form10-q20090331.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 MARCH 31, 2009 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 Web site, 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 May 1, 2009 was 16,006,595.
 
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended March 31, 2009
     
   
Page
   
Number
     
 
   
 
   
 
 
     
 
 
     
 
 
     
   
   
   
   
 
   
   
   
   
   
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
  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-2-
 
 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars in thousands)

 
Unaudited
  
   
March 31,
    
December 31,
  
   
2009
    
2008
  
Assets:
            
Cash and noninterest-bearing balances due from banks
   $ 29,234     $ 11,644  
Interest-bearing balances due from banks
     11,052       41,780  
Federal funds sold and securities purchased under resale agreements
     3,453       2,942  
Other short-term investments
     1,518       1,824  
Mortgage loans held for sale
     7,437       2,543  
Securities available for sale, at fair value;
                
amortized cost $833,177 in 2009 and $869,433 in 2008
     833,959       866,219  
Federal Home Loan Bank stock, at cost
     42,008       42,008  
Loans:
                
Commercial and other
     908,283       880,313  
Residential real estate
     637,137       642,052  
Consumer
     320,534       316,789  
Total loans
     1,865,954       1,839,154  
Less allowance for loan losses
     24,498       23,725  
Net loans
     1,841,456       1,815,429  
Premises and equipment, net
     24,760       25,102  
Accrued interest receivable
     10,466       11,036  
Investment in bank-owned life insurance
     43,607       43,163  
Goodwill
     58,114       58,114  
Identifiable intangible assets, net
     9,844       10,152  
Other assets
     30,202       33,510  
Total assets
   $ 2,947,110     $ 2,965,466  
                 
Liabilities:
                
Deposits:
                
Demand deposits
   $ 170,975     $ 172,771  
NOW accounts
     179,903       171,306  
Money market accounts
     377,603       305,879  
Savings accounts
     186,152       173,485  
Time deposits
     969,691       967,427  
Total deposits
     1,884,324       1,790,868  
Dividends payable
     3,354       3,351  
Federal Home Loan Bank advances
     723,143       829,626  
Junior subordinated debentures
     32,991       32,991  
Other borrowings
     20,933       26,743  
Accrued expenses and other liabilities
     43,638       46,776  
Total liabilities
     2,708,383       2,730,355  
                 
Shareholders’ Equity:
                
Common stock of $.0625 par value; authorized 30,000,000 shares;
                
issued 16,018,868 shares in 2009 and 2008
     1,001       1,001  
Paid-in capital
     82,186       82,095  
Retained earnings
     165,191       164,679  
Accumulated other comprehensive loss
     (7,864 )     (10,458 )
Treasury stock, at cost; 68,922 shares in 2009 and 84,191 shares in 2008
     (1,787 )     (2,206 )
Total shareholders’ equity
     238,727       235,111  
Total liabilities and shareholders’ equity
   $ 2,947,110     $ 2,965,466  
                 
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
except per share amounts)
  
   
Unaudited
  
Three months ended March 31,
  
2009
    
2008
  
Interest income:
            
Interest and fees on loans
   $ 24,139     $ 24,970  
Interest on securities:
Taxable
     8,449       8,416  
 
Nontaxable
     780       780  
Dividends on corporate stock and Federal Home Loan Bank stock
     72       620  
Other interest income
     17       140  
Total interest income
     33,457       34,926  
Interest expense:
                
Deposits
     9,547       11,899  
Federal Home Loan Bank advances
     7,227       7,299  
Junior subordinated debentures
     479       338  
Other interest expense
     245       314  
Total interest expense
     17,498       19,850  
Net interest income
     15,959       15,076  
Provision for loan losses
     1,700       450  
Net interest income after provision for loan losses
     14,259       14,626  
Noninterest income:
                
Wealth management services:
                
