Edgar Filing: WASHINGTON TRUST BANCORP INC

form10-q20100331.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, 2010 or

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

Commission file number: 001-32991

WASHINGTON TRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

(401) 348-1200

(Registrant’s telephone number, including area code)

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

xYes oNo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

oYes oNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Mark one)

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

oYes x No

The number of shares of common stock of the registrant outstanding as of May 3, 2010 was 16,112,923.

Table of Contents

FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended March 31, 2010

TABLE OF CONTENTS
		Page
		Number

PART I. Financial Information

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets
	March 31, 2010 and December 31, 2009	3

Consolidated Statements of Income
	Three Months Ended March 31, 2010 and 2009	4

Consolidated Statements of Cash Flows
	Three Months Ended March 31, 2010 and 2009	5

Condensed Notes to Unaudited Consolidated Financial Statements		6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		28

Item 3. Quantitative and Qualitative Disclosures About Market Risk		52

Item 4. Controls and Procedures		52

PART II. Other Information

Item 1. Legal Proceedings		52

Item 1A. Risk Factors		53

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		53

Item 6. Exhibits		53

Signatures		54

Exhibit 10.2 Terms of Form of Deferred Stock Unit Award Agreement, dated January 20, 2010

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 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Table of Contents

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

CONSOLIDATED BALANCE SHEETS (unaudited)
	March 31,		December 31,
	2010		2009
Assets:
Cash and noninterest-bearing balances due from banks	$	24,284	$	38,167
Interest-bearing balances due from banks		5,817		13,686
Other short-term investments		4,676		5,407
Mortgage loans held for sale		4,658		9,909
Securities available for sale, at fair value;
amortized cost $700,016 in 2010 and $677,676 in 2009		716,964		691,484
Federal Home Loan Bank stock, at cost		42,008		42,008
Loans:
Commercial and other		998,759		984,550
Residential real estate		609,058		605,575
Consumer		329,707		329,543
Total loans		1,937,524		1,919,668
Less allowance for loan losses		27,711		27,400
Net loans		1,909,813		1,892,268
Premises and equipment, net		27,365		27,524
Accrued interest receivable		9,628		9,137
Investment in bank-owned life insurance		45,396		44,957
Goodwill		58,114		58,114
Identifiable intangible assets, net		8,652		8,943
Property acquired through foreclosure or repossession, net		1,974		1,974
Other assets		37,076		40,895
Total assets	$	2,896,425	$	2,884,473

Liabilities:
Deposits:
Demand deposits	$	204,317	$	194,046
NOW accounts		196,905		202,367
Money market accounts		397,896		403,333
Savings accounts		202,236		191,580
Time deposits		959,834		931,684
Total deposits		1,961,188		1,923,010
Dividends payable		3,405		3,369
Federal Home Loan Bank advances		577,965		607,328
Junior subordinated debentures		32,991		32,991
Other borrowings		20,803		21,501
Accrued expenses and other liabilities		40,544		41,328
Total liabilities		2,636,896		2,629,527

Shareholders’ Equity:
Common stock of $.0625 par value; authorized 30,000,000 shares;
issued 16,079,116 shares in 2010 and 16,061,748 shares in 2009		1,005		1,004
Paid-in capital		82,798		82,592
Retained earnings		170,296		168,514
Accumulated other comprehensive income		5,430		3,337
Treasury stock, at cost; 19,185 in 2009		–		(501	)
Total shareholders’ equity		259,529		254,946
Total liabilities and shareholders’ equity	$	2,896,425	$	2,884,473

