Body of 10-Q for September 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 SEPTEMBER 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.
Yes x     No o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

The number of shares of common stock of the registrant outstanding as of October  31, 2006 was 13,464,109.
-1-
 
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended September 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 31.2 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)
      
   
September 30,
  
December 31,
  
   
2006
  
2005
  
Assets:
              
Cash and due from banks
  
$
52,862
  
$
48,997
  
Federal funds sold and other short-term investments
    
15,923
    
17,166
  
Mortgage loans held for sale
    
2,913
    
439
  
Securities:
              
Available for sale, at fair value; amortized cost $581,154 in 2006 and $620,638 in 2005
    
580,506
    
619,234
  
Held to maturity, at cost; fair value $159,099 in 2006 and $162,756 in 2005
    
160,844
    
164,707
  
Total securities
    
741,350
    
783,941
  
Federal Home Loan Bank stock, at cost
    
31,966
    
34,966
  
Loans:
              
Commercial and other
    
561,314
    
554,734
  
Residential real estate
    
587,372
    
582,708
  
Consumer
    
279,798
    
264,466
  
Total loans
    
1,428,484
    
1,401,908
  
Less allowance for loan losses
    
18,645
    
17,918
  
Net loans
    
1,409,839
    
1,383,990
  
Premises and equipment, net
    
24,068
    
23,737
  
Accrued interest receivable
    
11,441
    
10,594
  
Investment in bank-owned life insurance
    
39,374
    
30,360
  
Goodwill
    
44,558
    
39,963
  
Identifiable intangible assets, net
    
13,200
    
14,409
  
Other assets
    
15,772
    
13,441
  
Total assets
  
$
2,403,266
  
$
2,402,003
  
Liabilities:
              
Deposits:
              
Demand deposits
  
$
189,329
  
$
196,102
  
NOW accounts
    
172,317
    
178,677
  
Money market accounts
    
295,431
    
223,255
  
Savings accounts
    
193,029
    
212,499
  
Time deposits
    
850,080
    
828,725
  
Total deposits
    
1,700,186
    
1,639,258
  
Dividends payable
    
2,558
    
2,408
  
Federal Home Loan Bank advances
    
464,148
    
545,323
  
Junior subordinated debentures
    
22,681
    
22,681
  
Other borrowings
    
14,928
    
9,774
  
Accrued expenses and other liabilities
    
26,345
    
24,113
  
Total liabilities
    
2,230,846
    
2,243,557
  
Shareholders’ Equity:
              
Common stock of $.0625 par value; authorized 30,000,000 shares;
              
issued 13,459,740 shares in 2006 and 13,372,295 in 2005
    
841
    
836
  
Paid-in capital
    
35,096
    
32,778
  
Retained earnings
    
137,900
    
126,735
  
Accumulated other comprehensive loss
    
(1,050
)
  
(1,653
)
Treasury stock, at cost; 14,676 shares in 2006 and 10,519 shares in 2005
    
(367
)
  
(250
)
Total shareholders’ equity
    
172,420
    
158,446
  
Total liabilities and shareholders’ equity
  
$
2,403,266
  
$
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
  
Nine Months
  
Periods ended September 30,
  
2006
  
2005
  
2006
  
2005
  
Interest income:
                          
Interest and fees on loans
  
$
23,430
  
$
20,418
    
68,457
  
$
57,339
  
Interest on securities:
                          
Taxable
    
8,493
    
8,085
    
25,553
    
24,804
  
Nontaxable
    
405
    
221
    
1,104
    
610
  
Dividends on corporate stock and Federal Home Loan Bank stock
    
1,197
    
594
    
2,124
    
1,838
  
Interest on federal funds sold and other short-term investments
    
252
    
187
    
517
    
321
  
Total interest income
    
33,777
    
29,505
    
97,755
    
84,912
  
Interest expense:
                          
