Edgar Filing: WASHINGTON TRUST BANCORP INC

form10-qa20070630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1 to)

(Mark One)

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

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

Commission file number: 000-13091

WASHINGTONTRUSTBANCORP,INC.

(Exact name of registrant as specified in its charter)

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

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

(401) 348-1200

(Registrant’s telephone number, including area code)

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

xYes o No

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).

o Yes x No

The number of shares of common stock of the registrant outstanding as of July 31, 2007 was 13,304,518.

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EXPLANATORY NOTE

We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2007, originally filed with the Securities and Exchange Commission (the “SEC”) on August 8, 2007 (the “Original Filing”), to restate our consolidated financial statements as of June 30, 2007 and for the three and six months ended June 30, 2007. Please refer to Note 1 of our consolidated financial statements for additional information relating to the restatement of our consolidated financial statements.

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 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.

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$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.

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.

This Form 10-Q/A does not reflect events occurring after the filing of the Original Filing on August 8, 2007 or modify or update those disclosures affected by subsequent events or discoveries. Information not affected by this disclosure is unchanged and reflects the disclosures made at the time of the Original Filing on August 8, 2007. Accordingly, this Form 10-Q/A should be read in conjunction with our filings that we have made with the SEC subsequent to the filing of the Original Filing, which include our Current Reports on Form 8-K.

We have amended disclosures presented in the Original Filing as required to reflect the matters described above and accordingly, have amended only the following items:

·	Part I—Item 1—Financial Statements

·	Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

·	Part I—Item 3—Quantitative and Qualitative Disclosures About Market Risk

·	Part II—Item 6—Exhibits

The other items of the Original Filing have not been amended and, accordingly, have not been repeated in this Form 10-Q/A.

In addition, in accordance with applicable SEC rules, this Form 10-Q/A includes updated certifications from our chief executive officer and chief financial officer as Exhibits 31.1, 31.2, 32.1 and 32.2.

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

TABLE OF CONTENTS
		Page
		Number

PART I. Financial Information

Item 1. Financial Statements

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

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

Consolidated Statements of Cash Flows
	Six Months Ended June 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

PART II. Other Information

Item 6. Exhibits		39

Signatures		40

Exhibit 15.1 Letter re: Unaudited Interim Financial Information

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

Exhbit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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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
	June 30,			December 31,
	2007			2006
Assets:
Cash and due from banks	$	36,942		$	54,337
Federal funds sold		19,175			16,425
Other short-term investments		1,899			1,147
Mortgage loans held for sale		4,132			2,148
Securities:
Available for sale, at fair value; amortized cost $683,104 in 2007 and $525,966 in 2006		676,204			526,396
Held to maturity, at cost; fair value $175,369 in 2006		–			177,455
Total securities		676,204			703,851
Federal Home Loan Bank stock, at cost		28,727			28,727
Loans:
Commercial and other		622,988			587,397
Residential real estate		583,392			588,671
Consumer		282,794			283,918
Total loans		1,489,174			1,459,986
Less allowance for loan losses		19,327			18,894
Net loans		1,469,847			1,441,092
Premises and equipment, net		26,293			24,307
Accrued interest receivable		11,145			11,268
Investment in bank-owned life insurance		40,560			39,770
Goodwill		44,558			44,558
Identifiable intangible assets, net		12,100			12,816
Other assets		22,300			18,719
Total assets	$	2,393,882		$	2,399,165
Liabilities:
Deposits:
Demand deposits	$	177,210		$	186,533
NOW accounts		174,715			175,479
Money market accounts		290,046			286,998
Savings accounts		196,105			205,998
Time deposits		831,013			822,989
Total deposits		1,669,089			1,677,997
Dividends payable		2,667			2,556
Federal Home Loan Bank advances		468,827			474,561
Junior subordinated debentures		22,681			22,681
Other borrowings		27,574			14,684
Accrued expenses and other liabilities		31,856			33,630
Total liabilities		2,222,694			2,226,109
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 30,000,000 shares;
issued 13,492,110 in 2007 and 2006		843			843
Paid-in capital		35,734			35,893
Retained earnings		147,657			141,548
Accumulated other comprehensive loss		(8,109	)		(3,515	)
Treasury stock, at cost; 186,972 shares in 2007 and 62,432 shares in 2006		(4,937	)		(1,713	)
Total shareholders’ equity		171,188			173,056
Total liabilities and shareholders’ equity	$	2,393,882		$	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)

