Form 10-Q for Quarter Ended June 30, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark One)
xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended JUNE 30, 2006 or

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

Commission file number: 000-13091
 
WASHINGTON TRUST BANCORP, INC.
 
(Exact name of registrant as specified in its charter)


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

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

(401) 348-1200
(Registrant’s telephone number, including area code)



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

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

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

The number of shares of common stock of the registrant outstanding as of July 31, 2006 was 13,442,052.



-1-
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended June 30, 2006
     
   
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 31.1 Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002  
Exhibit 32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  

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. All statements, other than statements of historical facts, including statements regarding our strategy, effectiveness of investment programs, evaluations of future interest rate trends and liquidity, expectations as to growth in assets, deposits and results of operations, success of acquisitions, future operations, market position, financial position, and prospects, plans, goals and objectives of management are forward-looking statements. The actual results, performance or achievements of the Corporation (as defined below) 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 and trust 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.
-2-
 
 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars in thousands)

 
(Unaudited)
      
   
June 30,
  
December 31,
  
   
2006
  
2005
  
Assets:
              
Cash and due from banks
  
$
44,042
  
$
48,997
  
Federal funds sold and other short-term investments
    
8,133
    
17,166
  
Mortgage loans held for sale
    
1,362
    
439
  
Securities:
              
Available for sale, at fair value; amortized cost $636,298 in 2006 and $620,638 in 2005
    
625,793
    
619,234
  
Held to maturity, at cost; fair value $155,484 in 2006 and $162,756 in 2005
    
160,458
    
164,707
  
Total securities
    
786,251
    
783,941
  
Federal Home Loan Bank stock, at cost
    
33,915
    
34,966
  
Loans:
              
Commercial and other
    
565,609
    
554,734
  
Residential real estate
    
589,194
    
582,708
  
Consumer
    
276,505
    
264,466
  
Total loans
    
1,431,308
    
1,401,908
  
Less allowance for loan losses
    
18,480
    
17,918
  
Net loans
    
1,412,828
    
1,383,990
  
Premises and equipment, net
    
24,261
    
23,737
  
Accrued interest receivable
    
10,749
    
10,594
  
Investment in bank-owned life insurance
    
38,985
    
30,360
  
Goodwill
    
39,963
    
39,963
  
Identifiable intangible assets, net
    
13,598
    
14,409
  
Other assets
    
18,190
    
13,441
  
Total assets
  
$
2,432,277
  
$
2,402,003
  
Liabilities:
              
Deposits:
              
Demand deposits
  
$
184,227
  
$
196,102
  
NOW accounts
    
178,063
    
178,677
  
Money market accounts
    
239,912
    
223,255
  
Savings accounts
    
191,585
    
212,499
  
Time deposits
    
877,010
    
828,725
  
Total deposits
    
1,670,797
    
1,639,258
  
Dividends payable
    
2,554
    
2,408
  
Federal Home Loan Bank advances
    
543,588
    
545,323
  
Junior subordinated debentures
    
22,681
    
22,681
  
Other borrowings
    
7,173
    
9,774
  
Accrued expenses and other liabilities
    
24,155
    
24,113
  
Total liabilities
    
2,270,948
    
2,243,557
  
Shareholders’ Equity:
              
Common stock of $.0625 par value; authorized 30,000,000 shares;
              
issued 13,443,046 shares in 2006 and 13,372,295 in 2005
    
840
    
836
  
Paid-in capital
    
34,516
    
32,778
  
Retained earnings
    
133,880
    
126,735
  
Accumulated other comprehensive loss
    
(7,566
)
  
(1,653
)
Treasury stock, at cost; 13,677 shares in 2006 and 10,519 shares in 2005
    
(341
)
  
(250
)
Total shareholders’ equity
    
161,329
    
158,446
  
Total liabilities and shareholders’ equity
  
$
2,432,277
  
$
2,402,003
  
               
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,
  
2006
  
2005
  
2006
  
2005
  
Interest income:
                          
Interest and fees on loans
  
$
23,130
  
$
19,096
  
$
45,027
  
$
36,921
  
Interest on securities:
                          
Taxable
    
8,648
    
8,285
    
17,060
    
16,719
  
Nontaxable
    
371
    
204
    
699
    
389
  
Dividends on corporate stock and Federal Home Loan Bank stock
    
249
    
625
    
926
    
1,244
  
Interest on federal funds sold and other short-term investments
    
150
    
79
    
265
    
134
  
Total interest income
    
32,548
    
28,289
    
63,977
    
55,407
  
Interest expense:
                          
Deposits
    
11,161
    
7,627
    
21,399
    
14,559
  
Federal Home Loan Bank advances
    
5,745
    
5,670
    
11,104
    
11,219
  
Junior subordinated debentures
    
338
    
-
    
676
    
-
  
Other
    
87
    
20
    
166
    
36
  
Total interest expense
    
17,331
    
13,317
    
33,345
    
25,814
  
Net interest income
    
15,217
    
14,972
    
30,632
    
29,593
  
Provision for loan losses
    
300
    
300
    
600
    
600
  
Net interest income after provision for loan losses
    
14,917
    
14,672
    
30,032
    
28,993
  
Noninterest income:
                          
Wealth management and trust services
    
6,177
    
3,486
    
12,059
    
6,698
  
Service charges on deposit accounts
    
1,236
    
1,168
    
2,355
    
2,179
  
Merchant processing fees
    
1,656
    
1,337
    
2,703
    
2,115
  
Income from bank-owned life insurance
    
346
    
279
    
625
    
551
  
Net gains on loan sales
    
336
    
418
    
612
    
905
  
Net realized gains on securities
    
765
    
3
    
824
    
3
  
Other income
    
931
    
303
    
1,789
    
622
  
Total noninterest income
    
11,447
    
6,994
    
20,967
    
13,073
  
Noninterest expense:
                          
Salaries and employee benefits
    
9,830
    
7,450
    
19,449
    
14,909
  
Net occupancy
    
1,018
    
802
    
1,972
    
1,655
  
Equipment
    
881
    
869
    
1,680
    
1,751
  
Merchant processing costs
    
1,407
    
1,098
    
2,294
    
1,734
  
Advertising and promotion
    
681
    
733
    
1,118
    
1,036
  
Outsourced services
    
496
    
444
    
1,014
    
857
  
Legal, audit and professional fees
    
403
    
520
    
779
    
912
  
Amortization of intangibles
    
406
    
99
    
811
    
246
  
Other
    
2,158
    
1,358
    
3,867
    
2,717
  
Total noninterest expense
    
17,280
    
13,373
    
32,984
    
25,817
  
Income before income taxes
    
9,084
    
8,293
    
18,015
    
16,249
  
Income tax expense
    
2,907
    
2,654
    
5,765
    
5,200
  
Net income
  
$
6,177
  
$
5,639
  
$
12,250
  
$
11,049
  
                           
Weighted average shares outstanding - basic
    
13,419.9
    
13,296.0
    
13,403.4
    
13,289.4
  
Weighted average shares outstanding - diluted
    
13,703.2
    
13,592.3
    
13,699.6
    
13,602.3
  
Per share information:
                          
Basic earnings per share
  
$
0.46
  
$
0.42
  
$
0.91
  
$
0.83
  
Diluted earnings per share
  
$
0.45
  
$
0.41
  
$
0.89
  
$
0.81
  
Cash dividends declared per share
  
$
0.19
  
$
0.18
  
$
0.38
  
$
0.36
  
                           
The accompanying notes are an integral part of these consolidated financial statements.
-4-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
  
(Dollars in thousands)
  
     
Six months ended June 30,
  
2006
  
2005
  
Cash flows from operating activities:
              
Net income
  
$
12,250
  
$
11,049
  
Adjustments to reconcile net income to net cash provided by operating activities:
              
Provision for loan losses
    
600
    
600
  
Depreciation of premises and equipment
    
1,513
    
1,507
  
Net amortization of premium and discount
   
791
    
1,210
  
Net amortization of intangibles
    
811
    
246
  
Share-based compensation
    
360
    
154
  
Earnings from bank-owned life insurance
    
(625
)
  
(551
)
Net gains on loan sales
    
(612
)
  
(905
)
Net realized gains on securities
    
(824
)
  
(3
)
Proceeds from sales of loans
    
18,208
    
28,103
  
Loans originated for sale
    
(18,646
)
  
(28,353
)
Increase in accrued interest receivable, excluding purchased interest
    
(51
)
  
(390
)
Increase in other assets
    
(1,562
)
  
(3,046
)
Increase in accrued expenses and other liabilities
    
42
    
1,121
  
Other, net
    
(101
)
  
37
  
Net cash provided by operating activities
    
12,154
    
10,779
  
Cash flows from investing activities:
              
Purchases of: Mortgage-backed securities available for sale
    
(23,854
)
  
(31,993
)
Other investment securities available for sale
    
(41,868
)
  
(22,223
)
Mortgage-backed securities held to maturity
    
-
    
(17,505
)
Other investment securities held to maturity
    
(12,526
)
  
(14,113
)
Proceeds from sale of: Mortgage-backed securities available for sale
   
1,026
    
-
  
Other investment securities available for sale
    
193
    
41,199
  
Maturities and principal payments of: Mortgage-backed securities available for sale
   
49,168
    
59,193
  
Other investment securities available for sale
    
-
    
30,000
  
Mortgage-backed securities held to maturity
    
8,965
    
13,675
  
Other investment securities held to maturity
    
7,685
    
2,110
  
Remittance (purchase) of Federal Home Loan Bank stock
    
1,051
    
(593
)
Principal collected on loans under loan originations
    
(8,016
)
  
(40,454
)
Purchases of loans, including purchased interest
    
(21,592
)
  
(55,207
)
Purchases of premises and equipment
    
(2,037
)
  
(1,425
)
Purchases of bank-owned life insurance
    
(8,000
)
  
-
  
Net cash used in investing activities
    
(49,805
)
  
(37,336
)
Cash flows from financing activities:
              
Net increase in deposits
    
31,541
    
72,819
  
Net decrease in other borrowings
    
(2,601
)
  
(541
)
Proceeds from Federal Home Loan Bank advances
    
338,104
    
387,683
  
Repayment of Federal Home Loan Bank advances
    
(339,814
)
  
(434,753
)
Purchases of treasury stock, net
    
(91
)
  
20
  
Proceeds from the issuance of common stock under dividend reinvestment plan
    
610
    
-
  
Proceeds from the exercise of share options
    
632
    
226
  
Tax benefit from share option exercises
    
241
    
-
  
Cash dividends paid
    
(4,959
)
  
(4,651
)
Net cash provided by financing activities
    
23,663
    
20,803
  
Net decrease in cash and cash equivalents
    
(13,988
)
  
(5,754
)
Cash and cash equivalents at beginning of year
    
66,163
    
52,081
  
Cash and cash equivalents at end of period
  
$
52,175
  
$
46,327
  
Noncash Investing and Financing Activities: Loans charged off
  
$
151
  
$
238
  
Supplemental Disclosures: Interest payments
    
32,588
    
25,023
  
Income tax payments (refunds)
    
6,400
    
5,241
  
               
The accompanying notes are an integral part of these consolidated financial statements.
              
-5-

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 and trust 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 accounting principles generally accepted in the United States of America (“GAAP”) and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change are the determination of the allowance for loan losses and the review of goodwill and other intangible assets for impairment.

In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) and disclosures necessary to present fairly the Corporation’s financial position as of June 30, 2006 and December 31, 2005, respectively, and the results of operations and cash flows for the interim periods presented. 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 accounting principles generally accepted in the United States of America. 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, 2005.

