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 September 30, 2011 and December 31, 2010 were as follows:



(Dollars in thousands)
September 30, 2011	Amortized Cost (1)		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises	$	29,422	$	3,785	$	—		$	33,207
Mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises	387,519		21,138		(1		)	408,656
States and political subdivisions	76,145		4,664		—			80,809
Trust preferred securities:
Individual name issuers	30,629		—		(6,983		)	23,646
Collateralized debt obligations	4,256		—		(3,460		)	796
Corporate bonds	18,868		960		(62		)	19,766
Common stocks	659		298		—			957
Perpetual preferred stocks (2)	1,854		12		—			1,866
Total securities available for sale	$	549,352	$	30,857	$	(10,506	)	$	569,703
Held to Maturity:
Mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises	11,840		3		—			11,843
Total securities held to maturity	$	11,840	$	3	$	—		$	11,843
Total securities	$	561,192	$	30,860	$	(10,506	)	$	581,546



(Dollars in thousands)
December 31, 2010	Amortized Cost (1)		Unrealized Gains		Unrealized Losses			Fair 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 $511 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 September 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 $22 million were pledged for potential use at the Federal Reserve Bank discount window at September 30, 2011 and December 31, 2010. There were no borrowings with the Federal Reserve Bank at either date. As of September 30, 2011 and December 31, 2010, securities available for sale with a fair value of $8.0 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				Nine Months
Periods ended September 30,	2011		2010		2011		2010
Balance at beginning of period	$	2,946	$	2,913	$	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	158		—		191		417
Balance at end of period	$	3,104	$	2,913	$	3,104	$	2,913

During the third quarter of 2011, $158 thousand of credit-related impairment losses were recognized in earnings on a pooled trust preferred debt security. There were no credit-related impairment losses recognized in the same quarter of 2010. For the nine months ended September 30, 2011 and 2010, credit-related impairment losses recognized in earnings on pooled trust preferred debt securities totaled $191 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 September 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
September 30, 2011	#	Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	1	$	115	$	1	—	$	—	$	—	1	$	115	$	1
Trust preferred securities:
Individual name issuers	—	—		—		11	23,646		6,983		11	23,646		6,983
Collateralized debt obligations	—	—		—		2	796		3,460		2	796		3,460
Corporate bonds	3	5,544		62		—	—		—		3	5,544		62
Total temporarily impaired securities	4	$	5,659	$	63	13	$	24,442	$	10,443	17	$	30,101	$	10,506

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
December 31, 2010	#	Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses		#	Fair Value		Unrealized 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 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 September 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 $7.0 million at September 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 September 30, 2011, trust preferred debt securities with a carrying value of $8.6 million and unrealized losses of $3.3 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 September 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 $4.3 million and aggregate unrealized losses of $3.5 million at September 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 September 30, 2011, one of the pooled trust preferred securities had an amortized cost of $3.0 million. This amortized cost was net of $1.9 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 September 30, 2011, this security has unrealized losses of $2.4 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 third quarter of 2011, an adverse change occurred in the expected cash flows for this security and additional credit-related impairment losses of $158 thousand were recognized in earnings.

As of September 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 September 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 September 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 September 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 September 30, 2011 were debt securities with an amortized cost balance of $98 million and a fair value of $91 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 1 Year or Less			After 1 Year but within 5 Years			After 5 Years but within 10 Years			After 10 Years			Totals
Securities Available for Sale:
Obligations of U.S. government-sponsored
enterprises:
Amortized cost	$	—		$	29,422		$	—		$	—		$	29,422
Weighted average yield	—		%	5.41		%	—		%	—		%	5.41		%
Mortgage-backed securities issued by U.S.
government agencies & U.S.
government-sponsored enterprises:
Amortized cost	129,428			194,993			50,540			12,558			387,519
Weighted average yield	4.29		%	3.86		%	2.34		%	2.42		%	3.76		%
State and political subdivisions:
Amortized cost	7,427			52,808			15,910			—			76,145
Weighted average yield	3.89		%	3.87		%	3.94		%	—		%	3.89		%
Trust preferred securities:
Amortized cost (1)	—			—			—			34,885			34,885
Weighted average yield	—		%	—		%	—		%	1.66		%	1.66		%
Corporate bonds:
Amortized cost	4,989			13,879			—			—			18,868
Weighted average yield	6.50		%	5.06		%	—		%	—		%	5.44		%
Total debt securities available for sale:
Amortized cost	141,844			291,102			66,450			47,443			546,839
Weighted average yield	4.34		%	4.08		%	2.72		%	1.86		%	3.79		%
Fair value	$	146,836		$	301,735		$	70,181		$	48,128		$	566,880
Held to Maturity:
Mortgage-backed securities issued by U.S.
government agencies & U.S.
government-sponsored enterprises:
Amortized cost	2,861			6,168			2,314			497			11,840
Weighted average yield	2.18		%	2.05		%	1.86		%	0.19		%	1.97		%
Fair value	$	2,864		$	6,168		$	2,314		$	497		$	11,843


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