.25 %    
-
     
-
 
Rate of compensation increase
    4.25 %     4.25 %     4.25 %     4.25 %

As discussed in Note 2, the SFAS No. 158 requirement to measure the plan’s assets and obligations as of the employer’s fiscal year end is effective December 31, 2008.

Employer Contributions:
The Corporation previously disclosed in its financial statements for the year ended December 31, 2006 that it expected to contribute $1.3 million to its qualified pension plan and $369 thousand in benefit payments to its non-qualified retirement plans in 2007.  During the six month period ended June 30, 2007, approximately $1.9 million of contributions were made to the qualified pension plan and no further contributions are expected for 2007.  The increase in the qualified pension plan contribution over the amount estimated at December 31, 2006 was the result of further analysis by the Corporation and included an additional discretionary contribution in excess of statutory requirements.  During the six month period ended June 30, 2007, $168 thousand in benefit payments have been made to the non-qualified retirement plans.  The Corporation presently anticipates contributing an additional $167 thousand in benefit payments to the non-qualified retirement plans in 2007.
-17-

WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
(12) Business Segments
Washington Trust segregates financial information in assessing its results among two operating segments: Commercial Banking and Wealth Management Services.  The amounts in the Corporate column include activity not related to the segments, such as the investment securities portfolio, wholesale funding activities and administrative units.  The Corporate column is not considered to be an operating segment.  The methodologies and organizational hierarchies that define the business segments are periodically reviewed and revised.  Results may be restated, when necessary, to reflect changes in organizational structure or allocation methodology. The following tables present the statement of operations and total assets for Washington Trust’s reportable segments.

(Dollars in thousands)
                       
   
Commercial
Banking
   
Wealth Management Services
   
Corporate
   
Consolidated
Total
 
Three months ended June 30,
 
2007
   
2006
   
2007
   
2006
   
2007
   
2006
   
2007
   
2006
 
Net interest income (expense)
  $
13,239
    $
13,614
    $ (20 )   $ (27 )   $
1,627
    $
1,630
    $
14,846
    $
15,217
 
Noninterest income
   
3,874
     
3,575
     
7,493
     
6,737
     
1,161
     
1,135
     
12,528
     
11,447
 
Total income
   
17,113
     
17,189
     
7,473
     
6,710
     
2,788
     
2,765
     
27,374
     
26,664
 
                                                                 
Provision for loan losses
   
300
     
300
     
-
     
-
     
-
     
-
     
300
     
300
 
Depreciation and
 amortization expense
   
607
     
574
     
433
     
425
     
44
     
191
     
1,084
     
1,190
 
Other noninterest expenses
   
9,644
     
9,371
     
4,614
     
4,442
     
2,533
     
2,277
     
16,791
     
16,090
 
Total noninterest expenses
   
10,551
     
10,245
     
5,047
     
4,867
     
2,577
     
2,468
     
18,175
     
17,580
 
Income before income taxes
   
6,562
     
6,944
     
2,426
     
1,843
     
211
     
297
     
9,199
     
9,084
 
Income tax expense (benefit)
   
2,302
     
2,419
     
937
     
720
      (350 )     (232 )    
2,889
     
2,907
 
Net income
  $
4,260
    $
4,525
    $
1,489
    $
1,123
    $
561
    $
529
    $
6,310
    $
6,177
 
                                                                 
Total assets at period end
   
1,570,917
     
1,514,253
     
37,418
     
33,585
     
787,965
     
884,439
     
2,396,300
     
2,432,277
 
Expenditures for
  long-lived assets
   
2,317
     
726
     
93
     
106
     
18
     
107
     
2,428
     
939
 

(Dollars in thousands)
                       
   
Commercial
Banking
   
Wealth Management Services
   
Corporate
   
Consolidated
Total
 
Six months ended June 30,
 
2007
   
2006
   
2007
   
2006
   
2007
   
2006
   
2007
   
2006
 
Net interest income (expense)
  $
26,614
    $
27,010
    $ (28 )   $ (51 )    
3,130
     
3,673
    $
29,716
     
30,632
 
Noninterest income
   
6,763
     
6,324
     
14,363
     
13,177
     
2,650
     
1,466
     
23,776
     
20,967
 
Total income
   
33,377
     
33,334
     
14,335
     
13,126
     
5,780
     
5,139
     
53,492
     
51,599
 
                                                                 
Provision for loan losses
   
600
     
600
     
-
     
-
     
-
     
-
     
600
     
600
 
Depreciation and
 amortization expense
   
1,223
     
1,132
     
869
     
844
     
88
     
348
     
2,180
     
2,324
 
Other noninterest expenses
   
18,287
     
17,686
     
8,912
     
8,784
     
5,605
     
4,190
     
32,804
     
30,660
 
Total noninterest expenses
   
20,110
     
19,418
     
9,781
     
9,628
     
5,693
     
4,538
     
35,584
     
33,584
 
Income before income taxes
   
13,267
     
13,916
     
4,554
     
3,498
     
87
     
601
     
17,908
     
18,015
 
Income tax expense (benefit)
   
4,663
     
4,844
     
1,763
     
1,378
      (803 )     (457 )    
5,623
     
5,765
 
Net income
  $
8,604
    $
9,072
    $
2,791
    $
2,120
    $
890
    $
1,058
    $
12,285
    $
12,250
 
                                                                 
Total assets at period end
   
1,570,917
     
1,514,253
     
37,418
     
33,585
     
787,965
     
884,439
     
2,396,300
     
2,432,277
 
Expenditures for
  long-lived assets
   
3,203
     
1,514
     
162
     
360
     
108
     
163
     
3,473
     
2,037
 

Management uses certain methodologies to allocate income and expenses to the business lines.  A funds transfer pricing methodology is used to assign interest income and interest expense to each interest-earning asset and interest-bearing liability on a matched maturity funding basis.  Certain indirect expenses are allocated to segments.  These
-18-

WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
include support unit expenses such as technology and processing operations and other support functions.  Taxes are allocated to each segment based on the effective rate for the period shown.

Commercial Banking
The Commercial Banking segment includes commercial, commercial real estate, residential and consumer lending activities; mortgage banking, secondary market and loan servicing activities; deposit generation; merchant credit card services; cash management activities; and direct banking activities, which include the operation of ATMs, telephone and internet banking services and customer support and sales.

Wealth Management Services
Wealth Management Services includes asset management services provided for individuals and institutions; personal trust services, including services as executor, trustee, administrator, custodian and guardian; corporate trust services, including services as trustee for pension and profit sharing plans; and other financial planning and advisory services.

Corporate
Corporate includes the Treasury Unit, which is responsible for managing the wholesale investment portfolio and wholesale funding needs.  It also includes income from bank-owned life insurance as well as administrative and executive expenses not allocated to the business lines and the residual impact of methodology allocations such as funds transfer pricing offsets.
 
(13) Comprehensive Income
 
(Dollars in thousands)
     
       
Six months ended June 30,
 
2007
   
2006
 
Net income
  $
12,285
    $
12,250
 
                 
Unrealized holding losses on securities available for sale, net of $1,100 income
               
   tax benefit in 2007 and $3,521 income tax benefit in 2006
    (2,043 )     (5,421 )
Reclassification adjustments for gains arising during the period, net of $640 income tax
               
   expense in 2007 and $333 income tax expense in 2006
    (1,101 )     (491 )
Change in funded status of defined benefit plans related to the amortization of net
               
   actuarial losses, net prior service credit and net transition asset, net of $75 income
               
    tax expense in 2007
   
139
     
-
 
Total comprehensive income
  $
9,281
    $
6,337
 
 
 
-19-

WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
(14) Earnings Per Share
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average common stock outstanding, excluding options and other equity instruments.  The dilutive effect of options, nonvested share units, non vested share awards and other items is calculated using the treasury stock method for purposes of weighted average dilutive shares.  Diluted EPS is computed by dividing net income by the average number of common stock and common stock equivalents outstanding.

