Edgar Filing: WASHINGTON TRUST BANCORP INC

Form 10-Q 2013 Q1

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended MARCH 31, 2013 or



o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______.

Commission file number: 001-32991

WASHINGTON TRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)



RHODE ISLAND		05-0404671
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



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

(401) 348-1200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

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). x Yes o No

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). o Yes x No

The number of shares of common stock of the registrant outstanding as of May 1, 2013 was 16,446,465.



FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended March 31, 2013

TABLE OF CONTENTS
		Page Number
		Page Number
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012		3
Consolidated Statements of Income for the three months ended March 31, 2013 and 2012		4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012		5
Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2013 and 2012		6
Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012		7
Condensed Notes to Unaudited Consolidated Financial Statements		8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		43
Item 3. Quantitative and Qualitative Disclosures About Market Risk		67
Item 4. Controls and Procedures		68
PART II. Other Information
Item 1. Legal Proceedings		69
Item 1A. Risk Factors		69
Item 6. Exhibits		69
Signatures		70

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



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



	March 31, 2013			December 31, 2012
Assets:
Cash and due from banks		$80,616			$73,474
Short-term investments	18,418			19,176
Mortgage loans held for sale, at fair value; amortized cost $27,274 in 2013 and $48,370 in 2012	27,899			50,056
Securities:
Available for sale, at fair value; amortized cost $336,954 in 2013 and $363,408 in 2012	350,205			375,498
Held to maturity, at cost; fair value $37,804 in 2013 and $41,420 in 2012	36,897			40,381
Total securities	387,102			415,879
Federal Home Loan Bank stock, at cost	37,730			40,418
Loans:
Commercial	1,277,147			1,252,419
Residential real estate	724,361			717,681
Consumer	323,537			323,903
Total loans	2,325,045			2,294,003
Less allowance for loan losses	31,139			30,873
Net loans	2,293,906			2,263,130
Premises and equipment, net	26,812			27,232
Investment in bank-owned life insurance	55,290			54,823
Goodwill	58,114			58,114
Identifiable intangible assets, net	6,000			6,173
Other assets	59,961			63,409
Total assets		$3,051,848			$3,071,884
Liabilities:
Deposits:
Demand deposits		$375,156			$379,889
NOW accounts	294,136			291,174
Money market accounts	503,414			496,402
Savings accounts	284,983			274,934
Time deposits	861,952			870,232
Total deposits	2,319,641			2,312,631
Federal Home Loan Bank advances	341,218			361,172
Junior subordinated debentures	32,991			32,991
Other borrowings	209			1,212
Other liabilities	56,498			68,226
Total liabilities	2,750,557			2,776,232
Commitments and contingencies
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 30,000,000 shares; issued and outstanding 16,425,442 shares in 2013 and 16,379,771 shares in 2012	1,027			1,024
Paid-in capital	92,662			91,453
Retained earnings	216,920			213,674
Accumulated other comprehensive loss	(9,318		)	(10,499		)
Total shareholders’ equity	301,291			295,652
Total liabilities and shareholders’ equity		$3,051,848			$3,071,884

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



WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES	(Dollars and shares in thousands,
CONSOLIDATED STATEMENTS OF INCOME (unaudited)	except per share amounts)