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

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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,		2010			2009
Interest income:
Interest and fees on loans		$	23,968		$	24,139
Interest on securities:	Taxable		6,051			8,449
	Nontaxable		769			780
Dividends on corporate stock and Federal Home Loan Bank stock			55			72
Other interest income			21			17
Total interest income			30,864			33,457
Interest expense:
Deposits			5,769			9,547
Federal Home Loan Bank advances			6,219			7,227
Junior subordinated debentures			630			479
Other interest expense			242			245
Total interest expense			12,860			17,498
Net interest income			18,004			15,959
Provision for loan losses			1,500			1,700
Net interest income after provision for loan losses			16,504			14,259
Noninterest income:
Wealth management services:
Trust and investment advisory fees			5,017			4,122
Mutual fund fees			1,110			915
Financial planning, commissions and other service fees			179			376
Wealth management services			6,306			5,413
Service charges on deposit accounts			1,153			1,113
Merchant processing fees			1,606			1,349
Income from bank-owned life insurance			439			444
Net gains on loan sales and commissions on loans originated for others			560			1,044
Net realized gains on securities			–			57
Net gains on interest rate swap contracts			68			60
Other income			313			419
Noninterest income, excluding other-than-temporary impairment loses			10,445			9,899
Total other-than-temporary impairment losses on securities			(1,262	)		(4,244	)
Portion of loss recognized in other comprehensive income (before taxes)			1,199			2,253
Net impairment losses recognized in earnings			(63	)		(1,991	)
Total noninterest income			10,382			7,908
Noninterest expense:
Salaries and employee benefits			11,501			10,475
Net occupancy			1,224			1,226
Equipment			997			975
Merchant processing costs			1,357			1,143
FDIC deposit insurance costs			794			651
Outsourced services			755			786
Legal, audit and professional fees			518			675
Advertising and promotion			364			301
Amortization of intangibles			291			308
Other expenses			1,791			1,850
Total noninterest expense			19,592			18,390
Income before income taxes			7,294			3,777
Income tax expense			2,122			1,107
Net income		$	5,172		$	2,670
Weighted average shares outstanding – basic			16,057.7			15,942.7
Weighted average shares outstanding – diluted			16,101.5			15,997.8
Per share information:	Basic earnings per common share	$	0.32		$	0.17
	Diluted earnings per common share	$	0.32		$	0.17

Cash dividends declared per share

0.21

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

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

Three months ended March 31,		2010			2009
Cash flows from operating activities:
Net income		$	5,172		$	2,670
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			1,500			1,700
Depreciation of premises and equipment			772			790
Net amortization of premium and discount			102			127
Net amortization of intangibles			291			308
Share-based compensation			177			215
Earnings from bank-owned life insurance			(439	)		(444	)
Net gains on loan sales and commissions on loans originated for others			(560	)		(1,044	)
Net realized gains on securities			–			(57	)
Net impairment losses recognized in earnings			63			1,991
Net gains on interest rate swap contracts			(68	)		(60	)
Proceeds from sales of loans			36,113			72,820
Loans originated for sale			(30,336	)		(76,436	)
(Increase) decrease in accrued interest receivable, excluding purchased interest			(492	)		579
Decrease in other assets			2,811			1,042
Decrease in accrued expenses and other liabilities			(708	)		(3,098	)
Other, net			(2	)		1
Net cash provided by operating activities			14,396			1,104
Cash flows from investing activities:
Purchases of:	Mortgage-backed securities available for sale		(44,479	)		–
	Other investment securities available for sale		(15,000	)		(204	)
Proceeds from sale of:	Other investment securities available for sale		711			590
Maturities and principal payments of:	Mortgage-backed securities available for sale		36,184			35,633
Net increase in loans			(18,887	)		(25,220	)
Purchases of loans, including purchased interest			(75	)		(2,721	)
Proceeds from the sale of property acquired through foreclosure or repossession			–			222
Purchases of premises and equipment			(613	)		(448	)
Payment of deferred acquisition obligation			–			(2,509	)
Net cash (used in) provided by investing activities			(42,159	)		5,343
Cash flows from financing activities:
Net increase in deposits			38,178			93,456
Net decrease in other borrowings, excluding deferred acquisition obligation			(698	)		(3,301	)
Proceeds from Federal Home Loan Bank advances			15,000			91,669
Repayment of Federal Home Loan Bank advances			(44,360	)		(198,148	)
Issuance of treasury stock, including deferred compensation plan activity			35			19
Net proceeds from the issuance of common stock under dividend reinvestment plan			256			274
Net proceeds from the exercise of stock options and issuance of other
compensation-related equity instruments			214			2
Tax benefit from stock option exercises and issuance of other
compensation-related equity instruments			24			–
Cash dividends paid			(3,369	)		(3,351	)
Net cash provided by (used in) financing activities			5,280			(19,380	)
Net decrease in cash and cash equivalents			(22,483	)		(12,933	)
Cash and cash equivalents at beginning of period			57,260			58,190
Cash and cash equivalents at end of period		$	34,777		$	45,257

Noncash Investing and Financing Activities:	Loans charged off	$	1,275		$	1,026
	Reclassification of other-than-temporary impairment
	charge effective January 1, 2009		–			1,859
Supplemental Disclosures:	Interest payments		12,064			17,048
	Income tax payments		3			583

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

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Table of Contents

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

General

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

(1) Basis of Presentation

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

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

In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) and disclosures necessary to present fairly the Corporation’s financial position as of March 31, 2010 and December 31, 2009, respectively, and the results of operations and cash flows for the interim periods presented. Interim results are not necessarily reflective of the results of the entire year. The unaudited consolidated financial statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2009. The Corporation has evaluated subsequent events through the filing date of this quarterly report.