Trust and investment advisory fees
     4,122       5,342  
Mutual fund fees
     915       1,341  
Financial planning, commissions and other service fees
     376       575  
Wealth management services
     5,413       7,258  
Service charges on deposit accounts
     1,113       1,160  
Merchant processing fees
     1,349       1,272  
Income from bank-owned life insurance
     444       447  
Net gains on loan sales and commissions on loans originated for others
     1,044       491  
Net realized gains on securities
     57       813  
Net unrealized gains on interest rate swaps
     60       119  
Other income
     419       342  
Noninterest income, excluding other-than-temporary impairment loses
     9,899       11,902  
Total other-than-temporary impairment losses on securities
     (4,244 )     (858 )
Portion of loss recognized in other comprehensive income (before taxes)
     2,253       –  
Net impairment losses recognized in earnings
     (1,991 )     (858 )
Total noninterest income
     7,908       11,044  
Noninterest expense:
                
Salaries and employee benefits
     10,475       10,343  
Net occupancy
     1,226       1,138  
Equipment
     975       944  
Merchant processing costs
     1,143       1,068  
Outsourced services
     786       636  
Legal, audit and professional fees
     675       543  
FDIC deposit insurance costs
     651       256  
Advertising and promotion
     301       386  
Amortization of intangibles
     308       326  
Other expenses
     1,850       1,502  
Total noninterest expense
     18,390       17,142  
Income before income taxes
     3,777       8,528  
Income tax expense
     1,107       2,712  
Net income
   $ 2,670     $ 5,816  
Weighted average shares outstanding – basic
     15,942.7       13,358.1  
Weighted average shares outstanding – diluted
     15,997.8       13,560.6  
Per share information:
Basic earnings per share
   $ 0.17     $ 0.44  
 
Diluted earnings per share
   $ 0.17     $ 0.43  
 
Cash dividends declared per share
   $ 0.21     $ 0.20  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
  
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
  
(Dollars in thousands)
  
 
 Unaudited
  
Three months ended March 31,
  
2009
    
2008
  
Cash flows from operating activities:
            
Net income
   $ 2,670     $ 5,816  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Provision for loan losses
     1,700       450  
Depreciation of premises and equipment
     790       749  
Net amortization of premium and discount
     127       187  
Net amortization of intangibles
     308       326  
Share-based compensation
     215       83  
Earnings from bank-owned life insurance
     (444 )     (447 )
Net gains on loan sales and commissions on loans originated for others
     (1,044 )     (491 )
Net realized gains on securities
     (57 )     (813 )
Net impairment losses recognized in earnings
     1,991       858  
Net unrealized gains on interest rate swap contracts
     (60 )     (119 )
Proceeds from sales of loans
     72,820       16,176  
Loans originated for sale
     (76,436 )     (15,696 )
Decrease in accrued interest receivable, excluding purchased interest
     579       467  
Decrease (increase) in other assets
     1,042       (692 )
Decrease in accrued expenses and other liabilities
     (3,098 )     (1,701 )
Other, net
     1       (4 )
Net cash provided by operating activities
     1,104       5,149  
Cash flows from investing activities:
                
Purchases of:
Mortgage-backed securities available for sale
     –       (73,111 )
 
Other investment securities available for sale
     (204 )     (1,025 )
Proceeds from sale of:
Mortgage-backed securities available for sale
     –       53,289  
 
Other investment securities available for sale
     590       –  
Maturities and principal payments of:
Mortgage-backed securities available for sale
     35,633       21,354  
 
Other investment securities available for sale
     –       7,007  
Purchase of Federal Home Loan Bank stock
     –       (3,548 )
Net increase in loans
     (25,220 )     (38,840 )
Proceeds from sale of loans
     –       18,047  
Purchases of loans, including purchased interest
     (2,721 )     (4,064 )
Proceeds from the sale of property acquired through foreclosure or repossession
     222       –  
Purchases of premises and equipment
     (448 )     (318 )
Payment of deferred acquisition obligation
     (2,509 )     (8,065 )
Net cash provided by (used in) investing activities
     5,343       (29,274 )
Cash flows from financing activities:
                