Three months ended March 31,		2013			2012
Interest income:
Interest and fees on loans			$25,223			$25,363
Interest on securities:	Taxable	2,845			4,377
	Nontaxable	659			693
Dividends on corporate stock and Federal Home Loan Bank stock		38			77
Other interest income		28			20
Total interest income		28,793			30,530
Interest expense:
Deposits		3,194			3,434
Federal Home Loan Bank advances		2,737			4,085
Junior subordinated debentures		390			392
Other interest expense		5			234
Total interest expense		6,326			8,145
Net interest income		22,467			22,385
Provision for loan losses		600			900
Net interest income after provision for loan losses		21,867			21,485
Noninterest income:
Wealth management services:
Trust and investment advisory fees		6,066			5,778
Mutual fund fees		1,022			1,025
Financial planning, commissions and other service fees		386			382
Wealth management services		7,474			7,185
Service charges on deposit accounts		791			759
Merchant processing fees		1,977			1,988
Card interchange fees		599			543
Income from bank-owned life insurance		467			486
Net gains on loan sales and commissions on loans originated for others		4,166			3,097
Net gains on interest rate swap contracts		19			28
Equity in earnings (losses) of unconsolidated subsidiaries		39			(37		)
Other income		406			392
Noninterest income, excluding other-than-temporary impairment losses		15,938			14,441
Total other-than-temporary impairment losses on securities		(613		)	(85		)
Portion of loss recognized in other comprehensive income (before tax)		(2,159		)	(124		)
Net impairment losses recognized in earnings		(2,772		)	(209		)
Total noninterest income		13,166			14,232
Noninterest expense:
Salaries and employee benefits		15,442			14,460
Net occupancy		1,514			1,526
Equipment		1,244			1,107
Merchant processing costs		1,673			1,663
Outsourced services		841			920
Legal, audit and professional fees		608			482
FDIC deposit insurance costs		431			458
Advertising and promotion		355			372
Amortization of intangibles		173			187
Foreclosed property costs		47			298
Other expenses		1,856			1,926
Total noninterest expense		24,184			23,399
Income before income taxes		10,849			12,318
Income tax expense		3,428			3,880
Net income			$7,421			$8,438
Weighted average common shares outstanding - basic		16,401			16,330
Weighted average common shares outstanding - diluted		16,449			16,370
Per share information:	Basic earnings per common share		$0.45			$0.51
	Diluted earnings per common share		$0.45			$0.51
	Cash dividends declared per share		$0.25			$0.23

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



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



Three months ended March 31,	2013			2012
Net income		$7,421			$8,438
Other comprehensive income, net of tax:
Securities available for sale:
Changes in fair value of securities available for sale	(1,053		)	143
Less: net losses on securities reclassified into earnings	393			55
Net change in fair value of securities available for sale	(660		)	198
Reclassification adjustment for other-than-temporary impairment losses transferred into earnings	1,384			80
Cash flow hedges:
Change in fair value of cash flow hedges	(2		)	(75		)
Less: net cash flow hedge losses reclassified into earnings	122			110
Net change in fair value of cash flow hedges	120			35
Defined benefit plan obligation adjustment	337			184
Total other comprehensive income, net of tax	1,181			497
Total comprehensive income		$8,602			$8,935

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



WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES	(Dollars and shares in thousands)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)



	Common Shares Outstanding	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive (Loss)			Total
Balance at January 1, 2012	16,292		$1,018		$88,030		$194,198			($1,895	)		$281,351
Net income						8,438						8,438
Total other comprehensive income, net of tax									497			497
Cash dividends declared						(3,809		)				(3,809		)
Share-based compensation				412								412
Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit	10	1		145								146
Shares issued – dividend reinvestment plan	52	3		897								900
Balance at March 31, 2012	16,354		$1,022		$89,484		$198,827			($1,398	)		$287,935



	Common Shares Outstanding	Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss)			Total
Balance at January 1, 2013	16,380		$1,024		$91,453			$213,674			($10,499	)		$295,652
Net income							7,421						7,421
Total other comprehensive income, net of tax										1,181			1,181
Cash dividends declared							(4,175		)				(4,175		)
Share-based compensation				581									581
Deferred compensation plan	2	—		30									30
Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit	38	3		628									631
Shares issued – nonvested shares	5	—		(30		)							(30		)
Balance at March 31, 2013	16,425		$1,027		$92,662			$216,920			($9,318	)		$301,291