(2) Recently Issued Accounting Pronouncements

Accounting Standards Codification (“ASC”) 860, “Transfers and Servicing,” incorporates former SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” which was issued in June 2009 and will be effective for interim and annual periods beginning after January 1, 2010. These pending provisions of ASC 860 will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to the transferred financial assets. Among other things, the concept of a “qualifying special-purpose entity” is eliminated under these pending provisions of ASC 860, which also changes the requirements for derecognizing financial assets and requires additional disclosures. The adoption of these provisions of ASC 260 did not have a material impact on its consolidated financial statements.

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

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

Accounting Standards Update No. 2010-06 “Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”) was issued in January 2010 to update ASC 820 “Fair Value Measurements and Disclosures”. ASU 2010-06 requires new disclosures (1) for significant transfers in and out of Level 1 and Level 2 including a description of the reason for the transfers and (2) in the reconciliation of Level 3 presenting sales, issuances and settlements gross rather than one net number. ASU 2010-06 also requires clarification of existing disclosures requiring (1) measurement disclosures for each “class” of assets and liabilities (a class being a subset of assets and liabilities within one line item in the statement of financial position) using judgment in determining the appropriate classes and (2) disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3. The new disclosures and clarifications of existing disclosures were effective for interim and reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity Level 3 which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. See Note 10 for the Corporation’s Fair Value Measurements disclosure.

(3) Federal Home Loan Bank Stock

The Bank is a member of the Federal Home Loan Bank of Boston (“FHLBB”). The FHLBB is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Agency, to maintain capital adequacy of the FHLBB. While the Corporation currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. In 2008, the FHLBB announced to its members that it is focusing on preserving capital in response to ongoing market volatility including the extension of a moratorium on excess stock repurchases and in 2009 announced the suspension of its quarterly dividends. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Corporation’s FHLBB stock as of March 31, 2010. Further deterioration of the FHLBB’s capital levels may require the Corporation to deem its restricted investment in FHLBB stock to be other-than-temporarily impaired. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Corporation will continue to monitor its investment in FHLBB stock.

(4) Securities

The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value of securities by major security type and class of security at March 31, 2010 and December 31, 2009 were as follows:

(Dollars in thousands)
	Amortized		Unrealized		Unrealized			Fair
March 31, 2010	Cost (1)		Gains		Losses			Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises	$	56,575	$	3,586	$	(66	)	$	60,095
Mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises		511,242		22,078		(367	)		532,953
States and political subdivisions		79,469		2,120		(215	)		81,374
Trust preferred securities:
Individual name issuers		30,572		−		(8,418	)		22,154
Collateralized debt obligations		4,876		−		(3,722	)		1,154
Corporate bonds		13,270		1,486		−			14,756
Common stocks		658		156		−			814
Perpetual preferred stocks		3,354		438		(128	)		3,664
Total securities available for sale	$	700,016	$	29,864	$	(12,916	)	$	716,964

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

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

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

Securities available for sale with a fair value of $543 million and $558 million were pledged in compliance with state regulations concerning trust powers and to secure Treasury Tax and Loan deposits, borrowings and certain public deposits at March 31, 2010 and December 31, 2009, respectively. (See Note 7 to the Consolidated Financial Statements for additional discussion of FHLBB borrowings). In addition, securities available for sale with a fair value of $21.5 million and $22.2 million were pledged for potential use at the Federal Reserve Bank discount window at March 31, 2010 and December 31, 2009, respectively. There were no borrowings with the Federal Reserve Bank at either date. Securities available for sale with a fair value of $6.8 million and $7.2 million were designated in rabbi trusts for nonqualified retirement plans at March 31, 2010 and December 31, 2009, respectively. Securities available for sale with a fair value of $2.6 million were pledged as collateral to secure certain interest rate swap agreements at both March 31, 2010 and December 31, 2009.