(2) New Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections”. SFAS No 154 replaces Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. APB Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This Statement also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. This Statement requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. This Statement carries forward without change the guidance contained in APB Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. This Statement also carries forward the guidance in APB Opinion 20 requiring justification of a change in accounting principle on the basis of preferability. This Statement was effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 did not have a material impact on the Corporation’s financial position or results of operations.
-6-
 
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 
In November 2005, the FASB issued FASB Staff Position (“FSP”) 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP provides additional guidance on when an investment in a debt or equity security should be considered impaired, and when that impairment should be considered other-than-temporary and recognized as a loss in earnings. Specifically, the guidance clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. The FSP also requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. This FSP was effective for reporting periods beginning after December 15, 2005. The adoption of FSP 115-1 did not have a material impact on the Corporation’s financial position or results of operations.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140.” 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 Corporation believes the adoption of SFAS No. 155 will 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.” 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 Corporation believes the adoption of SFAS No. 156 will not have a material impact on the Corporation’s financial position or results of operations.

In June 2006, the FASB issued 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 provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The Corporation has not yet determined the potential financial impact of adopting FIN 48.
-7-
 
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  

(3) Share-Based Compensation Arrangements
Washington Trust has three share-based compensation plans, which are described below. Effective January 1, 2006, the fair value recognition provisions of SFAS 123R, “Share-Based Payment”, were adopted on a modified prospective basis. Prior to this date, the provisions of APB No. 25 and related interpretations were applied for option grant accounting.
 
In the Corporation’s consolidated financial statements for the three and six months ended June 30, 2005, the following pro forma net income and earnings per share information was disclosed in accordance with SFAS No. 123 and SFAS No. 148:
 
(Dollars in thousands, except per share amounts)
  
Three Months
  
Six Months
  
       
Ended
  
Ended
  
       
June 30, 2005
  
June 30, 2005
  
 
Net income
    
As reported
  
$
5,639
  
$
11,049
  
Less total share-based compensation determined under
                    
the fair value method for all awards, net of tax
          
(590
)
  
(728
)
Pro forma
        
$
5,049
  
$
10,321
  
                     
Basic earnings per share
    
As reported
  
$
0.42
  
$
0.83
  
Pro forma
        
$
0.38
  
$
0.78
  
Diluted earnings per share
    
As reported
  
$
0.41
  
$
0.81
  
Pro forma
        
$
0.37
  
$
0.76
  

The Bancorp’s 2003 Stock Incentive Plan, as amended (the “2003 Plan”), which is shareholder approved, permits the granting of share options and other equity incentives to officers, employees, directors, and other key persons. Up to 600,000 shares of the Bancorp’s common stock may be used from authorized but unissued shares, treasury stock, shares reacquired by the Corporation, or shares available from expired or terminated awards. No more than 200,000 shares may be issued in the form of awards other than share options or stock appreciation rights. Share options are designated as either non-qualified or incentive share options. Incentive share option awards may be granted at any time until February 20, 2013.

The Bancorp’s 1997 Equity Incentive Plan, as amended (the “1997 Plan”), which is shareholder approved, permits the granting of share options and other equity incentives to key employees, directors, advisors, and consultants. Up to 1,012,500 shares of the Bancorp’s common stock may be used from authorized but unissued shares, treasury stock, shares reacquired by the Corporation, or shares available from expired or terminated awards. Share options are designated as either non-qualified or incentive share options. Incentive share option awards may be granted at any time until April 29, 2007.

The Amended and Restated 1988 Stock Option Plan (the “1988 Plan”), which was shareholder approved, provided for the granting of share options to directors, officers and key employees. The 1988 Plan permitted share options to be granted at any time until December 31, 1997. The 1988 Plan provided for shares of the Bancorp’s common stock to be used from authorized but unissued shares, treasury stock, or shares available from expired awards. Share options were designated as either non-qualified or incentive share options.

The 1988 Plan, the 1997 Plan and the 2003 Plan (collectively, “the Plans”) permit options to be granted with stock appreciation rights ("SARs"), however, no share options have been granted with SARs. Pursuant to the Plans, the exercise price of each share option may not be less than fair market value of the common stock on the date of the grant. In general, the share option price is payable in cash, by the delivery of shares of common stock already owned by the grantee, or a combination thereof. Nonvested share units and shares are valued at the fair market value of the common stock as of the award date. No option, share unit or share awards made prior to January 1, 2003 had requisite vesting periods remaining as of January 1, 2006. Share options awarded during 2003, 2004 and 2005 were granted with a variety of vesting terms including immediate vesting, graded vesting over three-year periods and cliff vesting over three-year periods. Nonvested share units or shares awarded during 2004, 2005 and 2006 were granted with vesting terms ranging from one to five years. Share option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plans).
-8-
 
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  

Amounts recognized in the consolidated financial statements for share option, nonvested share unit and nonvested share awards are as follows:

(Dollars in thousands)
          
   
Three Months
  
Six Months
  
Periods ended June 30,
 
2006
  
2005
  
2006
  
2005
  
Share-based compensation expense
  
$
179
  
$
84
  
$
360
  
$
154
  
Related income tax benefit
   
56
    
30
    
107
    
54
  


A summary of share option activity under the Plans as of June 30, 2006, and changes during the six months ended June 30, 2006, is presented below:
 
(Dollars in thousands)
  
 
      
Weighted
      
   
Number
  
 Weighted
  
Average
      
   
of
  
Average
  
Remaining
  
Aggregate
  
   
Share
  
Exercise
  
Contractual
  
Intrinsic
  
   
Options
  
Price
  
Term (Years)
  
Value
  
Outstanding at January 1, 2006
    
1,198,111
  
$
20.31
    
-
    
-
  
Granted
    
-
    
-
    
-
    
-
  
Exercised
    
67,146
    
15.24
    
-
    
-
  
Forfeited or expired
    
5,583
    
27.13
    
-
    
-
  
Outstanding at June 30, 2006
    
1,125,382
  
$
20.58
    
5.8 years
  
$
8,089
  
Exercisable at June 30, 2006
    
1,096,047
  
$
20.40
    
5.8 years
  
$
8,083
  

The total intrinsic value of share options exercised during the six months ended June 30, 2006 was $774 thousand.

A summary of the status of Washington Trust’s nonvested shares as of June 30, 2006, and changes during the six months ended June 30, 2006, is presented below:
 
       
Weighted
  
   
Number
  
Average
  
   
of
  
Grant Date
  
   
Shares
  
Fair Value
  
 
Nonvested at January 1, 2006
    
55,850
  
$
24.77
  
Granted
    
17,400
    
26.59
  
Vested
    
-
    
-
  
Forfeited
    
(450
)
  
23.61
  
Nonvested at June 30, 2006
    
72,800
  
$
25.21
  

As of June 30, 2006, there was $1.2 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements (including share option and nonvested share awards) granted under the Plans. That cost is expected to be recognized over a weighted average period of 2.2 years.
-9-
 
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 
(4) Securities
Securities available for sale are summarized as follows:
 
(Dollars in thousands)
  
Amortized
  
Unrealized
  
Unrealized
  
Fair
  
   
Cost
  
Gains
  
Losses
  
Value
  
 
June 30, 2006
                          
U.S. Treasury obligations and obligations
                          
of U.S. government-sponsored agencies
  
$
145,126
  
$
63
  
$
(2,503
)
$
142,686
  
Mortgage-backed securities
    
411,237
    
579
    
(14,615
)
  
397,201
  
Corporate bonds
    
63,560
    
322
    
(652
)
  
63,230
  
Corporate stocks
    
16,375
    
6,747
    
(446
)
  
22,676
  
Total
    
636,298
    
7,711
    
(18,216
)
  
625,793
  
 
December 31, 2005
                          
U.S. Treasury obligations and obligations
                          
of U.S. government-sponsored agencies
    
107,135
    
1,332
    
(816
)
  
107,651
  
Mortgage-backed securities
    
436,142
    
1,019
    
(8,987
)
  
428,174
  
Corporate bonds
    
63,565
    
346
    
(716
)
  
63,195
  
Corporate stocks
    
13,796
    
6,573
    
(155
)
  
20,214
  
Total
  
$
620,638
  
$
9,270
  
$
(10,674
)
$
619,234
  

Securities held to maturity are summarized as follows:
 
(Dollars in thousands)
  
Amortized
  
Unrealized
  
Unrealized
  
Fair
  
   
Cost
  
Gains
  
Losses
  
Value
  
 
June 30, 2006
                          
U.S. Treasury obligations and obligations
                          
of U.S. government-sponsored agencies
  
$
42,000
  
$
-
  
$
(936
)
$
41,064
  
Mortgage-backed securities
    
76,487
    
243
    
(2,814
)
  
73,916
  
States and political subdivisions
    
41,971
    
15
    
(1,482
)
  
40,504
  
Total
    
160,458
    
258
    
(5,232
)
  
155,484
  
 
December 31, 2005
                          
U.S. Treasury obligations and obligations
                          
of U.S. government-sponsored agencies
    
47,250
    
-
    
(797
)
  
46,453
  
Mortgage-backed securities
    
84,960
    
768
    
(1,527
)
  
84,201
  
States and political subdivisions
    
32,497
    
72
    
(467
)
  
32,102
  
Total
  
$
164,707
  
$
840
  
$
(2,791
)
$
162,756
  

Securities available for sale and held to maturity with a fair value of $580.5 million and $564.3 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, 2006 and December 31, 2005, respectively. In addition, securities available for sale and held to maturity with a fair value of $11.1 million and $13.8 million were collateralized for the discount window at the Federal Reserve Bank at June 30, 2006 and December 31, 2005, 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 $2.2 million were designated in a rabbi trust for a nonqualified retirement plan at June 30, 2006 and December 31, 2005, respectively.

At June 30, 2006 and December 31, 2005, the available for sale and held to maturity securities portfolio included $15.5 million and $3.4 million of net pretax unrealized losses, respectively. Included in these net amounts were gross unrealized losses amounting to $23.4 million and $13.5 million at June 30, 2006 and December 31, 2005, respectively.

