Edgar Filing: WASHINGTON TRUST BANCORP INC

form10-q20070930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission file number: 000-13091

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):

Large accelerated filer o Accelerated filer x Non-accelerated filero

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 October 31, 2007 was 13,351,231.

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

TABLE OF CONTENTS
		Page
		Number

PART I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets
	September 30, 2007 (as restated) and December 31, 2006	3

Consolidated Statements of Income
	Three and Nine Months (as restated) Ended September 30, 2007 (as restated) and 2006	4

Consolidated Statements of Cash Flows
	Nine Months Ended September 30, 2007 (as restated) and 2006	5

Condensed Notes to Consolidated Financial Statements		7

Report of Independent Registered Public Accounting Firm		24

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3. Quantitative and Qualitative Disclosures About Market Risk		38

Item 4. Controls and Procedures		38

PART II. Other Information

Item 1. Legal Proceedings		38

Item 1A. Risk Factors		38

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		39

Item 6. Exhibits		40

Signatures		41

Exhibit 15.1 Letter re: Unaudited Interim Financial Information

Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 Certification of Chief Finanical Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002

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

CONSOLIDATED BALANCE SHEETS (Unaudited)	As Restated
	September 30,			December 31,
	2007			2006
Assets:
Cash and due from banks	$	31,521		$	54,337
Federal funds sold		21,975			16,425
Other short-term investments		1,516			1,147
Mortgage loans held for sale		2,095			2,148
Securities:
Available for sale, at fair value; amortized cost $691,836 in 2007 and $525,966 in 2006		688,709			526,396
Held to maturity, at cost; fair value $175,369 in 2006		–			177,455
Total securities		688,709			703,851
Federal Home Loan Bank stock, at cost		28,727			28,727
Loans:
Commercial and other		650,023			587,397
Residential real estate		578,816			588,671
Consumer		285,654			283,918
Total loans		1,514,493			1,459,986
Less allowance for loan losses		19,472			18,894
Net loans		1,495,021			1,441,092
Premises and equipment, net		25,790			24,307
Accrued interest receivable		12,030			11,268
Investment in bank-owned life insurance		40,936			39,770
Goodwill		50,479			44,558
Identifiable intangible assets, net		11,759			12,816
Other assets		21,204			18,719
Total assets	$	2,431,762		$	2,399,165
Liabilities:
Deposits:
Demand deposits	$	182,830		$	186,533
NOW accounts		172,378			175,479
Money market accounts		312,257			286,998
Savings accounts		189,157			205,998
Time deposits		799,265			822,989
Total deposits		1,655,887			1,677,997
Dividends payable		2,676			2,556
Federal Home Loan Bank advances		502,265			474,561
Junior subordinated debentures		22,681			22,681
Other borrowings		36,403			14,684
Accrued expenses and other liabilities		33,953			33,630
Total liabilities		2,253,865			2,226,109
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 30,000,000 shares;
issued 13,492,110 in 2007 and 2006		843			843
Paid-in capital		34,821			35,893
Retained earnings		151,537			141,548
Accumulated other comprehensive loss		(5,587	)		(3,515	)
Treasury stock, at cost; 141,646 shares in 2007 and 62,432 shares in 2006		(3,717	)		(1,713	)
Total shareholders’ equity		177,897			173,056
Total liabilities and shareholders’ equity	$	2,431,762		$	2,399,165