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



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



Three months ended March 31,		2013			2012
Cash flows from operating activities:
Net income			$7,421			$8,438
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		600			900
Depreciation of premises and equipment		847			783
Foreclosed and repossessed property valuation adjustments		20			119
Net amortization of premium and discount		460			522
Net amortization of intangibles		173			187
Share-based compensation		581			412
Income from bank-owned life insurance		(467		)	(486		)
Net gains on loan sales and commissions on loans originated for others		(4,166		)	(3,097		)
Net impairment losses recognized in earnings		2,772			209
Net gains on interest rate swap contracts		(19		)	(28		)
Equity in (earnings) losses of unconsolidated subsidiaries		(39		)	37
Proceeds from sales of loans		138,729			110,632
Loans originated for sale		(114,244		)	(97,682		)
Decrease (increase) in other assets		2,050			(18		)
Decrease in other liabilities		(10,945		)	(6,488		)
Net cash provided by operating activities		23,773			14,440
Cash flows from investing activities:
Purchases of:	Mortgage-backed securities available for sale	(1,036		)	—
	Other investment securities available for sale	(203		)	—
Maturities and principal payments of:	Mortgage-backed securities available for sale	23,934			31,508
	Other investment securities available for sale	690			681
	Mortgage-backed securities held to maturity	3,328			2,525
Remittance of Federal Home Loan Bank stock		2,688			1,590
Net increase in loans		(26,102		)	(13,573		)
Purchases of loans, including purchased interest		(3,442		)	(1,278		)
Proceeds from the sale of property acquired through foreclosure or repossession		460			517
Purchases of premises and equipment		(427		)	(1,652		)
Net cash (used in) provided by investing activities		(110		)	20,318
Cash flows from financing activities:
Net increase in deposits		7,010			19,247
Net decrease in other borrowings		(1,003		)	(18,939		)
Proceeds from Federal Home Loan Bank advances		100,000			135,429
Repayment of Federal Home Loan Bank advances		(119,954		)	(170,946		)
Proceeds from the exercise of stock options and issuance of other compensation-related equity instruments		555			937
Tax benefit from stock option exercises and issuance of other compensation-related equity instruments		76			109
Cash dividends paid		(3,963		)	(3,604		)
Net cash used in financing activities		(17,279		)	(37,767		)
Net increase (decrease) in cash and cash equivalents		6,384			(3,009		)
Cash and cash equivalents at beginning of period		92,650			87,020
Cash and cash equivalents at end of period			$99,034			$84,011
Noncash Investing and Financing Activities:
Loans charged off			$374			$681
Loans transferred to property acquired through foreclosure or repossession		1,050			1,519
Supplemental Disclosures:
Interest payments			$6,260			$7,957
Income tax payments		103			440

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

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


(1)	General Information

Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company and financial holding company. The Bancorp owns all of the outstanding common stock of The Washington Trust Company (the “Bank”), a Rhode Island chartered commercial bank founded in 1800. Through its subsidiaries, the Bancorp offers a complete product line of financial services including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut.

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.

The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change are the determination of the allowance for loan losses and the review of goodwill, other intangible assets and investments for impairment. The current economic environment has increased the degree of uncertainty inherent in such estimates and assumptions.

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. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying consolidated financial statements have been included. Interim results are not necessarily reflective of the results of the entire year. 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 fiscal year ended December 31, 2012.


(2)	Recently Issued Accounting Pronouncements

Balance Sheet - Topic 210

Accounting Standards Update No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), was issued in December 2011 and was intended to enhance current disclosure requirements on offsetting financial assets and liabilities. The requirements of ASU 2011-11 enable users to compare balance sheets prepared under U.S. GAAP and International Financial Reporting Standards (“IFRS”), which are subject to different offsetting models. The requirements affect all entities that have financial instruments that are either offset in the balance sheet or subject to an enforceable master netting arrangement or similar agreement. ASU 2011-11 was effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The required disclosures were effective retrospectively for all comparative periods presented. The adoption of ASU 2011-11 did not have a material impact on the Corporation’s consolidated financial statements.

Comprehensive Income - Topic 220

Accounting Standards Update No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”) was issued in February 2013 and requires additional disclosure of the effects of reclassifications out of accumulated other comprehensive income (“AOCI”) in a single location, either on the face of the financial statement that reports net income or in the notes to the financial statements. ASU 2013-02 does not change the current requirements and carries forward the existing requirements that reclassifications out of AOCI be separately presented for each component of other comprehensive income. For items reclassified out of AOCI and into net income in their entirety, the effect of the reclassification on each affected net income line must be disclosed. For AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other required disclosures is required. The amendments were effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this standard did not have a material impact on the Corporation’s consolidated financial statements, see Note 15.


(3)	Cash and Due from Banks

The Bank maintains certain average reserve balances to meet the requirements of the Board of Governors of the Federal Reserve System (“FRB”). Some or all of this reserve requirement may be satisfied with vault cash. Reserve balances amounted to $4.6 million at March 31, 2013 and $5.5 million at December 31, 2012 and were included in cash and due from banks in the Consolidated Balance Sheets.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of March 31, 2013 and December 31, 2012, cash and due from banks included interest-bearing deposits in other banks of $41.4 million and $32.2 million, respectively.


