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 December 31, 2011 and 2010 were as follows:



(Dollars in thousands)
December 31, 2011	Amortized Cost (1)		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$29,429		$3,404		$—			$32,833
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	369,946		19,712		—			389,658
States and political subdivisions	74,040		5,453		—			79,493
Trust preferred securities:
Individual name issuers	30,639		—		(8,243		)	22,396
Collateralized debt obligations	4,256		—		(3,369		)	887
Corporate bonds	13,872		813		(403		)	14,282
Perpetual preferred stocks (2)	1,854		—		(150		)	1,704
Total securities available for sale		$524,036		$29,382		($12,165	)		$541,253
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$52,139		$360		$—			$52,499
Total securities held to maturity		$52,139		$360		$—			$52,499
Total securities		$576,175		$29,742		($12,165	)		$593,752



(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 and held to maturity with a fair value of $526.2 million and securities available for sale of $503.4 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 December 31, 2011 and 2010, respectively. (See Note 11 for additional discussion of FHLBB borrowings). In addition, securities available for sale with a fair value of $20.6 million and $22.0 million were pledged for potential use at the Federal Reserve Bank discount window at December 31, 2011 and 2010, respectively. There were no borrowings with the Federal Reserve Bank at either date. Securities available for sale with a fair value of $7.5 million and $5.5 million were designated in rabbi trusts for nonqualified retirement plans at December 31, 2011 and 2010, respectively. Securities available for sale with a fair value of $4.0 million and $4.1 million were pledged as collateral to secure certain interest rate swap agreements as of December 31, 2011 and 2010, respectively.

Washington Trust elected to early adopt guidance issued by FASB in 2009 regarding the recognition and presentation of other-than-temporary impairments, a sub-topic within ASC 320, “Investments - Debt and Equity Securities.” These provisions applied to existing and new debt securities held by the Corporation as of January 1, 2009, the beginning of the interim period in which it was adopted. As a result of adopting these provisions of ASC 320, “Investments - Debt and Equity Securities,” Washington Trust reclassified the noncredit-related portion of an other-than-temporary impairment loss previously recognized in earnings in the fourth quarter of 2008 on the Corporation's other pooled trust preferred debt security. This reclassification was reflected as a cumulative effect adjustment of $1.2 million after taxes ($1.9 million before taxes) that increased retained earnings and decreased accumulated other comprehensive loss. The amortized cost basis of this debt security for which an other-than-temporary impairment loss was recognized in the fourth quarter of 2008 was adjusted by the amount of the cumulative effect adjustment before taxes. Had the adoption of these provisions in 2009 not been required, the Corporation estimates that net income and diluted earnings per share could have been lower by $1.3 million and 8 cents per diluted share, respectively. Had these provisions been required to have been adopted retrospectively, the Corporation estimates that net income and diluted earnings per share would have been higher in 2008 by $1.2 million and 8 cents per diluted share, respectively.

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)
Years ended December 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	191		417
Balance at end of period		$3,104		$2,913

For the years ended December 31, 2011 and 2010, credit-related impairment losses of $191 thousand and $417 thousand, respectively, were recognized in earnings on pooled trust preferred debt securities. 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 investment securities at December 31, 2011, segregated by length of time the securities have been continuously in an unrealized loss position.



(Dollars in thousands)	Less than 12 Months					12 Months or Longer					Total
December 31, 2011	#	Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses
Trust preferred securities:
Individual name issuers	—		$—		$—	11		$22,396		$8,243	11		$22,396		$8,243
Collateralized debt obligations	—	—		—		2	887		3,369		2	887		3,369
Corporate bonds	3	5,203		403		—	—		—		3	5,203		403
Subtotal, debt securities	3	5,203		403		13	23,283		11,612		16	28,486		12,015
Perpetual preferred stocks	2	1,704		150		—	—		—		2	1,704		150
Total temporarily impaired securities	5		$6,907		$553	13		$23,283		$11,612	18		$30,190		$12,165

The following table summarizes temporarily impaired investment securities at December 31, 2010, segregated by length of time the securities have been continuously in an 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 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 December 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 $8.2 million at December 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 December 31, 2011, trust preferred debt securities with a carrying value of $11.8 million and unrealized losses of $3.4 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 December 31, 2011.