(Dollars and shares in thousands, except per share amounts)
       
   
Three Months
   
Six Months
 
Periods ended June 30,
 
2007
   
2006
   
2007
   
2006
 
                         
Net income
  $
6,310
    $
6,177
    $
12,285
    $
12,250
 
                                 
Weighted average basic shares
   
13,339.6
     
13,419.9
     
13,375.7
     
13,403.4
 
Dilutive effect of:
                               
Options
   
200.4
     
242.4
     
221.8
     
258.3
 
Other
   
76.4
     
40.9
     
70.1
     
37.9
 
Weighted average diluted shares
   
13,616.4
     
13,703.2
     
13,667.6
     
13,699.6
 
                                 
Earnings per share:
                               
Basic
  $
0.47
    $
0.46
    $
0.92
    $
0.91
 
Diluted
  $
0.46
    $
0.45
    $
0.90
    $
0.89
 

(15) Litigation
The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business.  Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated financial position or results of operations of the Corporation.


-20-


With respect to the unaudited consolidated financial statements of Washington Trust Bancorp, Inc. and Subsidiaries at June 30, 2007 and for the three and six months ended June 30, 2007 and 2006, KPMG LLP has made a review (based on the standards of the Public Company Accounting Oversight Board (United States)) and not an audit, set forth in their separate report dated August 3, 2007 appearing below.  That report does not express an opinion on the interim unaudited consolidated financial information.  KPMG LLP has not carried out any significant or additional audit tests beyond those which would have been necessary if their report had not been included.  Accordingly, such report is not a “report” or “part of the Registration Statement” within the meaning of Sections 7 and 11 of the Securities Act of 1933, as amended, and the liability provisions of Section 11 of the Securities Act do not apply.


Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders
Washington Trust Bancorp, Inc.:


We have reviewed the accompanying consolidated balance sheet of Washington Trust Bancorp, Inc. and Subsidiaries (the Corporation) as of June 30, 2007, the related consolidated statements of income for the three and six month periods ended June 30, 2007 and 2006, and the related consolidated statements of cash flows for the six month periods ended June 30, 2007 and 2006.  These consolidated financial statements are the responsibility of the Corporation’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards established by the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Washington Trust Bancorp, Inc. and Subsidiaries as of December 31, 2006, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated March 12, 2007, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the consolidated balance sheet as of December 31, 2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

KPMGLLP

Providence, Rhode Island
August 3, 2007


-21-



ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
This report contains certain statements that may be considered “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  The actual results, performance or achievements of the Corporation could differ materially from those projected in the forward-looking statements as a result of, among other factors, changes in general national or regional economic conditions, changes in interest rates, reductions in the market value of wealth management assets under administration, reductions in loan demand, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in loan default and charge-off rates, changes in the size and nature of the Corporation’s competition, changes in legislation or regulation and accounting principles, policies and guidelines, and changes in the assumptions used in making such forward-looking statements.  The Corporation assumes no obligation to update forward-looking statements or update the reasons actual results, performance or achievements could differ materially from those provided in the forward-looking statements, except as required by law.

Critical Accounting Policies
Accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets and impact income are considered critical accounting policies.  The Corporation’s accounting and reporting policies comply with U.S. generally accepted accounting principles and conform to general practices within the banking industry.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions.  The financial position and results of operations can be affected by these estimates and assumptions, which are important in understanding the reported results.  Management has discussed the development and the selection of critical accounting policies with the Audit Committee of our board of directors.  As discussed in our 2006 Annual Report on Form 10-K, we have identified the allowance for loan losses, accounting for acquisitions and review of goodwill and intangible assets for impairment, other-than-temporary impairment of investment securities, defined benefit pension obligations, interest income recognition, and tax estimates as critical accounting policies.  There have been no significant changes in the methods or assumptions used in the accounting policies that require material estimates and assumptions.

Recent Events
In June 2007, Washington Trust opened its 17th branch located in Cranston, Rhode Island.  This branch office is the second location in Cranston.

Results of Operations
Overview
Net income for the second quarter of 2007 was $6.3 million, or 46 cents per diluted share.  Net income for the second quarter of last year totaled $6.2 million, or 45 cents per diluted share.  The returns on average equity and average assets for the quarter ended June 30, 2007 were 14.37% and 1.06%, respectively, compared to 15.28% and 1.02%, respectively, for the same period in 2006.

Net income for the six months ended June 30, 2007 amounted to $12.3 million, or 90 cents per diluted share, compared to the $12.3 million, or 89 cents per diluted share, reported for the same period a year ago.  The returns on average equity and average assets for the first half of 2007 were 14.01% and 1.03%, respectively, compared to 15.19% and 1.02%, respectively, for the comparable period in 2006.
-22-


Selected financial highlights are presented in the table below.

(Dollars in thousands, except per share amounts)
           
   
Three Months
   
Six Months
 
Periods ended June 30,
 
2007
   
2006
   
2007
   
2006
 
                         
Earnings:
                       
Net income
  $
6,310
    $
6,177
    $
12,285
    $
12,250
 
Diluted earnings per share
   
0.46
     
0.45
     
0.90
     
0.89
 
Dividends declared per common share
   
0.20
     
0.19
     
0.40
     
0.38
 
                                 
Select Ratios:
                               
Return on average assets
    1.06 %     1.02 %     1.03 %     1.02 %
Return on average shareholders equity
    14.37 %     15.28 %     14.01 %     15.19 %
Interest rate spread (taxable equivalent basis)
    2.38 %     2.43 %     2.42 %     2.49 %
Net interest margin (taxable equivalent basis)
    2.75 %     2.75 %     2.78 %     2.79 %

Net Interest Income
Net interest income is the difference between interest earned on loans and securities and interest paid on deposits and other borrowings, and continues to be the primary source of Washington Trust’s operating income.  Net interest income is affected by the level of interest rates, changes in interest rates and changes in the amount and composition of interest-earnings assets and interest-bearing liabilities.  Included in interest income are loan prepayment fees and certain other fees, such as late charges.

Net interest income for the three months ended June 30, 2007 decreased $371 thousand, or 2.4%, from the same period in 2006, and for the six months ended June 30, 2007, declined $916 thousand, or 3.0%, from the comparable period a year earlier.  The decline in net interest income was due to the fact that rates paid on deposits and borrowings have risen faster than earning-asset yields and a higher rate of growth was experienced in higher cost deposit categories.  In addition, the average balance of total interest-earnings assets have declined somewhat in 2007 compared to 2006.

The following discussion presents net interest income on a fully taxable equivalent (“FTE”) basis by adjusting income and yields on tax–exempt loans and securities to be comparable to taxable loans and securities.  For more information see the section entitled “Average Balances / Net Interest Margin - Fully Taxable Equivalent (FTE) Basis” below.