The following tables summarize, for all securities in an unrealized loss position at June 30, 2006 and December 31, 2005, respectively, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position.
-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 June 30, 2006
  
#
  
Value
  
Losses
  
#
  
Value
  
Losses
  
#
  
Value
  
Losses
  
U.S. Treasury obligations
                                                       
and obligations of U.S. government-sponsored agencies
    
13
  
$
110,346
  
$
1,546
    
11
  
$
67,357
  
$
1,893
    
24
  
$
177,703
  
$
3,439
  
Mortgage-backed securities
    
47
    
118,588
    
3,039
    
74
    
285,004
    
14,389
    
121
    
403,592
    
17,428
  
States and
                                                       
political subdivisions
    
46
    
29,603
    
1,122
    
14
    
7,380
    
360
    
60
    
36,983
    
1,482
  
Corporate bonds
    
5
    
13,033
    
277
    
10
    
28,389
    
375
    
15
    
41,422
    
652
  
Subtotal, debt securities
    
111
    
271,570
    
5,984
    
109
    
388,130
    
17,017
    
220
    
659,700
    
23,001
  
Corporate stocks
    
10
    
8,195
    
370
    
1
    
435
    
76
    
11
    
8,630
    
446
  
Total temporarily
                                                       
impaired securities
    
121
  
$
279,765
  
$
6,354
    
110
  
$
388,565
  
$
17,093
    
231
  
$
668,330
  
$
23,447
  

(Dollars in thousands)
  
Less than 12 Months
  
12 Months or Longer
  
Total
  
       
Fair
  
Unrealized
      
Fair
  
Unrealized
      
Fair
  
Unrealized
  
At December 31, 2005
  
#
  
Value
  
Losses
  
#
  
Value
  
Losses
  
#
  
Value
  
Losses
  
U.S. Treasury obligations
                                                       
and obligations of U.S. government-sponsored agencies
    
12
  
$
70,586
  
$
827
    
6
  
$
43,464
  
$
786
    
18
  
$
114,050
  
$
1,613
  
Mortgage-backed securities
    
56
    
178,688
    
2,565
    
47
    
238,844
    
7,949
    
103
    
417,532
    
10,514
  
States and
                                                       
political subdivisions
    
33
    
19,129
    
349
    
5
    
3,557
    
118
    
38
    
22,686
    
467
  
Corporate bonds
    
5
    
10,929
    
75
    
9
    
25,019
    
641
    
14
    
35,948
    
716
  
Subtotal, debt securities
    
106
    
279,332
    
3,816
    
67
    
310,884
    
9,494
    
173
    
590,216
    
13,310
  
Corporate stocks
    
6
    
2,617
    
126
    
1
    
483
    
28
    
7
    
3,100
    
155
  
Total temporarily
                                                       
impaired securities
    
112
  
$
281,949
  
$
3,942
    
68
  
$
311,367
  
$
9,522
    
180
  
$
593,316
  
$
13,465
  

For those debt securities whose amortized cost exceeds fair value, the primary cause is related to interest rates. The majority of debt securities reported in an unrealized loss position at June 30, 2006 were purchased during 2005, 2004 and 2003, during which time interest rates were at or near historical lows. The relative increase in short and medium term interest rates resulted in a decline in market value for these debt securities. The Corporation believes that the nature and duration of impairment on its debt security holdings are primarily a function of future 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 debt securities in an unrealized loss position at June 30, 2006 consisted of 220 debt security holdings. The largest loss percentage of any single holding was 7.21% 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, 2006 consisted of 11 holdings of financial and commercial entities. The largest loss percentage position of any single holding was 14.84% of its cost.
-11-
 
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  

(5) Loan Portfolio
The following is a summary of loans:
 
(Dollars in thousands)
  
June 30, 2006
  
December 31, 2005
  
   
Amount
  
% 
  
Amount
   %   
Commercial:
                          
Mortgages (1)
  
$
273,186
    
19
%
$
291,292
    
21
%
Construction and development (2)
    
33,768
    
2
%
  
37,190
    
3
%
Other (3)
    
258,655
    
19
%
  
226,252
    
16
%
Total commercial
    
565,609
    
40
%
  
554,734
    
40
%
                           
Residential real estate:
                          
Mortgages (4)
    
568,914
    
40
%
  
565,680
    
40
%
Homeowner construction
    
20,280
    
1
%
  
17,028
    
2
%
Total residential real estate
    
589,194
    
41
%
  
582,708
    
42
%
                           
Consumer
                          
Home equity lines
    
153,037
    
11
%
  
161,100
    
11
%
Home equity loans
    
84,030
    
6
%
  
72,288
    
5
%
Other
    
39,438
    
2
%
  
31,078
    
2
%
Total consumer
    
276,505
    
19
%
  
264,466
    
18
%
Total loans (5)
  
$
1,431,308
    
100
%
$
1,401,908
    
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 9 for additional discussion of FHLB borrowings).
(5) Net of unamortized loan origination fees, net of costs, totaling $302 thousand and $373 thousand at June 30, 2006 and December 31, 2005, respectively. Also includes $484 thousand and $753 thousand of premium, net of discount, on purchased loans at June 30, 2006 and December 31, 2005, respectively.

(6) 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,
  
2006
  
2005
  
2006
  
2005
  
Balance at beginning of period
  
$
18,247
  
$
17,058
  
$
17,918
  
$
16,771
  
Provision charged to expense
    
300
    
300
    
600
    
600
  
Subtotal
    
18,547
    
17,358
    
18,518
    
17,371
  
                           
Charge-offs
    
(113
)
  
(134
)
  
(151
)
  
(238
)
Recoveries
    
46
    
218
    
113
    
309
  
Net recoveries (charge-offs)
    
(67
)
  
84
    
(38
)
  
71
  
Balance at end of period
  
$
18,480
  
$
17,442
  
$
18,480
  
$
17,442
  
-12-
 
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 
(7) Goodwill and Other Intangibles
The changes in the carrying value of goodwill and other intangible assets for the six months ended June 30, 2006 are as follows:
 
Goodwill
       
Wealth
      
(Dollars in thousands)
  
Commercial
  
Management
      
   
Banking
  
Service
      
   
Segment
  
Segment
  
Total
  
Balance at December 31, 2005
  
$
22,591
  
$
17,372
  
$
39,963
  
Goodwill acquired during the period
    
-
    
-
    
-
  
Impairment recognized
    
-
    
-
    
-
  
Balance at June 30, 2006
  
$
22,591
  
$
17,372
  
$
39,963
  

Other Intangible Assets
   
Core Deposit
  
Advisory
  
Non-compete
      
   
Intangible
  
Contracts
  
Agreements
  
Total
  
Balance at December 31, 2005
  
$
911
  
$
13,220
  
$
278
  
$
14,409
  
Amortization
    
131
    
656
    
24
    
811
  
Balance at June 30, 2006
  
$
780
  
$
12,564
  
$
254
  
$
13,598
  

Amortization of intangible assets for the six months ended June 30, 2006, totaled $811 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
      
   
Deposits
  
Contracts
  
Agreements
  
Total
  
Estimated amortization expense:
                          
2006 (full year)
  
$
261
  
$
1,283
  
$
49
  
$
1,593
  
2007
    
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
  

The components of intangible assets at June 30, 2006 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
    
2,217
    
1,093
    
893
    
4,203
  
Net amount
  
$
780
  
$
12,564
  
$
254
  
$
13,598
  

(8) 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 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:
-13-
 
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 
(Dollars in thousands)
  
June 30,
2006
  
December 31, 2005
  
Financial instruments whose contract amounts represent credit risk:
              
Commitments to extend credit:
              
Commercial loans
  
$
108,573
  
$
105,971
  
Home equity lines
    
180,301
    
174,073
  
Other loans
    
11,844
    
17,271
  
Standby letters of credit
    
11,056
    
10,986
  
Financial instruments whose notional amounts exceed the amount of credit risk:
              
Forward loan commitments:
              
Commitments to originate fixed rate mortgage loans to be sold
    
2,668
    
2,188
  
Commitments to sell fixed rate mortgage loans
    
4,034
    
2,626
  

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, 2006 and December 31, 2005, the maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered, totaled $11.1 million and $11.0 million, respectively. At June 30, 2006 and December 31, 2005, there was no liability to beneficiaries resulting from standby letters of credit.

At June 30, 2006, 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, 2006 and December 31, 2005 and the respective changes in fair values for the six months ended June 30, 2006 and 2005 were insignificant.

(9) 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,
  
   
2006
  
2005
  
FHLB advances
  
$
543,588
  
$
545,323
  

In addition to outstanding advances, the Corporation also has access to an unused line of credit amounting to $8.0 million at June 30, 2006 and December 31, 2005. Under 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
-14-
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, 2006 and December 31, 2005. Included in the collateral were securities available for sale and held to maturity with a fair value of $497.2 million and $498.0 million that were specifically pledged to secure FHLB borrowings at June 30, 2006 and December 31, 2005, respectively. Unless there is an event of default under the agreement with the FHLB, the Corporation may use, encumber or dispose of any portion of the collateral in excess of the amount required to secure FHLB borrowings, except for that collateral that has been specifically pledged.

Junior Subordinated Debentures
In connection with the Weston Financial Group, Inc. (“Weston Financial”) acquisition, trust preferred securities totaling $22 million were issued in the third quarter of 2005 by WT Capital Trust I (“Trust I”) and WT Capital Trust II (“Trust II”), capital trusts created by the Bancorp. In accordance with FASB Interpretation 46-R, “Consolidation of Variable Interest Entities - Revised”, Trust I and Trust II are not consolidated into the Corporation’s financial statements; however, the Corporation reflects the amounts of junior subordinated debentures payable to Trust I and Trust II as debt in its financial statements. At June 30, 2006 and December 31, 2005, junior subordinated debentures payable amounted to $22.7 million.

Other Borrowings
The following is a summary of other borrowings:
 
(Dollars in thousands)
  
June 30,
  
December 31,
  
   
2006
  
2005
  
Treasury, Tax and Loan demand note balance
  
$
1,122
  
$
3,794
  
Deferred acquisition obligations
    
5,592
    
5,469
  
Other
    
459
    
511
  
Other borrowings
  
$
7,173
  
$
9,774
  

There were no securities sold under repurchase agreements outstanding at June 30, 2006 and December 31, 2005. Securities sold under repurchase agreements generally mature within 90 days. 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.

(10) Defined Benefit Pension Plans
The Corporation’s noncontributory tax-qualified defined benefit pension plan covers substantially all employees. Benefits are based on an employee’s years of service and highest 3-year compensation. The plan is funded on a current basis, in compliance with the requirements of the Employee Retirement Income Security Act of 1974, as amended. The Corporation also has non-qualified retirement plans to provide supplemental retirement benefits to certain employees, as defined in the plans.

The actuarial assumptions used for the non-qualified retirement plans are the same as those used for the Corporation’s tax-qualified pension plan. The non-qualified retirement plans provide for the designation of assets in rabbi trusts. At June 30, 2006 and December 31, 2005, securities available for sale and other assets designated for this purpose with a carrying value of $2.6 million and $2.8 million, respectively, were included in the Corporation’s Consolidated Balance Sheets.
-15-
 
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  

Components of Net Periodic Benefit Costs:
 
(Dollars in thousands)
  
Qualified
  
Non-Qualified
  
   
Pension Plan
  
Retirement Plans
  
Six months ended June 30,
    
2006
    
2005
    
2006
    
2005
  
Service cost
  
$
1,034
  
$
935
  
$
176
  
$
156
  
Interest cost
    
825
    
761
    
233
    
218
  
Expected return on plan assets
    
(900
)
  
(843
)
  
-
    
-
  
Amortization of transition asset
    
(3
)
  
(3
)
  
-
    
-
  
Amortization of prior service cost
    
(17
)
  
15
    
32
    
38
  
Recognized net actuarial loss
    
159
    
62
    
107
    
66
  
Net periodic benefit cost
  
$
1,098
  
$
927
  
$
548
  
$
478
  

Assumptions:
The measurement date and weighted-average assumptions used to determine net periodic benefit cost for the six months ended June 30, 2006 and 2005 were as follows:
 
   
Qualified
  
Non-Qualified
  
   
Pension Plan
  
Retirement Plans
  
   
2006
  
2005
  
2006
  
2005
  
 
Measurement date
    
Sept. 30, 2005
    
Sept. 30, 2004
    
Sept. 30, 2005
    
Sept. 30, 2004
  
Discount rate
    
5.50
%
  
6.00
%
  
5.50
%
  
6.00
%
Expected long-term return on plan assets
    
8.25
%
  
8.25
%
  
-
    
-
  
Rate of compensation increase
    
4.25
%
  
4.25
%
  
4.25
%
  
4.25
%

Employer Contributions:
The Corporation previously disclosed in its financial statements for the year ended December 31, 2005 that it expected to contribute $1.3 million to its qualified pension plan and $335 thousand in benefit payments to its non-qualified retirement plans in 2006. As of June 30, 2006, $1.3 million of contributions have been made to the qualified pension plan and $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 2006.