(4)	Securities

The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and fair value of securities by major security type and class of security:



(Dollars in thousands)
March 31, 2013	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$29,465		$1,855		$—			$31,320
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	193,921		12,873		—			206,794
States and political subdivisions	67,502		4,081		—			71,583
Trust preferred securities:
Individual name issuers	30,686		—		(5,112		)	25,574
Collateralized debt obligations	1,264		—		(860		)	404
Corporate bonds	14,116		414		—			14,530
Total securities available for sale		$336,954		$19,223		($5,972	)		$350,205
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$36,897		$907		$—			$37,804
Total securities held to maturity		$36,897		$907		$—			$37,804
Total securities		$373,851		$20,130		($5,972	)		$388,009



(Dollars in thousands)
December 31, 2012	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$29,458		$2,212		$—			$31,670
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	217,136		14,097		—			231,233
States and political subdivisions	68,196		4,424		—			72,620
Trust preferred securities:
Individual name issuers	30,677		—		(5,926		)	24,751
Collateralized debt obligations	4,036		—		(3,193		)	843
Corporate bonds	13,905		476		—			14,381
Total securities available for sale		$363,408		$21,209		($9,119	)		$375,498
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$40,381		$1,039		$—			$41,420
Total securities held to maturity		$40,381		$1,039		$—			$41,420
Total securities		$403,789		$22,248		($9,119	)		$416,918

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At March 31, 2013 and December 31, 2012, securities available for sale and held to maturity with a fair value of $385.7 million and $386.5 million, respectively, were pledged to secure borrowings with the Federal Home Loan Bank of Boston (“FHLBB”), potential borrowings with the FRB, certain public deposits and for other purposes.

The schedule of maturities of debt securities available for sale and held to maturity as of March 31, 2013 is presented below. Mortgage‑backed securities are included based on weighted average maturities, adjusted for anticipated prepayments. All other debt 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.



(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		$—			$29,465			$—			$—			$29,465
Weighted average yield	—		%	5.39		%	—		%	—		%	5.39		%
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
Amortized cost	73,925			97,398			17,126			5,472			193,921
Weighted average yield	4.31		%	3.91		%	2.83		%	2.30		%	3.92		%
State and political subdivisions:
Amortized cost	7,665			59,837			—			—			67,502
Weighted average yield	3.92		%	3.90		%	—		%	—		%	3.91		%
Trust preferred securities:
Amortized cost	—			—			—			31,950			31,950
Weighted average yield	—		%	—		%	—		%	1.32		%	1.32		%
Corporate bonds:
Amortized cost	8,215			5,701			200			—			14,116
Weighted average yield	6.52		%	2.85		%	1.65		%	—		%	4.97		%
Total debt securities available for sale:
Amortized cost		$89,805			$192,401			$17,326			$37,422			$336,954
Weighted average yield	4.48		%	4.11		%	2.82		%	1.46		%	3.85		%
Fair value		$91,941			$202,095			$18,384			$37,785			$350,205
Securities Held to Maturity:
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
Amortized cost		$11,837			$19,917			$4,559			$584			$36,897
Weighted average yield	2.11		%	1.93		%	1.80		%	0.97		%	1.96		%
Fair value		$12,128			$20,407			$4,671			$598			$37,804

Included in the securities were debt securities with an amortized cost balance of $89.1 million and a fair value of $86.4 million that are callable at the discretion of the issuers. Final maturities of the callable securities range from three to twenty-five years, with call features ranging from one month to five years.