FTE net interest income for the quarter ended June 30, 2007 decreased $251 thousand, or 1.6%, from the second quarter of 2006, and for the six months ended June 30, 2007, declined $678 thousand, or 2.2%, from the same period a year earlier.  The net interest margin (FTE net interest income as a percentage of average interest–earnings assets) for the three months ended June 30, 2007 was 2.75%, unchanged from the same period a year earlier.  While the net interest margin was unchanged from the second quarter of 2006, in that quarter of last year, no dividend income was recognized nor included in net interest income on the Corporation’s investment in Federal Home Loan Bank of Boston (“FHLBB”) stock due to a timing change made by the FHLBB in its dividend payment schedule.  The Corporation estimated, at that time, that the loss of that dividend income negatively affected net interest income and net interest margin for the second quarter 2006 by approximately $450 thousand, or 8 basis points.  The net interest margin for the six months ended June 30, 2007 was 2.78%, compared to 2.79% for the same period a year ago.  Included in net interest income in 2007 was interest recovery of $322 thousand received in the first quarter on a previously charged off loan.  This interest recovery accounted for 3 basis points of the net interest margin for the six months ended June 30, 2007.

Average interest-earning assets for the three and six months ended June 30, 2007 decreased $41.4 million and $38.1 million, respectively, from the amounts reported for the same periods last year.  This decrease was mainly due to reductions in the securities portfolio, offset in part by growth in the loan portfolio.  Total average loans for the three and six months ended June 30, 2007 increased $55.9 million and $51.9 million, respectively, from the comparable 2006 periods.  The yield on total loans for the three and six months ended June 30, 2007 increased 10 and 22 basis points, respectively, from the comparable 2006 periods.  Loan prepayment and other fees included in interest income for the three and six months ended June 30, 2007 were $90 thousand and $192 thousand, respectively, compared to $326 thousand and $460 thousand for the same periods in 2006.  Total average securities for the three and six months ended June 30, 2007 decreased $97.3 million and $90.0 million, respectively.  The relatively flat yield curve made reinvestment of maturing balances unattractive relative to funding costs during these periods.  The FTE rate of return on securities for the three and six months ended June 30, 2007
-23-

 
increased 63 and 57 basis points from the comparable 2006 periods.  The increase in the total yield on securities reflects a combination of higher yields on variable rate securities tied to short-term interest rates, sale or runoff of lower yielding securities and higher marginal rates on reinvestment of cash flows relative to the prior year.  The Corporation continues to consider appropriate strategies to manage rising funding costs and more slowly increasing investment yields given the relatively flat yield curve.

For the three and six months ended June 30, 2007, average interest-bearing liabilities declined $50.5 million and $38.9 million, respectively, from the amounts reported for the comparable periods last year.  The Corporation experienced growth in money market and savings accounts and other borrowed funds, and declines in NOW accounts, time deposits and FHLB advances.  The decline in time deposits resulted from decreases in average brokered certificates of deposit, which are utilized by the Corporation as part of its overall funding program along with FHLB advances and other sources.  Average brokered certificates of deposit for the three and six months ended June 30, 2007 decreased $59.2 million and $51.1 million, respectively.  The average rate paid on brokered certificates of deposit for the second quarter and first six months of 2007 was unchanged and increased 3 basis points, respectively, from the comparable periods in 2006.  The average balance of FHLB advances for the three and six months ended June 30, 2007 decreased $87.2 million and $83.6 million, respectively, while the average rate paid on FHLB advances increased 19 and 27 basis points, respectively, from the same periods a year ago.


-24-

Average Balances / Net Interest Margin - Fully Taxable Equivalent (FTE) Basis
The following tables present average balance and interest rate information.  Tax-exempt income is converted to a fully taxable equivalent (“FTE”) basis using the statutory federal income tax rate.  For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency.  Unrealized gains (losses) on available for sale securities are excluded from the average balance and yield calculations.  Nonaccrual and renegotiated loans, as well as interest earned on these loans (to the extent recognized in the Consolidated Statements of Income) are included in amounts presented for loans.
 
Three months ended June 30,
 
2007
   
2006
 
   
Average
         
Yield/
   
Average
         
Yield/
 
(Dollars in thousands)
 
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
Assets:
                                   
Residential real estate loans
  $
590,226
    $
7,812
      5.31 %   $
590,595
    $
7,505
      5.10 %
Commercial and other loans
   
615,606
     
11,730
      7.64 %    
568,937
     
11,049
      7.79 %
Consumer loans
   
282,408
     
4,911
      6.98 %    
272,819
     
4,633
      6.81 %
Total loans
   
1,488,240
     
24,453
      6.59 %    
1,432,351
     
23,187
      6.49 %
Federal funds sold and
                                               
other short-term investments
   
17,028
     
184
      4.34 %    
12,827
     
150
      4.69 %
Taxable debt securities
   
605,538
     
7,709
      5.11 %    
737,987
     
8,648
      4.70 %
Nontaxable debt securities
   
78,964
     
1,112
      5.65 %    
39,659
     
570
      5.76 %
Corporate stocks and FHLB stock
   
42,806
     
763
      7.15 %    
51,128
     
343
      2.69 %
Total securities
   
744,336
     
9,768
      5.26 %    
841,601
     
9,711
      4.63 %
Total interest-earning assets
   
2,232,576
     
34,221
      6.15 %    
2,273,952
     
32,898
      5.80 %
Non interest-earning assets
   
159,111
                     
154,648
                 
Total assets
  $
2,391,687
                    $
2,428,600
                 
Liabilities and Shareholders’ Equity:
                                               
NOW accounts
  $
168,742
    $
64
      0.15 %   $
177,260
    $
80
      0.18 %
Money market accounts
   
293,245
     
2,869
      3.92 %    
233,489
     
1,835
      3.15 %
Savings deposits
   
196,647
     
661
      1.35 %    
195,251
     
274
      0.56 %
Time deposits
   
837,223
     
9,621
      4.61 %    
871,519
     
8,972
      4.13 %
FHLB advances
   
467,411
     
5,063
      4.34 %    
554,639
     
5,745
      4.15 %
Junior subordinated debentures
   
22,681
     
338
      5.98 %    
22,681
     
338
      5.98 %
Other borrowed funds
   
25,764
     
289
      4.51 %    
7,346
     
87
      4.75 %
Total interest-bearing liabilities
   
2,011,713
     
18,905
      3.77 %    
2,062,185
     
17,331
      3.37 %
Demand deposits
   
173,473
                     
182,546
                 
Other liabilities
   
30,863
                     
22,184
                 
Shareholders’ equity
   
175,638
                     
161,685
                 
Total liabilities and shareholders’ equity
  $
2,391,687
                    $
2,428,600
                 
Net interest income (FTE)
          $
15,316
                    $
15,567
         
Interest rate spread
                    2.38 %                     2.43 %
Net interest margin
                    2.75 %                     2.75 %

 
Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:
 
(Dollars in thousands)
           
             
Three months ended June 30,
 
2007
   
2006
 
Commercial and other loans
  $
39
    $
57
 
Nontaxable debt securities
   
353
     
199
 
Corporate stocks
   
78
     
94
 


-25-

Six months ended June 30,
 
2007
   
2006
 
   
Average
         
Yield/
   
Average
         
Yield/
 
(Dollars in thousands)
 
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
Assets:
                                   
Residential real estate loans
  $
591,138
    $
15,585
      5.32 %   $
590,217
    $
14,909
      5.09 %
Commercial and other loans
   