(11) 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.
-16-
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 
(12) Shareholders’ Equity
The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios at June 30, 2006 and December 31, 2005, 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, 2006:
                                      
Total Capital (to Risk-Weighted Assets):
                                      
Corporation
  
$
157,634
    
10.85
%
$
116,182
    
8.00
%
$
145,228
    
10.00
%
Bank
  
$
161,132
    
11.10
%
$
116,110
    
8.00
%
$
145,137
    
10.00
%
Tier 1 Capital (to Risk-Weighted Assets):
                                      
Corporation
  
$
136,637
    
9.41
%
$
58,091
    
4.00
%
$
87,137
    
6.00
%
Bank
  
$
140,147
    
9.66
%
$
58,055
    
4.00
%
$
87,082
    
6.00
%
Tier 1 Capital (to Average Assets): (1)
                                      
Corporation
  
$
136,637
    
5.73
%
$
95,332
    
4.00
%
$
119,165
    
5.00
%
Bank
  
$
140,147
    
5.88
%
$
95,288
    
4.00
%
$
119,110
    
5.00
%
                                       
As of December 31, 2005:
                                      
Total Capital (to Risk-Weighted Assets):
                                      
Corporation
  
$
147,454
    
10.51
%
$
112,221
    
8.00
%
$
140,277
    
10.00
%
Bank
  
$
151,383
    
10.80
%
$
112,152
    
8.00
%
$
140,190
    
10.00
%
Tier 1 Capital (to Risk-Weighted Assets):
                                      
Corporation
  
$
127,023
    
9.06
%
$
56,111
    
4.00
%
$
84,166
    
6.00
%
Bank
  
$
130,962
    
9.34
%
$
56,076
    
4.00
%
$
84,114
    
6.00
%
Tier 1 Capital (to Average Assets): (1)
                                      
Corporation
  
$
127,023
    
5.45
%
$
93,285
    
4.00
%
$
116,606
    
5.00
%
Bank
  
$
130,962
    
5.62
%
$
93,254
    
4.00
%
$
116,568
    
5.00
%
 
(1)  
Leverage ratio

As previously disclosed, in connection with the Weston Financial acquisition, trust preferred securities totaling $22 million were issued in the third quarter of 2005 by Trust I and Trust II, capital trusts created by the Bancorp. In accordance with FASB Interpretation 46-R, “Consolidation of Variable Interest Entities - Revised”, Trust I and Trust II are not consolidated into the Corporation’s financial statements; however, the Corporation reflects the amounts of junior subordinated debentures payable to Trust I and Trust II as debt in its financial statements. The trust preferred securities qualify as Tier 1 capital.

The Corporation’s capital ratios at June 30, 2006 place the Corporation in the “well-capitalized” category according to regulatory standards. On March 1, 2005, the Federal Reserve Board issued a final rule that would retain trust preferred securities in Tier 1 capital of bank holding companies, but with stricter quantitative limits and clearer standards. Under the proposal, after a five-year transition period that would end on March 31, 2009, the aggregate amount of trust preferred securities would be limited to 25% of Tier 1 capital elements, net of goodwill. The Corporation has evaluated the potential impact of such a change on its Tier 1 capital ratio and has concluded that the regulatory capital treatment of the trust preferred securities in the Corporation’s total capital ratio would be unchanged.

(13) Comprehensive Income
(Dollars in thousands)
      
       
Six months ended June 30,
  
2006
  
2005
  
Net income
  
$
12,250
  
$
11,049
  
               
Unrealized holding losses on securities available for sale, net of tax
    
(5,266
)
  
(1,673
)
Reclassification adjustments for gains arising during the period, net of tax
    
(647
)
  
(2
)
Total comprehensive income
  
$
6,337
  
$
9,374
  
-17-
 
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, restricted stock units 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,
  
2006
  
2005
  
2006
  
2005
  
                           
Net income
  
$
6,177
  
$
5,639
  
$
12,250
  
$
11,049
  
                           
Weighted average basic shares
    
13,419.9
    
13,296.0
    
13,403.4
    
13,289.4
  
Dilutive effect of:
                          
Options
    
242.4
    
272.4
    
258.3
    
294.3
  
Other
    
40.9
    
23.9
    
37.9
    
18.6
  
Weighted average diluted shares
    
13,703.2
    
13,592.3
    
13,699.6
    
13,602.3
  
                           
Earnings per share:
                          
Basic
  
$
0.46
  
$
0.42
  
$
0.91
  
$
0.83
  
Diluted
  
$
0.45
  
$
0.41
  
$
0.89
  
$
0.81
  

(15) 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 table presents 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,
  
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
Net interest income (expense)
  
$
13,273
  
$
13,186
  
$
(27
)
$
(13
)
$
1,971
  
$
1,799
  
$
15,217
  
$
14,972
  
Noninterest income
   
4,327
    
3,224
    
6,737
    
3,486
    
383
    
284
    
11,447
    
6,994
  
Total income
    
17,600
    
16,410
    
6,710
    
3,473
    
2,354
    
2,083
    
26,664
    
21,966
  
                                                   
Provision for loan losses
    
300
    
300
    
-
    
-
    
-
    
-
    
300
    
300
  
Depreciation and
amortization expense
    
574
    
628
    
425
    
163
    
191
    
57
    
1,190
    
848
  
Other noninterest expenses
    
9,883
    
8,648
    
4,442
    
2,076
    
1,765
    
1,801
    
16,090
    
12,525
  
Total noninterest expenses
    
10,757
    
9,576
    
4,867
    
2,239
    
1,956
    
1,858
    
17,580
    
13,673
  
Income before income taxes
    
6,843
    
6,834
    
1,843
    
1,234
    
398
    
225
    
9,084
    
8,293
  
Income tax expense (benefit)
    
2,384
    
2,377
    
720
    
434
    
(197
)
  
(157
)
  
2,907
    
2,654
  
Net income
  
$
4,459
  
$
4,457
  
$
1,123
  
$
800
  
$
595
  
$
382
  
$
6,177
  
$
5,639
  
                                                   
Total assets at period end
    
1,514,253
    
1,427,729
    
33,585
    
4,676
    
884,439
    
906,859
    
2,432,277
    
2,339,264
  
Expenditures for
long-lived assets
    
726
    
856
    
106
    
144
    
107
    
113
    
939
    
1,113
  
-18-
 
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  

(Dollars in thousands)
                  
   
Commercial
Banking
  
Wealth Management Services
  
Corporate
  
Consolidated
Total
  
Six months ended June 30,
  
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
Net interest income (expense)
  
$
26,415
  
$
25,857
  
$
(51
)
$
(32
)
$
4,268
  
$
3,768
  
$
30,632
  
$
29,593
  
Noninterest income
   
7,076
    
5,798
    
13,177
    
6,698
    
714
    
577
    
20,967
    
13,073
  
Total income
    
33,491
    
31,655
    
13,126
    
6,666
    
4,982
    
4,345
    
51,599
    
42,666
  
                                                   
Provision for loan losses
    
600
    
600
    
-
    
-
    
-
    
-
    
600
    
600
  
Depreciation and
amortization expense
    
1,132
    
1,301
    
844
    
341
    
348
    
111
    
2,324
    
1,753
  
Other noninterest expenses
    
18,198
    
16,490
    
8,784
    
4,156
    
3,678
    
3,418
    
30,660
    
24,064
  
 
Total noninterest expenses
    
19,930
    
18,391
    
9,628
    
4,497
    
4,026
    
3,529
    
33,584
    
26,417
  
Income before income taxes
    
13,561
    
13,264
    
3,498
    
2,169
    
956
    
816
    
18,015
    
16,249
  
Income tax expense (benefit)
    
4,720
    
4,623
    
1,378
    
764
    
(333
)
  
(187
)
  
5,765
    
5,200
  
Net income
  
$
8,841
  
$
8,641
  
$
2,120
  
$
1,405
  
$
1,289
  
$
1,003
  
$
12,250
  
$
11,049
  
                                                   
Total assets at period end
    
1,514,253
    
1,427,729
    
33,585
    
4,676
    
884,439
    
906,859
    
2,432,277
    
2,339,264
  
Expenditures for
long-lived assets
    
1,514
    
1,074
    
360
    
163
    
163
    
188
    
2,037
    
1,425
  

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 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. The increase in revenues and expenses for this segment in the 2006 is primarily attributable to the acquisition of Weston Financial completed on August 31, 2005.

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.

(15) Subsequent Event
In July 2006, a portfolio management strategy was approved by the Executive Committee of the Board of Directors under which approximately $19.0 million of mortgage-backed securities were sold, resulting in a realized loss of $1.1 million and certain equity securities were sold resulting in a realized gain of approximately $1.1 million. The proceeds from these transactions will be used to reduce FHLB advances during the third quarter of 2006.
-19-

With respect to the unaudited consolidated financial statements of Washington Trust Bancorp, Inc. and Subsidiaries at June 30, 2006 and for the three and six months ended June 30, 2006 and 2005, 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 8, 2006 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, 2006, the related consolidated statements of income for the three and six-month periods ended June 30, 2006 and 2005 and the related consolidated statements of cash flows for the six-month periods ended June 30, 2006 and 2005. 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, 2005, 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 15, 2006, 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, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

KPMG LLP

Providence, Rhode Island
August 8, 2006
-20-

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

Forward-Looking Statements
This report contains statements that are “forward-looking statements.” All statements, other than statements of historical facts, including statements regarding our strategy, effectiveness of investment programs, evaluations of future interest rate trends and liquidity, expectations as to growth in assets, deposits and results of operations, success of acquisitions, future operations, market position, financial position, and prospects, plans, goals and objectives of management are forward-looking statements. We may also make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “outlook,” “will,” “should,” and other expressions which predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Corporation. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Corporation to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

Some of the factors that might cause these differences include the following: changes in general national or regional economic conditions, changes in interest rates, reductions in the market value of wealth management and trust assets under administration, reductions in loan demand, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in loan defaults and charge-off rates, changes in the size and nature of the Corporation’s competition, changes in legislation or regulation and accounting principles, policies and guidelines and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under “Risk Factors” in Item 1A of Washington Trust’s Annual Report on Form 10-K for the year ended December 31, 2005 may result in these differences. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

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 accounting principles generally accepted in the United States 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 2005 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, 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.

Results of Operations
Overview
Net income for the second quarter of 2006 was $6.2 million, an increase of 9.5% from the $5.6 million reported for the second quarter of 2005. On a per diluted share basis, the Corporation earned $0.45 for the second quarter of 2006, up $0.04, or 9.8%, from the same quarter in 2005. The rates of return on average equity and average assets for the three months ended June 30, 2006 were 15.28% and 1.02%, up from 14.58% and 0.97%, respectively, for the same period in 2005.

Net income for the six months ended June 30, 2006 amounted to $12.3 million, an increase of 10.9% from the $11.0 million reported for the same period a year ago. On a diluted earnings per share basis, the Corporation earned $0.89 for the first half of 2006, up $0.08 from the 81 cents reported for the first half of 2005. The returns on average equity and average assets for the six months ended June 30, 2006 were 15.19% and 1.02%, respectively, compared to 14.39% and 0.95%, respectively, for the comparable period in 2005.
-21-

Selected financial highlights are presented in the table below.

