Securities

The following tables present the amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of securities by major security type and class of security at September 30, 2012 and December 31, 2011.



(Dollars in thousands)
September 30, 2012	Amortized Cost (1)		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$29,451		$2,584		$—			$32,035
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	277,432		18,394		—			295,826
States and political subdivisions	68,700		4,913		—			73,613
Trust preferred securities:
Individual name issuers	30,667		—		(7,231		)	23,436
Collateralized debt obligations	4,047		—		(3,117		)	930
Corporate bonds	13,897		585		(33		)	14,449
Total securities available for sale		$424,194		$26,476		($10,381	)		$440,289
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$43,569		$1,462		$—			$45,031
Total securities held to maturity		$43,569		$1,462		$—			$45,031
Total securities		$467,763		$27,938		($10,381	)		$485,320



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

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

(2) Callable at the discretion of the issuer.

Securities available for sale (“AFS”) and held to maturity (“HTM”) with a fair value of $449.7 million and $558.2 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 at September 30, 2012 and December 31, 2011.

The following table presents a roll forward of the balance of credit-related impairment losses on debt securities, for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:



(Dollars in thousands)	Three Months				Nine Months
Periods ended September 30,	2012		2011		2012		2011
Balance at beginning of period		$3,313		$2,946		$3,104		$2,913
Credit-related impairment loss on debt securities for which an other-than-temporary impairment was not previously recognized	—		—		—		—
Additional increases to the amount of credit-related impairment loss on debt securities for which an other-than-temporary impairment was previously recognized	—		158		209		191
Balance at end of period		$3,313		$3,104		$3,313		$3,104

There were no credit-related impairment losses recognized in earnings on debt securities in the three months ended September 30, 2012, while credit-related impairment losses of $158 thousand were recognized in earnings in the same period of 2011. For the nine months ended September 30, 2012 and 2011, credit-related impairment losses recognized in earnings on debt securities totaled $209 thousand and $191 thousand, respectively. The anticipated cash flows expected to be collected from these 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 cash flows and prospective 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 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 at September 30, 2012, segregated by length of time the securities have been in a continuous unrealized loss position:



(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
September 30, 2012	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Trust preferred securities:
Individual name issuers	—		$—		$—		11		$23,436		($7,231	)	11		$23,436		($7,231	)
Collateralized debt obligations	—	—		—			2	930		(3,117		)	2	930		(3,117		)
Corporate bonds	2	4,966		(33		)	—	—		—			2	4,966		(33		)
Subtotal, debt securities	2	4,966		(33		)	13	24,366		(10,348		)	15	29,332		(10,381		)
Total temporarily impaired securities	2		$4,966		($33	)	13		$24,366		($10,348	)	15		$29,332		($10,381	)

The following table summarizes temporarily impaired securities at December 31, 2011, segregated by length of time the securities have been in a continuous unrealized loss position:



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

Unrealized losses on debt securities generally occur as a result of increases in interest rates since the time of purchase, a structural change in an investment or deterioration in credit quality of the issuer. Management evaluates impairments in value whether caused by adverse interest rates or credit movements to determine if they are other-than-temporary.

Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, a continuation or worsening of the current economic downturn, or additional declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods, and the Corporation may incur additional write-downs.

Trust Preferred Debt Securities of Individual Name Issuers

Included in debt securities in an unrealized loss position at September 30, 2012 were 11 trust preferred security holdings issued by seven individual companies in the financial services/banking industry. The aggregate unrealized losses on these debt securities amounted to $7.2 million at September 30, 2012. Management believes the decline in fair value of these trust preferred securities primarily reflects investor concerns about global economic growth and how it will affect the recent and potential future losses in the financial services industry. These concerns resulted in increased risk premiums for securities in this sector. Based on the information available through the filing date of this report, all individual name trust preferred debt securities held in our portfolio continue to accrue and make payments as expected with no payment deferrals or defaults on the part of the issuers. As of September 30, 2012, trust preferred debt securities with an amortized cost of $11.8 million and unrealized losses of $2.9 million were rated below investment grade by Standard & Poors, Inc. (“S&P”). Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report and other information. We noted no additional downgrades to below investment grade between the reporting period date and the filing date of this report. Based on these analyses, management concluded that it expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2012.