	Three Months					Six Months
	As Restated					As Restated
Periods ended June 30,	2007			2006		2007		2006
Interest income:
Interest and fees on loans	$	24,414		$	23,130	$	48,348	$	45,027
Interest on securities:
Taxable		7,839			8,648		15,631		17,060
Nontaxable		759			371		1,427		699
Dividends on corporate stock and Federal Home Loan Bank stock		685			249		1,403		926
Interest on federal funds sold and other short-term investments		184			150		375		265
Total interest income		33,881			32,548		67,184		63,977
Interest expense:
Deposits		13,215			11,161		26,192		21,399
Federal Home Loan Bank advances		5,112			5,745		10,080		11,104
Junior subordinated debentures		338			338		676		676
Other		289			87		439		166
Total interest expense		18,954			17,331		37,387		33,345
Net interest income		14,927			15,217		29,797		30,632
Provision for loan losses		300			300		600		600
Net interest income after provision for loan losses		14,627			14,917		29,197		30,032
Noninterest income:
Wealth management services:
Trust and investment advisory fees		5,252			4,682		10,290		9,309
Mutual fund fees		1,352			1,214		2,614		2,344
Financial planning, commissions and other service fees		889			841		1,459		1,524
Wealth management services		7,493			6,737		14,363		13,177
Service charges on deposit accounts		1,220			1,236		2,345		2,355
Merchant processing fees		1,829			1,656		3,033		2,703
Income from bank-owned life insurance		399			346		790		625
Net gains on loan sales and commissions on loans originated for others		510			336		774		612
Net realized (losses) gains on securities		(700	)		765		336		824
Other income		372			371		730		671
Total noninterest income		11,123			11,447		22,371		20,967
Noninterest expense:
Salaries and employee benefits		10,285			9,830		20,097		19,449
Net occupancy		1,038			1,018		2,055		1,972
Equipment		861			881		1,693		1,680
Merchant processing costs		1,558			1,407		2,577		2,294
Outsourced services		535			496		1,054		1,014
Advertising and promotion		572			681		1,001		1,118
Legal, audit and professional fees		404			403		854		779
Amortization of intangibles		348			406		716		811
Debt prepayment penalties		-			–		1,067		–
Other		2,159			2,158		3,755		3,867
Total noninterest expense		17,760			17,280		34,869		32,984
Income before income taxes		7,990			9,084		16,699		18,015
Income tax expense		2,508			2,907		5,242		5,765
Net income	$	5,482		$	6,177	$	11,457	$	12,250

Weighted average shares outstanding - basic		13,339.6			13,419.9		13,375.7		13,403.4
Weighted average shares outstanding - diluted		13,616.4			13,703.2		13,667.6		13,699.6
Per share information:
Basic earnings per share	$	0.41		$	0.46	$	0.86	$	0.91
Diluted earnings per share	$	0.40		$	0.45	$	0.84	$	0.89
Cash dividends declared per share	$	0.20		$	0.19	$	0.40	$	0.38

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

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES	(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
		As Restated
Six months ended June 30,		2007			2006
Cash flows from operating activities:
Net income		$	11,457		$	12,250
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			600			600
Depreciation of premises and equipment			1,464			1,513
Loss on disposal of premises and equipment			23			–
Net amortization of premium and discount			354			791
Net amortization of intangibles			716			811
Share-based compensation			323			360
Non-cash charitable contribution			520			513
Earnings from bank-owned life insurance			(790	)		(625	)
Net gains on loan sales			(774	)		(612	)
Net realized gains on sales of securities			(336	)		(824	)
Proceeds from sales of loans			28,293			18,208
Loans originated for sale			(29,811	)		(18,646	)
Decrease (increase) in accrued interest receivable, excluding purchased interest			137			(51	)
Increase in other assets			(987	)		(1,562	)
(Decrease) increase in accrued expenses and other liabilities			(1,635	)		42
Other, net			(2	)		8
Net cash provided by operating activities			9,552			12,776
Cash flows from investing activities:
Purchases of:	Mortgage-backed securities available for sale		(113,649	)		(23,854	)
	Other investment securities available for sale		(33,896	)		(41,868	)
	Other investment securities held to maturity		(12,882	)		(12,526	)
Proceeds from sale of:	Mortgage-backed securities available for sale		47,938			–
	Other investment securities available for sale		9,438			706
	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		32,583			49,168
	Other investment securities available for sale		6,432			–
	Mortgage-backed securities held to maturity		3,191			8,965
	Other investment securities held to maturity		20,490			7,685
Remittance of Federal Home Loan Bank stock			–			1,051
Net increase in loans			(24,880	)		(8,016	)
Purchases of loans, including purchased interest			(4,265	)		(21,592	)
Purchases of premises and equipment			(3,473	)		(2,037	)
Purchases of bank-owned life insurance			–			(8,000	)
Payment of deferred acquisition obligation			(6,720	)		–
Net cash used in investing activities			(19,494	)		(50,318	)
Cash flows from financing activities:
Net (decrease) increase in deposits			(8,908	)		31,541
Net increase (decrease) in other borrowings			19,610			(2,601	)
Proceeds from Federal Home Loan Bank advances			391,719			338,104
Repayment of Federal Home Loan Bank advances			(397,433	)		(339,814	)
Purchases of treasury stock, including deferred compensation plan activity			(4,264	)		(91	)
Proceeds from the issuance of common stock under dividend reinvestment plan			–			610
Proceeds from the exercise of share options			320			523
Tax benefit from share option exercises			242			241
Cash dividends paid			(5,237	)		(4,959	)
Net cash (used in) provided by financing activities			(3,951	)		23,554
Net decrease in cash and cash equivalents			(13,893	)		(13,988	)
Cash and cash equivalents at beginning of year			71,909			66,163
Cash and cash equivalents at end of period		$	58,016		$	52,175