Deposits
    
12,473
    
8,241
    
33,872
    
22,800
  
Federal Home Loan Bank advances
    
5,011
    
5,741
    
16,115
    
16,960
  
Junior subordinated debentures
    
338
    
124
    
1,014
    
124
  
Other
    
89
    
39
    
256
    
75
  
Total interest expense
    
17,911
    
14,145
    
51,257
    
39,959
  
Net interest income
    
15,866
    
15,360
    
46,498
    
44,953
  
Provision for loan losses
    
300
    
300
    
900
    
900
  
Net interest income after provision for loan losses
    
15,566
    
15,060
    
45,598
    
44,053
  
Noninterest income:
                          
Wealth management and trust services
    
6,040
    
4,066
    
18,099
    
10,764
  
Service charges on deposit accounts
    
1,312
    
1,158
    
3,667
    
3,337
  
Merchant processing fees
    
2,125
    
1,932
    
4,828
    
4,047
  
Income from bank-owned life insurance
    
389
    
282
    
1,014
    
833
  
Net gains on loan sales
    
417
    
415
    
1,029
    
1,320
  
Net realized (losses) gains on securities
    
(365
)
  
17
    
459
    
20
  
Other income
    
865
    
504
    
2,654
    
1,126
  
Total noninterest income
    
10,783
    
8,374
    
31,750
    
21,447
  
Noninterest expense:
                          
Salaries and employee benefits
    
9,651
    
8,194
    
29,100
    
23,103
  
Net occupancy
    
934
    
828
    
2,906
    
2,483
  
Equipment
    
872
    
832
    
2,552
    
2,583
  
Merchant processing costs
    
1,796
    
1,623
    
4,090
    
3,357
  
Advertising and promotion
    
371
    
460
    
1,489
    
1,496
  
Outsourced services
    
490
    
406
    
1,504
    
1,263
  
Legal, audit and professional fees
    
563
    
513
    
1,342
    
1,425
  
Amortization of intangibles
    
398
    
196
    
1,209
    
442
  
Other
    
1,536
    
1,758
    
5,403
    
4,475
  
Total noninterest expense
    
16,611
    
14,810
    
49,595
    
40,627
  
Income before income taxes
    
9,738
    
8,624
    
27,753
    
24,873
  
Income tax expense
    
3,160
    
2,802
    
8,925
    
8,002
  
Net income
  
$
6,578
  
$
5,822
  
$
18,828
  
$
16,871
  
                           
Weighted average shares outstanding - basic
    
13,436.6
    
13,330.3
    
13,414.6
    
13,303.2
  
Weighted average shares outstanding - diluted
    
13,726.3
    
13,641.9
    
13,708.2
    
13,615.8
  
Per share information:
                          
Basic earnings per share
  
$
0.49
  
$
0.44
  
$
1.40
  
$
1.27
  
Diluted earnings per share
  
$
0.48
  
$
0.43
  
$
1.37
  
$
1.24
  
Cash dividends declared per share
  
$
0.19
  
$
0.18
  
$
0.57
  
$
0.54
  
                           
The accompanying notes are an integral part of these consolidated financial statements.
-4-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
  
(Dollars in thousands)
  
     
   
(Unaudited)
  
Nine months ended September 30,
  
2006
  
2005
  
Cash flows from operating activities:
              
Net income
  
$
18,828
  
$
16,871
  
Adjustments to reconcile net income to net cash provided by operating activities:
              
Provision for loan losses
    
900
    
900
  
Depreciation of premises and equipment
    
2,287
    
2,246
  
Net amortization of premium and discount
   
1,070
    
1,878
  
Net amortization of intangibles
    
1,209
    
442
  
Share-based compensation
    
535
    
261
  
Earnings from bank-owned life insurance
    
(1,014
)
  
(833
)
Net gains on loan sales
    
(1,029
)
  
(1,320
)
Net realized gains on securities
    
(459
)
  