The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at March 31, 2010 and 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,	2010		2009
Balance at beginning of period	$	2,496	$	–
Credit-related impairment loss on debt securities for which an
other-than-temporary impairment was not previously recognized		–		1,350
Additional increases to the amount of credit-related impairment loss on debt securities
for which an other-than-temporary impairment was previously recognized		63		–
Balance at end of period	$	2,559	$	1,350

During the three months ended March 31, 2010 and 2009, credit-related impairment losses of $63 thousand and $1.35 million, respectively, were recognized in earnings on pooled trust preferred debt securities not expected to be sold. The anticipated cash flows expected to be collected from these debt securities were discounted at the rate equal to the yield used to accrete the current and prospective beneficial interest for each security. Significant inputs included estimated cash flows and prospective deferrals, defaults and recoveries. Estimated cash flows are generated based on the underlying seniority status and subordination structure of the pooled trust preferred debt tranche at the time of measurement. Prospective deferral, default and recovery estimates affecting projected cash flows were based on analysis of the underlying financial condition of individual issuers, and took into account capital adequacy, credit quality, lending concentrations, and other factors. All cash flow estimates were based on the underlying security’s tranche structure and contractual rate and maturity terms. The present value of the expected cash flows was compared to the current outstanding balance of the tranche to determine the ratio of the estimated present value of expected cash flows to the total current balance for the tranche. This ratio was then multiplied by the principal balance of

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

Washington Trust’s holding to determine the credit-related impairment loss. The estimates used in the determination of the present value of the expected cash flows are susceptible to changes in future periods, which could result in additional credit-related impairment losses.

The following table summarizes temporarily impaired securities as of March 31, 2010, segregated by length of time the securities have been in a continuous unrealized loss position.

(Dollars in thousands)	Less than 12 Months			12 Months or Longer			Total
		Fair	Unrealized		Fair	Unrealized		Fair	Unrealized
At March 31, 2010	#	Value	Losses	#	Value	Losses	#	Value	Losses
Obligations of U.S. government-
sponsored enterprises	2	$14,934	$66	–	–	–	2	$14,934	$66
Mortgage-backed securities
issued by U.S. government agencies and U.S. government-sponsored enterprises	3	44,146	194	14	34,343	173	17	78,489	367
States and
political subdivisions	1	1,018	8	4	3,095	207	5	4,113	215
Trust preferred securities:
Individual name issuers	–	–	–	11	22,154	8,418	11	22,154	8,418
Collateralized debt obligations	–	–	–	2	1,154	3,722	2	1,154	3,722
Subtotal, debt securities	6	60,098	268	31	60,746	12,520	37	120,844	12,788
Perpetual preferred stocks	–	–	–	4	1,373	128	4	1,373	128
Total temporarily
impaired securities	6	$60,098	$268	35	$62,119	$12,648	41	$122,217	$12,916

The following table summarizes temporarily impaired securities as of December 31, 2009, segregated by length of time the securities have been in a continuous unrealized loss position.

(Dollars in thousands)	Less than 12 Months			12 Months or Longer			Total
		Fair	Unrealized		Fair	Unrealized		Fair	Unrealized
At December 31, 2009	#	Value	Losses	#	Value	Losses	#	Value	Losses
Mortgage-backed securities
issued by U.S. government agencies and U.S. government-sponsored enterprises	3	$2,218	$5	25	$38,023	$472	28	$40,241	$477
States and
political subdivisions	4	3,836	45	3	2,097	169	7	5,933	214
Trust preferred securities:
Individual name issuers	–	–	–	11	20,586	9,977	11	20,586	9,977
Collateralized debt obligations	–	–	–	2	1,065	3,901	2	1,065	3,901
Subtotal, debt securities	7	6,054	50	41	61,771	14,519	48	67,825	14,569
Perpetual preferred stocks	1	427	73	3	933	67	4	1,360	140
Total temporarily
impaired securities	8	$6,481	$123	44	$62,704	$14,586	52	$69,185	$14,709

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

Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, a continuation 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.

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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 $367 thousand at March 31, 2010 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, 2010.

Debt securities issued by states and political subdivisions:

The unrealized losses on debt securities issued by states and political subdivisions amounted to $215 thousand at March 31, 2010. 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, 2010.

Trust preferred debt securities of individual name issuers:

Included in debt securities in an unrealized loss position at March 31, 2010 were 11 trust preferred security holdings issued by seven individual name companies (reflecting, where applicable, the impact of mergers and acquisitions of issuers subsequent to original purchase) in the financial services/banking industry. The aggregate unrealized losses on these debt securities amounted to $8.4 million at March 31, 2010. Management believes the decline in fair value of these trust preferred securities primarily reflects 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 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, 2010, trust preferred debt securities with a carrying value of $8.1 million and unrealized losses of $3.7 million were rated below investment grade by Standard & Poors, Inc. (“S&P”). Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this quarterly report and other information. We noted no additional downgrades to below investment grade between the reporting period date and the filing date of this report. Based on these analyses, management concluded that it expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2010.