601,425
     
23,102
      7.75 %    
562,511
     
21,303
      7.64 %
Consumer loans
   
281,992
     
9,736
      6.96 %    
269,960
     
8,922
      6.66 %
Total loans
   
1,474,555
     
48,423
      6.62 %    
1,422,688
     
45,134
      6.40 %
Federal funds sold and
                                               
other short-term investments
   
15,271
     
375
      4.96 %    
11,510
     
265
      4.64 %
Taxable debt securities
   
614,211
     
15,501
      5.09 %    
737,776
     
17,060
      4.66 %
Nontaxable debt securities
   
74,332
     
2,090
      5.67 %    
37,430
     
1,074
      5.79 %
Corporate stocks and FHLB stock
   
43,136
     
1,563
      7.30 %    
50,241
     
1,104
      4.43 %
Total securities
   
746,950
     
19,529
      5.27 %    
836,957
     
19,503
      4.70 %
Total interest-earning assets
   
2,221,505
     
67,952
      6.17 %    
2,259,645
     
64,637
      5.77 %
Non interest-earning assets
   
165,038
                     
152,019
                 
Total assets
  $
2,386,543
                    $
2,411,664
                 
Liabilities and Shareholders’ Equity:
                                               
NOW accounts
  $
169,206
    $
132
      0.16 %   $
173,859
    $
147
      0.17 %
Money market accounts
   
293,613
     
5,680
      3.90 %    
230,911
     
3,442
      3.01 %
Savings deposits
   
201,086
     
1,371
      1.38 %    
199,984
     
561
      0.57 %
Time deposits
   
834,870
     
19,009
      4.59 %    
861,464
     
17,249
      4.04 %
FHLB advances
   
467,429
     
10,031
      4.33 %    
551,035
     
11,104
      4.06 %
Junior subordinated debentures
   
22,681
     
676
      6.01 %    
22,681
     
676
      6.01 %
Other borrowed funds
   
19,316
     
439
      4.58 %    
7,183
     
166
      4.67 %
Total interest-bearing liabilities
   
2,008,201
     
37,338
      3.75 %    
2,047,117
     
33,345
      3.28 %
Demand deposits
   
172,232
                     
181,257
                 
Other liabilities
   
30,791
                     
21,972
                 
Shareholders’ equity
   
175,319
                     
161,318
                 
Total liabilities and shareholders’ equity
  $
2,386,543
                    $
2,411,664
                 
Net interest income (FTE)
          $
30,614
                    $
31,292
         
Interest rate spread
                    2.42 %                     2.49 %
Net interest margin
                    2.78 %                     2.79 %

 
Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:
 
(Dollars in thousands)
           
             
Six months ended June 30,
 
2007
   
2006
 
Commercial and other loans
  $
75
    $
107
 
Nontaxable debt securities
   
663
     
375
 
Corporate stocks
   
160
     
178
 


-26-



The following table presents certain information on a FTE basis regarding changes in our interest income and interest expense for the periods indicated.  The net change attributable to both volume and rate has been allocated proportionately.
 
   
Three months ended
   
Six months ended
 
   
June 30, 2007 vs. 2006
   
June 30, 2007 vs. 2006
 
   
Increase (decrease) due to
   
Increase (decrease) due to
 
(Dollars in thousands)
 
Volume
   
Rate
   
Net Chg
   
Volume
   
Rate
   
Net Chg
 
Interest on interest-earning assets:
                                   
Residential real estate loans
  $ (5 )   $
312
    $
307
    $
23
    $
653
    $
676
 
Commercial and other loans
   
895
      (215 )    
680
     
1,489
     
309
     
1,798
 
Consumer loans
   
163
     
116
     
279
     
405
     
410
     
815
 
Federal funds sold and other short-term investments
   
46
      (11 )    
35
     
91
     
19
     
110
 
Taxable debt securities
    (1,647 )    
708
      (939 )     (3,033 )    
1,474
      (1,559 )
Nontaxable debt securities
   
554
      (13 )    
541
     
1,038
      (23 )    
1,015
 
Corporate stocks and FHLB stock
    (63 )    
483
     
420
      (175 )    
634
     
459
 
Total interest income
    (57 )    
1,380
     
1,323
      (162 )    
3,476
     
3,314
 
Interest on interest-bearing liabilities:
                                               
NOW accounts
    (4 )     (12 )     (16 )     (5 )     (10 )     (15 )
Money market accounts
   
529
     
505
     
1,034
     
1,071
     
1,167
     
2,238
 
Savings deposits
   
2
     
385
     
387
     
4
     
806
     
810
 
Time deposits
    (364 )    
1,013
     
649
      (543 )    
2,303
     
1,760
 
FHLB advances
    (935 )    
253
      (682 )     (1,772 )    
699
      (1,073 )
Junior subordinated debentures
   
     
     
     
     
     
 
Other borrowed funds
   
207
      (5 )    
202
     
275
      (3 )    
272
 
Total interest expense
    (565 )    
2,139
     
1,574
      (970 )    
4,962
     
3,992
 
Net interest income
  $
508
    $ (759 )   $ (251 )   $
808
    $ (1,486 )   $ (678 )

Provision and Allowance for Loan Losses
The Corporation’s loan loss provision charged to earnings amounted to $300 thousand and $600 thousand, respectively, for the three and six months ended June 30, 2007, unchanged from the amounts recorded in 2006.  The allowance for loan losses was $19.3 million, or 1.30% of total loans, at June 30, 2007, compared to $18.5 million, or 1.29%, at June 30, 2006.  See additional discussion under the caption “Asset Quality” for further information on the Allowance for Loan Losses.

Noninterest Income
Noninterest income is an important source of revenue for Washington Trust.  Noninterest income as a percent of total revenues (net interest income plus noninterest income) increased from 42.9% in the second quarter of 2006 to 45.8% in the second quarter of 2007.  Total noninterest income for the second quarter of 2007 increased $1.1 million, or 9.4%, from the same quarter a year ago.  For the six months ended June 30, 2007, total noninterest income increased $2.8 million, or 13.4%, from the comparable 2006 period.


-27-

The following table presents a noninterest income comparison for the three and six months ended June 30, 2007 and 2006:
 
(Dollars in thousands)
 
Three Months
   
Six Months
 
                     
% 
               
 $
     
% 
 
Periods ended June 30
 
2007
   
2006
   
Chg
   
Chg
   
2007
   
2006
   
Chg
   
Chg
 
Noninterest income:
                                                   
Wealth management services:
         
,
                                         
Trust and investment advisory fees
   
5,252
     
4,682
     
570
      12 %    
10,290
     
9,309
     
981
      11 %
Mutual fund fees
   
1,352
     
1,214
     
138
      11 %    
2,614
     
2,344
     
270
      12 %
Financial planning, commissions and other service fees
   
889
     
841
     
48
      6 %    
1,459
     
1,524
      (65 )     (4 )%
Wealth management services
   
7,493
     
6,737
     
756
      11 %    
14,363
     
13,177
     
1,186
      9 %
Service charges on deposit accounts
   
1,220
     
1,236
      (16 )     (1 )%    
2,345
     
2,355
      (10 )     %
Merchant processing fees
   
1,829
     
1,656
     
173
      10 %    
3,033
     
2,703
     
330
      12 %
Income from BOLI
   
399
     
346
     
53
      15 %    
790
     
625
     
165
      26 %
Net gains on loan sales and commissions
                                                               
on loans originated for others
   
510
     
336
     
174
      52 %    
774
     
612
     
162
      26 %
Other income
   
372
     
371
     
1
      %    
730
     
671
     
59
      9 %
Subtotal
   
11,823
     
10,682
     
1,141
      11 %    
22,035
     
20,143
     
1,892
      9 %
Net realized gains on securities
   
705
     
765
      (60 )     (8 )%    
1,741
     
824
     
917
      111 %
Total noninterest income
  $
12,528
    $
11,447
     
1,081
      9 %   $
23,776
    $
20,967
    $
2,809
      13 %

Wealth management revenues for the three and six months ended June 30, 2007 increased by 11.2% and 9.0%, respectively, over the same periods in 2006.  Revenue from wealth management services is largely dependent on the value of assets under administration and is closely tied to the performance of the financial markets.  Assets under administration totaled $3.948 billion at June 30, 2007, up $253.6 million, or 6.9%, in the first six months of 2007 and up $523.7 million, or 15.3%, from June 30, 2006.  This growth was due to financial market appreciation and business development efforts.  The following table presents the changes in wealth management assets under administration for the three and six month periods ended June 30, 2007:

(Dollars in thousands)
 
Three Months
   
Six Months
 
             
Periods ended June 30,
 
2007
   
2007
 
Balance at the beginning of period
  $
3,806,274
    $
3,694,813
 
Net market appreciation and income
   
113,656
     
161,725
 
Net customer cash flows
   
28,460
     
91,852
 
Balance at the end of period
  $
3,948,390
    $
3,948,390
 

Merchant processing fees for the three and six months ended June 30, 2007 increased 10.4% and 12.2%, respectively, from the corresponding periods a year ago due to increases in the volume of transactions processed for existing and new customers.  Merchant processing fees represent charges to merchants for credit card transactions processed.

Income from bank-owned life insurance (“BOLI”) increased $53 thousand and $165 thousand, respectively, for the three and six months ended June 30, 2007.  The increase was largely attributable to the purchase of an additional $8.0 million in BOLI during the second quarter of 2006.

For the three and six months ended June 30, 2007, net gains on loan sales and commissions on loans originated for others increased $174 thousand and $162 thousand, respectively, due to increased sales of residential mortgage loans.

Net realized gains on sales of securities amounted to $705 thousand and $765 thousand for the three months ended June 30, 2007 and 2006, respectively.  These amounts included $397 thousand and $381 thousand of gains recognized in the second quarter of 2007 and 2006, respectively, resulting from the Corporation’s annual contribution of appreciated equity securities to the Corporation’s charitable foundation.  The cost of the annual contributions, included in noninterest expenses, amounted to $520 thousand and $513 thousand for the second quarter of 2007 and 2006, respectively.  In addition, net realized securities gains of $195 thousand were recognized
-28-

 
in the second quarter of 2007 due to certain debt and equity securities that were called prior to maturity by the issuers.  Also in the second quarter of 2007, $113 thousand of net realized gains were recognized on the sale of debt and equity securities.  The year to date increase in net realized gains on securities was largely due to the common equity securities that were sold in the first quarter of 2007, resulting in the recognition of $1.0 million of net realized gains.  See additional discussion on securities in Note 3 to the Consolidated Financial Statements.

Noninterest Expense
Noninterest expenses amounted to $17.9 million for the second quarter of 2007, up $595 thousand, or 3.4%, from the same quarter a year ago.  For the six months ended June 30, 2007, noninterest expense totaled $35.0 million, up $2.0 million, or 6.1%.  During the first quarter of 2007, the Corporation prepaid $26.5 million in higher cost advances from FHLBB, resulting in a debt prepayment penalty charge, recorded in noninterest expense, of $1.1 million.  The source of funds for the paydowns was maturities of investments as well as other borrowings.  Excluding debt prepayment penalty expense, noninterest expenses increased $933 thousand, or 2.8%, over the same six-month period last year.

The following table presents a noninterest expense comparison for the three and six months ended June 30, 2007 and 2006:
 
(Dollars in thousands)
 
Three Months
   
Six Months
 
                      %                 
 $
      %   
Periods ended September 30
 
2007
   
2006
   
Chg
   
Chg
   
2007
   
2006
   
Chg
   
Chg
 
Noninterest expense:
                                                   
Salaries and employee benefits
  $
10,285
    $
9,830
    $
455
      5 %   $
20,097
    $
19,449
    $
648
      3 %
Net occupancy
   
1,038
     
1,018
     
20
      2 %    
2,055
     
1,972
     
83
      4 %
Equipment
   
861
     
881
      (20 )     (2 %)    
1,693
     
1,680
     
13
      1 %
Merchant processing costs
   
1,558
     
1,407
     
151
      11 %    
2,577
     
2,294
     
283
      12 %
Outsourced services
   
535
     
496
     
39
      8 %    
1,054
     
1,014
     
40
      4 %
Advertising and promotion
   
572
     
681
      (109 )     (16 %)    
1,001
     
1,118
      (117 )     (11 %)
Legal, audit and professional fees
   
404
     
403
     
1
      %    
854
     
779
     
75
      10 %
Amortization of intangibles
   
348
     
406
      (58 )     (14 %)    
716
     
811
      (95 )     (12 %)
Debt prepayment penalties
   
     
     
      %    
1,067
     
     
1,067
      100 %
Other
   
2,274
     
2,158
     
116
      5 %    
3,870
     
3,867
     
3
      %
Total noninterest expense
  $
17,875
    $
17,280
    $
595
      3 %   $
34,984
    $
32,984
    $
2,000
      6 %

Salaries and employee benefit expense, the largest component of noninterest expense, totaled $10.3 million and $20.1 million, respectively, for the three and six months ended June 30, 2007, up $455 thousand and $648 thousand, respectively, from the same periods in 2006.  The increase was primarily attributable to increases in salaries and wages and performance-based compensation plans.

Merchant processing costs for the three and six months ended June 30, 2007 increased $151 thousand and $283 thousand from the comparable periods in 2006 due to increases in the volume of transactions processed for existing and new customers.  Merchant processing costs represent third-party costs incurred that are directly attributable to handling merchant credit card transactions.

Advertising and promotion expense for the three and six months ended June 30, 2007 decreased by 16% and 11%, respectively, from the same periods in 2006 due to timing of promotions.

Legal, audit and professional fees for the six months ended June 30, 2007 increased $75 thousand, or 9.6%, from the same period last year primarily due to increased consulting expenses.

Debt prepayment penalty expense, resulting from the first quarter 2007 prepayment of $26.5 million in higher cost advances from the FHLBB, amounted to $1.1 million for the six months ended June 30, 2007.

Income Taxes
Income tax expense amounted to $2.9 million and $5.6 million, respectively, for the three and six months ended June 30, 2007 compared to $2.9 million and $5.8 million, respectively for the same periods in 2006.  The Corporation’s effective tax rate for the three and six months ended June 30, 2007 was 31.4%, down slightly from
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32.0% for the same periods in 2006.  These rates differed from the federal rate of 35% due to the benefits of tax-exempt income, the dividends received deduction and income from BOLI.

Financial Condition
Summary
Total assets amounted to $2.396 billion at June 30, 2007, essentially unchanged from December 31, 2006.  Total liabilities declined $3.4 million in the first half of 2007, with other borrowings increasing $12.9 million, total deposits decreasing $8.9 million, and FHLB advances decreasing $5.7 million.  Shareholders’ equity totaled $173.6 million at June 30, 2007, compared to $173.1 million at December 31, 2006.

Securities
Washington Trust’s securities portfolio is managed to generate interest income, to implement interest rate risk management strategies, and to provide a readily available source of liquidity for balance sheet management.  At June 30, 2007 the securities portfolio totaled $679.9 million, down $24.0 million from December 31, 2006 due to sales and maturities.

The net unrealized losses on securities available for sale and held to maturity amounted to $8.1 million at June 30, 2007, compared to $1.7 million at December 31, 2006.  The increase in unrealized losses in the first half of 2007 was primarily attributable to the effect an increase in the intermediate to long term rates had on the Corporation’s securities portfolio.  See Note 3 to the Consolidated Financial Statements for detail of unrealized gains and losses on securities.