Trust Preferred Debt Securities in the Form of Collateralized Debt Obligations

Washington Trust has two pooled trust preferred holdings in the form of collateralized debt obligations with a total amortized cost of $4.0 million and aggregate unrealized losses of $3.1 million at September 30, 2012. These pooled trust preferred holdings consist of trust preferred obligations of banking industry companies and, to a lesser extent, insurance industry companies. For both of these pooled trust preferred securities, Washington Trust’s investment is senior to one or more subordinated tranches which have first loss exposure. Valuations of the pooled trust preferred holdings are dependent in part on cash flows from underlying issuers. Unexpected cash flow disruptions could have an adverse impact on the fair value and performance of pooled trust preferred securities. Management believes the unrealized losses on these pooled trust preferred securities primarily reflect investor concerns about global economic growth and how it will affect the recent and potential future losses in the financial services industry and the possibility of further incremental deferrals of or defaults on interest payments on trust preferred debentures by financial institutions participating in these pools. These concerns have resulted in a substantial decrease in market liquidity and increased risk premiums for securities in this sector. Credit spreads for issuers in this sector have remained wide during recent months, causing prices for these securities holdings to remain at low levels.

As of September 30, 2012, one of the pooled trust preferred securities had an amortized cost of $2.8 million. This security was placed on nonaccrual status in March 2009. The tranche instrument held by Washington Trust has been deferring a portion of interest payments since April 2010. The September 30, 2012 amortized cost was net of $2.1 million of credit-related impairment losses previously recognized in earnings, reflective of payment deferrals and credit deterioration of the underlying collateral. Included in the $2.1 million were credit-related impairment losses of $209 thousand recorded in the first quarter of 2012. As of September 30, 2012, this security has unrealized losses of $2.2 million and a below investment grade rating of “Ca” by Moody’s Investors Service Inc. (“Moody’s”). Through the filing date of this report, there have been no further rating changes on this security. This credit rating status has been considered by management in its assessment of the impairment status of this security. The analysis of the expected cash flows for this security as of September 30, 2012 did not negatively affect the amount of credit-related impairment losses previously recognized on this security.

As of September 30, 2012, the second pooled trust preferred security held by Washington Trust had an amortized cost of $1.3 million. This security was placed on nonaccrual status in December 2008. The tranche instrument held by Washington Trust has been deferring interest payments since December 2008. The September 30, 2012 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 September 30, 2012, this security has unrealized losses of $1.0 million and a below investment grade rating of “C” by Moody’s. Through the filing date of this report, there have been no rating changes on this security. This credit rating status has been considered by management in its assessment of the impairment status of this security. The analysis of the expected cash flows for this security as of September 30, 2012 did not negatively affect the amount of credit-related impairment losses previously recognized on this security.

Based on information available through the filing date of this report, there have been no further adverse changes in the deferral or default status of the underlying issuer institutions within either of these trust preferred collateralized debt obligations. Based on cash flow forecasts for these securities, management expects to recover the remaining amortized cost of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be at maturity. Therefore, management does not consider the unrealized losses on these investments to be other-than-temporary.

Corporate Bonds

At September 30, 2012, Washington Trust had two corporate bond holdings with unrealized losses of $33 thousand. These investment grade corporate bonds, maturing in three years, represent large financial corporations with potential exposure to the European markets. The unrealized losses on these securities are attributable to the increased risk premium required in the current economic environment.

As of September 30, 2012, the amortized cost of debt securities by maturity is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments. All other securities are included based on contractual maturities. Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. Yields on tax exempt obligations are not computed on a tax equivalent basis. Included in the securities portfolio at September 30, 2012 were debt securities with an amortized cost balance of $91.9 million and a fair value of $85.5 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.



(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		$—			$29,451			$—			$—			$29,451
Weighted average yield	—		%	5.40		%	—		%	—		%	5.40		%
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
Amortized cost	92,691			145,406			33,912			5,423			277,432
Weighted average yield	4.27		%	3.83		%	2.44		%	2.54		%	3.78		%
State and political subdivisions:
Amortized cost	3,852			64,045			803			—			68,700
Weighted average yield	3.62		%	3.91		%	3.81		%	—		%	3.89		%
Trust preferred securities:
Amortized cost (1)	—			—			—			34,714			34,714
Weighted average yield	—		%	—		%	—		%	1.72		%	1.72		%
Corporate bonds:
Amortized cost	3,199			10,698			—			—			13,897
Weighted average yield	6.31		%	4.68		%	—		%	—		%	5.05		%
Total debt securities available for sale:
Amortized cost		$99,742			$249,600			$34,715			$40,137			$424,194
Weighted average yield	4.31		%	4.07		%	2.48		%	1.83		%	3.78		%
Fair value		$103,908			$258,863			$37,021			$40,497			$440,289
Securities Held to Maturity:
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
Amortized cost		$10,635			$22,407			$8,376			$2,151			$43,569
Weighted average yield	2.48		%	2.36		%	2.24		%	1.19		%	2.31		%
Fair value		$10,992			$23,159			$8,657			$2,223			$45,031


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