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

At March 31, 2010, Washington Trust had two pooled trust preferred holdings in the form of collateralized debt obligations with unrealized losses of $3.7 million. These pooled trust preferred holdings consist of trust preferred obligations of banking industry companies and, to a lesser extent, insurance industry companies. For both these pooled trust preferred securities, Washington Trust’s investment is senior to one or more subordinated tranches which have first loss exposure. Valuations of the pooled trust preferred holdings are dependent in part on cash flows from underlying issuers. Unexpected cash flow disruptions could have an adverse impact on the fair value and performance of pooled trust preferred securities. Management believes the unrealized losses on these pooled trust preferred securities primarily reflect investor concerns about recent and potential future losses in the financial services industry related to subprime lending and other credit related exposure, 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

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

concerns have resulted in a substantial decrease in market liquidity and increased risk premiums for securities in this sector. Credit spreads for issuers in this sector have remained wide during recent months, causing prices for these securities holdings to remain at low levels.

In the first quarter of 2009, an adverse change occurred in the expected cash flows for one of the trust preferred collateralized debt obligation securities indicating that, based on cash flow forecasts with regard to timing of deferrals and potential future recovery of deferred payments, default rates, and other matters, the Corporation would not receive all contractual amounts due under the instrument and would not recover the entire cost basis of this security. In the first quarter of 2009, the Corporation recognized a $1.4 million credit-related impairment loss in earnings for this trust preferred collateralized debt security, with a commensurate adjustment to reduce the amortized cost of this security. This security was downgraded to a below investment grade rating of “Caa3” by Moody’s Investors Service Inc. (“Moody’s”) on March 27, 2009 and was placed on nonaccrual status as of March 31, 2009. On October 30, 2009, Moody’s downgraded this security to a rating of “Ca.” This credit rating status was considered by management in its assessment of the impairment status of this security. Through the filing date of this report, there have been no further rating changes on this security. The Corporation has continued to monitor the deferral and default status of the underlying issuer institutions and has noted that in April 2010, this investment security began deferring a portion of interest payments. The current analysis of the expected cash flows for this security did not result in further credit-related impairment loss.

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

Based on information available through the filing date of this report, there have been no further adverse changes in the deferral or default status of the underlying issuer institutions within either of these trust preferred collateralized debt obligations. Based on cash flow forecasts for these securities, management expects to recover the remaining amortized cost of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be at maturity. Therefore, management does not consider the unrealized losses on these investments to be other-than-temporary at March 31, 2010.

Perpetual preferred stocks:

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

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

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.

As of March 31, 2010, the Corporation had four perpetual preferred stock holdings of financial and utility companies with a total fair value of $1.4 million and unrealized losses of $128 thousand, or 8% 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, reflects 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, 2010.

(5) Loans

The following is a summary of loans:

(Dollars in thousands)	March 31, 2010					December 31, 2009
	Amount		%			Amount		%
Commercial:
Mortgages (1)	$	493,102		25	%	$	496,996		26	%
Construction and development (2)		77,787		4	%		72,293		4	%
Other (3)		427,870		23	%		415,261		21	%
Total commercial		998,759		52	%		984,550		51	%
Residential real estate:
Mortgages (4)		597,481		30	%		593,981		31	%
Homeowner construction		11,577		1	%		11,594		1	%
Total residential real estate		609,058		31	%		605,575		32	%
Consumer:
Home equity lines (5)		213,841		11	%		209,801		11	%
Home equity loans (5)		59,390		3	%		62,430		3	%
Other (6)		56,476		3	%		57,312		3	%
Total consumer		329,707		17	%		329,543		17	%
Total loans (7)	$	1,937,524		100	%	$	1,919,668		100	%

(1)	Amortizing mortgages and lines of credit, primarily secured by income producing property. $133 million of these loans at March 31, 2010 were pledged as collateral for FHLBB borrowings (see Note 7).

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

(3)

Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate. At March 31, 2010, $39 million of these loans were pledged as collateral for FHLBB borrowings and $71 million of these loans were collateralized for the discount window at the Federal Reserve Bank (see Note 7).