Trust preferred debt securities in the form of collateralized debt obligations:

At December 31, 2011, Washington Trust had two pooled trust preferred holdings in the form of collateralized debt obligations with unrealized losses of $3.4 million. These pooled trust preferred holdings consist of trust preferred obligations of banking industry companies and, to a lesser extent, insurance industry companies. For both 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 December 31, 2011, one of the pooled trust preferred securities had an amortized cost of $3.0 million. 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. The December 31, 2011 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. Included in the $1.9 million were credit-related impairment losses of $171 thousand recorded in 2011, reflecting adverse changes in the expected cash flows for this security. On January 24, 2012, one of the underlying issuers announced its intention to invoke its contractual right to defer quarterly interest payments beginning in April 2012. This subsequent adverse change in expected cash flows for this security resulted in a credit-related impairment loss of approximately $180 thousand. Management has concluded this was immaterial to the Corporation's 2011 consolidated financial position, results of operations and cash flows and this credit-related impairment loss will be recorded in the first quarter of 2012. As of December 31, 2011, this security has unrealized losses of $2.4 million and a below investment grade rating of “Ca” by Moody's Investor Services, 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.

As of December 31, 2011, the second pooled trust preferred security held by Washington Trust had an amortized cost of $1.3 million. 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. The December 31, 2011 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. Included in the $1.2 million, were credit-related impairment losses of $20 thousand recorded in 2011 reflecting a modest adverse change in the expected cash flows for this security. As of December 31, 2011, this security has unrealized losses of $1.0 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.

Based on information available through the filing date of this report, there have been no additional 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.

Corporate Bonds:

At December 31, 2011, Washington Trust had three corporate bond holdings with unrealized losses of $403 thousand. These investment grade corporate bonds, maturing in four years, represent large financial corporations with potential exposure to the European markets. The unrealized losses on these securities are attributable to the increased risk premiums required in the current economic environment.

As of December 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 December 31, 2011 were debt securities with an amortized cost balance of $96.4 million and a fair value of $89.3 million that are callable at the discretion of the issuers. Final maturities of the callable securities range from forty five months to twenty-five years, with call features ranging from one month to five years.



(Dollars in thousands)	Within 1 Year			1-5 Years			5-10 Years			After 10 Years			Totals
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises:
Amortized cost		$—			$29,429			$—			$—			$29,429
Weighted average yield	—		%	5.41		%	—		%	—		%	5.41		%
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
Amortized cost	104,213			191,214			60,242			14,277			369,946
Weighted average yield	4.33		%	3.94		%	2.55		%	2.42		%	3.77		%
State and political subdivisions:
Amortized cost	5,826			58,438			9,776			—			74,040
Weighted average yield	3.77		%	3.88		%	3.93		%	—		%	3.88		%
Trust preferred securities:
Amortized cost (1)	—			—			—			34,895			34,895
Weighted average yield	—		%	—		%	—		%	1.91		%	1.91		%
Corporate bonds:
Amortized cost	—			13,872			—			—			13,872
Weighted average yield	—		%	5.14		%	—		%	—		%	5.14		%
Total debt securities available for sale:
Amortized cost		$110,039			$292,953			$70,018			$49,172			$522,182
Weighted average yield	4.30		%	4.13		%	2.74		%	2.06		%	3.79		%
Fair value		$116,020			$299,648			$73,948			$49,933			$539,549
Securities Held to Maturity:
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
Amortized cost		$10,782			$25,390			$11,787			$4,180			$52,139
Weighted average yield	2.63		%	2.53		%	2.40		%	1.36		%	2.43		%
Fair value		$11,142			$25,390			$11,787			$4,180			$52,499


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

The following is a summary of amounts relating to sales of securities:



(Dollars in thousands)
Years ended December 31,	2011			2010			2009
Proceeds from sales (1)		$56,461			$99,097			$1,604

Gross realized gains (1)		$919			$852			$318
Gross realized losses	(221		)	(123		)	(4		)
Net realized gains on securities		$698			$729			$314


(1)	Includes a contribution of appreciated equity securities to the Corporation’s charitable foundation in 2011. The cost of the contribution, included in noninterest expenses, amounted to $990 thousand in 2011. This transaction resulted in a realized security gain of $331 thousand for the same period.