Other-Than-Temporary Impairment Assessment

The Corporation assesses whether the decline in fair value of investment securities is other-than-temporary on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates impairments in value both qualitatively and quantitatively to assess whether they are other-than-temporary.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables summarize temporarily impaired securities, 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
March 31, 2013	#	Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Trust preferred securities:
Individual name issuers	—		$—		$—	11		$25,574		($5,112	)	11		$25,574		($5,112	)
Collateralized debt obligations	—	—		—		1	404		(860		)	1	404		(860		)
Total temporarily impaired securities	—		$—		$—	12		$25,978		($5,972	)	12		$25,978		($5,972	)



(Dollars in thousands)	Less than 12 Months					12 Months or Longer						Total
December 31, 2012	#	Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Trust preferred securities:
Individual name issuers	—		$—		$—	11		$24,751		($5,926	)	11		$24,751		($5,926	)
Collateralized debt obligations	—	—		—		2	843		(3,193		)	2	843		(3,193		)
Total temporarily impaired securities	—		$—		$—	13		$25,594		($9,119	)	13		$25,594		($9,119	)

Further deterioration in credit quality of the underlying issuers of 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 March 31, 2013 and December 31, 2012 were 11 trust preferred security holdings issued by seven individual companies in the financial services industry, specifically, the banking sector. Management believes the decline in fair value of these trust preferred securities primarily reflects investor concerns about global economic growth and how it will affect the recent and potential future losses in the financial services industry. These concerns resulted in increased risk premiums for securities in this sector. Based on the information available through the filing date of this report, all individual name trust preferred debt securities held in our portfolio continue to accrue and make payments as expected with no payment deferrals or defaults on the part of the issuers. As of March 31, 2013, trust preferred debt securities with an amortized cost of $11.9 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 its 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 these investments to be other-than-temporarily impaired at March 31, 2013.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Trust Preferred Debt Securities in the Form of Collateralized Debt Obligations (“CDO”)

Washington Trust has pooled trust preferred holdings in the form of collateralized debt obligations. These pooled trust preferred holdings consist of trust preferred obligations of banking industry companies and, to a lesser extent, insurance industry companies.



(Dollars in thousands)	March 31, 2013							December 31, 2012
	Amortized Cost (1)		Fair Value		Unrealized Losses			Amortized Cost (1)		Fair Value		Unrealized Losses
Deal Name	Amortized Cost (1)		Fair Value		Unrealized Losses			Amortized Cost (1)		Fair Value		Unrealized Losses
Tropic CDO 1, tranche A4L (2)		$—		$—		$—			$2,772		$613		($2,159	)
Preferred Term Securities [PreTSL] XXV, tranche C1 (3)	1,264		404		(860		)	1,264		230		(1,034		)
Totals		$1,264		$404		($860	)		$4,036		$843		($3,193	)


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

(2)

In the first quarter of 2013, Washington Trust recognized an other-than-temporary impairment charge of $2.8 million on the Tropic CDO 1, tranche A4L (“Tropic”). On March 22, 2013, the trustee for the Tropic security issued a notice that a liquidation of the CDO entity, Tropic CDO I, Ltd., will take place at the direction of holders of the CDO tranches that are senior to certain subordinate tranches, of which Washington Trust is a note holder. The estimated proceeds from the liquidation event are expected to be insufficient to satisfy the amount owed to the note holders of the CDO's subordinate tranches. The Corporation had recognized other-than-temporary losses amounting to $2.1 million on this security in years prior to 2013; however, prior to the March 2013 announcement of the liquidation event, the expected future cash flows through the maturity of the CDO in the year 2033 were considered to be sufficient to recover the Corporation's remaining $2.8 million amortized cost. The first quarter impairment loss reduces the Corporation's carrying value in the holding to zero. The security had been classified in nonaccruing status with no interest recognition since 2009.

(3)

Washington Trust’s investment is subordinate to two senior tranche levels. Valuations of the pooled trust preferred holdings is 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 this pooled trust preferred security. Management believes the unrealized losses on this pooled trust preferred security primarily reflects 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 this security holding to remain at low levels.

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 March 31, 2013 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. As of March 31, 2013, this security had unrealized losses of $860 thousand and a below investment grade rating of “C” by Moody’s. Through the filing date of this report, there have been no additional 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 deferral or default status of the underlying issuer institutions. Based on cash flow forecasts for this security, management expects to recover the remaining amortized cost of this security. Furthermore, Washington Trust does not intend to sell this security and its is not more likely than not that Washington Trust will be required to sell this security before recovery of its cost basis, which may be at maturity. Therefore, management does not consider the unrealized losses on this security to be other-than-temporary at March 31, 2013.