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

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES		(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)		(Continued)

		As Restated
Six months ended June 30,		2007		2006
Noncash Investing and Financing Activities:
	Loans charged off	$	370	$	151
	Held to maturity securities transferred to available for sale		162,997		–
Supplemental Disclosures:	Interest payments		37,588		32,588
	Income tax payments		6,309		6,400

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

In the Corporation’s quarterly report on Form 10-Q for the quarter ended March 31, 2007, a $6.7 million deferred acquisition obligation payment was misclassified as a financing activity, in the line item “Net increase in other borrowings,” in the Consolidated Statements of Cash Flows. The Consolidated Statement of Cash Flows for the six months ended June 30, 2007 has been corrected to properly report this first quarter payment as an investing activity, in the line item “Payment of deferred acquisition obligation.”

The following table presents the impact of the misclassification on the Consolidated Statements of Cash Flows for the three months ended March 31, 2007:

(Dollars in thousands)

Three Months ended March 31, 2007	As Reported			Reclass			As Adjusted
Net cash used in investing activities	$	(11,849	)	$	(6,720	)	$	(18,569	)
Net cash (used in) provided by financing activities		(4,886	)		6,720			1,834

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

On November 20, 2007, we filed an Amendment No. 1 to our Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2007, originally filed with the SEC on August 8, 2007, to restate our consolidated financial statements as of June 30, 2007 and for the three and six months ended June 30, 2007.

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 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.

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.

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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

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

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

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	)

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

(2) New Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140,” (“SFAS No. 155”). This Statement eliminates the exemption from applying SFAS No. 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. This Statement also allows a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have to be bifurcated. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. Prior periods should not be restated. The adoption of SFAS No. 155 did not have a material impact on the Corporation’s financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140,” (“SFAS No. 156”). This Statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value. SFAS No. 156 permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. An entity that used derivative instruments to mitigate the risks inherent in servicing assets and servicing liabilities is required to account for those derivative instruments at fair value. SFAS No. 156 is effective as of the beginning of the first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 156 did not have a material impact on the Corporation’s financial position or results of operations.

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

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

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

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities – Including an amendment to FASB No. 115” (“SFAS No. 159”). This Statement permits entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument-by-instrument with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and

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

(iii) is applied only to entire instruments and not to portions of instruments. This Statement is effective as of the beginning of the first fiscal year that begins after November 15, 2007. Early adoption 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 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. See further discussion in the Explanatory Note and in Note 3.

(3) Securities

Securities available for sale are summarized as follows:

(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2007 (As Restated)
U.S. Treasury obligations and obligations
of U.S. government-sponsored agencies	$	173,342	$	19	$	(1,124	)	$	172,237
Mortgage-backed securities issued by
U.S. government-sponsored agencies		357,164		857		(7,337	)		350,684
States and political subdivisions		81,173		6		(1,966	)		79,213
Trust preferred securities		33,317		206		(192	)		33,331
Corporate bonds		24,968		33		(142	)		24,859
Corporate stocks		13,140		3,063		(323	)		15,880
Total		683,104		4,184		(11,084	)		676,204
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

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

In connection with a planned early adoption of SFAS No. 159, the Corporation sold twelve held to maturity debt 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 April 13, 2007. 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 the Explanatory Note and Note 1 to the Consolidated Financial Statements.