Net increase (decrease) in deposits
     93,456       (11,180 )
Net decrease in other borrowings
     (3,301 )     (1,438 )
Proceeds from Federal Home Loan Bank advances
     91,669       289,870  
Repayment of Federal Home Loan Bank advances
     (198,148 )     (248,231 )
Issuance of treasury stock, including deferred compensation plan activity
     19       43  
Net proceeds from the issuance of common stock under dividend reinvestment plan
     274       –  
Net proceeds from the exercise of stock options and issuance of other
                
compensation-related equity instruments
     2       94  
Tax benefit from stock option exercises and issuance of other
                
compensation-related equity instruments
     –       51  
Cash dividends paid
     (3,351 )     (2,677 )
Net cash (used in) provided by financing activities
     (19,380 )     26,532  
Net (decrease) increase in cash and cash equivalents
     (12,933 )     2,407  
Cash and cash equivalents at beginning of period
     58,190       41,112  
Cash and cash equivalents at end of period
   $ 45,257     $ 43,519  
 
                
Noncash Investing and Financing Activities:
Loans charged off
   $ 1,026     $ 106  
 
Reclassification of other-than-temporary impairment
                
 
charge effective January 1, 2009 (see Note 3)
     1,859       –  
Supplemental Disclosures:
Interest payments
     17,048       19,248  
 
Income tax payments
     583       332  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
  
 

General
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, Massachusetts and southeastern Connecticut, ATMs, and its Internet web site (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 March 31, 2009 and December 31, 2008, 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, 2008.

(2) Recently Issued Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”).  SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP.  The current GAAP hierarchy is set forth in the American Institute of Certified Public Accountants Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.”  The FASB has concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and issued SFAS No. 162 to achieve that result.  SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to Interim Auditing Standards AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”.  The FASB does not expect that SFAS No. 162 will result in a change in current practice.

In December 2008, the FASB issued FASB Staff Position No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP No. 132(R)-1”).  FSP No. 132(R)-1 provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan.  FSP No. 132(R)-1 states that in providing detailed disclosures about plan assets, entities should consider (1) how investment allocation decisions are made, (2) the major categories of plan assets, (3) the inputs and valuation techniques used to measure the fair value of plan assets, (4) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period and (5) significant concentrations of risks within plan assets.  The disclosures about plan assets required by FSP No. 132(R)-1 must be provided for fiscal years ending after December 15, 2009.  The Corporation will adopt FSP No. 132(R)-1 and provide the additional disclosures in its Annual Report on Form 10-K for the year ended December 31, 2009.
-6-
 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

Effective January 1, 2009, Washington Trust adopted FASB Staff Position No. Emerging Issues Task Force 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP No. EITF 03-6-1-2”).  FSP No. EITF 03-6-1 required unvested share-based payments that contain nonforfeitable rights and dividends or dividend equivalents to be treated as participating securities and be included in the calculation of Earnings Per Share (“EPS”) pursuant to the two-class method.  The adoption of FSP No. EITF 03-6-1 did not have a material impact on the Corporation’s results of operations.

In April 2009, the FASB issued FASB Staff Position No. 107-1 and Accounting Principles Board Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. 107-1 and APB No. 28-1”).  FSP No. 107-1 and APB No. 28-1 require disclosures made by publicly traded companies to include the fair value of its financial instruments whenever it issues financial information for interim reporting periods.  The Corporation will be required to (a) disclose in the body or in the accompanying notes of its financial statements for interim and annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position, as required by SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” (b) disclose in the notes, fair value information presented together with the related carrying amount in a form that makes it clear whether the fair value and carrying amount represent assets or liabilities and how the carrying amount relates to what is reported in the statement of financial position and (c) disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments and describe changes in method(s) and significant assumptions, if any, during the period.  The disclosures required by FSP No. 107-1 and APB No. 28-1 must be provided for interim reporting periods ending after June 15, 2009, with early adoption for periods ended after March 15, 2009 permitted.  The Corporation will provide the additional disclosures upon adoption of FSP No. 107-1 and APB No. 28-1 in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2009.