(Dollars in thousands, except per share amounts)
          
   
Three Months
  
Six Months
  
Periods ended June 30,
  
2006
  
2005
  
2005
  
2005
  
                           
Earnings:
                          
Net income
  
$
6,177
  
$
5,639
  
$
12,250
  
$
11,049
  
Diluted earnings per share
    
0.45
    
0.41
    
0.89
    
0.81
  
Dividends declared per common share
    
0.19
    
0.18
    
0.38
    
0.36
  
                           
Select Ratios:
                          
Return on average assets
    
1.02
%
  
0.97
%
  
1.02
%
  
0.95
%
Return on average shareholders equity
    
15.28
%
  
14.58
%
  
15.19
%
  
14.39
%
Interest rate spread (taxable equivalent basis)
    
2.43
%
  
2.48
%
  
2.49
%
  
2.49
%
Net interest margin (taxable equivalent basis)
    
2.75
%
  
2.76
%
  
2.79
%
  
2.76
%
                           
                           
 
    
June 30,
    
March 31,
    
Dec. 31,
    
June 30,
  
As of
    
2006
    
2006
    
2005
    
2005
  
                           
Book value per share
  
$
12.01
  
$
11.92
  
$
11.86
  
$
11.79
  
Tangible book value per common share
    
8.02
    
7.90
    
7.79
    
10.01
  
Market value per share
    
27.72
    
28.07
    
26.18
    
27.67
  
                           

On August 31, 2005, the Corporation completed the acquisition of Weston Financial Group, Inc. (“Weston Financial”), a registered investment advisor and financial planning company located in Wellesley, Massachusetts, with broker-dealer and insurance agency subsidiaries. The results of Weston Financial’s operations have been included in the Consolidated Statements of Income since that date. The acquisition of Weston Financial increased the size and range of products and services offered by Washington Trust’s wealth management group.

Net Interest Income
Net interest income is the difference between interest earned on loans and investments and interest paid on deposits and other borrowings, and continues to be the primary source of Washington Trust’s operating income. Included in interest income are loan prepayment fees and certain other fees, such as late charges. 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.

Net interest income totaled $15.2 million and $30.6 million for the three and six months ended June 30, 2006, respectively, up 1.6% and 3.5%, respectively, from the corresponding periods in 2005. In the second quarter of 2006, no dividend income was recognized nor included in net interest income on the Corporation’s investment in Federal Home Loan Bank of Boston (“FHLB”) stock due to a timing change made by the FHLB in its dividend payment schedule. The Corporation estimates that it would have otherwise recorded approximately $450 thousand of FHLB stock dividend income in the second quarter. The FHLB has indicated that it intends to pay dividends during the third quarter with a catch-up for the delayed dividend, although the amount of such dividends has not yet been announced.

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 three and six months ended June 30, 2006 amounted to $15.6 million and $31.3 million, respectively, up 2.3% and 4.0% from the same periods a year ago. The net interest margin (annualized tax-equivalent net interest income as a percentage of average interest-earning assets) amounted to 2.75% for the second quarter of 2006, down 1 basis point from the second quarter last year and down 9 basis points from the first quarter of 2006. The decline in the net interest margin from the first quarter of 2006 was largely due to the FHLB dividend schedule change, which was approximately 8 basis points. The continuing rise in short-term interest rates in
-22-
the first half of 2006 and the shift in the mix of deposits from lower cost savings accounts into premium money market accounts and certificates of deposit have also affected the margin.

Average interest-earning assets for the three and six months ended June 30, 2006 increased $64.4 million and $61.2 million, respectively, over the amounts reported for the same periods last year. This increase was mainly due to growth in the loan portfolio, which was partially offset by reductions in the securities portfolio. The yield on total loans for the three and six months ended June 30, 2006 increased 68 and 65 basis points, respectively, from the comparable 2005 periods. The contribution of loan prepayment and other fees to the yield on total loans was 9 and 7 basis points, respectively, for the three and six months ended June 30, 2006. Comparable amounts for the three and six months ended June 30, 2005 were 5 and 4 basis points, respectively. Total average securities for the three and six months ended June 30, 2006 decreased $47.5 million and $64.2 million, respectively, from the same periods last year, as the flattening of the yield curve has 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, 2006 increased 39 and 47 basis points, respectively, from the comparable 2005 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, runoff of lower yielding securities and higher marginal rates on reinvestment of cash flows in 2006 relative to the prior year. The Corporation continues to monitor appropriate strategies to manage rising funding costs and more slowly increasing investment yields given the flat yield curve.

For the three and six months ended June 30, 2006, average interest-bearing liabilities rose $86.3 million and $77.9 million, respectively, over the amounts reported for the comparable periods last year. The Corporation experienced growth in time deposits and money market accounts, and declines in NOW accounts, savings accounts and FHLB advances. Included in time deposits were brokered certificates of deposit, which are utilized by the Corporation as part of its overall funding program along with FHLB advances and other sources. The balance of average FHLB advances for the three and six months ended June 30, 2006 decreased $76.8 million and $92.4 million, respectively, while the average rate paid on FHLB advances increased 55 and 54 basis points, respectively, from the same periods a year ago.
-23-
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,
  
2006
  
2005
  
   
Average
      
Yield/
  
Average
      
Yield/
  
(Dollars in thousands)
  
Balance
  
Interest
  
Rate
  
Balance
  
Interest
  
Rate
  
Assets:
                                      
Residential real estate loans
  
$
590,595
  
$
7,505
    
5.10
%
$
558,645
  
$
6,889
    
4.95
%
Commercial and other loans
    
568,937
    
11,049
    
7.79
%
  
518,025
    
8,922
    
6.91
%
Consumer loans
    
272,819
    
4,633
    
6.81
%
  
243,756
    
3,329
    
5.48
%
Total loans
    
1,432,351
    
23,187
    
6.49
%
  
1,320,426
    
19,140
    
5.81
%
Federal funds sold and
                                     
other short-term investments
    
12,827
    
150
    
4.69
%
  
12,018
    
79
    
2.64
%
Taxable debt securities
    
737,987
    
8,648
    
4.70
%
  
804,232
    
8,285
    
4.13
%
Nontaxable debt securities
    
39,659
    
570
    
5.76
%
  
21,369
    
315
    
5.91
%
Corporate stocks and FHLB stock
    
51,128
    
343
    
2.69
%
  
51,511
    
720
    
5.61
%
Total securities
    
841,601
    
9,711
    
4.63
%
  
889,130
    
9,399
    
4.24
%
Total interest-earning assets
    
2,273,952
    
32,898
    
5.80
%
  
2,209,556
    
28,539
    
5.18
%
Non interest-earning assets
    
154,648
                
127,417
              
Total assets
  
$
2,428,600
              
$
2,336,973
              
Liabilities and Shareholders’ Equity:
                                      
NOW accounts
  
$
177,260
  
$
80
    
0.18
%
$
180,103
  
$
77
    
0.17
%
Money market accounts
    
233,489
    
1,835
    
3.15
%
  
186,957
    
919
    
1.97
%
Savings deposits
    
195,251
    
274
    
0.56
%
  
241,594
    
372
    
0.62
%
Time deposits
    
871,519
    
8,972
    
4.13
%
  
733,927
    
6,259
    
3.42
%
FHLB advances
    
554,639
    
5,745
    
4.15
%
  
631,390
    
5,670
    
3.60
%
Junior subordinated debentures
    
22,681
    
338
    
5.98
%
  
-
    
-
    
-
%
Other borrowed funds
    
7,346
    
87
    
4.75
%
  
1,891
    
20
    
4.12
%
Total interest-bearing liabilities
    
2,062,185
    
17,331
    
3.37
%
  
1,975,862
    
13,317
    
2.70
%
Demand deposits
    
182,546
                
189,465
              
Other liabilities
    
22,184
                
16,983
              
Shareholders’ equity
    
161,685
                
154,663
              
Total liabilities and shareholders’ equity
  
$
2,428,600
              
$
2,336,973
              
 
Net interest income (FTE)
        
$
15,567
              
$
15,222
        
Interest rate spread
                
2.43
%
              
2.48
%
Net interest margin
                
2.75
%
              
2.76
%

Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:
 
(Dollars in thousands)
          
           
Three months ended June 30,
  
2006
  
2005
  
Commercial and other loans
  
$
57
  
$
44
  
Nontaxable debt securities
    
199
    
111
  
Corporate stocks
    
94
    
95
  

-24-
 
Six months ended June 30,
  
2006
  
2005
  
   
Average
      
Yield/
  
Average
      
Yield/
  
(Dollars in thousands)
  
Balance
  
Interest
  
Rate
  
Balance
  
Interest
  
Rate
  
Assets:
                                      
Residential real estate loans
  
$
590,217
  
$
14,909
    
5.09
%
$
544,822
  
$
13,394
    
4.96
%
Commercial and other loans
    
562,511
    
21,303
    
7.64
%
  
515,158
    
17,348
    
6.79
%
Consumer loans
    
269,960
    
8,922
    
6.66
%
  
237,278
    
6,268
    
5.33
%
Total loans
    
1,422,688
    
45,134
    
6.40
%
  
1,297,258
    
37,010
    
5.75
%
Federal funds sold and
                                     
other short-term investments
    
11,510
    
265
    
4.64
%
  
11,349
    
134
    
2.38
%
Taxable debt securities
    
737,776
    
17,060
    
4.66
%
  
817,412
    
16,719
    
4.12
%
Nontaxable debt securities
    
37,430
    
1,074
    
5.79
%
  
20,256
    
599
    
5.96
%
Corporate stocks and FHLB stock
    
50,241
    
1,104
    
4.43
%
  
52,178
    
1,443
    
5.58
%
Total securities
    
836,957
    
19,503
    
4.70
%
  
901,195
    
18,895
    
4.23
%
Total interest-earning assets
    
2,259,645
    
64,637
    
5.77
%
  
2,198,453
    
55,905
    
5.13
%
Non interest-earning assets
    
152,019
                
126,801
              
 
Total assets
  
$
2,411,664
              
$
2,325,254
              
Liabilities and Shareholders’ Equity:
                                      
NOW accounts
  
$
173,859
  
$
147
    
0.17
%
$
175,630
  
$
155
    
0.18
%
Money market accounts
    
230,911
    
3,442
    
3.01
%
  
191,740
    
1,760
    
1.85
%
Savings deposits
    
199,984
    
561
    
0.57
%
  
245,256
    
748
    
0.62
%
Time deposits
    
861,464
    
17,249
    
4.04
%
  
711,527
    
11,896
    
3.37
%
FHLB advances
    
551,035
    
11,104
    
4.06
%
  
643,410
    
11,219
    
3.52
%
Junior subordinated debentures
    
22,681
    
676
    
6.01
%
  
-
    
-
    
-
%
Other borrowed funds
    
7,183
    
166
    
4.67
%
  
1,700
    
36
    
4.17
%
Total interest-bearing liabilities
    
2,047,117
    
33,345
    
3.28
%
  
1,969,263
    
25,814
    
2.64
%
Demand deposits
    
181,257
                
185,893
              
Other liabilities
    
21,972
                
16,550
              
Shareholders’ equity
    
161,318
                
153,548
              
Total liabilities and shareholders’ equity
  
$
2,411,664
              
$
2,325,254
              
 
Net interest income (FTE)
        
$
31,292
              
$
30,091
        
Interest rate spread
                
2.49
%
              
2.49
%
Net interest margin
                
2.79
%
              
2.76
%

Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:
 
(Dollars in thousands)
          
           
Six months ended June 30,
  
2006
  
2005
  
Commercial and other loans
  
$
107
  
$
89
  
Nontaxable debt securities
    
375
    
210
  
Corporate stocks
    
178
    
199
  

-25-


The following table presents certain information on a fully taxable equivalent 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, 2006 vs. 2005
  