Securities available for sale with a fair value of $527.8 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 June 30, 2007 and December 31, 2006, respectively. In addition, securities available for sale with a fair value of $8.7 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 June 30, 2007 and December 31, 2006, respectively. There were no borrowings with the Federal Reserve Bank at either date. Securities available for sale with a fair value of $2.0 million and $2.1 million were designated in a rabbi trust for a nonqualified retirement plan at June 30, 2007 and December 31, 2006. As of June 30, 2007, securities available for sale with a fair value of $20.8 million were pledged as collateral to secure securities sold under agreements to repurchase.

At June 30, 2007 and December 31, 2006, the securities portfolio included $6.9 million (as restated) and $1.7 million of net pretax unrealized losses, respectively. Included in these net amounts were gross unrealized losses amounting to $11.1 million (as restated) and $9.1 million at June 30, 2007 and December 31, 2006, respectively.

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

(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
(As Restated)			Fair		Unrealized				Fair		Unrealized				Fair		Unrealized
At June 30, 2007		#	Value		Losses			#	Value		Losses			#	Value		Losses
U.S. Treasury obligations
and obligations of U.S. government-sponsored agencies		10	$	91,357	$	378		12	$	72,661	$	746		22	$	164,018	$	1,124
Mortgage-backed securities
issued by U.S. government-sponsored agencies		20		75,349		740		65		196,272		6,597		85		271,621		7,337
States and
political subdivisions		91		70,674		1,705		12		6,648		261		103		77,322		1,966
Trust preferred securities		3		10,477		63		5		11,927		129		8		22,404		192
Corporate bonds		4		14,092		133		1		3,000		9		5		17,092		142
Subtotal, debt securities		128		261,949		3,019		95		290,508		7,742		223		552,457		10,761
Corporate stocks		6		7,027		226		4		1,462		97		10		8,489		323
Total temporarily
impaired securities		134	$	268,976	$	3,245		99	$	291,970	$	7,839		233	$	560,946	$	11,084

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

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

For those debt securities whose amortized cost exceeds fair value, the primary cause is related to the movement of interest rates. The Corporation believes that the nature and duration of impairment on its debt security holdings are primarily a function of interest rate movements and changes in investment spreads, and does not consider full repayment of principal on the reported debt obligations to be at risk. The Corporation has the ability and intent to hold these investments to full recovery of the cost basis. The debt securities in an unrealized loss position at June 30, 2007 consisted of 223 debt security holdings. The largest loss percentage of any single holding was 6.28% of its amortized cost.

Causes of conditions whereby the fair value of corporate stock equity securities is less than cost include the timing of purchases and changes in valuation specific to individual industries or issuers. The relationship between the level of market interest rates and the dividend rates paid on individual equity securities may also be a contributing factor. The Corporation believes that the nature and duration of impairment on its equity securities holdings are considered to be a function of general financial market movements and industry conditions. The equity securities in an unrealized loss position at June 30, 2007 consisted of 10 holdings of financial and commercial entities.

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

(4) Loan Portfolio

The following is a summary of loans:

(Dollars in thousands)	June 30, 2007					December 31, 2006
	Amount		%			Amount		%
Commercial:
Mortgages (1)	$	265,560		18	%	$	282,019		19	%
Construction and development (2)		43,755		3	%		32,233		2	%
Other (3)		313,673		21	%		273,145		19	%
Total commercial		622,988		42	%		587,397		40	%

Residential real estate:
Mortgages (4)		572,321		38	%		577,522		39	%
Homeowner construction		11,071		1	%		11,149		1	%
Total residential real estate		583,392		39	%		588,671		40	%

Consumer:
Home equity lines		139,256		9	%		145,676		10	%
Home equity loans		97,253		7	%		93,947		6	%
Other		46,285		3	%		44,295		4	%
Total consumer		282,794		19	%		283,918		20	%
Total loans (5)	$	1,489,174		100	%	$	1,459,986		100	%

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

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

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

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

(5)	Net of unamortized loan origination fees, net of costs, totaling $65 thousand and $277 thousand at June 30, 2007 and December 31, 2006, respectively. Also includes $112 thousand and $342 thousand of premium, net of discount, on purchased loans at June 30, 2007 and December 31, 2006, respectively.

(5) Allowance for Loan Losses

The following is an analysis of the allowance for loan losses:

(Dollars in thousands)
	Three Months			Six Months
Periods ended June 30,	2007		2006	2007	2006
Balance at beginning of period	$	19,360