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

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

(6)	Fixed rate consumer installment loans.

(7)	Net of unamortized loan origination costs, net of fees, totaling $211 thousand and $103 thousand at March 31, 2010 and December 31, 2009, respectively. Also includes $107 thousand and $140 thousand of net discounts on purchased loans at March 31, 2009 and December 31, 2009, respectively.

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

Impaired Loans

Impaired loans are loans for which it is probable that the Corporation will not be able to collect all amounts due according to the contractual terms of the loan agreements and loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller-balance homogenous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans. The following is a summary of impaired loans:

(Dollars in thousands)	March 31, 2010		December 31, 2009
Nonaccrual commercial loans, excluding troubled debt restructured loans:
Commercial mortgages	$	6,695	$	11,588
Other commercial		7,978		8,847
Total nonaccrual commercial loans, excluding troubled debt restructured loans		14,673		20,435
Nonaccrual troubled debt restructured loans:
Commercial mortgages		2,238		–
Other commercial		247		228
Residential real estate mortgages		887		336
Consumer		44		45
Nonaccrual troubled debt restructured loans		3,416		609
Accruing troubled debt restructured loans:
Commercial mortgages		5,813		5,566
Other commercial		1,217		540
Residential real estate mortgages		2,622		2,736
Consumer		1,398		858
Accruing troubled debt restructured loans		11,050		9,700
Total troubled debt restructured loans		14,466		10,309
Other:
Nonaccrual residential real estate mortgages		1,168		772
Accruing consumer		76		38
Total other		1,244		810
Total recorded investment in impaired loans	$	30,383	$	31,554

(Dollars in thousands)	March 31, 2010		December 31, 2009
Impaired loans requiring an allowance	$	19,663	$	19,480
Impaired loans not requiring an allowance		10,720		12,074
Total recorded investment in impaired loans	$	30,383	$	31,554
Loss allocation on impaired loans	$	2,289	$	2,459

(Dollars in thousands)

Three months ended March 31,	2010		2009
Average recorded investment in impaired loans	$	31,602	$	10,097
Interest income recognized on impaired loans	$	347	$	54

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

(6) Allowance for Loan Losses

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

(Dollars in thousands)

Three months ended March 31,	2010			2009
Balance at beginning of period	$	27,400		$	23,725
Charge-offs:
Commercial:
Mortgages		(493	)		(461	)
Construction and development		–			–
Other		(535	)		(441	)
Residential:
Mortgages		(171	)		(32	)
Homeowner construction		–			–
Consumer		(76	)		(92	)
Total charge-offs		(1,275	)		(1,026	)
Recoveries:
Commercial:
Mortgages		2			–
Construction and development		–			–
Other		27			92
Residential:
Mortgages		50			–
Homeowner construction		–			–
Consumer		7			7
Total recoveries		86			99
Net charge-offs		(1,189	)		(927	)
Provision charged to expense		1,500			1,700
Balance at end of period	$	27,711		$	24,498

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

(7) Borrowings

Federal Home Loan Bank Advances

Advances payable to the FHLBB amounted to $578 million at March 31, 2010 and $607 million at December 31, 2009.

In connection with the Corporation’s ongoing interest rate risk management efforts, in January 2010, the Corporation modified the terms to extend the maturity dates of $50 million of its FHLBB advances with original maturity dates in 2011 and 2012. In April 2010, the Corporation modified the terms to extend the maturity dates of an additional $38.5 million of its FHLBB advances with original maturity dated in 2010 and 2011. The following table presents maturities and weighted average interest rates paid on FHLBB advances outstanding at March 31, 2010 on a pro forma basis reflecting the April 2010 modification:

(Dollars in thousands)
	Scheduled		Redeemed at		Weighted
	Maturity		Call Date (1)		Average Rate (2)
April 1, 2010 through December 31, 2010	$	91,743	$	104,743		4.34	%
2011		95,039		87,039		3.71	%
2012		117,365		117,365		4.31	%
2013		123,534		118,534		4.10	%
2014		63,562		63,562		4.04	%
2015		22,810		22,810		4.32	%
2016 and after		63,912		63,912		5.07	%
Balance at March 31, 2010	$	577,965	$	577,965