Federal Home Loan Bank Stock
The Corporation is required to maintain a level of investment in FHLB stock that currently is based on the level of its FHLB advances.  As of June 30, 2007 and 2006, the Corporation’s investment in FHLB stock totaled $28.7 million.

Loans
Total loans increased by $29.2 million, or 2.0%, in the first half of 2007, including $35.6 million, or 6.1%, in commercial loan growth.  Residential real estate loans declined by $5.3 million, or 0.9%, and consumer loans decreased by $1.1 million, or 0.4%, during the six months ended June 30, 2007.

Asset Quality
Allowance for Loan Losses
Establishing an appropriate level of allowance for loan losses necessarily involves a high degree of judgment.  The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient allowance for loan losses.  For a more detailed discussion on the allowance for loan losses, see additional information in Item 7 under the caption “Application of Critical Accounting Policies and Estimates” of Washington Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

The allowance for loan losses is management’s best estimate of the probable loan losses incurred as of the balance sheet date.  The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans.

At June 30, 2007, the allowance for loan losses was $19.3 million, or 1.30% of total loans, and 651% of total nonaccrual loans.  This compares with an allowance of $18.9 million, or 1.29% of total loans, and 694% of nonaccrual loans at December 31, 2006.  Loan charge-offs, net of recoveries, amounted to $167 thousand and $38 thousand, respectively, for the six months ended June 30, 2007 and 2006.
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Nonperforming Assets
Nonperforming assets are summarized in the following table:
 
(Dollars in thousands)
 
June 30,
   
December 31,
 
   
2007
   
2006
 
Nonaccrual loans 90 days or more past due
  $
2,013
    $
1,470
 
Nonaccrual loans less than 90 days past due
   
956
     
1,253
 
Total nonaccrual loans
   
2,969
     
2,723
 
Other real estate owned, net
   
     
 
Total nonperforming assets
  $
2,969
    $
2,723
 
Nonaccrual loans as a percentage of total loans
    0.20 %     0.19 %
Nonperforming assets as a percentage of total assets
    0.12 %     0.11 %
Allowance for loan losses to nonaccrual loans
    650.96 %     693.87 %
Allowance for loan losses to total loans
    1.30 %     1.29 %

There were no accruing loans 90 days or more past due at June 30, 2007 or December 31, 2006.

Impaired loans consist of all nonaccrual commercial loans.  At June 30, 2007, the recorded investment in impaired loans was $2.0 million, which had a related allowance of $11 thousand.  Also during the six months ended June 30, 2007, interest income recognized on impaired loans amounted to approximately $291 thousand.  Interest income on impaired loans is recognized on a cash basis only.

The following is an analysis of nonaccrual loans by loan category:

(Dollars in thousands)
 
June 30,
   
December 31,
 
   
2007
   
2006
 
Residential real estate
  $
698
    $
721
 
Commercial:
               
Mortgages
   
1,385
     
981
 
Construction and development
   
     
 
Other
   
645
     
831
 
Consumer
   
241
     
190
 
Total nonaccrual loans
  $
2,969
    $
2,723
 

Deposits
Deposits totaled $1.669 billion at June 30, 2007, down $8.9 million, or 0.5%, from December 31, 2006.  Excluding a $16.3 million decrease in brokered certificates of deposit, in-market deposits were up $7.4 million, or 0.5%, for the six months ended June 30, 2007.  Deposit gathering continues to be extremely competitive.

Demand deposits decreased $9.3 million, or 5.0%, from December 31, 2006.  NOW account balances were down $764 thousand, or 0.4%, from the end of 2006.  Savings deposits declined $9.9 million, or 4.8%, during the six months ended June 30, 2007.  Money market account balances increased $3.0 million, or 1.1%, in the first half of 2007.  Time deposits (including brokered certificates of deposit) were up $8.0 million, or 1.0%, during the first half of 2007.  The Corporation utilizes brokered time deposits as part of its overall funding program along with other sources.  Brokered time deposits decreased $16.3 million, or 9.3%, during the first six months of 2007 and amounted to $159.3 million at June 30, 2007. Excluding the brokered time deposits, time deposits rose $7.4 million, or 0.5%, during the six months ended June 30, 2007 due to growth in consumer and commercial certificates of deposit.

Borrowings
The Corporation utilizes advances from the FHLB as well as other borrowings as part of its overall funding strategy.  FHLB advances are used to meet short-term liquidity needs, to purchase securities and to purchase loans from other institutions.  FHLB advances declined $5.7 million during the six months ended June 30, 2007.  See Note 8 to the Consolidated Financial Statements for additional information on borrowings.
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Liquidity and Capital Resources
Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. Washington Trust’s primary source of liquidity is deposits.  Deposits (demand, NOW, money market, savings and time deposits) funded approximately 70% of total average assets in the first half of 2007.  Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and other borrowings), cash flows from the Corporation’s securities portfolios and loan repayments.  In addition, securities designated as available for sale may be sold in response to short-term or long-term liquidity needs.

The Corporation’s Asset/Liability Committee (“ALCO”) establishes and monitors internal liquidity measures to manage liquidity exposure.  Liquidity remained well within target ranges established by the ALCO during the first half of 2007.

For the six months ended June 30, 2007, net cash used in financing activities amounted to $4.0 million.  In the first quarter of 2007, $19.5 million in securities sold under repurchase agreements were executed and $26.5 million in FHLB advances were prepaid.  See additional discussion on borrowings in the Condensed Notes to Consolidated Financial Statements.  Net cash used in investing activities totaled $19.4 million for the six months ended June 30, 2007 and was used primarily to fund loan growth.  Net cash provided by operating activities amounted to $9.4 million for the six months ended June 30, 2007, and was generated primarily by net income.  See the Corporation’s Consolidated Statements of Cash Flows for further information about sources and uses of cash.  See additional discussion in Note 1 to the Consolidated Financial Statements for more information regarding the reclassification of the first quarter 2007 deferred acquisition obligation payment in the Consolidated Statements of Cash Flows.

Total shareholders’ equity amounted to $173.6 million at June 30, 2007, down $550 thousand since December 31, 2006.  The increase in retained earnings reflected the Corporations net income of $12.3 million, and was offset in part by dividends declared of $5.3 million.  The dividend represented a $0.20 per share dividend, an increase from the $0.19 per share rate paid throughout 2006, making 2007 the fifteenth consecutive year with a dividend increase.  Under the Corporation’s 2006 Stock Repurchase Plan, 149,700 shares were repurchased at a total cost of $3.9 million during the first half of 2007.

The ratio of total equity to total assets amounted to 7.2% at June 30, 2007 and December 31, 2006, respectively.  Book value per share as of June 30, 2007 and December 31, 2006 amounted to $13.05 and $12.89, respectively.  The tangible book value per share was $8.79 at June 30, 2007, compared to $8.61 at the end of 2006.

Contractual Obligations and Commitments
The Corporation has entered into numerous contractual obligations and commitments.  The following table summarizes our contractual cash obligation and other commitments at June 30, 2007.