The following table presents a roll forward of the balance of cumulative credit-related impairment losses recognized on debt securities for the periods indicated:



(Dollars in thousands)
Three months ended March 31,	2013		2012
Balance at beginning of period		$3,325		$3,104
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	2,772		209
Balance at end of period		$6,097		$3,313

The anticipated cash flows expected to be collected from pooled trust preferred 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

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

cash flows and prospective defaults and recoveries. Estimated cash flows were generated based on the underlying seniority status and subordination structure of the pooled trust preferred debt tranche at the time of measurement. Prospective 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.


(5)	Loans

The following is a summary of loans:



(Dollars in thousands)	March 31, 2013				December 31, 2012
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$729,968	31	%		$710,813	31	%
Construction and development (2)	34,179		2		27,842		1
Other (3)	513,000		22		513,764		23
Total commercial	1,277,147		55		1,252,419		55
Residential real estate:
Mortgages (4)	702,418		30		692,798		30
Homeowner construction	21,943		1		24,883		1
Total residential real estate	724,361		31		717,681		31
Consumer:
Home equity lines (5)	226,640		10		226,861		10
Home equity loans (5)	40,134		2		39,329		2
Other (6)	56,763		2		57,713		2
Total consumer	323,537		14		323,903		14
Total loans (7)		$2,325,045	100	%		$2,294,003	100	%


(1)	Amortizing mortgages and lines of credit, primarily secured by income producing property. As of March 31, 2013 and December 31, 2012, $230.7 million and $238.6 million, respectively, were pledged as collateral for FHLBB borrowings.


(2)	Loans for construction of residential and commercial properties and for land development.

(3)

Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate. As of March 31, 2013, $49.8 million and $24.7 million, respectively, were pledged as collateral for FHLBB borrowings and were collateralized for the discount window at the Federal Reserve Bank. Comparable amounts for December 31, 2012 were $51.8 million and $29.5 million, respectively.


(4)	As of March 31, 2013 and December 31, 2012, $631.7 million and $627.4 million, respectively, were pledged as collateral for FHLBB borrowings.


(5)	As of March 31, 2013 and December 31, 2012, $190.1 million and $189.4 million, respectively, were pledged as collateral for FHLBB borrowings.


(6)	Fixed-rate consumer installment loans.


(7)	Includes net unamortized loan origination costs of $56 thousand and $39 thousand, respectively, and net unamortized premiums on purchased loans of $42 thousand and $83 thousand, respectively, at March 31, 2013 and December 31, 2012.

Nonaccrual Loans

Loans, with the exception of certain well-secured residential mortgage loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest or sooner if considered appropriate by management. Well-secured residential mortgage loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued but not collected on such loans is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.

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



(Dollars in thousands)	Mar 31, 2013		Dec 31, 2012
Commercial:
Mortgages		$14,953		$10,681
Construction and development	—		—
Other	3,122		4,412
Residential real estate:
Mortgages	6,699		6,158
Homeowner construction	—		—
Consumer:
Home equity lines	406		840
Home equity loans	431		371
Other	64		81
Total nonaccrual loans		$25,675		$22,543
Accruing loans 90 days or more past due		$—		$—

As of March 31, 2013 and December 31, 2012, nonaccrual loans of $6.7 million and $1.6 million, respectively, were current as to the payment of principal and interest.

Past Due Loans

Past due status is based on the contractual payment terms of the loan. The following tables present an age analysis of past due loans, segregated by class of loans, as of the dates indicated:



(Dollars in thousands)	Days Past Due
March 31, 2013	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$—		$193		$9,852		$10,045		$719,923		$729,968
Construction and development	—		—		—		—		34,179		34,179
Other	689		341		2,961		3,991		509,009		513,000
Residential real estate:
Mortgages	3,891		1,451		4,327		9,669		692,749		702,418
Homeowner construction	—		—		—		—		21,943		21,943
Consumer:
Home equity lines	872		115		190		1,177		225,463		226,640
Home equity loans	538		346		243		1,127		39,007		40,134
Other	124		—		51		175		56,588		56,763
Total loans		$6,114		$2,446		$17,624		$26,184		$2,298,861		$2,325,045