June 30, 2006 vs. 2005
  
   
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
  
$
403
  
$
213
  
$
616
  
$
1,153
  
$
362
  
$
1,515
  
Commercial and other loans
    
927
    
1,200
    
2,127
    
1,674
    
2,281
    
3,955
  
Consumer loans
    
429
    
875
    
1,304
    
944
    
1,710
    
2,654
  
Federal funds sold and other short-term investments
    
6
    
63
    
69
    
2
    
128
    
130
  
Taxable debt securities
    
(719
)
  
1,082
    
363
    
(1,721
)
  
2,062
    
341
  
Nontaxable debt securities
    
263
    
(6
)
  
257
    
493
    
(16
)
  
477
  
Corporate stocks and FHLB stock
    
(5
)
  
(372
)
  
(377
)
  
(52
)
  
(287
)
  
(339
)
Total interest income
    
1,304
    
3,055
    
4,359
    
2,493
    
6,240
    
8,733
  
Interest on interest-bearing liabilities:
                                      
NOW accounts
    
(1
)
  
4
    
3
    
(1
)
  
(7
)
  
(8
)
Money market accounts
    
456
    
460
    
916
    
828
    
854
    
1,682
  
Savings deposits
    
(66
)
  
(31
)
  
(97
)
  
(130
)
  
(57
)
  
(187
)
Time deposits
    
1,287
    
1,426
    
2,713
    
2,754
    
2,599
    
5,353
  
FHLB advances
    
(734
)
  
809
    
75
    
(1,722
)
  
1,607
    
(115
)
Junior subordinated debentures
    
338
    
-
    
338
    
676
    
-
    
676
  
Other borrowed funds
    
64
    
2
    
66
    
127
    
4
    
131
  
Total interest expense
    
1,344
    
2,670
    
4,014
    
2,532
    
5,000
    
7,532
  
Net interest income
  
$
(40
)
$
385
  
$
345
  
$
(39
)
$
1,240
  
$
1,201
  

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, 2006, consistent with the amounts recorded in 2005. The allowance for loan losses was $18.5 million, or 1.29% of total loans, at June 30, 2006, compared to $17.9 million, or 1.28%, at December 31, 2005.

Noninterest Income
Noninterest income is an important source of revenue for Washington Trust. Noninterest income, excluding realized gains on securities, comprised 41% of total revenue, excluding realized gains on securities, for the second quarter of 2006, compared with 32% for the same quarter in 2005. Primary sources of noninterest income are wealth management and trust services fees, service charges on deposit accounts, merchant credit card processing fees and net gains on sales of loans. Noninterest income, excluding realized gains on securities amounted to $10.7 million and $20.1 million, respectively, for the three and six months ended June 30, 2006, up 53% and 54% over the same periods last year. This increase is primarily attributable to higher revenues from wealth management and trust services, mainly due to the acquisition of Weston Financial in the third quarter of 2005.
-26-

 
The following table presents a noninterest income comparison for the three and six months ended June 30, 2006 and 2005:
 
(Dollars in thousands)
  
Three Months
  
Six Months
  
           
$ 
  
%
          
$
  
%
  
Periods ended June 30
  
2006
  
2005
  
Chg
  
Chg
  
2006
  
2005
  
Chg
  
Chg
  
Noninterest income:
                                                  
Wealth management and trust services
  
$
6,177
  
$
3,486
  
$
2,691
    
77
%
$
12,059
  
$
6,698
  
$
5,361
    
80
%
Service charges on deposit accounts
    
1,236
    
1,168
    
68
    
6
%
  
2,355
    
2,179
    
176
    
8
%
Merchant processing fees
    
1,656
    
1,337
    
319
    
24
%
  
2,703
    
2,115
    
588
    
28
%
Income from bank-owned life insurance
    
346
    
279
    
67
    
24
%
  
625
    
551
    
74
    
13
%
Net gains on loan sales
    
336
    
418
    
(82
)
  
(20
)%
  
612
    
905
    
(293
)
  
(32
)%
Other income
    
931
    
303
    
628
    
207
%
  
1,789
    
622
    
1,167
    
188
%
Subtotal
    
10,682
    
6,991
    
3,691
    
53
%
  
20,143
    
13,070
    
7,073
    
54
%
Net realized gains on securities
    
765
    
3
    
762
          
824
    
3
    
821
        
Total noninterest income
  
$
11,447
  
$
6,994
  
$
4,453
    
64
%
$
20,967
  
$
13,073
  
$
7,894
    
60
%

Revenues from wealth management and trust services for the three and six months ended June 30, 2006 rose by 77% and 80%, respectively, over the same periods in 2005. The increase was primarily attributable to the acquisition of Weston Financial completed on August 31, 2005. Revenue from wealth management and trust 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 $3.425 billion at June 30, 2006, up $153 million, or 5%, from $3.272 billion at December 31, 2005. This increase was due to business development efforts and, to a lesser extent, financial market appreciation.

For the three and six months ended June 30, 2006, service charges on deposits were up 6% and 8%, respectively, from the same periods a year ago, primarily due to the broadening of existing product fee arrangements.

Merchant processing fees for the three and six months ended June 30, 2006 increased 24% and 28%, 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.

For the three and six months ended June 30, 2006, net gains on loan sales were down 20% and 32%, respectively, from the comparable 2005 periods due to decreased sales of Small Business Administration (“SBA”) loans and residential mortgage loans. In general, loan originations have been adversely affected by higher interest rates.

Income from bank-owned life insurance (“BOLI”) amounted to $346 thousand and $625 thousand, respectively, for the three and six months ended June 30, 2006. BOLI represents life insurance on the lives of certain employees who have consented to allowing the Bank to be the beneficiary of such policies. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. The BOLI investment provides a means to mitigate increasing employee benefit costs. During the second quarter of 2006, the Corporation purchased $8 million in BOLI, bringing the total investment in BOLI to $39.0 million at June 30, 2006.

In the second quarter of 2006, Washington Trust recognized $765 thousand of net realized gains on sales of securities, primarily equity securities. Approximately $381 thousand of the gains resulted from the Corporation’s annual contribution of appreciated equity securities to the Corporation’s charitable foundation. The cost of the annual contribution, which was included in noninterest expenses, amounted to $513 thousand for the second quarter of 2006. Washington Trust made its 2005 annual contribution to its charitable foundation in the fourth quarter of 2005. The remainder of the net realized gains recognized in the second quarter of 2006 resulted primarily from the market sale of appreciated equity securities.

Other income consists of loan servicing fees, safe deposit rents, wire transfer fees, fees on letters of credit, financial advisory services fees, commissions on annuities and other fees. Other income amounted to $931 thousand and $1.8 million, respectively for the three and six months ended June 30, 2006, up $628 thousand and $1.2 million from
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the same periods a year ago. Approximately 89% of the quarter-to-quarter increase and 96% of the year-to-year increase was attributable to the acquisition of Weston Financial in the third quarter of 2005.

Noninterest Expense
Noninterest expenses amounted to $17.3 million and $33.0 million, respectively, for the three and six months ended June 30, 2006, up 29% and 28% over the same periods last year. Approximately 54% of the increase from 2005 was attributable to the acquisition of Weston Financial.

The following table presents a noninterest expense comparison for the three and six months ended June 30, 2006 and 2005:
 
(Dollars in thousands)
  
Three Months
  
Six Months
  
           
$ 
  
%
          
 $
  
%
  
Periods ended June 30
  
2006
  
2005
  
Chg
  
Chg
  
2006
  
2005
  
Chg
  
Chg
  
Noninterest expense:
                                                  
Salaries and employee benefits
  
$
9,830
  
$
7,450
  
$
2,380
    
32
%
$
19,449
  
$
14,909
  
$
4,540
    
31
%
Net occupancy
    
1,018
    
802
    
216
    
27
%
  
1,972
    
1,655
    
317
    
19
%
Equipment
    
881
    
869
    
12
    
1
%
  
1,680
    
1,751
    
(71
)
  
(4
%)
Merchant processing costs
    
1,407
    
1,098
    
309
    
28
%
  
2,294
    
1,734
    
560
    
32
%
Outsourced services
    
496
    
444
    
52
    
12
%
  
1,014
    
857
    
157
    
18
%
Advertising and promotion
    
681
    
733
    
(52
)
  
(7
%)
  
1,118
    
1,036
    
82
    
8
%
Legal, audit and professional fees
    
403
    
520
    
(117
)
  
(23
%)
  
779
    
912
    
(133
)
  
(15
%)
Amortization of intangibles
    
406
    
99
    
307
    
310
%
  
811
    
246
    
565
    
230
%
Other
    
2,158
    
1,358
    
800
    
59
%
  
3,867
    
2,717
    
1,150
    
42
%
Total noninterest expense
  
$
17,280
  
$
13,373
  
$
3,907
    
29
%
$
32,984
  
$
25,817
  
$
7,167
    
28
%

Salaries and employee benefit expense for the three and six months ended June 30, 2006 were up $2.4 million and $4.5 million, respectively, from the same periods in 2005. Approximately 61% of the increase from 2005 was due to the operating expenses of Weston Financial. The remainder of the increase from 2005 was due to increases in salaries and wages, higher defined benefit plan costs, increases in performance-based compensation and higher share-based compensation. See Note 3 to the Consolidated Financial Statements for additional discussion on share-based compensation.

Net occupancy expense for the three and six months ended June 30, 2006 increased 27% and 19%, respectively, over the same periods in 2005. The increase reflected higher rental expense for leased premises and included operating expenses of Weston Financial.

Merchant processing costs for the three and six months ended June 30, 2006, up 28% and 32%, respectively, from the comparable periods in 2005 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.

Outsourced services for the three and six months ended June 30, 2006 increased 12% and 18%, respectively, over the same periods a year ago due to higher costs for data processing services and third party vendor costs.

Legal, audit and professional fees for the three and six months ended June 30, 2006, down 23% and 15%, respectively, from the same periods last year. The primary reason for the decrease was that the second quarter 2005 included approximately $124 thousand related to a special project.

Amortization of intangibles amounted to $406 thousand and $811 thousand for the three and six months ended June 30, 2006, respectively. See Note 7 to the Consolidated Financial Statements for additional information on identifiable intangible assets.

Other noninterest expense for the three and six months ended June 30, 2006, increased $800 thousand and $1.2 million, respectively, from the same periods last year, and included $106 thousand and $221 thousand of operating costs for Weston Financial. Included in other noninterest expense in the second quarter of 2006 was the annual contribution of appreciated equity securities to the Corporation’s charitable foundation amounting to
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$513 thousand. This transaction resulted in realized securities gains of $381 thousand in the second quarter of 2006. Washington Trust made its 2005 annual contribution to its charitable foundation in the fourth quarter of 2005.

Income Taxes
Income tax expense amounted to $2.9 million and $5.8 million for the three and six months ended June 30, 2006, respectively. The Corporation’s effective tax rate for first half of 2006 was 32.0%, unchanged from the first half of 2005. 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
At June 30, 2006, total assets amounted to $2.432 billion, up $30.3 million from December 31, 2005, mainly due to an increase in total loans. Total liabilities increased $27.4 million in the first half of 2006, with the largest increase in total deposits. Shareholders’ equity totaled $161.3 million at June 30, 2006, up $2.9 million in the first six months of 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, 2006 the securities portfolio totaled $786.3 million, or 32.3% of total assets, compared with $783.9 million, or 32.6% of total assets, at December 31, 2005. As a result of increases in interest rates, the net unrealized losses on securities available for sale and held to maturity amounted to $15.5 million at June 30, 2006, compared to $3.4 million at December 31, 2005. See Note 4 to the Consolidated Financial Statements for detail of unrealized gains and losses on securities.