(Dollars in thousands)
 
Payments Due by Period
 
   
Total
   
Less Than
1 Year
   
1-3 Years
   
4-5 Years
   
After
5 Years
 
Contractual Obligations:
                             
FHLB advances (1)
  $
468,827
    $
168,995
    $
177,108
    $
58,895
    $
63,829
 
Junior subordinated debentures
   
22,681
     
     
     
     
22,681
 
Operating lease obligations
   
4,243
     
869
     
1,246
     
801
     
1,327
 
Software licensing arrangements
   
1,201
     
671
     
406
     
124
     
 
Treasury, tax and loan demand note
   
3,868
     
3,868
     
     
     
 
Deferred acquisition obligations
   
3,810
     
1,945
     
1,865
     
     
 
Other borrowed funds
   
19,896
     
27
     
60
     
19,570
     
239
 
Total contractual obligations
  $
524,526
    $
176,375
    $
180,685
    $
79,390
    $
88,076
 
 
(1)  
All FHLB advances are shown in the period corresponding to their scheduled maturity.
 
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(Dollars in thousands)
 
Amount of Commitment Expiration – Per Period
 
   
Total
   
Less Than
1 Year
   
1-3 Years
   
4-5 Years
   
After
5 Years
 
Other Commitments:
                             
Commercial loans
  $
149,090
    $
97,898
    $
11,716
    $
10,200
    $
29,276
 
Home equity lines
   
181,477
     
339
     
3,721
     
7,829
     
169,588
 
Other loans
   
11,542
     
9,068
     
1,782
     
692
     
 
Standby letters of credit
   
9,210
     
9,210
     
     
     
 
Forward loan commitments to:
                                       
Originate loans
   
3,544
     
3,544
     
     
     
 
Sell loans
   
7,498
     
7,498
     
     
     
 
Total commitments
  $
362,361
    $
127,557
    $
17,219
    $
18,721
    $
198,864
 

See additional discussion in Note 10 to the Consolidated Financial Statements for more information regarding the nature and business purpose of financial instruments with off-balance sheet risk and derivative financial instruments.

Off-Balance Sheet Arrangements
For the six months ended June 30, 2007, Washington Trust engaged in no off-balance sheet transactions reasonably likely to have a material effect on the consolidated financial condition.

Asset/Liability Management and Interest Rate Risk
The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk.  Interest rate risk is the risk of loss to future earnings due to changes in interest rates.  The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with Washington Trust’s liquidity, capital adequacy, growth, risk and profitability goals.

The ALCO manages the Corporation’s interest rate risk using income simulation to measure interest rate risk inherent in the Corporation’s on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 12-month horizon, the month 13 to month 24 horizon and a 60-month horizon.  The simulations assume that the size and general composition of the Corporation’s balance sheet remain static over the simulation horizons and take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios.  The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency.

The ALCO reviews simulation results to determine whether the Corporation’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure.  As of June 30, 2007 and December 31, 2006, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation.  The Corporation defines maximum unfavorable net interest income exposure to be a change of no more than 5% in net interest income over the first 12 months, no more than 10% over the second 12 months, and no more than 10% over the full 60-month simulation horizon.  All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where both interest rates and the composition of the Corporation’s balance sheet remain stable for a 60-month period.  In addition to measuring the change in net interest income as compared to an unchanged interest rate scenario, the ALCO also measures the trend of both net interest income and net interest margin over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.

The ALCO reviews a variety of interest rate shift scenario results to evaluate interest risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve shape as well as parallel changes in interest rates.  Because income simulations assume that the Corporation’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

The following table sets forth the estimated change in net interest income from an unchanged interest rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on and off-balance
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sheet financial instruments as of June 30, 2007 and December 31, 2006.  Interest rates are assumed to shift by a parallel 100 or 200 basis points upward or 100 basis points downward over the periods indicated, except for core savings deposits, which are assumed to shift by lesser amounts due to their relative historical insensitivity to market interest rate movements.  Further, deposits are assumed to have certain minimum rate levels below which they will not fall.  It should be noted that the rate scenarios shown do not necessarily reflect the ALCO’s view of the “most likely” change in interest rates over the periods indicated.

   
June 30, 2007
   
December 31, 2006
 
   
Months 1 - 12
   
Months 13 - 24
   
Months 1 - 12
   
Months 13 - 24
 
100 basis point rate decrease
    -2.23 %     -1.69 %     -1.63 %     -2.47 %
100 basis point rate increase
    -1.33 %     -5.97 %     -1.18 %     -5.03 %
200 basis point rate increase
    -0.60 %     -9.15 %     -0.78 %     -8.01 %

The ALCO estimates that the exposure of net interest income to falling rates as compared to an unchanged rate scenario results from a more rapid decline in earning asset yields compared to rates paid in deposits.  If rates were to fall and remain low for a sustained period, certain core savings and time deposit rates could decline more slowly and by a lesser amount than other market rates.  Asset yields would likely decline more rapidly than deposit costs as current asset holdings mature or reprice, since cash flow from mortgage-related prepayments and redemption of callable securities would increase as market rates fall.

The neutral exposure of net interest income to rising rates in Year 1 as compared to an unchanged rate scenario results from a relative balance between anticipated increases in asset yields and funding costs over the near term.  For simulation purposes, core savings deposit rate changes are anticipated to lag other market rates in both timing and magnitude.  The ALCO’s estimate of interest rate risk exposure to rising rate environments, including those involving changes to the shape of the yield curve, incorporates certain assumptions regarding the shift in mix from low-cost core savings deposits to higher-cost deposit categories, which has characterized a shift in funding mix during the current rising interest rate cycle.

The negative exposure of net interest income to rising rates in Year 2 as compared to an unchanged rate scenario is primarily attributable to an increase in funding costs associated with retail deposits.  Increases in interest rates have created greater growth in rate-sensitive money market and time deposits than growth in other lower-cost deposit categories.  The ALCO remodeling process assumes that this shift in deposit mix towards higher cost deposit categories would continue if interest rates were to increase, and that this assumption accurately reflects historical operating conditions in rising rate cycles.  Although asset yields would also increase in a rising interest rate environment, the cumulative impact of relative growth in the rate-sensitive higher cost deposit category suggests that by Year 2 of rising interest rate scenarios, the increase in the Corporation’s cost of funds could result in a relative decline in net interest margin compared to an unchanged rate scenario.

While the ALCO reviews simulation assumptions and back-tests simulation results to ensure that they are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin.  Over time, the repricing, maturity and prepayment characteristics of financial instruments and the composition of the Corporation’s balance sheet may change to a different degree than estimated.  Simulation modeling assumes a static balance sheet, with the exception of certain modeled deposit mix shifts from low-cost core savings deposits to higher-cost money market and time deposits noted above.  The static balance sheet assumption does not necessarily reflect the Corporation’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior.  Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates.  Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates.  The assumed relationship between short-term interest rate changes and core deposit rate and balance changes used in income simulation may differ from the ALCO’s estimates.  Lastly, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments.  Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value.  Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.

The Corporation also monitors the potential change in market value of its available for sale debt securities in changing interest rate environments.  The purpose is to determine market value exposure that may not be captured by
-34-

 
income simulation, but which might result in changes to the Corporation’s capital position.  Results are calculated using industry-standard analytical techniques and securities data.  Available for sale equity securities are excluded from this analysis because the market value of such securities cannot be directly correlated with changes in interest rates.  The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of June 30, 2007 and December 31, 2006 resulting from immediate parallel rate shifts:

(Dollars in thousands)
 
Down 100
   
Up 200
 
   
Basis
   
Basis
 
Security Type
 
Points
   
Points
 
U.S. Treasury and government-sponsored agency securities (noncallable)
   
2,512
      (4,622 )
U.S. government-sponsored agency securities (callable)
   
1,197
      (5,808 )
Mortgage-backed securities
   
7,002
      (17,076 )
Corporate securities
   
361
      (694 )
Total change in market value as of June 30, 2007
  $
11,072
    $ (28,200 )
                 
Total change in market value as of December 31, 2006
  $
11,567
    $ (29,447 )

See additional discussion in Note 10 to the Corporation’s Consolidated Financial Statements for more information regarding the nature and business purpose of financial instruments with off-balance sheet risk and derivative financial instruments.

