Edgar Filing: WASHINGTON TRUST BANCORP INC

form10-q20100630.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 JUNE 30, 2010 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		(I.R.S. Employer
incorporation or organization)		Identification No.)

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

(401) 348-1200

(Registrant’s telephone number, including area code)

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

xYes 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 August 4, 2010 was 16,136,030.

Table of Content

FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended June 30, 2010

TABLE OF CONTENTS
		Page
		Number

PART I. Financial Information

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets
	June 30, 2010 and December 31, 2009	3

Consolidated Statements of Income
	Three and Six Months Ended June 30, 2010 and 2009	4

Consolidated Statements of Cash Flows
	Six Months Ended June 30, 2010 and 2009	5

Condensed Notes to Unaudited Consolidated Financial Statements		6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		31

Item 3. Quantitative and Qualitative Disclosures About Market Risk		56

Item 4. Controls and Procedures		56

PART II. Other Information

Item 1. Legal Proceedings		57

Item 1A. Risk Factors		57

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		57

Item 6. Exhibits		58

Signatures		59

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

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Table of Content

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS	(Dollars in thousands,
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES	except par value)

CONSOLIDATED BALANCE SHEETS (unaudited)
	June 30,		December 31,
	2010		2009
Assets:
Cash and noninterest-bearing balances due from banks	$	32,787	$	38,167
Interest-bearing balances due from banks		26,676		13,686
Other short-term investments		4,426		5,407
Mortgage loans held for sale		8,798		9,909
Securities available for sale, at fair value;
amortized cost $653,355 in 2010 and $677,676 in 2009		675,938		691,484
Federal Home Loan Bank stock, at cost		42,008		42,008
Loans:
Commercial and other		1,019,357		984,550
Residential real estate		622,613		605,575
Consumer		330,528		329,543
Total loans		1,972,498		1,919,668
Less allowance for loan losses		27,985		27,400
Net loans		1,944,513		1,892,268
Premises and equipment, net		27,237		27,524
Accrued interest receivable		9,195		9,137
Investment in bank-owned life insurance		50,871		44,957
Goodwill		58,114		58,114
Identifiable intangible assets, net		8,362		8,943
Property acquired through foreclosure or repossession, net		2,338		1,974
Other assets		38,590		40,895
Total assets	$	2,929,853	$	2,884,473

Liabilities:
Deposits:
Demand deposits	$	225,494	$	194,046
NOW accounts		234,014		202,367
Money market accounts		378,004		403,333
Savings accounts		209,616		191,580
Time deposits		902,777		931,684
Total deposits		1,949,905		1,923,010
Dividends payable		3,423		3,369
Federal Home Loan Bank advances		615,146		607,328
Junior subordinated debentures		32,991		32,991
Other borrowings		20,914		21,501
Accrued expenses and other liabilities		42,063		41,328
Total liabilities		2,664,442		2,629,527

Shareholders’ Equity:
Common stock of $.0625 par value; authorized 30,000,000 shares;
issued 16,120,659 shares in 2010 and 16,061,748 shares in 2009		1,008		1,004
Paid-in capital		83,657		82,592
Retained earnings		172,186		168,514
Accumulated other comprehensive income		8,560		3,337
Treasury stock, at cost; 19,185 shares in 2009		–		(501	)
Total shareholders’ equity		265,411		254,946
Total liabilities and shareholders’ equity	$	2,929,853	$	2,884,473

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

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Table of Content

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES		(Dollars and shares in thousands,
CONSOLIDATED STATEMENTS OF INCOME (unaudited)		except per share amounts)
		Three Months					Six Months
Periods ended June 30,		2010			2009		2010			2009
Interest income:
Interest and fees on loans		$	24,180		$	24,147	$	48,148		$	48,286
Interest on securities:	Taxable		5,837			7,588		11,888			16,037
	Nontaxable		770			778		1,539			1,558
Dividends on corporate stock and Federal Home Loan Bank stock			54			55		109			127
Other interest income			13			9		34			26
Total interest income			30,854			32,577		61,718			66,034
Interest expense:
Deposits			5,331			8,481		11,100			18,028
Federal Home Loan Bank advances			6,000			7,112		12,219			14,339
Junior subordinated debentures			447			479		1,077			958
Other interest expense			243			244		485			489
Total interest expense			12,021			16,316		24,881			33,814
Net interest income			18,833			16,261		36,837			32,220
Provision for loan losses			1,500			3,000		3,000			4,700
Net interest income after provision for loan losses			17,333			13,261		33,837			27,520
Noninterest income:
Wealth management services:
Trust and investment advisory fees			5,153			4,402		10,170			8,524
Mutual fund fees			1,105			993		2,215			1,908
Financial planning, commissions and other service fees			505			559		684			935
Wealth management services			6,763			5,954		13,069			11,367
Service charges on deposit accounts			1,400			1,201		2,553			2,314
Merchant processing fees			2,406			2,086		4,012			3,435
Income from bank-owned life insurance			474			447		913			891
Net gains on loan sales and commissions on loans originated for others			318			1,552		878			2,596
Net realized gains on securities			–			257		–			314
Net (losses) gains on interest rate swap contracts			(121	)		341		(53	)		401
Other income			273			465		586			884
Noninterest income, excluding other-than-temporary impairment losses			11,513			12,303		21,958			22,202
Total other-than-temporary impairment losses on securities			(2,840	)		–		(4,102	)		(4,244	)
Portion of loss recognized in other comprehensive income (before taxes)			2,486			–		3,685			2,253
Net impairment losses recognized in earnings			(354	)		–		(417	)		(1,991	)
Total noninterest income			11,159			12,303		21,541			20,211
Noninterest expense:
Salaries and employee benefits			11,726			10,359		23,227			20,834
Net occupancy			1,237			1,122		2,461			2,348
Equipment			1,014			1,036		2,011			2,011
Merchant processing costs			2,057			1,780		3,414			2,923
Outsourced services			855			568		1,610			1,354
FDIC deposit insurance costs			784			2,143		1,578			2,794
Legal, audit and professional fees			408			664		926			1,339
Advertising and promotion			419			491		783			792
Amortization of intangibles			290			308		581			616
Other expenses			2,193			1,858		3,984			3,708
Total noninterest expense			20,983			20,329		40,575			38,719
Income before income taxes			7,509			5,235		14,803			9,012
Income tax expense			2,211			1,470		4,333			2,577
Net income		$	5,298		$	3,765	$	10,470		$	6,435
Weighted average common shares outstanding – basic			16,104.6			15,983.6		16,081.3			15,963.2
Weighted average common shares outstanding – diluted			16,143.1			16,037.4		16,116.3			16,009.1
Per share information:	Basic earnings per common share	$	0.33		$	0.24	$	0.65		$	0.40
	Diluted earnings per common share	$	0.33		$	0.23	$	0.65		$	0.40
	Cash dividends declared per share	$	0.21		$	0.21	$	0.42		$	0.42
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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

Six months ended June 30,		2010			2009
Cash flows from operating activities:
Net income		$	10,470		$	6,435
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			3,000			4,700
Depreciation of premises and equipment			1,540			1,575
Net amortization of premium and discount			207			229
Net amortization of intangibles			581			616
Share-based compensation			395			398
Earnings from bank-owned life insurance			(913	)		(891	)
Net gains on loan sales and commissions on loans originated for others			(878	)		(2,596	)
Net realized gains on securities			–			(314	)
Net impairment losses recognized in earnings			417			1,991
Net losses (gains) on interest rate swap contracts			53			(401	)
Proceeds from sales of loans			59,487			167,015
Loans originated for sale			(57,518	)		(167,604	)
(Increase) decrease in accrued interest receivable, excluding purchased interest			(56	)		1,169
Decrease (increase) in other assets			2,474			(2,685	)
(Decrease) increase in accrued expenses and other liabilities			(3,140	)		617
Net cash provided by operating activities			16,119			10,254
Cash flows from investing activities:
Purchases of:	Mortgage-backed securities available for sale		(44,479	)		–
	Other investment securities available for sale		(15,000	)		(204	)
Proceeds from sale of:	Other investment securities available for sale		711			1,604
Maturities and principal payments of:	Mortgage-backed securities available for sale		82,301			88,564
	Other investment securities available for sale		–			7,000
Net increase in loans			(54,553	)		(50,615	)
Purchases of loans, including purchased interest			(558	)		(4,154	)
Proceeds from the sale of property acquired through foreclosure or repossession			219			367
Purchases of premises and equipment			(1,253	)		(1,993	)
Purchases of bank-owned life insurance			(5,000	)		–
Equity investment in real estate limited partnership			(414	)		–
Payment of deferred acquisition obligation			–			(2,509	)
Net cash (used in) provided by investing activities			(38,026	)		38,060
Cash flows from financing activities:
Net increase in deposits			26,895			92,852
Net decrease in other borrowings			(587	)		(2,195	)
Proceeds from Federal Home Loan Bank advances			164,500			224,170
Repayment of Federal Home Loan Bank advances			(156,679	)		(365,359	)
Issuance of treasury stock, including deferred compensation plan activity			44			19
Net proceeds from the issuance of common stock under dividend reinvestment plan			517			555
Net proceeds from the exercise of stock options and issuance of other
compensation-related equity instruments			558			117
Tax benefit from stock option exercises and issuance of other compensation-related equity instruments			47			303
Cash dividends paid			(6,759	)		(6,705	)
Net cash provided by (used in) financing activities			28,536			(56,243	)
Net increase (decrease) in cash and cash equivalents			6,629			(7,929	)
Cash and cash equivalents at beginning of period			57,260			58,190
Cash and cash equivalents at end of period		$	63,889		$	50,261

Noncash Investing and Financing Activities:	Loans charged off	$	2,538		$	2,509
	Net transfer from loans to property acquired through foreclosure or repossession		630			236
	Reclassification of other-than-temporary
	impairment charge effective January 1, 2009		–			1,859
Supplemental Disclosures:	Interest payments		24,148			33,588
	Income tax payments		4,513			5,168
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

General

Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned and registered bank holding company that has elected financial holding company status. 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, ATMs, and its Internet website (www.washtrust.com).

(1) Basis of Presentation

The consolidated financial statements include the accounts of the Bancorp and its subsidiaries (collectively, the “Corporation” or “Washington Trust”). All significant intercompany transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period’s classification. Such reclassifications have no effect on previously reported net income or shareholders’ equity.

The accounting and reporting policies of the Corporation conform to U.S. generally accepted accounting principles (“GAAP”) and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to 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 June 30, 2010 and December 31, 2009, 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, 2009.

(2) Recently Issued Accounting Pronouncements

Accounting Standards Codification (“ASC”) 860, “Transfers and Servicing,” incorporates former SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” which was issued in June 2009 and was effective for interim and annual periods beginning after January 1, 2010. These pending provisions of ASC 860 will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to the transferred financial assets. Among other things, the concept of a “qualifying special-purpose entity” is eliminated under these pending provisions of ASC 860, which also changes the requirements for derecognizing financial assets and requires additional disclosures. The adoption of these provisions of ASC 860 did not have a material impact on the Corporation’s consolidated financial statements.

ASC 810, “Consolidations,” incorporates former SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” which was issued in June 2009 and was effective for interim and annual periods beginning after January 1, 2010. These provisions of ASC 810 revise former FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” and change how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) and therefore should be consolidated. Consolidation of variable interest entities would be based on the target entity’s purpose and design as well as the reporting entity’s ability to direct the target’s activities, among other criteria. The adoption of these provisions of ASC 810 did not have an impact on the Corporation’s consolidated financial statements.

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

Accounting Standards Update No. 2010-06 “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”) was issued in January 2010 to update ASC 820 “Fair Value Measurements and Disclosures”. ASU 2010-06 requires new disclosures (1) for significant transfers in and out of Level 1 and Level 2 including a description of the reason for the transfers and (2) in the reconciliation of Level 3 presenting sales, issuances and settlements gross rather than one net number. ASU 2010-06 also requires clarification of existing disclosures requiring (1) measurement disclosures for each “class” of assets and liabilities (a class being a subset of assets and liabilities within one line item in the statement of financial position) using judgment in determining the appropriate classes and (2) disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3. The new disclosures and clarifications of existing disclosures were effective for interim and reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity Level 3 which will be effective for interim and annual periods beginning after December 15, 2010. See Note 10 for the Corporation’s Fair Value Measurements disclosure. The adoption of ASU-2010-06 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Accounting Standards Update No. 2010-11, “Scope Exception Related to Embedded Credit Derivatives” (“ASU 2010-11”) was issued in March 2010 and will be effective for interim and annual periods beginning after June 30, 2010. ASU 2010-11 updates ASC 815 “Derivatives and Hedging” to clarify scope exceptions for embedded credit derivatives features related to the transfer of credit risk in the form of subordination of one financial instrument to another. The adoption of ASU-2010-11 is not expected to have an impact on the Corporation’s consolidated financial statements.

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 will significantly enhance 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 will 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. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in this ASU encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. The adoption of ASU-2010-20 is not expected to have a material impact on the Corporation’s consolidated financial statements.

(3) Federal Home Loan Bank Stock

The Bank is a member of the Federal Home Loan Bank of Boston (“FHLBB”). The FHLBB is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Agency, to maintain capital adequacy of the FHLBB. While the Corporation currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. In 2008, the FHLBB announced to its members that it is focusing on preserving capital in response to ongoing market volatility including the extension of a moratorium on excess stock repurchases and in 2009 announced the suspension of its quarterly dividends. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Corporation’s FHLBB stock as of June 30, 2010. Further deterioration of the FHLBB’s capital levels may require the Corporation to deem its restricted investment in FHLBB stock to be other-than-temporarily impaired. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Corporation will continue to monitor its investment in FHLBB stock.

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

(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, 2010 and December 31, 2009 were as follows:

(Dollars in thousands)
	Amortized		Unrealized		Unrealized			Fair
June 30, 2010	Cost (1)		Gains		Losses			Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises	$	56,585	$	4,312	$	−		$	60,897
Mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises		464,938		25,338		(110	)		490,166
States and political subdivisions		79,464		3,123		(118	)		82,469
Trust preferred securities:
Individual name issuers		30,582		−		(7,970	)		22,612
Collateralized debt obligations		4,504		−		(3,632	)		872
Corporate bonds		13,269		1,554		−			14,823
Common stocks		659		102		−			761
Perpetual preferred stocks		3,354		85		(101	)		3,338
Total securities available for sale	$	653,355	$	34,514	$	(11,931	)	$	675,938

(Dollars in thousands)
	Amortized		Unrealized		Unrealized			Fair
December 31, 2009	Cost (1)		Gains		Losses			Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises	$	41,565	$	3,675	$	−		$	45,240
Mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises		503,115		20,808		(477	)		523,446
States and political subdivisions		80,183		2,093		(214	)		82,062
Trust preferred securities:
Individual name issuers		30,563		−		(9,977	)		20,586
Collateralized debt obligations		4,966		−		(3,901	)		1,065
Corporate bonds		13,272		1,434		−			14,706
Common stocks		658		111		−			769
Perpetual preferred stocks		3,354		396		(140	)		3,610
Total securities available for sale	$	677,676	$	28,517	$	(14,709	)	$	691,484

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

Securities available for sale with a fair value of $509 million and $558 million were pledged in compliance with state regulations concerning trust powers and to secure Treasury Tax and Loan deposits, borrowings, and certain public deposits at June 30, 2010 and December 31, 2009, respectively. (See Note 7 to the Consolidated Financial Statements for additional discussion of FHLBB borrowings.) In addition, securities available for sale with a fair value of $21.6 million and $22.2 million were pledged for potential use at the Federal Reserve Bank discount window at June 30, 2010 and December 31, 2009, respectively. There were no borrowings with the Federal Reserve Bank at either date. Securities available for sale with a fair value of $6.4 million and $7.2 million were designated in rabbi trusts for nonqualified retirement plans at June 30, 2010 and December 31, 2009, respectively. Securities available for sale with a fair value of $3.4 million and $2.6 million were pledged as collateral to secure certain interest rate swap agreements at June 30, 2010 and December 31, 2009, respectively.

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

The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at June 30, 2010 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,	2010		2009		2010		2009
Balance at beginning of period	$	2,559	$	1,350	$	2,496	$	–
Credit-related impairment loss on debt securities for
which an other-than-temporary impairment was not
previously recognized		–		–		–		1,350
Additional increases to the amount of credit-related
impairment loss on debt securities for which an other-
than-temporary impairment was previously recognized		354		–		417		–
Balance at end of period	$	2,913	$	1,350	$	2,913	$	1,350

During the three and six months ended June 30, 2010, credit-related impairment losses of $354 thousand and $417 thousand, respectively, were recognized in earnings on pooled trust preferred debt securities not expected to be sold. 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, 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
At June 30, 2010		#	Value		Losses			#	Value		Losses			#	Value		Losses
Mortgage-backed securities
issued by U.S. government agencies and U.S. government-sponsored enterprises		–	$	–	$	–		11	$	31,888	$	110		11	$	31,888	$	110
States and
political subdivisions		–		–		–		4		3,184		118		4		3,184		118
Trust preferred securities:
Individual name issuers		–		–		–		11		22,612		7,970		11		22,612		7,970
Collateralized debt obligations		–		–		–		2		872		3,632		2		872		3,632
Subtotal, debt securities		–		–		–		28		58,556		11,830		28		58,556		11,830
Perpetual preferred stocks		–		–		–		5		2,318		101		5		2,318		101
Total temporarily
impaired securities		–	$	–	$	–		33	$	60,874	$	11,931		33	$	60,874	$	11,931

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes temporarily impaired securities as of December 31, 2009, 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
At December 31, 2009		#	Value		Losses			#	Value		Losses			#	Value		Losses
Mortgage-backed securities
issued by U.S. government agencies and U.S. government-sponsored enterprises		3	$	2,218	$	5		25	$	38,023	$	472		28	$	40,241	$	477
States and
political subdivisions		4		3,836		45		3		2,097		169		7		5,933		214
Trust preferred securities:
Individual name issuers		–		–		–		11		20,586		9,977		11		20,586		9,977
Collateralized debt obligations		–		–		–		2		1,065		3,901		2		1,065		3,901
Subtotal, debt securities		7		6,054		50		41		61,771		14,519		48		67,825		14,569
Perpetual preferred stocks		1		427		73		3		933		67		4		1,360		140
Total temporarily
impaired securities		8	$	6,481	$	123		44	$	62,704	$	14,586		52	$	69,185	$	14,709

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, 2010 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 $8.0 million at June 30, 2010. 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, 2010, trust preferred debt securities with a carrying value of $11.8 million and unrealized losses of $3.7 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 quarterly 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, 2010.

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

At June 30, 2010, Washington Trust had two pooled trust preferred holdings in the form of collateralized debt obligations with unrealized losses of $3.6 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

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

In the first quarter of 2009, an adverse change occurred in the expected cash flows for one of the trust preferred collateralized debt obligation securities indicating that, based on cash flow forecasts with regard to timing of deferrals and potential future recovery of deferred payments, default rates, and other matters, the Corporation would not receive all contractual amounts due under the instrument and would not recover the entire cost basis of this security. In the first quarter of 2009, the Corporation recognized a $1.4 million credit-related impairment loss in earnings for this trust preferred collateralized debt security, with a commensurate adjustment to reduce the amortized cost of this security. This security was downgraded to a below investment grade rating of “Caa3” by Moody’s Investors Service Inc. (“Moody’s”) on March 27, 2009 and was placed on nonaccrual status as of March 31, 2009. On October 30, 2009, Moody’s downgraded this security to a rating of “Ca.” 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. In April 2010, this investment security began deferring a portion of interest payments. The analysis of this security as of June 30, 2010 indicated that an adverse change occurred in the expected cash flows for this security and resulted in an additional credit-related impairment loss of $354 thousand being recognized in earnings in the second quarter of 2010.

During the fourth quarter of 2008, the Corporation’s other trust preferred collateralized debt obligation security began deferring interest payments until future periods and the Corporation recognized an other-than-temporary impairment charge in the fourth quarter of 2008 on this security in the amount of $1.9 million. This investment security was also placed on nonaccrual status as of December 31, 2008. In connection with the first quarter 2009 early adoption of the provisions of ASC 320, “Investments – Debt and Equity Securities” and based on Washington Trust’s assessment of the facts associated with this instrument, the Corporation concluded that there was no credit loss portion of the other-than-temporary impairment charge as of December 31, 2008. Washington Trust reclassified the noncredit-related other-than-temporary impairment loss for this security previously recognized in earnings in the fourth quarter of 2008 as a cumulative effect adjustment as of January 1, 2009 in the amount of $1.2 million after taxes ($1.9 million before taxes) with an increase in retained earnings and a decrease in accumulated other comprehensive loss. In addition, the amortized cost basis of this security was increased by $1.9 million, the amount of the cumulative effect adjustment before taxes. This security was downgraded to a below investment grade rating of “Ca” by Moody’s on March 27, 2009. During the third quarter of 2009, an adverse change occurred in the expected cash flows for this instrument indicating that, based on cash flow forecasts with regard to timing of deferrals and potential future recovery of deferred payments, default rates, and other matters, the Corporation would not receive all contractual amounts due under the instrument and would not recover the entire cost basis of the security. The Corporation concluded that these conditions warranted a conclusion of other-than-temporary impairment for this holding as of September 30, 2009 and recognized a $467 thousand credit-related impairment loss in earnings, with a commensurate adjustment to reduce the amortized cost of this security in the third quarter of 2009. The analysis of the expected cash flows for this security as of December 31, 2009 resulted in an additional credit-related impairment loss of $679 thousand being recognized in earnings in the fourth quarter of 2009. An additional credit-related impairment loss of $63 thousand was recognized in earnings in the first quarter of 2010 based on the analysis of the expected cash flows for this security as of March 31, 2010. This security was downgraded to a rating of “C” by Moody’s on June 24, 2010. 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, 2010 did not result in further credit-related impairment loss for the quarter ended June 30, 2010.

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

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 at June 30, 2010.

(5) Loans

The following is a summary of loans:

(Dollars in thousands)		June 30, 2010					December 31, 2009
		Amount		%			Amount		%
Commercial:	Mortgages (1)	$	510,315		26	%	$	496,996		26	%
	Construction and development (2)		67,215		3	%		72,293		4	%
	Other (3)		441,827		23	%		415,261		21	%
	Total commercial		1,019,357		52	%		984,550		51	%

Residential real estate:	Mortgages (4)		610,245		31	%		593,981		31	%
	Homeowner construction		12,368		1	%		11,594		1	%
	Total residential real estate		622,613		32	%		605,575		32	%

Consumer:	Home equity lines (5)		218,440		11	%		209,801		11	%
	Home equity loans (5)		57,682		3	%		62,430		3	%
	Other (6)		54,406		2	%		57,312		3	%
	Total consumer		330,528		16	%		329,543		17	%
Total loans (7)		$	1,972,498		100	%	$	1,919,668		100	%

(1)	Amortizing mortgages and lines of credit, primarily secured by income producing property. $132 million of these loans at June 30, 2010 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. At June 30, 2010, $37 million of these loans were pledged as collateral for FHLBB borrowings and $66 million of these loans were collateralized for the discount window at the Federal Reserve Bank (see Note 7).

(4)	A substantial portion of these loans is used as qualified collateral for FHLBB borrowings (see Note 7 for additional discussion of FHLBB borrowings).

(5)	A significant portion of these loans was pledged as collateral for FHLBB borrowings (see Note 7).

(6)	Fixed rate consumer installment loans.

(7)	Net of unamortized loan origination costs, net of fees, totaling $319 thousand and $103 thousand at June 30, 2010 and December 31, 2009, respectively. Also includes $32 thousand and $140 thousand of net discounts on purchased loans at June 30, 2010 and December 31, 2009, respectively.

