form10-q20110331.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 MARCH 31, 2011 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:  001-32991
 
WASHINGTON TRUST BANCORP, INC.
 
(Exact name of registrant as specified in its charter)

RHODE ISLAND
 
05-0404671
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer 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 has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
oYes           oNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Mark one)
 
Large accelerated filer  o
Accelerated filer  x
Non-accelerated filer  o
Smaller reporting company  o
(Do not check if a smaller reporting company)
 

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 May 2, 2011 was 16,252,884.


 
 


FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended March 31, 2011
     
   
Page
   
Number
     
 
   
 
   
 
 
     
 
 
     
 
 
     
   
   
   
   
 
   
   
   
   
   
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 Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   
   
Exhibit 32.1 Certifications 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   

 
 
-2-

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

   
March 31,
   
December 31,
 
   
2011
   
2010
 
Assets:
           
Cash and due from banks
  $ 68,113     $ 85,971  
Other short-term investments
    6,296       6,765  
Mortgage loans held for sale
    2,985       13,894  
Securities available for sale, at fair value;
               
amortized cost $560,752 in 2011 and $578,897 in 2010
    576,158       594,100  
Federal Home Loan Bank stock, at cost
    42,008       42,008  
Loans:
               
Commercial and other
    1,056,388       1,027,065  
Residential real estate
    649,157       645,020  
Consumer
    324,092       323,553  
Total loans
    2,029,637       1,995,638  
Less allowance for loan losses
    29,109       28,583  
Net loans
    2,000,528       1,967,055  
Premises and equipment, net
    26,010       26,069  
Investment in bank-owned life insurance
    52,320       51,844  
Goodwill
    58,114       58,114  
Identifiable intangible assets, net
    7,614       7,852  
Other assets
    52,126       55,853  
Total assets
  $ 2,892,272     $ 2,909,525  
Liabilities:
               
Deposits:
               
Demand deposits
  $ 274,798     $ 228,437  
NOW accounts
    228,502       241,974  
Money market accounts
    387,923       396,455  
Savings accounts
    223,599       220,888  
Time deposits
    934,024       948,576  
Total deposits
    2,048,846       2,036,330  
Federal Home Loan Bank advances
    469,235       498,722  
Junior subordinated debentures
    32,991       32,991  
Other borrowings
    21,467       23,359  
Other liabilities
    45,848       49,259  
Total liabilities
    2,618,387       2,640,661  
Shareholders’ Equity:
               
Common stock of $.0625 par value; authorized 30,000,000 shares;
               
issued 16,233,587 shares in 2011 and 16,171,618 shares in 2010
    1,015       1,011  
Paid-in capital
    86,348       84,889  
Retained earnings
    182,136       178,939  
Accumulated other comprehensive income
    4,386       4,025  
Total shareholders’ equity
    273,885       268,864  
Total liabilities and shareholders’ equity
  $ 2,892,272     $ 2,909,525  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

 
 
-3-

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars and shares in thousands,
except per share amounts)

Three months ended March 31,
 
2011
   
2010
 
Interest income:
           
Interest and fees on loans
  $ 24,259     $ 23,968  
Interest on securities:
Taxable
    4,773       6,051  
 
Nontaxable
    769       769  
Dividends on corporate stock and Federal Home Loan Bank stock
    67       55  
Other interest income
    24       21  
Total interest income
    29,892       30,864  
Interest expense:
               
Deposits
    4,202       5,769  
Federal Home Loan Bank advances
    4,732       6,219  
Junior subordinated debentures
    390       630  
Other interest expense
    241       242  
Total interest expense
    9,565       12,860  
Net interest income
    20,327       18,004  
Provision for loan losses
    1,500       1,500  
Net interest income after provision for loan losses
    18,827       16,504  
Noninterest income:
               
Wealth management services:
               
Trust and investment advisory fees
    5,676       5,017  
Mutual fund fees
    1,123       1,110  
Financial planning, commissions and other service fees
    281       179  
Wealth management services
    7,080       6,306  
Service charges on deposit accounts
    932       849  
Merchant processing fees
    1,944       1,606  
Card interchange fees
    487       389  
Income from bank-owned life insurance
    476       439  
Net gains on loan sales and commissions on loans originated for others
    525       560  
Net realized loss on securities
    (29 )      
Net gains on interest rate swap contracts
    76       68  
Equity in losses of unconsolidated subsidiaries
    (144 )     (52 )
Other income
    383       365  
Noninterest income, excluding other-than-temporary impairment losses
    11,730       10,530  
Total other-than-temporary impairment losses on securities
    (54 )     (2 )
Portion of loss recognized in other comprehensive income (before tax)
    21       (61 )
Net impairment losses recognized in earnings
    (33 )     (63 )
Total noninterest income
    11,697       10,467  
Noninterest expense:
               