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(Dollars in thousands)	Days Past Due
December 31, 2012	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$373		$408		$10,300		$11,081		$699,732		$710,813
Construction and development	—		—		—		—		27,842		27,842
Other	260		296		3,647		4,203		509,561		513,764
Residential real estate:
Mortgages	4,840		1,951		3,658		10,449		682,349		692,798
Homeowner construction	—		—		—		—		24,883		24,883
Consumer:
Home equity lines	753		207		528		1,488		225,373		226,861
Home equity loans	252		114		250		616		38,713		39,329
Other	129		64		66		259		57,454		57,713
Total loans		$6,607		$3,040		$18,449		$28,096		$2,265,907		$2,294,003

Included in past due loans as of March 31, 2013 and December 31, 2012, were nonaccrual loans of $19.0 million and $21.0 million, respectively. All loans 90 days or more past due at March 31, 2013 and December 31, 2012 were classified as nonaccrual loans.

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 homogeneous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following is a summary of impaired loans, as of the dates indicated:



(Dollars in thousands)	Recorded Investment (1)				Unpaid Principal				Related Allowance
	Mar 31, 2013		Dec 31, 2012		Mar 31, 2013		Dec 31, 2012		Mar 31, 2013		Dec 31, 2012
No Related Allowance Recorded:
Commercial:
Mortgages		$1,529		$2,357		$1,531		$2,360		$—		$—
Construction and development	—		—		—		—		—		—
Other	1,469		1,058		1,467		1,057		—		—
Residential real estate:
Mortgages	578		1,294		593		1,315		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	—		—		—		—		—		—
Home equity loans	—		—		—		—		—		—
Other	—		—		—		—		—		—
Subtotal		$3,576		$4,709		$3,591		$4,732		$—		$—
With Related Allowance Recorded:
Commercial:
Mortgages		$23,056		$17,897		$24,893		$19,738		$3,609		$1,720
Construction and development	—		—		—		—		—		—
Other	8,218		9,939		8,533		10,690		683		694
Residential real estate:
Mortgages	4,061		2,576		4,435		2,947		701		463
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	174		187		174		255		1		1
Home equity loans	61		117		61		160		—		—
Other	165		137		236		136		32		2
Subtotal		$35,735		$30,853		$38,332		$33,926		$5,026		$2,880
Total impaired loans		$39,311		$35,562		$41,923		$38,658		$5,026		$2,880
Total:
Commercial		$34,272		$31,251		$36,424		$33,845		$4,292		$2,414
Residential real estate	4,639		3,870		5,028		4,262		701		463
Consumer	400		441		471		551		33		3
Total impaired loans		$39,311		$35,562		$41,923		$38,658		$5,026		$2,880

(1)

The recorded investment in impaired loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs. For impaired accruing loans (troubled debt restructurings for which management has concluded that the collectibility of the loan is not in doubt), the recorded investment also includes accrued interest.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the average recorded investment and interest income recognized on impaired loans segregated by loan class for the periods indicated:



(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Three months ended March 31,	2013		2012		2013		2012
Commercial:
Mortgages		$20,903		$10,991		$100		$70
Construction and development	—		—		—		—
Other	10,635		10,841		64		74
Residential real estate:
Mortgages	4,000		5,461		22		27
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	263		243		3		1
Home equity loans	105		170		3		1
Other	163		166		2		2
Totals	36,069		27,872		194		175

At March 31, 2013, there were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status or had been restructured.

Troubled Debt Restructurings

Loans are considered restructured in a troubled debt restructuring when the Corporation has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection.

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectibility of the loan. Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.

Troubled debt restructurings are reported as such for at least one year from the date of the restructuring. In years after the restructuring, troubled debt restructured loans are removed from this classification if the restructuring did not involve a below market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement.

Troubled debt restructurings are classified as impaired loans. The Corporation identifies loss allocations for impaired loans on an individual loan basis. The recorded investment in troubled debt restructurings was $19.0 million and $20.2 million, respectively, at March 31, 2013 and December 31, 2012. These amounts included accrued interest of $49 thousand and $13 thousand, respectively. The allowance for loan losses included specific reserves for these troubled debt restructurings of $842 thousand and $898 thousand, respectively, at March 31, 2013 and December 31, 2012.

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents loans modified as a troubled debt restructuring during the periods indicated: