Securities

6 Months Ended

Jun. 30, 2011

Securities [Abstract]

Securities

(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 June 30, 2011 and December 31, 2010 were as follows:

(Dollars in thousands)
	Amortized		Unrealized		Unrealized			Fair
June 30, 2011	Cost (1)		Gains		Losses			Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises	$	29,415	$	3,834	$	−		$	33,249
Mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises		411,629		20,098		(35	)		431,692
States and political subdivisions		78,445		3,595		(65	)		81,975
Trust preferred securities:
Individual name issuers		30,620		−		(5,009	)		25,611
Collateralized debt obligations		4,414		−		(3,480	)		934
Corporate bonds		13,870		1,098		−			14,968
Common stocks		658		224		−			882
Perpetual preferred stocks (2)		1,854		415		−			2,269
Total securities available for sale	$	570,905	$	29,264	$	(8,589	)	$	591,580

(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.

Securities available for sale with a fair value of $499 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 June 30, 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 $23.0 million and $22.0 million were pledged for potential use at the Federal Reserve Bank discount window at June 30, 2011 and December 31, 2010, respectively.  There were no borrowings with the Federal Reserve Bank at either date.  As of June 30, 2011 and December 31, 2010, securities available for sale with a fair value of $4.8 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				Six Months
Periods ended June 30,	2011		2010		2011		2010
Balance at beginning of period	$	2,946	$	2,559	$	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		–		354		33		417
Balance at end of period	$	2,946	$	2,913	$	2,946	$	2,913

During the second quarter of 2011, there were no credit-related impairment losses recognized in earnings, compared to $354 thousand of credit-related impairment losses in the same quarter a year earlier.  For the six months ended June 30, 2011 and 2010, credit-related impairment losses recognized in earnings on pooled trust preferred debt securities totaled $33 thousand and $417 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.

The following table summarizes temporarily impaired securities as of June 30, 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
June 30, 2011		#	Value		Losses			#	Value		Losses			#	Value		Losses
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		2	$	30,685	$	35		–	$	–	$	–		2	$	30,685	$	35
States and
political subdivisions		1		783		4		2		1,269		61		3		2,052		65
Trust preferred securities:
Individual name issuers		–		–		–		11		25,611		5,009		11		25,611		5,009
Collateralized debt obligations		–		–		–		2		934		3,480		2		934		3,480
Total temporarily impaired securities		3	$	31,468	$	39		15	$	27,814	$	8,550		18	$	59,282	$	8,589

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.

Trust Preferred Debt Securities of Individual Name Issuers

Included in debt securities in an unrealized loss position at June 30, 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 $5.0 million at June 30, 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 June 30, 2011, trust preferred debt securities with a carrying value of $9.6 million and unrealized losses of $2.2 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 June 30, 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 $3.5 million at June 30, 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 June 30, 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 status in March 2009.  The tranche instrument held by Washington Trust has been deferring a portion of interest payments since April 2010.  As of June 30, 2011, this security has unrealized losses of $2.3 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.  The analysis of the expected cash flows for this security as of June 30, 2011 did not negatively affect the amount of credit-related impairment losses previously recognized on this security.

As of June 30, 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 June 30, 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 material rating changes on this security.  This credit rating status has been considered by management in its assessment of the impairment status of this security.  The analysis of the expected cash flows for this security as of June 30, 2011 did not negatively affect the amount of credit-related impairment losses previously recognized on this security.

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.

As of June 30, 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 June 30, 2011 were debt securities with an amortized cost balance of $100 million and a fair value of $94 million that are callable at the discretion of the issuers.  Final maturities of the callable securities range from four 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	$	–		$	29,415		$	–		$	–		$	29,415
Weighted average yield		–	%		5.41	%		–	%		–	%		5.41	%
Mortgage-backed securities issued by U.S.
government agencies & U.S.
government-sponsored enterprises:
Amortized cost		86,992			204,993			92,680			26,964			411,629
Weighted average yield		4.39	%		4.12	%		2.89	%		2.84	%		3.82	%
State and political subdivisions:
Amortized cost		9,495			45,057			23,893			–			78,445
Weighted average yield		3.88	%		3.85	%		3.96	%		–	%		3.88	%
Trust preferred securities:
Amortized cost (1)		–			–			–			35,034			35,034
Weighted average yield		–	%		–	%		–	%		1.46	%		1.46	%
Corporate bonds:
Amortized cost		4,989			8,881			–			–			13,870
Weighted average yield		6.50	%		6.30	%		–	%		–	%		6.37	%
Total debt securities:
Amortized cost	$	101,476		$	288,346		$	116,573		$	61,998		$	568,393
Weighted average yield		4.44	%		4.28	%		3.11	%		2.06	%		3.83	%
Fair value	$	103,486		$	299,466		$	122,165		$	63,312		$	588,429

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