(20
)
Proceeds from sales of loans
    
29,395
    
48,484
  
Loans originated for sale
    
(31,076
)
  
(48,616
)
Increase in accrued interest receivable, excluding purchased interest
    
(724
)
  
(718
)
Increase in other assets
    
(2,483
)
  
4,157
  
Increase (decrease) in accrued expenses and other liabilities
    
2,233
    
(3,660
)
Other, net
    
(99
)
  
(147
)
Net cash provided by operating activities
    
19,573
    
19,925
  
Cash flows from investing activities:
              
Purchases of:    Mortgage-backed securities available for sale
    
(31,820
)
  
(57,520
)
Other investment securities available for sale
    
(58,561
)
  
(43,203
)
Mortgage-backed securities held to maturity
    
-
    
(17,505
)
Other investment securities held to maturity
    
(17,682
)
  
(21,098
)
Proceeds from sale of:     Mortgage-backed securities available for sale
   
43,532
    
11,426
  
Other investment securities available for sale
    
14,481
    
55,632
  
Maturities and principal payments of:     Mortgage-backed securities available for sale
   
69,613
    
97,355
  
Other investment securities available for sale
    
1,999
    
48,995
  
Mortgage-backed securities held to maturity
    
12,873
    
20,339
  
Other investment securities held to maturity
    
8,490
    
3,257
  
Remittance (purchase) of Federal Home Loan Bank stock
    
3,000
    
(593
)
Principal collected on loans under loan originations
    
(1,557
)
  
(76,651
)
Purchases of loans, including purchased interest
    
(25,309
)
  
(69,860
)
Purchases of premises and equipment
    
(2,619
)
  
(1,864
)
Purchases of bank-owned life insurance
    
(8,000
)
  
-
  
Equity investment in capital trusts
    
-
    
(681
)
Cash paid for acquisition, including deferred acquisition obligations, net of cash acquired
    
-
    
(19,568
)
Net cash provided by (used in) investing activities
    
8,440
    
(71,539
)
Cash flows from financing activities:
              
Net increase in deposits
    
60,929
    
152,361
  
Net increase (decrease) in other borrowings
    
559
    
(36
)
Proceeds from Federal Home Loan Bank advances
    
382,529
    
531,343
  
Repayment of Federal Home Loan Bank advances
    
(463,668
)
  
(626,099
)
Purchases of treasury stock, net
    
(117
)
  
9
  
Proceeds from the issuance of common stock under dividend reinvestment plan
    
911
    
296
  
Proceeds from the exercise of share options
    
720
    
592
  
Tax benefit from share option exercises
    
259
    
-
  
Proceeds from the issuance of junior subordinated debentures
    
-
    
22,681
  
Cash dividends paid
    
(7,513
)
  
(6,751
)
Net cash (used in) provided by financing activities
    
(25,391
)
  
74,396
  
Net increase in cash and cash equivalents
    
2,622
    
22,782
  
Cash and cash equivalents at beginning of year
    
66,163
    
52,081
  
Cash and cash equivalents at end of period
  
$
68,785
  
$
74,863
  
-5-
 

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
 
 
Noncash Investing and Financing Activities: Loans charged off
  
$
325
  
$
262
  
Supplemental Disclosures:       Interest payments
    
50,868
    
39,496
  
Income tax payments
    
10,327
    
8,042
  
               
The accompanying notes are an integral part of these consolidated financial statements.
              
 
-6-

WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
  
 
 
General
Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company and financial holding company. The Bancorp owns all of the outstanding common stock of The Washington Trust Company (the “Bank”), a Rhode Island chartered commercial bank founded in 1800. Through its subsidiaries, the Bancorp offers a complete product line of financial services to individuals and businesses including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management 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 September 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.
-7-
 
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.

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

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans (an amendment of FASB Statements No. 87, 88, 106 and 132R)”. This Statement requires that the funded status of an employer’s postretirement benefit plan be recognized in its statement of financial position. This Statement also requires that changes in the funded status of a defined benefit plan, including actuarial gains and losses and prior service costs and credits, must be recognized in comprehensive income in the year in which the
-8-

WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 
changes occur. In addition, SFAS No. 158 requires the measurement of the defined benefit plan’s assets and obligations as of the employer’s fiscal year end. The requirements to recognize funded status and any changes in that funded status are effective as of the fiscal year ending after December 15, 2006. The requirement to measure the plan’ assets and obligations as of the employers fiscal year end is effective for fiscal years ending after December 15, 2008. The Corporation is currently evaluating the impact that SFAS No. 158 will have on its consolidated financial statements.

The Securities and Exchange Commission released Staff Accounting Bulletin No. 108 (“SAB 108”), in September 2006. SAB 108 provides guidance on how the effects of the carryover or reversal of prior year financial statement misstatements should be considered in quantifying a current period misstatement. In addition, upon adoption, SAB 108 permits the Corporation to adjust the cumulative effect of immaterial errors relating to prior years in the carrying amount of assets and liabilities as of the beginning of the current fiscal year, with an offsetting adjustment to the opening balance of retained earnings. SAB 108 also requires the adjustment of any prior quarterly financial statement within the fiscal year of adoption for the effects of such errors on the quarters when the information is next presented. The Corporation will adopt SAB 108 in the first quarter of 2007, and does not anticipate that it will have a material impact on its results of operations and financial condition.

(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 nine months ended September 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
  
Nine Months
  
       
Ended
  
Ended
  
       
September 30, 2005
  
September 30, 2005
  
 
Net income
    
As reported
  
$
5,822
  
$
16,871
  
Less total share-based compensation determined under
                    
the fair value method for all awards, net of tax
          
(164
)
  
(892
)
Pro forma
        
$
5,658
  
$
15,979
  
                     
Basic earnings per share
    
As reported
  
$
0.44
  
$
1.27
  
Pro forma
        
$
0.42
  
$
1.20
  
Diluted earnings per share
    
As reported
  
$
0.43
  
$
1.24
  
Pro forma
        
$
0.41
  
$
1.17
  

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
-9-
 
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 
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 Bancorp’s 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 Bancorp’s 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).

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

(Dollars in thousands)
          
   
Three Months
  
Nine Months
  
Periods ended September 30,
 
2006
  
2005
  
2006
  
2005
  
Share-based compensation expense
  
$
175
  
$
108
  
$
535
  
$
262
  
Related income tax benefit
   
61
    
38
    
168
    
92
  

A summary of share option activity under the Plans as of September 30, 2006, and changes during the nine months ended September 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
    
72,489
    
15.37
    
-
    
-
  
Forfeited or expired
    
5,583
    
27.13
    
-
    
-
  
Outstanding at September 30, 2006
    
1,120,039
  
$
20.60
    
5.6 years
  
$
6,912
  
Exercisable at September 30, 2006
    
1,091,705
  
$
20.42
    
5.5 years
  
$
6,911
  

The total intrinsic value of share options exercised during the nine months ended September 30, 2006 was $824 thousand.
-10-
 
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 
A summary of the status of Washington Trust’s nonvested shares as of September 30, 2006, and changes during the nine months ended September 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 September 30, 2006
    
72,800
  
$
25.21
  

As of September 30, 2006, there was $1.0 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.

(4) Securities
Securities available for sale are summarized as follows:
 
(Dollars in thousands)
  
Amortized
  
Unrealized
  
Unrealized
  
Fair
  
   
Cost
  
Gains
  
Losses
  
Value
  
September 30, 2006
                          
U.S. Treasury obligations and obligations
                          
of U.S. government-sponsored agencies
  
$
153,846
  
$
896
  
$
(796
)
$
153,946
  
Mortgage-backed securities
    
356,022
    
995
    
(6,935
)
  
350,082
  
Corporate bonds
    
55,575
    
307
    
(285
)
  
55,597
  
Corporate stocks
    
15,711
    
5,340
    
(170
)
  
20,881
  
Total
    
581,154
    
7,538
    
(8,186
)
  
580,506
  
 
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
  

-11-
 
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 
Securities held to maturity are summarized as follows:
 
(Dollars in thousands)
  
Amortized
  
Unrealized
  
Unrealized
  
Fair
  
   
Cost
  
Gains
  
Losses
  
Value
  
September 30, 2006
                          
U.S. Treasury obligations and obligations
                          
of U.S. government-sponsored agencies
  
$
42,000
  
$
-
  
$
(565
)
$
41,435
  
Mortgage-backed securities
    
72,529
    
447
    
(1,663
)
  
71,313
  
States and political subdivisions
    
46,315
    
227
    
(191
)
  
46,351
  
Total
    
160,844
    
674
    
(2,419
)
  
159,099
  
 
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 $608.4 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 September 30, 2006 and December 31, 2005, respectively. In addition, securities available for sale and held to maturity with a fair value of $10.5 million and $13.8 million were collateralized for the discount window at the Federal Reserve Bank at September 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 $2.2 million were designated in a rabbi trust for a nonqualified retirement plan at September 30, 2006 and December 31, 2005.

At September 30, 2006 and December 31, 2005, the available for sale and held to maturity securities portfolio included $2.4 million and $3.4 million of net pretax unrealized losses, respectively. Included in these net amounts were gross unrealized losses amounting to $10.6 million and $13.5 million at September 30, 2006 and December 31, 2005, respectively.

The following tables summarize, for all securities in an unrealized loss position at September 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.

(Dollars in thousands)
  
Less than 12 Months
  
12 Months or Longer
  
Total
  
       
Fair
  
Unrealized
      
Fair
  
Unrealized
      
Fair
  
Unrealized
  
At September 30, 2006
  
#
  
Value
  
Losses
  
#
  
Value
  
Losses
  
#
  
Value
  
Losses
  
U.S. Treasury obligations
                                                       
and obligations of U.S. government-sponsored agencies
    
5
  
$
28,422
  
$
71
    
14
  
$
96,145
  
$
1,290
    
19
  
$
124,567
  
$
1,361
  
Mortgage-backed securities
    
13
    
28,368
    
208
    
81
    
292,616
    
8,390
    
94
    
320,984
    
8,598
  
States and
                                                       
political subdivisions
    
8
    
6,174
    
36
    
20
    
11,684
    
155
    
28
    
17,858
    
191
  
Corporate bonds
    
3
    
7,147
    
27
    
8
    
21,811
    
258
    
11
    
28,958
    
285
  
Subtotal, debt securities
    
29
    
70,111
    
342
    
123
    
422,256
    
10,093
    
152
    
492,367
    
10,435
  
Corporate stocks
    
6
    
6,339
    
115
    
3
    
982
    
55
    
9
    
7,321
    
170
  
Total temporarily
                                                       
impaired securities
    
35
  
$
76,450
  
$
457
    
126
  
$
423,238
  
$
10,148
    
161
  
$
499,688
  
$
10,605
  

-12-
Table of Contents

WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 
(Dollars in thousands)
  
Less than 12 Months
  
12 Months or Longer
  
Total
  
       
Fair
  
Unrealized
      
Fair
  
Unrealized
      
Fair
  
Unrealized
  
At December 31, 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 September 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 September 30, 2006 consisted of 152 debt security holdings. The largest loss percentage of any single holding was 5.06% 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 September 30, 2006 consisted of 9 holdings of financial and commercial entities. The largest loss percentage position of any single holding was 6.23% of its cost.
-13-

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)
  
September 30, 2006
  
December 31, 2005
  
   
Amount
  
% 
  
Amount
  
% 
  
Commercial:
                          