Loans
Total loans increased $29.4 million, or 2.1%, in the first six months of 2006 amounting to $1.431 billion at June 30, 2006.

The Corporation originates residential mortgages, for both portfolio and sale, and purchases mortgages from other financial institutions. Residential real estate loans totaled $589.2 million at June 30, 2006, increasing $6.5 million, or 1.1%, during the first half of 2006, including the effect of $11.8 million in purchased adjustable rate mortgages.

Consumer loans rose by $12.0 million, or 4.6%, in the first six months of 2006, led by growth in home equity loans.

Commercial loans, including commercial real estate and construction loans, totaled $565.6 million at June 30, 2006, up $10.9 million, or 2.0%, in the first half of 2006.

Asset Quality
Allowance for Loan Losses
Arriving at 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, 2005.

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, 2006, the allowance for loan losses was $18.5 million, or 1.29% of total loans, and 759% of total nonaccrual loans. This compares with an allowance of $17.4 million, or 1.30% of total loans, and 716% of nonaccrual loans at June 30, 2005. Loan charge-offs, net of recoveries, amounted to $38 thousand in the first half of 2006, compared to net recoveries of $71 thousand in the same period a year ago.
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Nonperforming Assets
Nonperforming assets are summarized in the following table:
 
(Dollars in thousands)
  
June 30,
  
December 31,
  
   
2006
  
2005
  
Nonaccrual loans 90 days or more past due
  
$
1,538
  
$
1,257
  
Nonaccrual loans less than 90 days past due
    
897
    
1,157
  
Total nonaccrual loans
    
2,435
    
2,414
  
Other real estate owned, net
    
-
    
-
  
Total nonperforming assets
  
$
2,435
  
$
2,414
  
Nonaccrual loans as a percentage of total loans
    
0.17
%
  
0.17
%
Nonperforming assets as a percentage of total assets
    
0.10
%
  
0.10
%
Allowance for loan losses to nonaccrual loans
    
758.93
%
  
742.25
%
Allowance for loan losses to total loans
    
1.29
%
  
1.28
%

Nonperforming assets amounted to $2.4 million, or 0.10% of total assets, at June 30, 2006, essentially unchanged from the level at December 31, 2005.

There were no accruing loans 90 days or more past due at June 30, 2006 or December 31, 2005.

Impaired loans consist of all nonaccrual commercial loans. At June 30, 2006, the recorded investment in impaired loans was $566 thousand, which had a related allowance of $59 thousand. Also during the six months ended June 30, 2006, interest income recognized on impaired loans amounted to approximately $173 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,
  
   
2006
  
2005
  
Residential real estate
  
$
1,692
  
$
1,147
  
Commercial:
              
Mortgages
    
-
    
394
  
Construction and development
    
-
    
-
  
Other
    
566
    
624
  
Consumer
    
177
    
249
  
Total nonaccrual loans
  
$
2,435
  
$
2,414
  

Deposits
In the first six months of 2006, total deposits rose by $31.5 million, or 1.9%. Excluding a $16.0 million increase in brokered certificates of deposit, in-market deposits were up by $15.5 million in the first half of 2006. Due to increases in short-term interest rates, the Corporation has continued to experience a shift in the mix of deposits, with a shift away from lower cost savings accounts into premium money market accounts and certificates of deposit.

Demand deposits amounted to $184.2 million at June 30, 2006, down $11.9 million, or 6.1%, from December 31, 2005. NOW account balances totaled $178.1 million at June 30, 2006, down $614 thousand, or 0.3%, from the end of 2005. Money market account balances totaled $239.9 million at June 30, 2006, up $16.7 million, or 7.5%, from December 31, 2005. During the six months ended June 30, 2006, savings deposits declined $20.9 million, or 9.8%, and amounted to $191.6 million. Time deposits (including brokered certificates of deposit) amounted to $877.0 million, up $48.3 million, or 5.8%, during the first half of 2006. The Corporation utilizes brokered time deposits as part of its overall funding program along with other sources. Brokered time deposits amounted to $216.1 million, up $16.0 million, or 8.0%, during the six months ended June 30, 2006. Excluding the brokered time deposits, time deposits rose $32.3 million, or 5.1%, in the first half of 2006 due to growth in consumer and commercial certificates of deposit.
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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. During the first six months of 2006, FHLB advances decreased by $1.7 million. See Note 9 to the Consolidated Financial Statements for additional information on borrowings.

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 68% of total average assets in the first half of 2006. 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 six months of 2006. Net loans as a percentage of total assets amounted to 58% at June 30, 2006, unchanged from December 31, 2005. Total securities as a percentage of total assets amounted to 32% at June 30, 2006, compared to 33% at December 31, 2005.

For the six months ended June 30, 2006, net cash provided by financing activities amounted to $23.7 million and was generated primarily from overall growth in deposits. Net cash used in investing activities was $49.8 million in the first half of 2006. The Corporation purchased $21.6 million of residential and consumer loans in the six months ended June 30, 2006. Also during this period, the Corporation purchased $8 million in BOLI. Net cash provided by operating activities amounted to $12.2 million in the first six months of 2006, generated primarily by net income. See the Corporation’s Consolidated Statements of Cash Flows for further information about sources and uses of cash.

Total shareholders’ equity amounted to $161.3 million at June 30, 2006, up approximately $2.9 million since December 31, 2005. Included in this change was a decrease in accumulated other comprehensive income of $5.9 million. The decrease in accumulated other comprehensive income in the first half of 2006 was due to increases in net unrealized losses on securities available for sale. Dividends payable at June 30, 2006 amounted to $2.6 million, representing a $0.19 per share dividend, which was paid to shareholders on July 14, 2006. This was an increase from the $0.18 per share rate paid throughout 2005 and represents the fourteenth consecutive year with a dividend increase. The source of funds for dividends paid by the Bancorp is dividends received from the Bank. The Bank is a regulated enterprise and, as such, its ability to pay dividends to the Bancorp is subject to regulatory review and restriction.

The ratio of total equity to total assets amounted to 6.6% at June 30, 2006, unchanged from December 31, 2005. Book value per share as of June 30, 2006 and December 31, 2005 amounted to $12.01 and $11.86, respectively. The tangible book value per share was $8.02 at June 30, 2006, compared to $7.79 at the end of 2005.

Pursuant to the Stock Purchase Agreement dated March 18, 2005, by and among the Corporation, Weston Financial and Weston Financial’s shareholders, the Corporation purchased all of the outstanding shares of capital stock of Weston Financial in exchange for an aggregate amount of cash equal to $20.3 million plus certain future payments. The future payments include minimum payments of $2 million per year in each of the years 2007, 2008 and 2009. The present value of these minimum payments amounting to $5.6 million is included in Other Borrowings in the Corporation’s Consolidated Balance Sheet. In addition, the transaction is structured to provide for the contingent payment of additional amounts up to a maximum of $18.5 million based on operating results in each of the years during a three-year earn-out period ending December 31, 2008. Contingent payments will be added to goodwill and recorded as liabilities at the time the payments are determinable beyond a reasonable doubt.

In connection with the Weston Financial acquisition, trust preferred securities totaling $22 million were issued in the third quarter of 2005 by capital trusts created by the Corporation. In accordance with FIN 46-R, the capital trusts that issued the trust preferred securities are not consolidated into the Corporation’s financial statements, however, the Corporation reflects the amounts of junior subordinated debentures payable to the capital trusts as debt in its financial statements. The trust preferred securities qualify as Tier 1 capital.
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The Corporation’s capital ratios at June 30, 2006 place the Corporation in the “well-capitalized” category according to regulatory standards. On March 1, 2005, the Federal Reserve Board issued a final rule that would retain trust preferred securities in Tier 1 capital of bank holding companies, but with stricter quantitative limits and clearer standards. Under the proposal, after a five-year transition period that would end on March 31, 2009, the aggregate amount of trust preferred securities would be limited to 25% of Tier 1 capital elements, net of goodwill. The Corporation has evaluated the potential impact of such a change on its Tier 1 capital ratio and has concluded that the regulatory capital treatment of the trust preferred securities in the Corporation’s total capital ratio would be unchanged.

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, 2006.

(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)
  
$
543,588
  
$
170,749
  
$
224,794
  
$
85,018
  
$
63,027
  
Junior subordinated debentures
    
22,681
    
-
    
-
    
-
    
22,681
  
Operating lease obligations
    
1,785
    
797
    
741
    
224
    
23
  
Software licensing arrangements
    
452
    
283
    
81
    
88
    
-
  
Treasury, tax and loan demand note
    
1,122
    
1,122
    
-
    
-
    
-
  
Other borrowed funds
    
6,051
    
2,008
    
3,702
    
65
    
276
  
 
Total contractual obligations
  
$
575,679
  
$
174,959
  
$
229,318
  
$
85,395
  
$
86,007
  
 
(1)  
All FHLB advances are shown in the period corresponding to their scheduled maturity.


(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
  
$
108,573
  
$
85,057
  
$
12,218
  
$
5,113
  
$
6,185
  
Home equity lines
    
180,301
    
2,746
    
7,796
    
12,293
    
157,466
  
Other loans
    
11,844
    
9,598
    
1,143
    
1,103
    
-
  
Standby letters of credit
    
11,056
    
1,488
    
9,078
    
490
    
-
  
Forward loan commitments to:
                                
Originate loans
    
2,668
    
2,668
    
-
    
-
    
-
  
Sell loans
    
4,034
    
4,034
    
-
    
-
    
-
  
 
Total commitments
  
$
318,476
  
$
105,591
  
$
30,235
  
$
18,999
  
$
163,651
  

See additional discussion under the caption Note 8 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.

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
-32-
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, 2006 and December 31, 2005, 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 sheet financial instruments as of June 30, 2006 and December 31, 2005. 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 historical insensitivity to rate changes. 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, 2006
December 31, 2005
 
Months 1 - 12
Months 13 - 24
Months 1 - 12
Months 13 - 24
100 basis point rate decrease
 
0.08%
 
0.93%
 
-0.08%
 
-1.18%
100 basis point rate increase
0.31%
-2.93%
0.93%
-0.14%
200 basis point rate increase
1.63%
-5.78%
1.59%
-1.31%
         

The ALCO estimates that the small positive exposure of net interest income to falling rates as compared to an unchanged rate scenario, results from the near-term effect of reducing rates paid on maturing time and certain core savings deposits, while asset yields would decline more slowly initially as current asset holdings mature or reprice. If rates were to fall and remain low for a sustained period, core savings deposit rates would likely not continue to fall as fast as other market rates, while asset yields would decline as current asset holdings mature or reprice with increasing cash flows from more rapid mortgage-related prepayments and redemption of callable securities.