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk
Information regarding quantitative and qualitative disclosures about market risk appears under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Interest Rate Risk.”

ITEM 4.  Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Corporation carried out an evaluation under the supervision and with the participation of the Corporation’s management, including the Corporation’s principal executive officer and principal financial and accounting officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures as of the end of the quarter ended June 30, 2007.  Based upon that evaluation, the Corporation’s principal executive officer and principal financial and accounting officer concluded that the Corporation’s disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  The Corporation will continue to review and document its disclosure controls and procedures and consider such changes in future evaluations of the effectiveness of such controls and procedures, as it deems appropriate.  There has been no change in our internal control over financial reporting during the period ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II
Other Information
Item 1.  Legal Proceedings
The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business.  Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated financial position or results of operations of the Corporation.

Item 1A.  Risk Factors
There have been no material changes in the risk factors described in Item 1A of Washington Trust’s Annual Report on Form 10-K for the year ended December 31, 2006.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information as of and for the quarter ended June 30, 2007 regarding shares of common stock of the Corporation that were repurchased under the Deferred Compensation Plan, the 2006 Stock Repurchase Plan, the Amended and Restated 1988 Stock Option Plan (the “1988 Plan”), the Bancorp’s 1997 Equity Incentive Plan, as amended (the “1997 Plan”), and the Bancorp’s 2003 Stock Incentive Plan, as amended (the “2003 Plan”).

   
Total number of shares purchased
   
Average price paid per share
   
Total number of shares purchased as part of publicly announced plan(s)
   
Maximum number of shares that may yet be purchased under the plan(s)
 
Deferred Compensation Plan (1)
                       
Balance at beginning of period
                   
N/A
 
4/1/2007 to 4/30/2007
   
458
    $
26.01
     
458
   
N/A
 
5/1/2007 to 5/31/2007
   
1,859
     
24.80
     
1,859
   
N/A
 
6/1/2007 to 6/30/2007
   
220
     
24.98
     
220
   
N/A
 
Total Deferred Compensation Plan
   
2,537
    $
25.04
     
2,537
   
N/A
 
                               
2006 Stock Repurchase Plan (2)
                             
Balance at beginning of period
                           
338,900
 
4/1/2007 to 4/30/2007
   
     
     
     
338,900
 
5/1/2007 to 5/31/2007
   
78,600
    $
25.76
     
78,600
     
260,300
 
6/1/2007 to 6/30/2007
   
10,000
     
24.54
     
10,000
     
250,300
 
Total 2006 Stock Repurchase Plan
   
88,600
    $
25.62
     
88,600
     
250,300
 
                                 
Other (3)
                               
Balance at beginning of period
                         
N/A
 
4/1/2007 to 4/30/2007
   
499
    $
12.95
     
499
   
N/A
 
5/1/2007 to 5/31/2007
   
921
     
11.56
     
921
   
N/A
 
6/1/2007 to 6/30/2007
   
     
     
   
N/A
 
Total Other
   
1,420
    $
12.05
     
1,420
   
N/A
 
Total Purchases of Equity Securities
   
186,462
    $
24.87
     
186,462
         

(1)
The Deferred Compensation Plan was established on January 1, 1999.  This plan allows directors and officers to defer a portion of their compensation.  The deferred compensation is contributed to a rabbi trust that invests the assets of the trust into selected mutual funds as well as shares of the Bancorp’s common stock pursuant to the direction of the plan participants.  The Plan authorizes Bancorp to acquire shares of Bancorp’s common stock to satisfy its obligation under this plan.  All shares are purchased in the open market.
(2)
The 2006 Stock Repurchase Plan was established in December 2006.  A maximum of 400,000 shares were authorized under the plan.  The Bancorp plans to hold the repurchased shares as treasury stock for general corporate purchases.
(3)
Pursuant to the Corporation’s share-based compensation plans, employees may deliver back shares of stock previously issued in payment of the exercise price of stock options.  While required to be reported in this table, such transactions are not reported as share repurchases in the Corporation’s Consolidated Financial Statements.  The Corporation’s share-based compensation plans (the 1988 Plan, the 1997 Plan and the 2003 Plan) have expiration dates of December 31, 1997, April 29 2007 and April 29, 2013, respectively.


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Item 4.                      Submission of Matters to a Vote of Security Holders
(a)  
 The Annual Meeting of Shareholders was held on April 24, 2007.  On the record date of February 23, 2007 there were 13,441,534 shares issued, outstanding and eligible to vote, of which 11,605,794 shares, or 86.239%, were represented at the meeting either in person or by proxy.

(b)  
 The results of matters voted upon are presented below:
i.  
Election of Directors to Serve Until 2010 Annual Meeting: Barry G. Hittner, Esq, Katherine W. Hoxsie, Edward M. Mazze, Ph.D., Kathleen McKeough, and John C. Warren were nominated and duly elected to hold office as Directors of Washington Trust Bancorp, Inc., each to serve a term of three years and until their successors are duly elected and qualified, by the number of votes set forth opposite each person’s name as follows:
 
Term
 
Votes
In Favor
   
Votes
Withheld
 
Barry G. Hittner, Esq
3 years
   
11,025,016
     
580,777
 
Katherine W. Hoxsie
3 years
   
10,024,185
     
581,609
 
Edward M. Mazze, Ph.D.
3 years
   
11,013,714
     
592,080
 
Kathleen McKeough
3 years
   
11,019,923
     
585,871
 
John C. Warren
3 years
   
10,968,199
     
637,595
 

The following additional persons continued as Directors of Washington Trust Bancorp, Inc. following the Annual Meeting:

Gary P. Bennett
Steven J. Crandall
Larry J. Hirsch, Esq.
Mary E. Kennard, Esq.
Vicotr J. Orsinger II, Esq.
H. Douglas Randall, III
Patrick J. Shanahan, Jr.
James P. Sullivan
Neil H. Thorpe
John F. Treanor

ii.  
A proposal for the ratification of KPMG LLP to serve as independent registered public accounting firm of the Corporation for the current fiscal year ending December 31, 2007 was passed by a vote of 11,453,573 shares in favor, 141,119 shares against, with 11,101 abstentions and broker non-votes.

Item 6.  Exhibits
(a) Exhibits.  The following exhibits are included as part of this Form 10-Q:
 
Exhibit Number
 
15.1
Letter re: Unaudited Interim Financial Information - Filed herewith.
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. – Filed herewith.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. – Filed herewith.
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 – Filed herewith. (1)
                              
(1)
These certifications are not “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Exchange Act.


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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


     
WASHINGTON TRUST BANCORP, INC.
     
(Registrant)
       
       
Date:   August 3, 2007
 
By:
/s/ John C. Warren                                         
     
John C. Warren
     
Chairman and Chief Executive Officer
     
(principal executive officer)
       
       
Date:   August 3, 2007
 
By:
/s/ David V. Devault                                      
     
David V. Devault
     
Executive Vice President, Secretary, Treasurer and Chief Financial Officer
     
(principal financial and accounting officer)
       


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Exhibit Index

Exhibit Number
 
15.1
Letter re: Unaudited Interim Financial Information - Filed herewith.
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. – Filed herewith.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. – Filed herewith.
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 – Filed herewith. (1)
                         
(1)
These certifications are not “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Exchange Act.

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