Salaries and employee benefits
    11,828       11,501  
Net occupancy
    1,321       1,224  
Equipment
    1,049       997  
Merchant processing costs
    1,669       1,357  
Outsourced services
    872       840  
FDIC deposit insurance costs
    723       794  
Legal, audit and professional fees
    492       518  
Advertising and promotion
    353       364  
Amortization of intangibles
    238       291  
Foreclosed property costs
    166       36  
Other expenses
    2,029       1,755  
Total noninterest expense
    20,740       19,677  
Income before income taxes
    9,784       7,294  
Income tax expense
    2,984       2,122  
Net income
  $ 6,800     $ 5,172  
Weighted average common shares outstanding - basic
    16,197.2       16,057.7  
Weighted average common shares outstanding - diluted
    16,229.8       16,063.9  
Per share information:
Basic earnings per common share
  $ 0.42     $ 0.32  
 
Diluted earnings per common share
  $ 0.42     $ 0.32  
 
Cash dividends declared per share
  $ 0.22     $ 0.21  
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
-4-

 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
 
(Dollars in thousands)
 
     
       
Three months ended March 31,
 
2011
   
2010
 
Cash Flows from Operating Activities:
           
Net income
  $ 6,800     $ 5,172  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    1,500       1,500  
Depreciation of premises and equipment
    767       772  
Net amortization of premium and discount
    373       102  
Net amortization of intangibles
    238       291  
Share-based compensation
    328       177  
Earnings from bank-owned life insurance
    (476 )     (439 )
Net gains on loan sales and commissions on loans originated for others
    (525 )     (560 )
Net realized losses on securities
    29        
Net impairment losses recognized in earnings
    33       63  
Net gains on interest rate swap contracts
    (76 )     (68 )
Equity in losses of unconsolidated subsidiaries
    144       52  
Proceeds from sales of loans
    32,066       36,113  
Loans originated for sale
    (20,267 )     (30,336 )
Decrease in other assets
    3,073       2,267  
Decrease in other liabilities
    (3,103 )     (708 )
Other, net
    5       6  
Net cash provided by operating activities
    20,909       14,404  
Cash Flows from Investing Activities:
               
Purchases of:
Mortgage-backed securities available for sale
    (49,675 )     (44,479 )
 
Other investment securities available for sale
    -       (15,000 )
Proceeds from sale of:
Mortgage-backed securities available for sale
    36,838       -  
 
Other investment securities available for sale
    -       711  
Maturities and principal payments of mortgage-backed securities available for sale
    30,519       36,184  
Net increase in loans
    (33,606 )     (18,887 )
Purchases of loans, including purchased interest
    (1,710 )     (75 )
Proceeds from the sale of property acquired through foreclosure or repossession
    251        
Purchases of premises and equipment
    (713 )     (621 )
Net cash used in investing activities
    (18,096 )     (42,167 )
Cash Flows from Financing Activities:
               
Net increase in deposits
    12,517       38,178  
Net decrease in other borrowings
    (1,892 )     (698 )
Proceeds from Federal Home Loan Bank advances
    43,578       15,000  
Repayment of Federal Home Loan Bank advances
    (73,065 )     (44,360 )
Issuance of treasury stock, including deferred compensation plan activity
    -       35  
Net proceeds from the issuance of common stock under dividend reinvestment plan
    236       256  
Net proceeds from the exercise of stock options and issuance of other
               
compensation-related equity instruments
    819       214  
Tax benefit from stock option exercises and issuance of other compensation-related equity instruments
    81       24  
Cash dividends paid
    (3,414 )     (3,369 )
Net cash (used in) provided by financing activities
    (21,140 )     5,280  
Net decrease in cash and cash equivalents
    (18,327 )     (22,483 )
Cash and cash equivalents at beginning of period
    92,736       57,260  
Cash and cash equivalents at end of period
  $ 74,409     $ 34,777  
                 
Noncash Investing and Financing Activities:
Loans charged off
  $ 1,052     $ 1,275  
 
Net transfer from loans to property acquired through
               
 
foreclosure or repossession
    129        
 
Proceeds due from sale of property acquired
               
 
through foreclosure or repossession
    1,267        
                   
Supplemental Disclosures:
Interest payments
    9,190       12,064  
 
Income tax (refunds) payments
    (584 )     3  
   
The accompanying notes are an integral part of these unaudited consolidated financial statements.
 