The modest positive exposure of net interest income to rising rates in Year 1 as compared to an unchanged rate scenario results from a more rapid relative rate of increase in asset yields than funding costs over the near term. For simulation purposes, core savings rate changes are anticipated to lag other market rates related to loan and investment yields in both timing and magnitude. The ALCO’s estimate of interest rate risk exposure to rising rate environments, including those involving a further flattening or inversion of the yield curve, incorporates certain assumptions regarding the shift in mix from low-cost core savings deposits to higher-cost time deposits, which has altered the composition of the balance sheet in 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. With the flattening of the yield curve, consumer demand for time deposits continues to be greater than growth in other lower-cost deposit categories.
-33-
For modeling purposes, this trend is expected to continue even if interest rates remain unchanged, since the ALCO believes that a shift in deposit mix more heavily weighted towards time deposits accurately reflects current operating conditions. Although asset yields would also increase in a rising interest rate environment, the cumulative impact of relative growth in the rate-sensitive time 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 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 since 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. Firstly, 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 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 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, 2006 and December 31, 2005 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)
    
2,646
    
(4,773
)
U.S. government-sponsored agency securities (callable)
    
2,085
    
(5,608
)
Mortgage-backed securities
    
10,898
    
(23,176
)
Corporate securities
    
526
    
(1,005
)
Total change in market value as of June 30, 2006
  
$
16,155
    
($34,562
)
               
Total change in market value as of December 31, 2005
  
$
13,533
    
($34,327
)

See additional discussion in Note 8 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.”
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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 Chief Executive Officer and Chief Financial 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, 2006. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are adequate 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, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In the third quarter of 2005, the Corporation completed its acquisition of Weston Financial, as discussed previously. The Corporation has not yet completed the documentation, evaluation and testing of Weston Financial’s internal controls over financial reporting, which is ongoing.


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, 2005.
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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, 2006 regarding shares of common stock of the Corporation that were repurchased under the Deferred Compensation Plan, the 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
                      
7,398
  
4/1/2006 to 4/30/2006
    
331
  
$
26.98
    
331
    
7,067
  
5/1/2006 to 5/31/2006
    
256
    
25.35
    
256
    
6,811
  
6/1/2006 to 6/30/2006
    
247
    
26.36
    
247
    
6,564
  
Total Deferred Compensation Plan
    
834
  
$
26.30
    
834
    
6,564
  
                           
Stock Repurchase Plan (2)
                          
Balance at beginning of period
                      
162,000
  
4/1/2006 to 4/30/2006
    
-
    
-
    
-
    
162,000
  
5/1/2006 to 5/31/2006
    
-
    
-
    
-
    
162,000
  
6/1/2006 to 6/30/2006
    
-
    
-
    
-
    
162,000
  
Total Stock Repurchase Plan
    
-
    
-
    
-
    
162,000
  
                           
Other (3)
                          
Balance at beginning of period
                      
N/A
  
4/1/2006 to 4/30/2006
    
-
  
$
-
    
-
    
N/A
 
5/1/2006 to 5/31/2006
    
3,303
    
9.78
    
3,303
    
N/A
 
6/1/2006 to 6/30/2006
    
7,163
    
19.61
    
7,163
    
N/A
 
Total Other
    
10,466
  
$
16.51
    
10,466
    
N/A
 
 
Total Purchases of Equity Securities
    
11,300
  
$
17.23
    
11,300
        

(1) The Deferred Compensation Plan was established on January 1, 1999. A maximum of 25,000 shares were authorized under the plan. 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. All shares are purchased in the open market.
(2) The Stock Repurchase Plan was established in September 2001. A maximum of 250,000 shares were authorized under the plan. The Bancorp plans to hold the repurchased shares as treasury stock for general corporate purposes.
(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 25, 2006. On the record date of February 24, 2006 there were 13,407,650 shares issued, outstanding and eligible to vote, of which 11,970,328 shares, or 89.28%, 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 2009 Annual Meeting: Steven J. Crandall, Victor J. Orsinger II., Patrick J. Shanahan, Jr., James P. Sullivan, and Neil H. Thorp 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
Steven J. Crandall
3 years
11,895,340
74,989
Victor J. Orsinger, II
3 years
10,731,674
1,238,654
Patrick J. Shanahan, Jr.
3 years
11,015,951
914,378
James P. Sullivan
3 years
11,887,497
82,832
Neil H. Thorp
3 years
11,901,042
69,286
 
The following additional persons continued as Directors of Washington Trust Bancorp, Inc. following the Annual Meeting:

Gary P. Bennett
Larry J. Hirsch, Esq.
Barry G. Hittner, Esq.
Katherine W. Hoxsie
Mary E. Kennard, Esq.
Edward M. Mazze, Ph.D.
Kathleen McKeough
H. Douglas Randall, III
Joyce Olson Resnikoff
John F. Treanor
John C. Warren

ii.  
A proposal for the ratification of KPMG LLP to serve as independent auditors of the Corporation for the current fiscal year ending December 31, 2006 was passed by a vote of 11,806,525 shares in favor, 152,647 shares against, with 11,157 abstentions and broker non-votes.

Item 5. Other Information
(a) On April 25, 2006, the Bancorp awarded Restricted Stock Units under the 1997 Plan and Restricted Stock Units under the 2003 Plan to certain of its executive officers and non-employee directors as set forth below.

The following Restricted Stock Units were awarded under the 1997 Plan; vest on the earlier of (a) April 25, 2009 or (b) a Change in Control (as defined in the 1997 Plan) of the Bancorp, provided that a pro-rata share will vest upon the employee’s retirement if earlier; and required no consideration to be paid by the recipient. The Bancorp will pay phantom dividends on the date and in the amount of the dividend paid to shareholders of the Bancorp’s common stock.

Name
Position
Award
John C. Warren
Chairman and Chief Executive Officer
1,150 Restricted Stock Units

A copy of the form of Restricted Stock Units Certificate under the 1997 Plan used in connection with such Restricted Stock Units grants was filed as Exhibit 10.1 to the Bancorp’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 17, 2005.

The following Restricted Stock Units were awarded under the 2003 Plan; vest on the earlier of (a) April 25, 2009 or (b) a Change in Control (as defined in the 2003 Plan) of the Bancorp, provided that a pro-rata share will vest upon
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the employee’s retirement if earlier; and required no consideration to be paid by the recipient. The Bancorp will pay phantom dividends on the date and in the amount of the dividend paid to shareholders of the Bancorp’s common stock.

Name
Position
Award
John C. Warren
Chairman and Chief Executive Officer
5,350 Restricted Stock Units
John F. Treanor
President and Chief Operating Officer
3,900 Restricted Stock Units

A copy of the form of Restricted Stock Units Certificate (for employees) under the 2003 Plan used in connection with such Restricted Stock Units grant was filed as Exhibit 10.2 to the Bancorp’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 19, 2006.

The following Restricted Stock Units were awarded under the 2003 Plan; vest on the earlier of (a) April 25, 2009, (b) retirement of the Director, or (c) a Change in Control (as defined in the 2003 Plan) of the Bancorp; and required no consideration to be paid by the recipient. For these purposes, retirement is defined as the cessation of service as a Director as of the Annual Meeting of Shareholders date following the attainment of age 70.

Name
Position
Award
Gary P. Bennett
Director
500 Restricted Stock Units
Steven J. Crandall
Director
500 Restricted Stock Units
Larry J. Hirsch, Esq.
Director
500 Restricted Stock Units
Barry G. Hittner
Director
500 Restricted Stock Units
Katherine W. Hoxsie
Director
500 Restricted Stock Units
Mary E. Kennard, Esq.
Director
500 Restricted Stock Units
Edward M. Mazze, Ph.D.
Director
500 Restricted Stock Units
Kathleen McKeough
Director
500 Restricted Stock Units
Victor J. Orsinger II
Director
500 Restricted Stock Units
H. Douglas Randall, III
Director
500 Restricted Stock Units
Joyce O. Resnikoff
Director
500 Restricted Stock Units
Patrick J. Shanahan, Jr.
Director
500 Restricted Stock Units
James P. Sullivan, CPA
Director
500 Restricted Stock Units
Neil H. Thorp
Director
500 Restricted Stock Units

A copy of the form of Restricted Stock Units Certificate (for Directors) under the 2003 Plan used in connection with such Restricted Stock Units grants was filed as Exhibit 10.3 to the Bancorp’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 19, 2006.

In addition, the Company may grant various awards to executive officers and directors under the 2003 Plan.

A copy of the form of Restricted Stock Agreement under the 2003 Plan for employees was filed as Exhibit 10.4 to the Bancorp’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 19, 2006. A copy of the form of Restricted Stock Agreement under the 2003 Plan for members of the Board of Directors was filed as Exhibit 10.5 to the Bancorp’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 19, 2006.
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Item 6. Exhibits
(a) Exhibits. The following exhibits are included as part of this Form 10-Q:
 
Exhibit Number
  
10.1
Form of Restricted Stock Units Certificate under the Washington Trust Bancorp, Inc. 1997 Equity Incentive Plan, as amended (employees) — Filed as Exhibit 10.1 to the Registrant’s Current Report on From 8-K dated June 17, 2005. (1) (2)
10.2
Form of Restricted Stock Units Certificate under the Washington Trust Bancorp, Inc. 2003 Stock Incentive Plan, as amended (employees) — Filed as Exhibit 10.2 to the Registrant’s Current Report on From 8-K dated May 19, 2006. (2)
10.3
Form of Restricted Stock Units Certificate under the Washington Trust Bancorp, Inc. 2003 Stock Incentive Plan, as amended (members of the Board of Directors) — Filed as Exhibit 10.3 to the Registrant’s Current Report on From 8-K dated May 19, 2006. (2)
10.4
Form of Restricted Stock Agreement under the Washington Trust Bancorp, Inc. 2003 Stock Incentive Plan, as amended (employees) — Filed as Exhibit 10.4 to the Registrant’s Current Report on From 8-K dated May 19, 2006. (2)
10.5
Form of Restricted Stock Agreement under the Washington Trust Bancorp, Inc. 2003 Stock Incentive Plan, as amended (members of the Board of Directors) — Filed as Exhibit 10.2 to the Registrant’s Current Report on From 8-K dated May 19, 2006. (2)
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)
Not filed herewith. In accordance with Rule 12b-32 promulgated to the Exchange Act, reference is made to the documents previously filed with the SEC, which are incorporated by reference herein.
(2)
Management contract or compensatory plan or arrangement.
(3)
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 8, 2006
  
By:
/s/ John F. Treanor                                              
     
John F. Treanor
     
President and Chief Operating Officer
     
(principal executive officer)
       
       
Date: August 8, 2006
  
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
  
10.1
Form of Restricted Stock Units Certificate under the Washington Trust Bancorp, Inc. 1997 Equity Incentive Plan, as amended (employees) — Filed as Exhibit 10.1 to the Registrant’s Current Report on From 8-K dated June 17, 2005. (1) (2)
10.2
Form of Restricted Stock Units Certificate under the Washington Trust Bancorp, Inc. 2003 Stock Incentive Plan, as amended (employees) — Filed as Exhibit 10.2 to the Registrant’s Current Report on From 8-K dated May 19, 2006. (2)
10.3
Form of Restricted Stock Units Certificate under the Washington Trust Bancorp, Inc. 2003 Stock Incentive Plan, as amended (members of the Board of Directors) — Filed as Exhibit 10.3 to the Registrant’s Current Report on From 8-K dated May 19, 2006. (2)
10.4
Form of Restricted Stock Agreement under the Washington Trust Bancorp, Inc. 2003 Stock Incentive Plan, as amended (employees) — Filed as Exhibit 10.4 to the Registrant’s Current Report on From 8-K dated May 19, 2006. (2)
10.5
Form of Restricted Stock Agreement under the Washington Trust Bancorp, Inc. 2003 Stock Incentive Plan, as amended (members of the Board of Directors) — Filed as Exhibit 10.2 to the Registrant’s Current Report on From 8-K dated May 19, 2006. (2)
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)
Not filed herewith. In accordance with Rule 12b-32 promulgated to the Exchange Act, reference is made to the documents previously filed with the SEC, which are incorporated by reference herein.
(2)
Management contract or compensatory plan or arrangement.
(3)
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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