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:

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)	June 30, 2010		December 31, 2009
Nonaccrual commercial loans, excluding troubled debt restructured loans:
Commercial mortgages	$	5,694	$	11,588
Other commercial		8,117		8,847
Total nonaccrual commercial loans, excluding troubled debt restructured loans		13,811		20,435
Nonaccrual troubled debt restructured loans:
Commercial mortgages		986		–
Other commercial		301		228
Residential real estate mortgages		381		336
Consumer		43		45
Nonaccrual troubled debt restructured loans		1,711		609
Accruing troubled debt restructured loans:
Commercial mortgages		6,176		5,566
Other commercial		2,224		540
Residential real estate mortgages		2,234		2,736
Consumer		997		858
Accruing troubled debt restructured loans		11,631		9,700
Total troubled debt restructured loans		13,342		10,309
Other:
Nonaccrual residential real estate mortgages		1,955		772
Accruing consumer		77		38
Total other		2,032		810
Total recorded investment in impaired loans	$	29,185	$	31,554

(Dollars in thousands)	June 30, 2010		December 31, 2009
Impaired loans requiring an allowance	$	19,856	$	19,480
Impaired loans not requiring an allowance		9,329		12,074
Total recorded investment in impaired loans	$	29,185	$	31,554
Loss allocation on impaired loans	$	2,736	$	2,459

(Dollars in thousands)

Three months ended June 30,	2010		2009
Average recorded investment in impaired loans	$	31,289	$	12,880
Interest income recognized on impaired loans	$	427	$	92

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(6) Allowance for Loan Losses

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

(Dollars in thousands)
		Three months						Six months
Periods ended June 30,		2010			2009			2010			2009
Balance at beginning of period		$	27,711		$	24,498		$	27,400		$	23,725
Charge-offs:
Commercial:	Mortgages		(533	)		(794	)		(1,026	)		(1,255	)
	Construction and development		–			–			–			–
	Other		(561	)		(515	)		(1,096	)		(956	)
Residential real estate:	Mortgages		(116	)		(127	)		(287	)		(159	)
	Homeowner construction		–			–			–			–
Consumer			(53	)		(47	)		(129	)		(139	)
Total charge-offs			(1,263	)		(1,483	)		(2,538	)		(2,509	)
Recoveries:
Commercial:	Mortgages		2			–			4			–
	Construction and development		–			–			–			–
	Other		3			–			30			92
Residential real estate:	Mortgages		26			–			76			–
	Homeowner construction		–			–			–			–
Consumer			6			36			13			43
Total recoveries			37			36			123			135
Net charge-offs			(1,226	)		(1,447	)		(2,415	)		(2,374	)
Provision charged to expense			1,500			3,000			3,000			4,700
Balance at end of period		$	27,985		$	26,051		$	27,985		$	26,051

(7) Borrowings

Federal Home Loan Bank Advances

Advances payable to the FHLBB amounted to $615 million at June 30, 2010 and $607 million at December 31, 2009.

In connection with the Corporation’s ongoing interest rate risk management efforts, in January 2010, the Corporation modified the terms to extend the maturity dates of $50 million of its FHLBB advances with original maturity dates in 2011 and 2012. In April 2010, the Corporation modified the terms to extend the maturity dates of an additional $38.5 million of its FHLBB advances with original maturity dated in 2010 and 2011. The following table presents maturities and weighted average interest rates paid on FHLBB advances outstanding at June 30, 2010:

(Dollars in thousands)
	Scheduled		Redeemed at		Weighted
	Maturity		Call Date (1)		Average Rate (2)
July 1, 2010 through December 31, 2010	$	108,925	$	121,925		2.34	%
2011		61,539		53,539		3.84	%
2012		122,365		122,365		4.20	%
2013		162,034		157,034		3.90	%
2014		68,562		68,562		3.99	%
2015		27,810		27,810		4.07	%
2016 and after		63,911		63,911		5.07	%
Balance at June 30, 2010	$	615,146	$	615,146

(1)	Callable FHLBB advances are shown in the respective periods assuming that the callable debt is redeemed at the call date while all other advances are shown in the periods corresponding to their scheduled maturity date.