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

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

						As Restated
	Three Months					Nine Months
Periods ended September 30,	2007		2006				2007		2006
Interest income:
Interest and fees on loans	$	25,032	$	23,430			$	73,380	$	68,457
Interest on securities:
Taxable		7,565		8,493				23,196		25,553
Nontaxable		781		405				2,208		1,104
Dividends on corporate stock and Federal Home Loan Bank stock		669		1,197				2,072		2,124
Interest on federal funds sold and other short-term investments		275		252				650		517
Total interest income		34,322		33,777				101,506		97,755
Interest expense:
Deposits		13,140		12,473				39,332		33,872
Federal Home Loan Bank advances		5,243		5,011				15,323		16,115
Junior subordinated debentures		338		338				1,014		1,014
Other		291		89				730		256
Total interest expense		19,012		17,911				56,399		51,257
Net interest income		15,310		15,866				45,107		46,498
Provision for loan losses		300		300				900		900
Net interest income after provision for loan losses		15,010		15,566				44,207		45,598
Noninterest income:
Wealth management services:
Trust and investment advisory fees		5,336		4,727				15,626		14,036
Mutual fund fees		1,386		1,229				4,000		3,573
Financial planning, commissions and other service fees		456		509				1,915		2,033
Wealth management services		7,178		6,465				21,541		19,642
Service charges on deposit accounts		1,214		1,312				3,559		3,667
Merchant processing fees		2,252		2,125				5,285		4,828
Income from bank-owned life insurance		376		389				1,166		1,014
Net gains on loan sales and commissions on loans originated for others		431		417				1,205		1,029
Net realized (losses) gains on securities		–		(365	)			336		459
Other income		399		440				1,129		1,111
Total noninterest income		11,850		10,783				34,221		31,750
Noninterest expense:
Salaries and employee benefits		10,098		9,651				30,195		29,100
Net occupancy		1,021		934				3,076		2,906
Equipment		871		872				2,564		2,552
Merchant processing costs		1,916		1,796				4,493		4,090
Outsourced services		556		490				1,610		1,504
Advertising and promotion		466		371				1,467		1,489
Legal, audit and professional fees		444		563				1,298		1,342
Amortization of intangibles		341		398				1,057		1,209
Debt prepayment penalties		–		–				1,067		–
Other		1,599		1,536				5,354		5,403
Total noninterest expense		17,312		16,611				52,181		49,595
Income before income taxes		9,548		9,738				26,247		27,753
Income tax expense		2,992		3,160				8,234		8,925
Net income	$	6,556	$	6,578			$	18,013	$	18,828

Weighted average shares outstanding - basic		13,323.6		13,436.6				13,358.1		13,414.6
Weighted average shares outstanding - diluted		13,564.1		13,726.3				13,612.7		13,708.2
Per share information:
Basic earnings per share	$	0.49	$	0.49			$	1.35	$	1.40
Diluted earnings per share	$	0.48	$	0.48			$	1.32	$	1.37
Cash dividends declared per share	$	0.20	$	0.19			$	0.60	$	0.57