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

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

In addition to the outstanding advances, the Bank also has access to an unused line of credit with the FHLBB amounting to $8.0 million at March 31, 2010. Under agreement with the FHLBB, the Bank is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and fair values, has a value equal to the aggregate amount of the line of credit and outstanding advances. The FHLBB maintains a security interest in various assets of the Corporation including, but not limited to, residential mortgage loans, commercial mortgages and other commercial loans, U.S. government agency securities, U.S. government-sponsored enterprise securities, and amounts maintained on deposit at the FHLBB. The Corporation maintained qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at March 31, 2010. Included in the collateral were securities available for sale with a fair value of $347 million and $370 million that were specifically pledged to secure FHLBB borrowings at March 31, 2010 and December 31, 2009, respectively. Unless there is an event of default under the agreement, the Corporation may use, encumber or dispose any portion of the collateral in excess of the amount required to secure FHLBB borrowings, except for that collateral which has been specifically pledged.

(8) Shareholders’ Equity

2006 Stock Repurchase Plan

The Corporation’s 2006 Stock Repurchase Plan authorizes the repurchase of up to 400,000 shares, or approximately 3%, of the Corporation’s common stock in open market transactions. This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. There is no set expiration date for this repurchase plan. The Corporation plans to hold the repurchased shares as treasury stock to be used for general corporate purposes. As of March 31, 2010, a cumulative total of 185,400 shares have been repurchased. These shares of stock were repurchased in 2007 at a total cost of $4.8 million.

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

Regulatory Capital Requirements:

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

(Dollars in thousands)	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2010:
Total Capital (to Risk-Weighted Assets):
Corporation	$	247,216		12.50	%	$	158,226		8.00	%	$	197,783		10.00	%
Bank	$	245,201		12.41	%	$	158,079		8.00	%	$	197,599		10.00	%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation	$	222,243		11.24	%	$	79,113		4.00	%	$	118,670		6.00	%
Bank	$	220,251		11.15	%	$	79,040		4.00	%	$	118,559		6.00	%
Tier 1 Capital (to Average Assets): (1)
Corporation	$	222,243		7.89	%	$	112,622		4.00	%	$	140,778		5.00	%
Bank	$	220,251		7.83	%	$	112,515		4.00	%	$	140,643		5.00	%

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

(1) Leverage ratio

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

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, an equity commitment to an affordable housing partnership, interest rate swap agreements and commitments to originate and commitments to sell fixed rate mortgage loans. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Corporation’s Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers, commitments to extend credit, and financial guarantees are similar to those used for loans. The interest rate swaps with other counterparties are generally subject to bilateral collateralization terms. The contractual and notional amounts of financial instruments with off-balance sheet risk are as follows:

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

(Dollars in thousands)	March 31, 2010		December 31, 2009
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Commercial loans	$	153,147	$	186,943
Home equity lines		185,458		185,892
Other loans		22,670		25,691
Standby letters of credit		9,194		8,712
Equity commitment to an affordable housing partnership		690		690
Financial instruments whose notional amounts exceed the amount of credit risk:
Forward loan commitments:
Commitments to originate fixed rate mortgage loans to be sold		12,533		15,898
Commitments to sell fixed rate mortgage loans		17,188		25,791
Customer related derivative contracts:
Interest rate swaps with customers		60,656		53,725
Mirror swaps with counterparties		60,656		53,725
Interest rate risk management contract:
Interest rate swap		–		10,000

Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each borrower’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the borrower.

Standby Letters of Credit

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Under a standby letter of credit, the Corporation is required to make payments to the beneficiary of the letter of credit upon request by the beneficiary contingent upon the customer’s failure to perform under the terms of the underlying contract with the beneficiary. Standby letters of credit extend up to five years. At March 31, 2010 and December 31, 2009, the maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered, totaled $9.2 million and $8.7 million, respectively. At March 31, 2010 and December 31, 2009, there was no liability to beneficiaries resulting from standby letters of credit. Fee income on standby letters of credit for the three months ended March 31, 2010 and 2009 was insignificant.

At March 31, 2010, a substantial portion of the standby letters of credit was supported by pledged collateral. The collateral obtained is determined based on management’s credit evaluation of the customer. Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required.

Equity Commitment

Equity commitment to an affordable housing partnership represents funding commitments by Washington Trust to a limited partnership. This partnership was created for the purpose of renovating and operating a low-income housing project. The funding of these commitments is generally contingent upon substantial completion of the project.

Forward Loan Commitments

Interest rate lock commitments are extended to borrowers that relate to the origination of readily marketable mortgage loans held for sale. To mitigate the interest rate risk inherent in these rate locks, as well as closed mortgage loans held for sale, best efforts forward commitments are established to sell individual mortgage loans. Commitments to originate and commitments to sell fixed rate mortgage loans are derivative financial instruments and, therefore, changes in fair value of these commitments are recognized in earnings.