(3) Securities
Securities are summarized as follows:
 
(Dollars in thousands)
                        
   
Amortized
    
Unrealized
    
Unrealized
    
Fair
  
March 31, 2009
  
Cost (1)
    
Gains
    
Losses
    
Value
  
Securities Available for Sale:
                        
U.S. Treasury obligations and obligations
                        
of U.S. government-sponsored agencies
   $ 58,535     $ 4,613     $ −     $ 63,148  
Mortgage-backed securities issued by U.S. government
                                
agencies and U.S. government-sponsored agencies
     639,345       18,163       (1,871 )     655,637  
States and political subdivisions
     80,675       1,436       (677 )     81,434  
Trust preferred securities:
                                
Individual name issuers
     30,534       −       (16,507 )     14,027  
Collateralized debt obligations
     6,142       −       (4,214 )     1,928  
Corporate bonds
     13,176       897       (1 )     14,072  
Common stocks
     796       9       −       805  
Perpetual preferred stocks
     3,974       −       (1,066 )     2,908  
Total securities available for sale
   $ 833,177     $ 25,118     $ (24,336 )   $ 833,959  
 
(1)
Net of other-than-temporary impairment write-downs recognized in earnings, other than such noncredit-related amounts reversed on January 1, 2009 in accordance with the adoption of FASB Staff Position No. FAS 115-2 and FAS 124-2.

-7-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
 
(Dollars in thousands)
                        
   
Amortized
    
Unrealized
    
Unrealized
    
Fair
  
December 31, 2008
  
Cost (1)
    
Gains
    
Losses
    
Value
  
Securities Available for Sale:
                        
U.S. Treasury obligations and obligations
                        
of U.S. government-sponsored agencies
   $ 59,022     $ 5,355     $ −     $ 64,377  
Mortgage-backed securities issued by U.S. government
                                
agencies and U.S. government-sponsored agencies
     675,159       12,543       (4,083 )     683,619  
States and political subdivisions
     80,680       1,348       (815 )     81,213  
Trust preferred securities:
                                
Individual name issuers
     30,525       −       (13,732 )     16,793  
Collateralized debt obligations
     5,633       −       (3,693 )     1,940  
Corporate bonds
     12,973       603       −       13,576  
Common stocks
     942       50       −       992  
Perpetual preferred stocks
     4,499       2       (792 )     3,709  
Total securities available for sale
   $ 869,433     $ 19,901     $ (23,115 )   $ 866,219  
 
(1)
Net of other-than-temporary impairment write-downs recognized in earnings.

Securities available for sale with a fair value of $685.7 million and $712.8 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 March 31, 2009 and December 31, 2008, respectively.  In addition, securities available for sale with a fair value of $21.6 million and $16.1 million were collateralized for the discount window at the Federal Reserve Bank at March 31, 2009 and December 31, 2008, respectively.  There were no borrowings with the Federal Reserve Bank at either date.  Securities available for sale with a fair value of $8.9 million and $9.0 million were designated in rabbi trusts for nonqualified retirement plans at March 31, 2009 and December 31, 2008, respectively.  In addition, as of December 31, 2008, securities available for sale with a fair value of $569 thousand were pledged as collateral to secure certain interest rate swap agreements.

Washington Trust elected to early adopt the provisions of FASB Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP No. FAS 115-2 and FAS 124-2”).  FSP No. FAS 115-2 and FAS 124-2 applied to existing and new debt securities held by the Corporation as of January 1, 2009, the beginning of the interim period in which it was adopted.  For those debt securities for which the fair value of the security is less than its amortized cost, the Corporation does not intend to sell such security and it is more likely than not that it will not be required to sell such security prior to the recovery of its amortized cost basis less any current period credit losses, FSP No. FAS 115-2 and FAS 124-2 requires that the credit-related portion of other-than-temporary impairment losses be recognized in earnings while the noncredit-related portion is recognized in other comprehensive income, net of related taxes.  As a result of the adoption of FSP No. FAS 115-2 and FAS 124-2 and as more fully described below, in the first quarter of 2009 a $1.350 million credit-related impairment loss was recognized in earnings and a $2.3 million noncredit-related impairment loss was recognized in other comprehensive income for a pooled trust preferred debt security not expected to be sold.  Also in accordance with FSP No. FAS 115-2 and FAS 124-2, Washington Trust reclassified the noncredit-related portion of an other-than-temporary impairment loss previously recognized in earnings in the fourth quarter of 2008.  This reclassification was reflected as a cumulative effect adjustment of $1.2 million after taxes ($1.9 million before taxes) that increased retained earnings and decreased accumulated other comprehensive loss.  The amortized cost basis of this debt security for which an other-than-temporary impairment loss was recognized in the fourth quarter of 2008 was adjusted by the amount of the cumulative effect adjustment before taxes.
-8-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