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

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES	(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
		As Restated
Nine months ended September 30,		2007			2006
Cash flows from operating activities:
Net income		$	18,013		$	18,828
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			900			900
Depreciation of premises and equipment			2,209			2,287
Loss on disposal of premises and equipment			23			–
Net amortization of premium and discount			466			1,070
Net amortization of intangibles			1,057			1,209
Share-based compensation			427			535
Non-cash charitable contribution			520			513
Earnings from bank-owned life insurance			(1,166	)		(1,014	)
Net gains on loan sales			(1,205	)		(1,029	)
Net realized gains on sales of securities			(336	)		(459	)
Proceeds from sales of loans			47,313			29,395
Loans originated for sale			(46,496	)		(31,076	)
Increase in accrued interest receivable, excluding purchased interest			(731	)		(724	)
Increase in other assets			(1,211	)		(2,483	)
Increase in accrued expenses and other liabilities			533			2,233
Other, net			(3	)		10
Net cash provided by operating activities			20,313			20,195
Cash flows from investing activities:
Purchases of:	Mortgage-backed securities available for sale		(143,774	)		(31,820	)
	Other investment securities available for sale		(39,290	)		(58,561	)
	Other investment securities held to maturity		(12,882	)		(17,682	)
Proceeds from sale of:	Mortgage-backed securities available for sale		47,938			45,249
	Other investment securities available for sale		10,160			12,251
	Mortgage-backed securities held to maturity		38,501			–
	Other investment securities held to maturity		21,698			–
Maturities and principal payments of:	Mortgage-backed securities available for sale		50,042			69,613
	Other investment securities available for sale		14,957			1,999
	Mortgage-backed securities held to maturity		3,191			12,873
	Other investment securities held to maturity		20,490			8,490
Remittance of Federal Home Loan Bank stock			–			3,000
Net increase in loans			(48,704	)		(1,557	)
Purchases of loans, including purchased interest			(5,841	)		(25,309	)
Purchases of premises and equipment			(3,715	)		(2,619	)
Purchases of bank-owned life insurance			–			(8,000	)
Payment of deferred acquisition obligation			(6,720	)		–
Net cash (used in) provided by investing activities			(53,949	)		7,927
Cash flows from financing activities:
Net (decrease) increase in deposits			(22,110	)		60,929
Net increase in other borrowings			22,518			559
Proceeds from Federal Home Loan Bank advances			532,463			382,529
Repayment of Federal Home Loan Bank advances			(504,729	)		(463,668	)
Purchases of treasury stock, including deferred compensation plan activity			(5,211	)		(117	)
Proceeds from the issuance of common stock under dividend reinvestment plan			–			911
Proceeds from the exercise of share options			989			611
Tax benefit from share option exercises			723			259
Cash dividends paid			(7,904	)		(7,513	)
Net cash provided by (used in) financing activities			16,739			(25,500	)
Net (decrease) increase in cash and cash equivalents			(16,897	)		2,622
Cash and cash equivalents at beginning of year			71,909			66,163
Cash and cash equivalents at end of period		$	55,012		$	68,785

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

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES		(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)				(Continued)
		As Restated
Nine months ended September 30,		2007		2006
Noncash Investing and Financing Activities:
Loans charged off		$	553	$	325
Increase to deferred acquisition obligation			5,921		4,595
Held to maturity securities transferred to available for sale			162,997		–

Supplemental Disclosures:	Interest payments		56,792		50,868
	Income tax payments		8,965		10,327

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

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

General

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

(1) Basis of Presentation

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

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

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

On October 30, 2007, we announced that we identified accounting errors related to sales of certain held-to-maturity investment securities conducted in the second quarter of 2007. Based on our assessment of the provisions of Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Liabilities” (“SFAS No. 159”), on April 12, 2007 we had decided to implement early adoption of SFAS No. 159. In connection with this, we selected the fair value option for certain U.S. Government sponsored agency and mortgage-backed securities with lower coupons and slower prepayment characteristics in the held-to-maturity portfolio totaling approximately $61.9 million. A portfolio restructuring plan was also undertaken to reduce interest rate risk and improve net interest margin, which included the sale of these securities. On Friday April 13, 2007 we executed sale trades for these held-to-maturity securities. At the time of the sales transactions the historical amortized cost basis of the sold securities exceeded the total sales price by $1.7 million. On Monday April 16, 2007 additional information became available regarding clarifications of the interpretation of the application of SFAS No. 159 by applicable regulatory and accounting industry bodies that led us to conclude that the application of SFAS No. 159 to our transactions might be inconsistent with the intent and spirit of SFAS No. 159. Consequently, we decided not to early-adopt SFAS No. 159.

In connection with that decision, we were able to promptly execute purchase trade transactions for the identical securities prior to the sales settlement date for approximately $49.9 million of the $61.9 million total, with the intent that, in substance, the sale transaction would be offset for these securities. The reacquired securities were retained in the held-to-maturity portfolio at the original pre-sale amortized cost and a $1.4 million loss on the sale of the reacquired securities was not recognized. The sale and reacquisition of the $49.9 million in held-to-maturity securities as well as certain other investing and financing transactions conducted in connection with the portfolio restructuring strategy were similarly treated in an offset manner and these transaction amounts were incorrectly omitted from the

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

consolidated statement of cash flows for the period ended June 30, 2007; the correction for these other investing and financing transactions had no effect on net income. For the reacquired securities, the reacquisition price exceeded the selling price by $153 thousand and an expense of this amount was recognized in other noninterest expense in the second quarter of 2007. Also in the second quarter of 2007, a realized securities loss in the amount of $261 thousand was recognized on the securities that were sold but not reacquired. We discussed the accounting treatment described above with KPMG LLP, our independent registered public accounting firm, in connection with its quarterly review process.