Mortgages (1)
  
$
274,635
    
19
%
$
291,292
    
21
%
Construction and development (2)
    
29,653
    
2
%
  
37,190
    
3
%
Other (3)
    
257,026
    
18
%
  
226,252
    
16
%
Total commercial
    
561,314
    
39
%
  
554,734
    
40
%
                           
Residential real estate:
                          
Mortgages (4)
    
572,399
    
40
%
  
565,680
    
40
%
Homeowner construction
    
14,973
    
1
%
  
17,028
    
2
%
Total residential real estate
    
587,372
    
41
%
  
582,708
    
42
%
                           
Consumer
                          
Home equity lines
    
147,897
    
10
%
  
161,100
    
11
%
Home equity loans
    
90,711
    
6
%
  
72,288
    
5
%
Other
    
41,190
    
4
%
  
31,078
    
2
%
Total consumer
    
279,798
    
20
%
  
264,466
    
18
%
Total loans (5)
  
$
1,428,484
    
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 $190 thousand and $373 thousand at September 30, 2006 and December 31, 2005, respectively. Also includes $384 thousand and $753 thousand of premium, net of discount, on purchased loans at September 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
  
Nine Months
  
Periods ended September 30,
  
2006
  
2005
  
2006
  
2005
  
Balance at beginning of period
  
$
18,480
  
$
17,442
  
$
17,918
  
$
16,771
  
Provision charged to expense
    
300
    
300
    
900
    
900
  
Subtotal
    
18,780
    
17,742
    
18,818
    
17,671
  
                           
Charge-offs
    
(174
)
  
(24
)
  
(325
)
  
(262
)
Recoveries
    
39
    
146
    
152
    
455
  
Net recoveries (charge-offs)
    
(135
)
  
122
    
(173
)
  
193
  
Reclassification of allowance on off-balance sheet exposures
    
-
    
(250
)
  
-
    
(250
)
Balance at end of period
  
$
18,645
  
$
17,614
  
$
18,645
  
$
17,614
  

-14-

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 nine months ended September 30, 2006 are as follows:
 
Goodwill
       
Wealth
      
 
  
Commercial
  
Management
      
(Dollars in thousands)   
Banking
  
Service
      
   
Segment
  
Segment
  
Total
  
Balance at December 31, 2005
  
$
22,591
  
$
17,372
  
$
39,963
  
Goodwill acquired during the period
    
-
    
4,595
    
4,595
  
Impairment recognized
    
-
    
-
    
-
  
Balance at September 30, 2006
  
$
22,591
  
$
21,967
  
$
44,558
  

The acquisition of Weston Financial Group, Inc. (“Weston Financial”) provides for the payment of contingent purchase price amounts based on operating results in each of the years in the three-year earn-out period ending December 31, 2008.  During the third quarter of 2006 the Corporation recognized a liability of $4.595 million, with a corresponding addition to goodwill, representing the 2006 portion of the earn-out period.

Other Intangible Assets
(Dollars in thousands)  
Core Deposit
  
Advisory
  
Non-compete
      
   
Intangible
  
Contracts
  
Agreements
  
Total
  
Balance at December 31, 2005
  
$
911
  
$
13,220
  
$
278
  
$
14,409
  
Amortization
    
196
    
977
    
36
    
1,209
  
Balance at September 30, 2006
  
$
715
  
$
12,243
  
$
242
  
$
13,200
  

Amortization of intangible assets for the nine months ended September 30, 2006, totaled $1.2 million. 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 September 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
    
2,282
    
1,414
    
905
    
4,601
  
Net amount
  
$
715
  
$
12,243
  
$
242
  
$
13,200
  

-15-
 
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 
(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:

(Dollars in thousands)
  
September 30,
2006
  
December 31, 2005
  
Financial instruments whose contract amounts represent credit risk:
              
Commitments to extend credit:
              
Commercial loans
  
$
103,419
  
$
105,971
  
Home equity lines
    
182,634
    
174,073
  
Other loans
    
14,697
    
17,271
  
Standby letters of credit
    
9,894
    
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
    
3,478
    
2,188
  
Commitments to sell fixed rate mortgage loans
    
6,389
    
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 September 30, 2006 and December 31, 2005, the maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered, totaled $9.9 million and $11.0 million, respectively. At September 30, 2006 and December 31, 2005, there was no liability to beneficiaries resulting from standby letters of credit.

At September 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 September 30, 2006 and December 31, 2005 and the respective changes in fair values for the nine months ended September 30, 2006 and 2005 were insignificant.
 
-16-

WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 
(9) Borrowings
Federal Home Loan Bank Advances
Advances payable to the Federal Home Loan Bank (“FHLB”) are summarized as follows:

(Dollars in thousands)
  
September 30,
  
December 31,
  
   
2006
  
2005
  
FHLB advances
  
$
464,148
  
$
545,323
  

In addition to outstanding advances, the Corporation also has access to an unused line of credit amounting to $8.0 million at September 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 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 September 30, 2006 and December 31, 2005. Included in the collateral were securities available for sale and held to maturity with a fair value of $501.8 million and $498.0 million that were specifically pledged to secure FHLB borrowings at September 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 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 September 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)
  
September 30,
  
December 31,
  
   
2006
  
2005
  
Treasury, Tax and Loan demand note balance
  
$
4,226
  
$
3,794
  
Deferred acquisition obligations
    
10,248
    
5,469
  
Other
    
454
    
511
  
Other borrowings
  
$
14,928
  
$
9,774
  

There were no securities sold under repurchase agreements outstanding at September 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.
-17-
 
WASHINGTON TRUST BANCORP INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
 
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 September 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.

Components of Net Periodic Benefit Costs:
 
(Dollars in thousands)
  
Qualified
  
Non-Qualified
  
   
Pension Plan
  
Retirement Plans
  
Nine months ended September 30,
  
2006
  
2005
  
2006
  
2005
  
Service cost
  
$
1,551
  
$
1,403
  
$
264
  
$
234
  
Interest cost
    
1,238
    
1,141
    
351
    
327
  
Expected return on plan assets
    
(1,350
)
  
(1,264
)
  
-
    
-
  
Amortization of transition asset
    
(4
)
  
(4
)
  
-
    
-
  
Amortization of prior service cost
    
(26
)
  
23
    
46
    
57
  
Recognized net actuarial loss
    
238
    
92
    
160
    
99
  
Net periodic benefit cost
  
$
1,647
  
$
1,391
  
$
821
  
$
717
  

Assumptions:
The measurement date and weighted-average assumptions used to determine net periodic benefit cost for the nine months ended September 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:
For the nine months ended of September 30, 2006, $1.3 million of contributions have been made to the qualified pension plan and $252 thousand in benefit payments have been made to the non-qualified retirement plans. The Corporation presently anticipates contributing an additional $83 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.
-18-
 
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 September 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 September 30, 2006:
                                      
Total Capital (to Risk-Weighted Assets):
                                      
Corporation
  
$
157,286
    
10.96
%
$
114,759
    
8.00
%
$
143,448
    
10.00
%
Bank
  
$
165,592
    
11.55
%
$
114,685
    
8.00
%
$
143,356
    
10.00
%
Tier 1 Capital (to Risk-Weighted Assets):
                                      
Corporation
  
$
137,016
    
9.55
%
$
57,379
    
4.00
%
$
86,069
    
6.00
%
Bank
  
$
145,333
    
10.14
%
$
57,342
    
4.00
%
$
86,013
    
6.00
%
Tier 1 Capital (to Average Assets): (1)
                                      
Corporation
  
$
137,016
    
5.81
%
$
94,331
    
4.00
%
$
117,914