The following table summarizes other-than-temporary impairment losses on securities for the three months ended March 31, 2009:
 
(Dollars in thousands)
  
Total
    
Portion of Loss
    
Net
  
   
Other-Than-
     Recognized in Other  
Impairment
  
   
Temporary
    
Comprehensive
    
(Losses)
  
   
Impairment
    
Income -
    
Recognized
  
Three months ended March 31, 2009
  
(Losses)
    
before taxes
    
In Earnings
  
Trust preferred debt securities:
                  
Collateralized debt obligations
   $ (3,603 )   $ 2,253     $ (1,350 )
Common and perpetual preferred stocks:
                        
Common stock (financials)
     (146 )     –       (146 )
Perpetual preferred stocks (financials)
     (495 )     –       (495 )
Total
   $ (4,244 )   $ 2,253     $ (1,991 )

The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at March 31, 2009 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:
 
(Dollars in thousands)
      
       
Three months ended March 31,
  
2009
  
Balance at beginning of period
   $ –  
Credit-related impairment loss on debt securities for which an
        
other-than-temporary impairment was not previously recognized
     1,350  
Balance at end of period
   $ 1,350  

During the first quarter of 2009, a $1.350 million credit-related impairment loss was recognized in earnings for a pooled trust preferred debt security not expected to be sold.  In accordance with FSP FAS No. 115-2 and FAS 124-2, the anticipated cash flows expected to be collected from this debt security were discounted at the rate equal to the yield used to accrete the current and prospective beneficial interest for the 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.
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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

The following table summarizes temporarily impaired securities as of March 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 March 31, 2009
     #    
Value
    
Losses
       #    
Value
    
Losses
       #    
Value
    
Losses
  
Mortgage-backed securities
                                                            
issued by U.S. government agencies and U.S. government-sponsored enterprises
     19     $ 21,240     $ 234       32     $ 46,184     $ 1,637       51     $ 67,424     $ 1,871  
States and
                                                                        
political subdivisions
     13       9,427       348       11       9,226       329       24       18,653       677  
Trust preferred securities:
                                                                        
Individual name issuers
     –       –       –       11       14,027       16,507       11       14,027       16,507  
Collateralized debt obligations
     –       –       –       2       1,928       4,214       2       1,928       4,214  
Corporate bond
     1       203       1       –       –       –       1       203       1  
Subtotal, debt securities
     33       30,870       583       56       71,365       22,687       89       102,235       23,270  
Perpetual preferred stocks
     2       544       205       4       1,743       861       6       2,287       1,066  
Total temporarily
                                                                        
impaired securities
     35     $ 31,414     $ 788       60     $ 73,108     $ 23,548       95     $ 104,522     $ 24,336  

The following table summarizes temporarily impaired securities as of December 31, 2008, 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, 2008
     #    
Value
    
Losses
       #    
Value
    
Losses
       #    
Value
    
Losses
  
Mortgage-backed securities
                                                            
issued by U.S. government agencies and U.S. government-sponsored enterprises
     64     $ 124,387     $ 2,140       22     $ 34,350     $ 1,943       86     $ 158,737     $ 4,083  
States and
                                                                        
political subdivisions
     25       18,846       523       7       7,423       292       32       26,269       815  
Trust preferred securities:
                                                                        
Individual name issuers
     –       –       –       11       16,793       13,732       11       16,793       13,732  
Collateralized debt obligations
     –       –       –       1       1,307       3,693       1       1,307       3,693  
Subtotal, debt securities
     89       143,233       2,663       41       59,873       19,660       130       203,106       22,323  
Perpetual preferred stocks
     –       –       –       5       2,062       792       5       2,062       792  
Total temporarily
                                                                        
impaired securities
     89     $ 143,233     $ 2,663       46     $ 61,935     $ 20,452       135     $ 205,168     $ 23,115  

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 of the current imbalances in liquidity that exist in the marketplace, a continuation or worsening of the current economic recession, 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.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises:
The unrealized losses on mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises amounted to $1.9 million at March 31, 2009 and were attributable to a combination of factors, including relative changes in interest rates since the time of purchase and decreased liquidity for investment securities in general.  The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises.  Based on its assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality.  Management 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 March 31, 2009.