Based on a recent review of these transactions, in consultation with KPMG, we have determined that the offsetting of the April 13, 2007 sales and subsequent reacquisition of identical securities was incorrect and that the sale transactions should have been recognized with a $1.4 million realized securities loss and corresponding reduction in the carrying value of the reacquired securities.

Also, we have determined that the remaining held-to-maturity portfolio should have been reclassified to the available-for-sale category. This reclassification has been recognized as of April 13, 2007. Accordingly, the effect on the June 30, 2007 consolidated balance sheet was to reclassify the portfolio of held-to-maturity securities to the available-for-sale category, which resulted in a $1.6 million reduction in shareholders’ equity. We will not be able to classify securities in the held-to-maturity category for a period of two years from the April 13, 2007 sales date as a result of this action.

The correction to reduce the cost basis of the reacquired securities results in a change to the accretion of discount for these securities, which is recognized in interest income until their maturity dates. The resulting additional amount of accretion income recognized on these securities was $79 thousand in each of the quarters ended June 30, 2007 and September 30, 2007.

For the quarter ended June 30, 2007, the accounting corrections for these transactions, including recognition of the realized loss on the sales transactions and other related changes, result in an after-tax reduction in net income of $828 thousand, or 6 cents per diluted share, from $6.3 million, or 46 cents per diluted share, to $5.5 million, or 40 cents per diluted share. For the six-month period ended June 30, 2007 the accounting corrections result in a reduction in net income from $12.3 million, or 90 cents per diluted share, to $11.5 million, or 84 cents per diluted share.

All applicable amounts related to this restatement have been reflected in this Form 10-Q, including the Consolidated Financial Statements and Notes thereto.

On October 24, 2007, management, in consultation with KPMG, concluded that the Corporation’s interim financial statements for the period ended June 30, 2007 should be restated and that the Corporation’s financial statements for the quarter ended June 30, 2007 should no longer be relied upon. The Audit Committee of our Board of Directors has thoroughly reviewed this matter and, on October 26, 2007, approved management’s conclusion.

The Corporation will file an amended Form 10-Q for the quarter ended June 30, 2007 reflecting the necessary adjustments with the SEC as soon as practicable. The Corporation will also file an amended Form 10-Q for the quarter ended March 31, 2007 with the SEC as soon as practicable to add a subsequent event footnote to disclose the second quarter 2007 transactions described above.

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

The following tables summarize the effect of the restatement adjustments on the consolidated financial statements as of and for the three and six months ended June 30, 2007:

Consolidated Balance Sheet (unaudited)	As of June 30, 2007
(Dollars in thousands)	As Reported			Adjustment			As Restated
Available for sale securities	$	525,688		$	150,516		$	676,204
Held to maturity securities		154,171			(154,171	)		–
Total securities		679,859			(3,655	)		676,204
Other assets		21,063			1,237			22,300
Total assets		2,396,300			(2,418	)		2,393,882
Retained earnings		148,485			(828	)		147,657
Accumulated other comprehensive loss		(6,519	)		(1,590	)		(8,109	)
Shareholders’ equity		173,606			(2,418	)		171,188
Total liabilities and shareholders’ equity		2,396,300			(2,418	)		2,393,882