(2) Weighted average rate based on scheduled maturity dates.

In addition to the outstanding advances, the Bank also has access to an unused line of credit with the FHLBB amounting to $8.0 million at June 30, 2010. Under agreement with the FHLBB, the Bank is required to maintain

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and fair values, has a value equal to the aggregate amount of the line of credit and outstanding advances. The FHLBB maintains a security interest in various assets of the Corporation including, but not limited to, residential mortgage loans, commercial mortgages and other commercial loans, U.S. government agency securities, U.S. government-sponsored enterprise securities, and amounts maintained on deposit at the FHLBB. The Corporation maintained qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at June 30, 2010. Included in the collateral were securities available for sale with a fair value of $318 million and $370 million that were specifically pledged to secure FHLBB borrowings at June 30, 2010 and December 31, 2009, respectively. Unless there is an event of default under the agreement, the Corporation may use, encumber or dispose any portion of the collateral in excess of the amount required to secure FHLBB borrowings, except for that collateral which has been specifically pledged.

(8) Shareholders’ Equity

2006 Stock Repurchase Plan:

The Corporation’s 2006 Stock Repurchase Plan authorizes the repurchase of up to 400,000 shares, or approximately 3%, of the Corporation’s common stock in open market transactions. This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. There is no set expiration date for this repurchase plan. The Corporation plans to hold the repurchased shares as treasury stock to be used for general corporate purposes. As of June 30, 2010, a cumulative total of 185,400 shares have been repurchased. These shares were repurchased in 2007 at a total cost of $4.8 million.

Regulatory Capital Requirements:

The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios at June 30, 2010 and December 31, 2009, as well as the corresponding minimum and well capitalized regulatory amounts and ratios:

(Dollars in thousands)	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2010:
Total Capital (to Risk-Weighted Assets):
Corporation	$	250,371		12.47	%	$	160,633		8.00	%	$	200,791		10.00	%
Bank	$	248,033		12.37	%	$	160,442		8.00	%	$	200,553		10.00	%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation	$	225,196		11.22	%	$	80,316		4.00	%	$	120,475		6.00	%
Bank	$	222,887		11.11	%	$	80,221		4.00	%	$	120,332		6.00	%
Tier 1 Capital (to Average Assets): (1)
Corporation	$	225,196		7.94	%	$	113,492		4.00	%	$	141,865		5.00	%
Bank	$	222,887		7.86	%	$	113,399		4.00	%	$	141,749		5.00	%

As of December 31, 2009:
Total Capital (to Risk-Weighted Assets):
Corporation	$	244,382		12.40	%	$	157,615		8.00	%	$	197,019		10.00	%
Bank	$	242,536		12.32	%	$	157,470		8.00	%	$	196,838		10.00	%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation	$	219,552		11.14	%	$	78,808		4.00	%	$	118,212		6.00	%
Bank	$	217,729		11.06	%	$	78,735		4.00	%	$	118,103		6.00	%
Tier 1 Capital (to Average Assets): (1)
Corporation	$	219,552		7.82	%	$	112,269		4.00	%	$	140,336		5.00	%
Bank	$	217,729		7.76	%	$	112,165		4.00	%	$	140,206		5.00	%

(1) Leverage ratio

(9) Financial Instruments with Off-Balance Sheet Risk and Derivative Financial Instruments

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, an equity commitment to an affordable housing partnership, interest rate swap agreements and commitments to originate and commitments to sell

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

fixed rate mortgage loans. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Corporation’s Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers, commitments to extend credit, and financial guarantees are similar to those used for loans. The interest rate swaps with other counterparties are generally subject to bilateral collateralization terms. The contractual and notional amounts of financial instruments with off-balance sheet risk are as follows:

(Dollars in thousands)	June 30, 2010		December 31, 2009
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Commercial loans	$	161,485	$	186,943
Home equity lines		185,126		185,892
Other loans		19,554		25,691
Standby letters of credit		9,264