Debt securities issued by states and political subdivisions:
The unrealized losses on debt securities issued by states and political subdivisions amounted to $677 thousand at March 31, 2009.  The unrealized losses on state and municipal holdings included in this analysis are attributable to a combination of factors, including a general decrease in liquidity and an increase in risk premiums for credit-sensitive securities since the time of purchase.  Based on its assessment of these factors, management believes that unrealized losses on these debt security holdings are a function of changes in investment spreads and liquidity and not changes in credit quality.  Management 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 March 31, 2009.

Trust preferred debt securities of individual name issuers:
Included in debt securities in an unrealized loss position at March 31, 2009 were 11 trust preferred security holdings issued by seven individual name companies in the financial services/banking industry, reflecting, where applicable, the impact of mergers and acquisitions of issuers subsequent to original purchase.  The aggregate unrealized losses on these debt securities amounted to $16.5 million at March 31, 2009.  Management believes the decline in fair value of these trust preferred securities primarily reflected increased investor concerns about recent and potential future losses in the financial services industry related to subprime lending and other credit related exposure.  These concerns 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 decline.  All individual name trust preferred debt securities held in our portfolio continue to accrue and make payments as expected.  As of March 31, 2009, trust preferred debt securities with a carrying value of $7.6 million and unrealized losses of $5.0 million were rated below investment grade by Standard & Poors, Inc. (“S&P”).  One additional security with a carrying value of $4.2 million and an unrealized loss of $1.9 million was downgraded to below investment grade subsequent to March 31, 2009.  Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuer, 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, with particular emphasis on downgrades to below investment grade, and other information.  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 March 31, 2009.

Trust preferred debt securities in the form of collateralized debt obligations:
At March 31, 2009, Washington Trust had two pooled trust preferred holdings in the form of collateralized debt obligations with unrealized losses of $4.2 million.  These pooled trust preferred holdings consist of trust preferred obligations of banking industry companies and, to a lesser extent, insurance industry companies.  For both these pooled trust preferred securities, Washington Trust’s investment is senior to one or more subordinated tranches which have first loss exposure.  Valuations of the pooled trust preferred holdings are dependent in part on cash flows from underlying issuers.  Unexpected cash flow disruptions could have an adverse impact on the fair value and performance of pooled trust preferred securities.  Management believes the unrealized losses on these pooled trust preferred securities primarily reflect increased investor concerns about recent and potential future losses in the financial services
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WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
 
industry related to subprime lending and other credit related exposure.  These concerns 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 decline.

During the quarter ended March 31, 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 will not receive all contractual amounts due under the instrument and will not recover the entire cost basis of this security.  As previously described, the Corporation early adopted FSP No. FAS 115-2 and FAS 124-2 for the quarter ended March 31, 2009, and recognized a $1.350 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 current with respect to its quarterly debt service (interest) payments as of the most recent quarterly payment date of April 15, 2009.  As of March 31, 2009, the carrying value of this security was $3.650 million, after recognition of the credit-related impairment loss, with an unrealized loss of $2.253 million.  This security was downgraded to a below investment grade rating of “Caa3” by Moody’s Investors Service Inc. (“Moody’s”) on March 27, 2009.  This credit rating was considered by management in its assessment of the impairment status of this security.  This security was placed on nonaccrual status as of March 31, 2009.

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 $1.859 million.  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 expects to receive all contractual amounts due under the instrument and expects to recover the entire cost basis of the security.  Based on this assessment and in connection with the early adoption of FSP No. FAS 115-2 and FAS 124-2, the Corporation concluded that there was no credit-related loss portion of the other-than-temporary impairment charge as of December 31, 2008 or as of March 31, 2009.  Washington Trust reclassified this 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 addition, the amortized cost basis of this security was increased by the $1.859 million amount of the cumulative effect adjustment.  This security was downgraded to a below investment grade rating of “Ca” by Moody’s on March 27, 2009 and is classified as nonaccrual.  This credit rating was considered by management in its assessment of the impairment status of this security.

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 March 31, 2009.