Consolidated Statement of Income (unaudited)	Three Months Ended June 30, 2007
(Dollars in thousands, except per share amounts)	As Reported		Adjustment			As Restated
Interest income on taxable securities	$	7,709	$	130		$	7,839
Interest expense on Federal Home Loan Bank advances		5,063		49			5,112
Net interest income		14,846		81			14,927
Net interest income after provision for loan losses		14,546		81			14,627
Net realized gains (losses) on securities		705		(1,405	)		(700	)
Total noninterest income		12,528		(1,405	)		11,123
Other noninterest expense		2,274		(115	)		2,159
Total noninterest expense		17,875		(115	)		17,760
Income before taxes		9,199		(1,209	)		7,990
Income tax expense		2,889		(381	)		2,508
Net income		6,310		(828	)		5,482

Basic earnings per share	$	0.47	$	(0.06	)	$	0.41
Diluted earnings per share	$	0.46	$	(0.06	)	$	0.40

Consolidated Statement of Income (unaudited)	Six Months Ended June 30, 2007
(Dollars in thousands, except per share amounts)	As Reported		Adjustment			As Restated
Interest income on taxable securities	$	15,501	$	130		$	15,631
Interest expense on FHLB advances		10,031		49			10,080
Net interest income		29,716		81			29,797
Net interest income after provision for loan losses		29,116		81			29,197
Net realized gains on securities		1,741		(1,405	)		336
Total noninterest income		23,776		(1,405	)		22,371
Other noninterest expense		3,870		(115	)		3,755
Total noninterest expense		34,984		(115	)		34,869
Income before taxes		17,908		(1,209	)		16,699
Income tax expense		5,623		(381	)		5,242
Net income		12,285		(828	)		11,457

Basic earnings	$	0.92	$	(0.06	)	$	0.86
Diluted earnings	$	0.90	$	(0.06	)	$	0.84

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

Consolidated Statement of Cash Flows (unaudited)	Six Months Ended June 30, 2007

(Dollars in thousands)	As Reported			Adjustment			As Restated
Cash flows from operating activities:
Net income	$	12,285		$	(828	)	$	11,457
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of premium and discount		433			(79	)		354
Net realized gains on sales of securities		(1,741	)		1,405			(336	)
Increase in other assets		(607	)		(380	)		(987	)
Net cash provided by operating activities		9,434			118			9,552
Cash flows from investing activities:
Purchases of:
Mortgage-backed securities available for sale		(29,065	)		(84,584	)		(113,649	)
Other investment securities available for sale		(18,865	)		(15,031	)		(33,896	)
Mortgage-backed securities held to maturity		–			–			–
Other investment securities held to maturity		(16,011	)		3,129			(12,882	)
Proceeds from sale of:
Mortgage-backed securities available for sale		–			47,938			47,938
Other investment securities available for sale		9,438			–			9,438
Mortgage-backed securities held to maturity		1,954			36,547			38,501
Other investment securities held to maturity		9,815			11,883			21,698
Maturities and principal payments of:
Mortgage-backed securities available for sale		29,542			3,041			32,583
Other investment securities available for sale		5,982			450			6,432
Mortgage-backed securities held to maturity		6,232			(3,041	)		3,191
Other investment securities held to maturity		20,940			(450	)		20,490
Net cash used in investing activities		(19,376	)		(118	)		(19,494	)
Cash flows from financing activities:
Proceeds from Federal Home Loan Bank advances		344,719			47,000			391,719
Repayment of Federal Home Loan Bank advances		(350,433	)		(47,000	)		(397,433	)
Net cash provided by financing activities		(3,951	)		–			(3,951	)
Net decrease in cash and cash and cash equivalents		(13,893	)		–			(13,893	)

(2) New Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140” (“SFAS No. 155”). SFAS No. 155 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. SFAS No. 155 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 SFAS No. 155 may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. Prior periods should not be restated. The adoption of SFAS No. 155 did not have a material impact on the Corporation’s financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140” (“SFAS No. 156”). SFAS No. 156 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

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

after September 15, 2006. The adoption of SFAS No. 156 did not have a material impact on the Corporation’s financial position or results of operations.

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

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

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

In February 2007, the FASB issued SFAS No. 159. SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument-by-instrument with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. Early adoption was permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elected to apply the provisions of SFAS No. 157, “Fair Value Instruments.” Based on our assessment of the provisions of SFAS 159, on April 12, 2007 we decided to implement early adoption of SFAS 159. In connection with this adoption, we selected the fair value option for certain U.S. Government sponsored agency and mortgage-backed securities with lower coupons and slower prepayment characteristics in the held-to-maturity portfolio totaling approximately $61.9 million. A portfolio restructuring plan was also undertaken to reduce interest rate risk and improve net interest margin, which included the sale of these securities. On Friday April 13, 2007 we executed sale trades for these held-to-maturity securities. At the time of the sales transactions the historical amortized cost basis of the sold securities exceeded the total sales price by $1.7 million. On Monday April 16, 2007 additional information became available regarding clarifications of the interpretation of the application of SFAS 159 by applicable regulatory and accounting industry bodies that led us to conclude that the application of SFAS 159 to our transactions might be inconsistent with the intent and spirit of SFAS 159. Consequently, we decided not to early-adopt SFAS 159. See further discussion regarding the restatement in Note 1 and Note 3 to the Consolidated Financial Statements.

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

(3) Securities

Securities available for sale are summarized as follows:

(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
September 30, 2007 (As Restated)
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies	$	173,396	$	1,381	$	(89	)	$	174,688
Mortgage-backed securities issued by
U.S. government-sponsored agencies		369,718		1,099		(4,858	)		365,959
States and political subdivision		80,640		85		(746	)		79,979
Trust preferred securities		38,010		–		(2,410	)		35,600
Corporate bonds		16,954		38		(28	)		16,964
Corporate stocks		13,118		3,120		(719	)		15,519
Total		691,836		5,723		(8,850	)		688,709
December 31, 2006
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies		157,383		778		(876	)		157,285
Mortgage-backed securities issued by
U.S. government-sponsored agencies		298,038		923		(5,174	)		293,787
Trust preferred securities		30,571		208		(205	)		30,574
Corporate bonds		24,998		83		(47	)		25,034
Corporate stocks		14,976		4,915		(175	)		19,716
Total	$	525,966	$	6,907	$	(6,477	)	$	526,396

Securities held to maturity are summarized as follows:

(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
December 31, 2006
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies	$	42,000	$	–	$	(422	)	$	41,578
Mortgage-backed securities issued by
U.S. government-sponsored agencies		69,340		440		(1,604	)		68,176
States and political subdivisions		66,115		88		(588	)		65,615
Total	$	177,455	$	528	$	(2,614	)	$	175,369

In connection with a planned early adoption of SFAS No. 159, the Corporation sold twelve held to maturity securities with an amortized cost of $61.9 million on April 13, 2007. The Corporation subsequently decided not to early-adopt SFAS No. 159 and realized securities losses of $1.7 million were recognized in the second quarter of 2007 (as restated). In addition, the remaining held-to-maturity portfolio was reclassified to the available-for-sale category as of the April 13, 2007 sale date of the securities. The Corporation will not be able to classify securities in the held-to-maturity category for a period of two years from the April 13, 2007 sales date as a result of this action. See additional discussion regarding the restatement in Note 1 to the Consolidated Financial Statements.

Securities available for sale with a fair value of $528.9 million and securities available for sale and held to maturity with a fair value of $557.4 million were pledged in compliance with state regulations concerning trust powers and to secure Treasury Tax and Loan deposits, borrowings, and certain public deposits at September 30, 2007 and December 31, 2006, respectively. In addition, securities available for sale with a fair value of $8.3 million and securities available for sale and held to maturity with a fair value of $9.6 million were collateralized for the discount window at the Federal Reserve Bank at September 30, 2007 and December 31, 2006, respectively. There were no borrowings with the Federal Reserve Bank at either date. Securities available for sale with a fair value of $1.9 million and $2.1 million were designated in a rabbi trust for a nonqualified retirement plan at September 30, 2007 and

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

December 31, 2006. As of September 30, 2007, securities available for sale with a fair value of $21.5 million were pledged as collateral to secure securities sold under agreements to repurchase.