 
-5-

 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
 
 
 
General
Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company that has elected to be a 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 including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and southeastern Connecticut.

(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, other intangible assets and investments for impairment.  The current economic environment has increased the degree of uncertainty inherent in such estimates and assumptions.

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 March 31, 2011 and December 31, 2010, 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 the Annual Report on Form 10-K for the year ended December 31, 2010.

(2) Recently Issued Accounting Pronouncements
Receivables – Topic 310
Accounting Standards Update No. 2010-20 “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”) was issued in July 2010.  ASU 2010-20 significantly enhances disclosures that entities must make about the credit quality of financing receivables and the allowance for credit losses.  The FASB issued the ASU to give financial statement users greater transparency about entities’ credit-risk exposures and the allowance for credit losses.  The disclosures provide financial statement users with additional information about the nature of credit risks inherent in entities’ financing receivables, how credit risk is analyzed and assessed when determining the allowance for credit losses, and the reasons for the change in the allowance for credit losses.  Accounting Standards Update No. 2011-01 “Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update 2010-20” (“ASU 2011-01”) was issued in January 2011 and delayed the effective date of the ASU 2010-20 disclosures pertaining to troubled debt restructurings.  The disclosures required by ASU 2011-01 are effective for interim and annual periods after June 15, 2011.  Effective December 31, 2010, we adopted the provisions of ASU 2010-20 requiring end of period disclosures about credit quality of financing receivables and the allowance for credit losses.  ASU 2010-20 provisions encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption.  The adoption of the remaining provisions of ASU 2010-20 and ASU 2011-11 is not expected to have a material impact on the Corporation’s consolidated financial position, results of operations or cash flows.
 
 
 
-6-

 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
 
 
Accounting Standards Update No. 2011-02 “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (“ASU 2011-02”) was issued in April 2011.  ASU 2011-02 provides additional guidance to assist creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a trouble debt restructuring.  ASU 2011-02 will be effective for interim and reporting periods beginning after June 15, 2011 and should be applied retrospectively to the beginning of the 2011 annual period.  The adoption of ASU 2011-02 is not expected to have a material impact on the Corporation’s consolidated financial position, results of operations or cash flows.

(3) Cash and Due from Banks
The Bank is required to maintain certain average reserve balances with the Board of Governors of the Federal Reserve System (“FRB”).  Such reserve balances amounted to $4.0 million at March 31, 2011 and December 31, 2010 and are included in cash and due from banks in the Consolidated Statements of Condition.

As of March 31, 2011 and December 31, 2010, cash and due from banks included interest-bearing deposits in other banks of $35.0 million and $50.5 million, respectively.

(4) Securities
The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value of securities by major security type and class of security at March 31, 2011 and December 31, 2010 were as follows:

(Dollars in thousands)
                       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
March 31, 2011
 
Cost (1)
   
Gains
   
Losses
   
Value
 
Securities Available for Sale:
                       
Obligations of U.S. government-sponsored enterprises
  $ 29,408     $ 3,495     $     $ 32,903  
Mortgage-backed securities issued by U.S. government
                               
agencies and U.S. government-sponsored enterprises
    400,471       17,870       (753 )     417,588  
States and political subdivisions
    79,450       2,420       (227 )     81,643  
Trust preferred securities:
                               
Individual name issuers
    30,610             (5,533 )     25,077  
Collateralized debt obligations
    4,428             (3,676 )     752  
Corporate bonds
    13,872       1,206       (3 )     15,075  
Common stocks
    659       147             806  
Perpetual preferred stocks (2)
    1,854       460             2,314  
Total securities available for sale
  $ 560,752     $ 25,598     $ (10,192 )   $ 576,158  

(Dollars in thousands)
                       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
December 31, 2010
 
Cost (1)
   
Gains
   
Losses
   
Value
 
Securities Available for Sale:
                       
Obligations of U.S. government-sponsored enterprises
  $ 36,900     $ 4,094     $     $ 40,994  
Mortgage-backed securities issued by U.S. government
                               
agencies and U.S. government-sponsored enterprises
    411,087       19,068       (384 )     429,771  
States and political subdivisions
    79,455       1,975       (375 )     81,055  
Trust preferred securities:
                               
Individual name issuers
    30,601             (7,326 )     23,275  
Collateralized debt obligations
    4,466             (3,660 )     806  
Corporate bonds
    13,874       1,338             15,212  
Common stocks
    660       149             809  
Perpetual preferred stocks (2)
    1,854       324             2,178  
Total securities available for sale
  $ 578,897     $ 26,948     $ (11,745 )   $ 594,100  

(1)      Net of other-than-temporary impairment losses.
(2)      Callable at the discretion of the issuer.
 