Perpetual preferred stocks:
As of March 31, 2009, the Corporation had 7 perpetual preferred stock holdings of financial and utility companies with a total fair value of $2.9 million and unrealized losses of $1.1 million.  In October 2008, the SEC’s Office of the Chief Accountant, after consultation and concurrence with the FASB, concluded that the assessment of other-than-temporary impairment of perpetual preferred securities for filings made after October 14, 2008 can be made using an impairment model (including an anticipated recovery period) similar to a debt security, provided there has been no evidence of a deterioration in credit of the issuer.  Washington Trust has complied with this guidance in its evaluation of other-than-temporary impairment of perpetual preferred stocks.

The perpetual preferred equity securities in an unrealized loss position at March 31, 2009 consisted of 6 holdings of financial and commercial entities with unrealized losses of $1.1 million, or 22% of their aggregate cost.  Causes of conditions whereby the fair value of equity securities is less than cost include the timing of purchases and changes in valuation specific to individual industries or issuers.  The relationship between the level of market interest rates and the dividend rates paid on individual equity securities may also be a contributing factor.  Based on its assessment of these market conditions, management believes that the decline in fair value of its perpetual preferred equity securities was not a function of the financial condition and operating outlook of the issuers but, rather, reflected increased
-12-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
 
investor concerns about recent losses in the financial services industry related to subprime lending and other credit related exposure.  These concerns resulted in greater volatility in market prices for perpetual preferred stocks in this market sector.  Management evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment.  Based on that analysis, management expects to recover the entire 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. Therefore, management does not consider these perpetual preferred equity securities to be other-than-temporarily impaired at March 31, 2009.

(4) Loan Portfolio
The following is a summary of loans:
 
(Dollars in thousands)
  
March 31, 2009
  
December 31, 2008
   
Amount
    
%
    
Amount
    
%
  
Commercial:
                        
Mortgages (1)
   $ 412,817       22 %   $ 407,904       22 %
Construction and development (2)
     49,215       3 %     49,599       3 %
Other (3)
     446,251       24 %     422,810       23 %
Total commercial
     908,283       49 %     880,313       48 %
                                 
Residential real estate:
                                
Mortgages (4)
     621,141       33 %     626,663       34 %
Homeowner construction
     15,996       1 %     15,389       1 %
Total residential real estate
     637,137       34 %     642,052       35 %
                                 
Consumer:
                                
Home equity lines
     183,058       10 %     170,662       9 %
Home equity loans
     79,881       4 %     89,297       5 %
Other
     57,595       3 %     56,830       3 %
Total consumer
     320,534       17 %     316,789       17 %
Total loans (5)
   $ 1,865,954       100 %   $ 1,839,154       100 %
 
(1)
Amortizing mortgages, primarily secured by income producing property.
(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.
(4)
A substantial portion of these loans is used as qualified collateral for Federal Home Loan Bank borrowings (See Note 6 for additional discussion of Federal Home Loan Bank borrowings).
(5)
Net of unamortized loan origination fees, net of costs, totaling $11 thousand and $2 thousand at March 31, 2009 and December 31, 2008, respectively.  Also includes $259 thousand of net discounts on purchased loans at both March 31, 2009 and December 31, 2008.

Nonaccrual Loans
Nonaccrual loans totaled $15.4 million at March 31, 2009, compared to $7.8 million at December 31, 2008. This reflects a $5.0 million increase in the nonaccrual commercial loans and a $2.3 million increase in nonaccrual residential mortgages.  In the first three months of 2009, four commercial loan relationships totaling $4.8 million moved into the nonaccrual loan classification.
-13-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

(5) Allowance for Loan Losses
The following is an analysis of the allowance for loan losses:
 
(Dollars in thousands)
  
       
Three months ended March 31,
  
2009
    
2008
  
Balance at beginning of period
   $ 23,725     $ 20,277  
Provision charged to expense
     1,700       450  
Recoveries of loans previously charged off
     99       103  
Loans charged off
     (1,026 )     (106 )
Balance at end of period
   $ 24,498     $ 20,724  

(6) Borrowings
Federal Home Loan Bank Advances
Advances payable to the Federal Home Loan Bank (“FHLB”) are summarized as follows:

(Dollars in thousands)
  