At September 30, 2007 and December 31, 2006, the securities portfolio included $3.1 million and $1.7 million of net pretax unrealized losses, respectively. Included in these net amounts were gross unrealized losses amounting to $8.9 million and $9.1 million at September 30, 2007 and December 31, 2006, respectively.

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

(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
(As Restated)			Fair		Unrealized				Fair		Unrealized				Fair		Unrealized
At September 30, 2007		#	Value		Losses			#	Value		Losses			#	Value		Losses
U.S. Treasury obligations
and obligations of U.S. government-sponsored agencies		–	$	–	$	–		5	$	27,162	$	89		5	$	27,162	$	89
Mortgage-backed securities
issued by U.S. government-sponsored agencies		19		79,778		704		62		185,462		4,154		81		265,240		4,858
States and
political subdivisions		69		57,400		567		13		8,134		179		82		65,534		746
Trust preferred securities		8		24,572		1,381		5		11,029		1,029		13		35,601		2,410
Corporate bonds		2		6,120		18		1		2,993		10		3		9,113		28
Subtotal, debt securities		98		167,870		2,670		86		234,780		5,461		184		402,650		8,131
Corporate stocks		6		6,632		620		3		938		99		9		7,570		719
Total temporarily
impaired securities		104	$	174,502	$	3,290		89	$	235,718	$	5,560		193	$	410,220	$	8,850

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

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

For those debt securities whose amortized cost exceeds fair value, the primary cause is related to the movement of interest rates. The Corporation believes that the nature and duration of impairment on its debt security holdings are primarily a function of interest rate movements and changes in investment spreads, and does not consider full repayment of principal on the reported debt obligations to be at risk. The Corporation has the ability and intent to hold these investments to full recovery of the cost basis. The debt securities in an unrealized loss position at September 30, 2007 consisted of 184 debt security holdings. The largest loss percentage of any single holding was 11.45% 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, 2007 consisted of 9 holdings of financial and commercial entities.

(4) Loan Portfolio

The following is a summary of loans:

(Dollars in thousands)	September 30, 2007					December 31, 2006
	Amount		%			Amount		%
Commercial:
Mortgages (1)	$	276,995		18	%	$	282,019		19	%
Construction and development (2)		48,899		3	%		32,233		2	%
Other (3)		324,129		22	%		273,145		19	%
Total commercial		650,023		43	%		587,397		40	%

Residential real estate:
Mortgages (4)		566,776		37	%		577,522		39	%
Homeowner construction		12,040		1	%		11,149		1	%
Total residential real estate		578,816		38	%		588,671		40	%

Consumer:
Home equity lines		139,732		9	%		145,676		10	%
Home equity loans		99,798		7	%		93,947		6	%
Other		46,124		3	%		44,295		4	%
Total consumer		285,654		19	%		283,918		20	%
Total loans (5)	$	1,514,493		100	%	$	1,459,986		100	%

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

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

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

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

(5)

Net of unamortized loan origination fees, net of costs, totaling $92 thousand and $277 thousand at September 30, 2007 and December 31, 2006, respectively. Also includes $130 thousand and $342 thousand of premium, net of discount, on purchased loans at September 30, 2007 and December 31, 2006, respectively.

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

(5) 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,	2007			2006			2007			2006
Balance at beginning of period	$	19,327		$	18,480		$	18,894		$	17,918
Provision charged to expense		300			300			900			900
Recoveries of loans previously charged off		27			39			231			152
Loans charged off		(182	)		(174	)		(553	)		(325	)
Balance at end of period	$	19,472		$	18,645		$	19,472		$	18,645