 
-7-

 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
 
 
Securities available for sale with a fair value of $521 million and $507 million were pledged in compliance with state regulations concerning trust powers and to secure Treasury Tax and Loan deposits, borrowings, certain public deposits and certain interest rate swap agreements at March 31, 2011 and December 31, 2010, respectively.  See Note 7 for additional disclosure regarding Federal Home Loan Bank of Boston (“FHLBB”) borrowings.  In addition, securities available for sale with a fair value of $22.9 million and $22.0 million were pledged for potential use at the Federal Reserve Bank discount window at March 31, 2011 and December 31, 2010, respectively.  There were no borrowings with the Federal Reserve Bank at either date.  As of March 31, 2011 and December 31, 2010, securities available for sale with a fair value of $5.1 million and $5.5 million, respectively, were designated in rabbi trusts for nonqualified retirement plans.

The following table presents a roll forward of the balance of credit-related impairment losses on debt securities, for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:

(Dollars in thousands)
           
             
Three months ended March 31,
 
2011
   
2010
 
Balance at beginning of period
  $ 2,913     $ 2,496  
Credit-related impairment loss on debt securities for which an other-than-temporary
               
impairment was not previously recognized
           
Additional increases to the amount of credit-related impairment loss on debt securities
               
for which an other-than-temporary impairment was previously recognized
    33       63  
Balance at end of period
  $ 2,946     $ 2,559  

For the three months ended March 31, 2011 and 2010, credit-related impairment losses recognized in earnings on pooled trust preferred debt securities totaled $33 thousand and $63 thousand, respectively.  The anticipated cash flows expected to be collected from these debt securities were discounted at the rate equal to the yield used to accrete the current and prospective beneficial interest for each security.  Significant inputs included estimated cash flows and prospective deferrals, defaults and recoveries.  Estimated cash flows are generated based on the underlying seniority status and subordination structure of the pooled trust preferred debt tranche at the time of measurement.  Prospective deferral, default and recovery estimates affecting projected cash flows were based on analysis of the underlying financial condition of individual issuers, and took into account capital adequacy, credit quality, lending concentrations, and other factors.  All cash flow estimates were based on the underlying security’s tranche structure and contractual rate and maturity terms.  The present value of the expected cash flows was compared to the current outstanding balance of the tranche to determine the ratio of the estimated present value of expected cash flows to the total current balance for the tranche.  This ratio was then multiplied by the principal balance of Washington Trust’s holding to determine the credit-related impairment loss.  The estimates used in the determination of the present value of the expected cash flows are susceptible to changes in future periods, which could result in additional credit-related impairment losses.

 
-8-

 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
 
 
The following table summarizes temporarily impaired securities as of March 31, 2011, segregated by length of time the securities have been in a continuous unrealized loss position:

(Dollars in thousands)
 
Less than 12 Months
   
12 Months or Longer
   
Total
 
         
Fair
   
Unrealized
         
Fair
   
Unrealized
         
Fair
   
Unrealized
 
March 31, 2011
    #    
Value
   
Losses
      #    
Value
   
Losses
      #    
Value
   
Losses
 
Mortgage-backed securities issued by U.S.
    government agencies and U.S.
   government-sponsored enterprises
    7     $ 101,688     $ 753           $     $       7     $ 101,688     $ 753  
States and
                                                                       
political subdivisions
    6       5,706       122       2       1,225       105       8       6,931       227  
Trust preferred securities:
                                                                       
Individual name issuers
                      11       25,077       5,533       11       25,077       5,533  
Collateralized debt obligations
                      2       752       3,676       2       752       3,676  
Corporate bonds
    1       604       3                         1       604       3  
Total temporarily impaired securities
    14     $ 107,998     $ 878       15     $ 27,054     $ 9,314       29     $ 135,052     $ 10,192  

The following table summarizes temporarily impaired securities as of December 31, 2010, segregated by length of time the securities have been in a continuous unrealized loss position:

(Dollars in thousands)
 
Less than 12 Months
   
12 Months or Longer
   
Total
 
         
Fair
   
Unrealized
         
Fair
   
Unrealized
         
Fair
   
Unrealized
 
December 31, 2010
    #    
Value
   
Losses
      #    
Value
   
Losses
      #    
Value
   
Losses
 
Mortgage-backed securities issued by U.S.
   government agencies and U.S.
   government-sponsored enterprises
    6     $ 76,382     $ 369       3     $ 5,208     $ 15       9     $ 81,590     $ 384  
States and
                                                                       
political subdivisions
    15       14,209       273       2       1,228       102       17       15,437       375  
Trust preferred securities:
                                                                       
Individual name issuers
                      11       23,275       7,326       11       23,275       7,326  
Collateralized debt obligations
                      2       806       3,660       2       806       3,660  
Total temporarily impaired securities
    21     $ 90,591     $ 642       18     $ 30,517     $ 11,103       39     $ 121,108     $ 11,745  

Unrealized losses on debt securities generally occur as a result of increases in interest rates since the time of purchase, a structural change in an investment or from deterioration in credit quality of the issuer.  Management evaluates impairments in value whether caused by adverse interest rates or credit movements to determine if they are other-than-temporary.

Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, a continuation or worsening of the current economic downturn, or additional declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods, and the Corporation may incur additional write-downs.

Mortgage-backed Securities Issued by U.S. Government Agencies and U.S. Government-sponsored Enterprises
The unrealized losses on mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises amounted to $753 thousand at March 31, 2011 and were primarily attributable to relative changes in interest rates since the time of purchase.  The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises.  Based on its assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes
 
 
-9-

 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
 
 
in investment spreads and interest rate movements and not changes in credit quality.  Management expects to recover the entire amortized cost basis of these securities.  Furthermore, Washington Trust does not intend to sell these securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity.  Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2011.

Debt Securities Issued by States and Political Subdivisions
The unrealized losses on debt securities issued by states and political subdivisions amounted to $227 thousand at March 31, 2011.  The unrealized losses on state and municipal holdings included in this analysis are primarily attributable to an increase in risk premiums for credit-sensitive securities since the time of purchase.  Based on its assessment of these factors, management believes that unrealized losses on these debt security holdings are a function of changes in investment spreads and liquidity and not changes in credit quality.  Management expects to recover the entire amortized cost basis of these securities.  Furthermore, Washington Trust does not intend to sell these securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity.  Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2011.

Trust Preferred Debt Securities of Individual Name Issuers
Included in debt securities in an unrealized loss position at March 31, 2011 were 11 trust preferred security holdings issued by seven individual companies in the financial services/banking industry.  The aggregate unrealized losses on these debt securities amounted to $5.5 million at March 31, 2011.  Management believes the decline in fair value of these trust preferred securities primarily reflects investor concerns about global economic growth and how it will affect the recent and potential future losses in the financial services industry.  These concerns resulted in increased risk premiums for securities in this sector.  Based on the information available through the filing date of this report, all individual name trust preferred debt securities held in our portfolio continue to accrue and make payments as expected with no payment deferrals or defaults on the part of the issuers.  As of March 31, 2011, trust preferred debt securities with a carrying value of $9.2 million and unrealized losses of $2.6 million were rated below investment grade by Standard & Poors, Inc. (“S&P”).  Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report and other information.  We noted no additional downgrades to below investment grade between the reporting period date and the filing date of this report.  Based on these analyses, management concluded that it expects to recover the entire amortized cost basis of these securities.  Furthermore, Washington Trust does not intend to sell these securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity.  Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2011.

Trust Preferred Debt Securities in the Form of Collateralized Debt Obligations
Washington Trust has two pooled trust preferred holdings in the form of collateralized debt obligations with a total amortized cost of $4.4 million and aggregate unrealized losses of $3.7 million at March 31, 2011.  These pooled trust preferred holdings consist of trust preferred obligations of banking industry companies and, to a lesser extent, insurance industry companies.  For both of these pooled trust preferred securities, Washington Trust’s investment is senior to one or more subordinated tranches which have first loss exposure.  Valuations of the pooled trust preferred holdings are dependent in part on cash flows from underlying issuers.  Unexpected cash flow disruptions could have an adverse impact on the fair value and performance of pooled trust preferred securities.  Management believes the unrealized losses on these pooled trust preferred securities primarily reflect investor concerns about global economic growth and how it will affect the recent and potential future losses in the financial services industry and the possibility of further incremental deferrals of or defaults on interest payments on trust preferred debentures by financial institutions participating in these pools.  These concerns have resulted in a substantial decrease in market liquidity and increased risk premiums for securities in this sector.  Credit spreads for issuers in this sector have remained wide during recent months, causing prices for these securities holdings to remain at low levels.

As of March 31, 2011, one of the pooled trust preferred securities had an amortized cost of $3.2 million.  This amortized cost was net of $1.7 million of credit-related impairment losses previously recognized in earnings reflective of payment deferrals and credit deterioration of the underlying collateral.  This security was placed on nonaccrual
 
 
-10-

 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
 
 
status in March 2009.  The tranche instrument held by Washington Trust has been deferring a portion of interest payments since April 2010.  As of March 31, 2011, this security has unrealized losses of $2.5 million and a below investment grade rating of “Ca” by Moody’s Investors Service Inc. (“Moody’s”).  Through the filing date of this report, there have been no further rating changes on this security.  This credit rating status has been considered by management in its assessment of the impairment status of this security.  During the first quarter of 2011, a modest adverse change occurred in the expected cash flows for this security and additional credit-related impairment losses of $13 thousand were recognized in earnings.

As of March 31, 2011, the second pooled trust preferred security held by Washington Trust had an amortized cost of $1.3 million.  This amortized cost was net of $1.2 million of credit-related impairment losses previously recognized in earnings reflective of payment deferrals and credit deterioration of the underlying collateral.  This security was placed on nonaccrual status in December 2008.  The tranche instrument held by Washington Trust has been deferring interest payments since December 2008.  As of March 31, 2011, this security has unrealized losses of $1.1 million and a below investment grade rating of “C” by Moody’s.  Through the filing date of this report, there have been no further rating changes on this security.  This credit rating status has been considered by management in its assessment of the impairment status of this security.  During the first quarter of 2011, a modest adverse change occurred in the expected cash flows for this security and additional credit-related impairment losses of $20 thousand were recognized in earnings.

Based on information available through the filing date of this report, there have been no further adverse changes in the deferral or default status of the underlying issuer institutions within either of these trust preferred collateralized debt obligations.  Based on cash flow forecasts for these securities, management expects to recover the remaining amortized cost of these securities.  Furthermore, Washington Trust does not intend to sell these securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be at maturity.  Therefore, management does not consider the unrealized losses on these investments to be other-than-temporary.

 
-11-

 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
 
 
As of March 31, 2011, the amortized cost of debt securities by maturity is presented below.  Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments.  All other securities are included based on contractual maturities.  Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.  Yields on tax exempt obligations are not computed on a tax equivalent basis.  Included in the securities portfolio at March 31, 2011 were debt securities with an amortized cost balance of $101 million and a fair value of $93 million that are callable at the discretion of the issuers.  Final maturities of the callable securities range from five to twenty-six years, with call features ranging from one month to six years.

(Dollars in thousands)
 
Due in
   
After 1 Year
   
After 5 Years
             
   
1 Year
   
but within
   
but within
   
After
       
   
or Less
   
5 Years
   
10 Years
   
10 Years
   
Totals
 
Securities Available for Sale:
                             
Obligations of U.S. government-sponsored
                             
  enterprises:
                             
Amortized cost
  $     $ 29,408     $     $     $ 29,408  
Weighted average yield
    %     5.41 %     %     %     5.41 %
Mortgage-backed securities issued by U.S.
                                       
  government agencies & U.S.
                                       
   government-sponsored enterprises:
                                       
Amortized cost
    93,731       200,991       82,852       22,897       400,471  
Weighted average yield
    4.59 %     4.28 %     2.78 %     2.61 %     3.95 %
State and political subdivisions:
                                       
Amortized cost
    8,094       42,862       28,494             79,450  
Weighted average yield
    3.90 %     3.84 %     3.96 %     %     3.89 %
Trust preferred securities:
                                       
Amortized cost (1)
                      35,038       35,038  
Weighted average yield
    %     %     %     1.53 %     1.53 %
Corporate bonds:
                                       
Amortized cost
    4,990       8,882                   13,872  
Weighted average yield
    6.50 %     6.30 %     %     %     6.37 %
Total debt securities:
                                       
Amortized cost
  $ 106,815     $ 282,143     $ 111,346     $ 57,935     $ 558,239  
Weighted average yield
    4.63 %     4.39 %     3.08 %     1.95 %     3.92 %
Fair value
  $ 108,165     $ 290,285     $ 115,674     $ 58,914     $ 573,038  

(1)
 Net of other-than-temporary impairment losses.
 

 
-12-

 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
 
 
(5) Loans
The following is a summary of loans:

(Dollars in thousands)
 
March 31, 2011
   
December 31, 2010
 
   
Amount
   
%
   
Amount
   
%
 
Commercial:
                       
Mortgages (1)
  $ 551,069       27 %   $ 518,623       26 %
Construction and development (2)
    34,615       2       47,335       2  
Other (3)
    470,704       23       461,107       23  
Total commercial
    1,056,388       52       1,027,065       51  
Residential real estate:
                               
Mortgages (4)
    636,916       31       634,739       31  
Homeowner construction
    12,241       1       10,281       1  
Total residential real estate
    649,157       32       645,020       32  
Consumer:
                               
Home equity lines (5)
    221,003       11       218,288       11  
Home equity loans (5)
    48,337       2       50,624       3  
Other (6)
    54,752       3       54,641       3  
Total consumer
    324,092       16       323,553       17  
Total loans (7)
  $ 2,029,637       100 %   $ 1,995,638       100 %

(1)
Amortizing mortgages and lines of credit, primarily secured by income producing property. As of March 31, 2011 and December 31, 2010, $118 million and $122 million, respectively, of these loans were pledged as collateral for FHLBB borrowings (see Note 7).
(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. As of March 31, 2011, $29 million and $59 million, respectively, of these loans were pledged as collateral for FHLBB borrowings and were collateralized for the discount window at the Federal Reserve Bank.  Comparable amounts for December 31, 2010 were $30 million and $61 million, respectively (see Note 7).
(4)
A substantial portion of these loans was pledged as collateral for FHLBB borrowings (see Note 7).
(5)
A significant portion of these loans was pledged as collateral for FHLBB borrowings (see Note 7).
(6)
Fixed rate consumer installment loans.
(7)
Includes unamortized loan origination costs, net of fees, totaling $293 thousand and $271 thousand at March 31, 2011 and December 31, 2010, respectively.  Also includes $15 thousand and $39 thousand of net premiums on purchased loans at March 31, 2011 and December 31, 2010, respectively.
 

 
 
-13-

 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
 
 
Nonaccrual Loans
Loans, with the exception of certain well-secured residential mortgage loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest or sooner if considered appropriate by management.  Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection.  Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful.  Interest previously accrued but not collected on such loans is reversed against current period income.  Subsequent cash receipts on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan.  Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.

The following is a summary of nonaccrual loans, segregated by class of loans, as of the dates indicated:

(Dollars in thousands)
 
March 31,
2011
   
December 31,
2010
 
Commercial:
           
Mortgages
  $ 6,068     $ 6,624  
Construction and development
           
Other
    4,445       5,259  
Residential real estate:
               
Mortgages
    8,265       6,414  
Homeowner construction
           
Consumer:
               
Home equity lines
    272       152  
Home equity loans
    294       53  
Other
    35       8  
Total nonaccrual loans
  $ 19,379     $ 18,510  
                 
Accruing loans 90 days or more past due
  $     $  

 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
 
 

Past Due Loans
The following tables present an age analysis of past due loans, segregated by class of loans, as of the dates indicated:

(Dollars in thousands)
 
Days Past Due
                   
March 31, 2011
    30-59       60-89    
Over 90
   
Total Past
Due
   
Current
   
Total Loans
 
Commercial:
                                       
Mortgages
  $ 3,223     $ 1,626     $ 5,242     $ 10,091     $ 540,978     $ 551,069  
Construction and development
                            34,615       34,615  
Other
    2,474       315       2,524       5,313       465,391       470,704  
Residential real estate:
                                               
Mortgages
    2,986       1,345       5,165       9,496       627,420       636,916  
Homeowner construction
                            12,241       12,241  
Consumer:
                                               
Home equity lines
    1,062       238       120       1,420       219,583       221,003  
Home equity loans
    598             170       768       47,569       48,337  
Other
    75       97       27       199       54,553       54,752  
Total loans
  $ 10,418     $ 3,621     $ 13,248     $ 27,287     $ 2,002,350     $ 2,029,637  


(Dollars in thousands)
 
Days Past Due
                   
December 31, 2010
    30-59       60-89    
Over 90
   
Total Past
Due
   
Current
   
Total Loans
 
Commercial:
                                       
Mortgages
  $ 2,185     $ 514     $ 5,322     $ 8,021     $ 510,602     $ 518,623  
Construction and development
                            47,335       47,335  
Other
    1,862       953       3,376       6,191       454,916       461,107  
Residential real estate:
                                               
Mortgages
    3,073       1,477       4,041       8,591       626,148       634,739  
Homeowner construction
                            10,281       10,281  
Consumer:
                                               
Home equity lines
    1,255       170             1,425       216,863       218,288  
Home equity loans
    529       180       11       720       49,904       50,624  
Other
    221       98             319       54,322       54,641  
Total loans
  $ 9,125     $ 3,392     $ 12,750     $ 25,267     $ 1,970,371     $ 1,995,638  

Included in past due loans as of March 31, 2011 and December 31, 2010, were nonaccrual loans of $16.5 million and $14.9 million, respectively.

 
-15-

 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
 
 
Impaired Loans
Impaired loans are loans for which it is probable that the Corporation will not be able to collect all amounts due according to the contractual terms of the loan agreements and loans restructured in a troubled debt restructuring.  Impaired loans do not include large groups of smaller-balance homogenous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans.  The following is a summary of impaired loans, as of the dates indicated:

(Dollars in thousands)
 
Recorded
   
Unpaid
   
Related
 
   
Investment (1)
   
Principal
   
Allowance
 
   
Mar. 31,
2011
   
Dec. 31,
2010
   
Mar. 31,
2011
   
Dec. 31,
2010
   
Mar. 31,
2011
   
Dec. 31,
2010
 
No Related Allowance Recorded:
                                   
Commercial:
                                   
Mortgages
  $ 1,772     $ 3,113     $ 1,768     $ 3,128     $     $  
Construction and development
                                   
Other
    2,453       3,237       2,579       3,834              
Residential real estate:
                                               
Mortgages
    2,149       928       2,230       937              
Homeowner construction
                                   
Consumer:
                                               
Home equity lines
                                   
Home equity loans
    159       163       159       159              
Other
                                   
Subtotal
  $ 6,533     $ 7,441     $ 6,736     $ 8,058     $     $  
                                                 
With Related Allowance Recorded:
                                               
Commercial:
                                               
Mortgages
  $ 14,418     $ 15,287     $ 15,422     $ 15,930     $ 546     $ 629  
Construction and development
                                   
Other
    6,636       6,632       9,119       9,311       774       1,245  
Residential real estate:
                                               
Mortgages
    3,742       3,773       4,004       3,971       337       258  
Homeowner construction
                                   
Consumer:
                                               
Home equity lines
    105       105       172       172       1       1  
Home equity loans
    260       307       281       330       1       4  
Other
    258       145       259       143       2        
Subtotal
  $ 25,419     $ 26,249     $ 29,257     $ 29,857     $ 1,661     $ 2,137  
Total impaired loans
  $ 31,952     $ 33,690     $ 35,993     $ 37,915     $ 1,661     $ 2,137  
                                                 
Total:
                                               
Commercial
  $ 25,279     $ 28,269     $ 28,888     $ 32,203     $ 1,320     $ 1,874  
Residential real estate
    5,891       4,701       6,234       4,908       337       258  
Consumer
    782       720       871       804       4       5  
Total impaired loans
  $ 31,952     $ 33,690     $ 35,993     $ 37,915     $ 1,661     $ 2,137  

(1)
The recorded investment in impaired loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs.  For impaired accruing loans (those troubled debt restructurings for which management has concluded that the collectibility of the loan is not in doubt), the recorded investment also includes accrued interest.  As of March 31, 2011 and December 31, 2010, recorded investment in impaired loans included accrued interest of $58 thousand and $62 thousand, respectively.
 
 
-16-

 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
 
 
The following table presents the average recorded investment and interest income recognized on impaired loans segregated by loan class for the period indicated:

(Dollars in thousands)
 
Average Recorded
   
Interest Income
 
   
Investment
   
Recognized
 
Three months ended March 31,
 
2011
   
2010
   
2011
   
2010
 
Commercial:
                       
Mortgages
  $ 18,150     $ 16,653     $ 173     $ 169  
Construction and development
                       
Other
    11,480       9,796       94       66  
Residential real estate:
                               
Mortgages
    5,028       4,369       44       52  
Homeowner construction
                       
Consumer:
                               
Home equity lines
    105       303       1       3