March 31,
    
December 31,
  
   
2009
    
2008
  
FHLB advances
   $ 723,143     $ 829,626  

In addition to outstanding advances, the Corporation also has access to an unused line of credit amounting to $8.0 million at March 31, 2009.  Under an agreement with the FHLB, the Corporation is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and market values, has a value equal to the aggregate amount of the line of credit and outstanding advances.  The FHLB maintains a security interest in various assets of the Corporation including, but not limited to, residential mortgage loans, U.S. government or agency securities, U.S. government-sponsored enterprise securities, and amounts maintained on deposit at the FHLB.  The Corporation maintained qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at March 31, 2009.  Included in the collateral were securities available for sale with a fair value of $473.3 million and $512.3 million that were specifically pledged to secure FHLB borrowings at March 31, 2009 and December 31, 2008, respectively.  Unless there is an event of default under the agreement with the FHLB, the Corporation may use, encumber or dispose of any portion of the collateral in excess of the amount required to secure FHLB borrowings, except for that collateral that has been specifically pledged.

Other Borrowings
The following is a summary of other borrowings:
 
(Dollars in thousands)
  
March 31,
    
December 31,
  
   
2009
    
2008
  
Treasury, Tax and Loan demand note balance
   $ 1,085     $ 4,382  
Deferred acquisition obligations
     –       2,506  
Securities sold under repurchase agreements
     19,500       19,500  
Other
     348       355  
Other borrowings
   $ 20,933     $ 26,743  

The Stock Purchase Agreement, as amended, for the August 2005 acquisition of Weston Financial Group, Inc. (“Weston Financial”) provided for the payment of contingent purchase price amounts based on operating results in each of the years in the three-year earn-out period ending December 31, 2008.  Contingent payments were added to goodwill and recorded as deferred acquisition liabilities at the time the payments were determinable beyond a reasonable doubt.  During the first quarter of 2009, the Corporation paid approximately $2.5 million, which represented the final payment pursuant to the Stock Purchase Agreement, as amended.
-14-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

(7) Shareholders’ Equity
Stock Repurchase Plan:
The Corporation’s 2006 Stock Repurchase Plan authorizes the repurchase of up to 400,000 shares of the Corporation’s common stock in open market transactions.  There were no shares repurchased under the Corporation’s 2006 Stock Repurchase Plan during the three months ended March 31, 2009.  As of March 31, 2009, a cumulative total of 185,400 shares have been repurchased 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 March 31, 2009 and December 31, 2008, 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 March 31, 2009:
                                    
Total Capital (to Risk-Weighted Assets):
                                    
Corporation
   $ 237,490       12.25 %   $ 155,034       8.00 %   $ 193,792       10.00 %
Bank
   $ 235,648       12.17 %   $ 154,900       8.00 %   $ 193,625       10.00 %
Tier 1 Capital (to Risk-Weighted Assets):
                                                
Corporation
   $ 213,259       11.00 %   $ 77,517       4.00 %   $ 116,275       6.00 %
Bank
   $ 211,438       10.92 %   $ 77,450       4.00 %   $ 116,175       6.00 %
Tier 1 Capital (to Average Assets): (1)
                                                
Corporation
   $ 213,259       7.35 %   $ 116,138       4.00 %   $ 145,173       5.00 %
Bank
   $ 211,438       7.29 %   $ 116,057       4.00 %   $ 145,071       5.00 %
                                                 
As of December 31, 2008:
                                                
Total Capital (to Risk-Weighted Assets):
   $ 235,728       12.54 %   $ 150,339       8.00 %   $ 187,923       10.00 %
Corporation
   $ 237,023       12.62 %   $ 150,201       8.00 %   $ 187,751       10.00 %
Bank
                                                
Tier 1 Capital (to Risk-Weighted Assets):
   $ 212,231       11.29 %   $ 75,169       4.00 %   $ 112,754       6.00 %
Corporation
   $ 213,547       11.37 %   $ 75,101       4.00 %   $ 112,651       6.00 %
Bank
                                                
Tier 1 Capital (to Average Assets): (1)
   $ 212,231       7.53 %   $ 112,799       4.00 %   $ 140,999       5.00 %
Corporation
   $ 213,547       7.58 %   $ 112,724       4.00 %   $ 140,905       5.00 %
Bank