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

Interest Rate Risk Management Agreements

Interest rate swaps are used from time to time as part of the Corporation’s interest rate risk management strategy. Swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g., fixed-rate for variable-rate payments) computed on a notional principal amount. The credit risk associated with swap transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure.

As of December 31, 2009, the Bancorp had an interest rate swap contract to hedge the interest rate risk associated with $10 million of the variable rate junior subordinated debentures. The interest rate swap contract had a notional amount of $10 million and matured in 2013. In March 2010, the Corporation terminated this interest rate swap contract and expects to execute a new interest rate swap contract in the second quarter of 2010.

The Bank has entered into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert floating rate loan payments to fixed rate loan payments. When we enter into an interest rate swap contract with a commercial loan borrower, we simultaneously enter into a “mirror” swap contract with a third party. The third party exchanges the client’s fixed rate loan payments for floating rate loan payments. We retain the risk that is associated with the potential failure of counterparties and inherent in making loans. At March 31, 2010 and December 31, 2009, Washington Trust had interest rate swap contracts with commercial loan borrowers with notional amounts of $60.7 million and $53.7 million, respectively, and equal amounts of “mirror” swap contracts with third-party financial institutions. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings.

The following table presents the fair values of derivative instruments in the Corporation’s Consolidated Balance Sheets as of the dates indicated.

(Dollars in thousands)

Asset Derivatives

Liability Derivatives

Balance Sheet

Mar. 31,

2010

Dec. 31,

2009

Balance

Sheet

Mar. 31,

2010

Dec. 31,

2009

Location

Fair Value

Location

Fair Value

Derivatives designated as cash

flow hedging instruments:

Interest rate risk management contract:

Accrued expenses

Interest rate swap

–

& other liabilities

–

434

Derivatives not designated

as hedging instruments under

SFAS No. 133:

Forward loan commitments:

Commitments to originate fixed rate

mortgage loans to be sold

Other assets

Accrued expenses

& other liabilities

180

Commitments to sell fixed rate

mortgage loans

Other assets

342

Accrued expenses

& other liabilities

Customer related derivative contracts:

Interest rate swaps with customers

Other assets

2,382

1,704

–

Mirror swaps with counterparties

–

Accrued expenses

& other liabilities

2,394

1,691

Total

2,479

2,068

2,482

2,336

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Table of Contents

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

The following tables present the effect of derivative instruments in the Corporation’s Consolidated Statements of Income and Changes in Shareholders’ Equity for the periods indicated.

(Dollars in thousands)			Location of Gain
	Gain (Loss)		(Loss) Recognized in
	Recognized in Other		Income on Derivative	Gain (Loss) Recognized
	Comprehensive		(Ineffective Portion	in Income
	Income		and Amount	on Derivative
	(Effective Portion)		Excluded from	(Ineffective Portion)
Three months ended March 31,	2010	2009	Effectiveness Testing)	2010	2009
Derivatives in cash flow hedging relationships:
Interest rate risk management contract:
Interest rate swap	$7	$ –	Interest Expense	$(78)	$ –
Total	$7	$ –		$(78)	$ –

(Dollars in thousands)		Amount of Gain (Loss)
	Location of Gain	Recognized in Income
	(Loss) Recognized in	on Derivative
Three months ended March 31,	Income on Derivative	2010			2009
Derivatives not designated as hedging instruments:
Forward loan commitments:
Commitments to originate fixed rate mortgage loans to be sold	Net gains on loan sales & commissions on loans originated for others	$	149		$	(81	)
Commitments to sell fixed rate mortgage loans	Net gains on loan sales & commissions on loans originated for others		(293	)		(2	)
Customer related derivative contracts:
Interest rate swaps with customers	Net gains (losses) on interest rate swaps		1,107			127
Mirror swaps with counterparties	Net gains (losses) on interest rate swaps		(1,039	)		(75	)
Interest rate risk management contract:
Interest rate swap	Net gains (losses) on interest rate swaps		–			8
Total		$	(76	)	$	(23	)

(10) Fair Value Measurements

The Corporation uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale and derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

Determination of Fair Value

Fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, the Corporation uses quoted market prices to determine fair value. If quoted prices are not available, fair value is based upon valuation techniques such as matrix pricing or other models that use, where possible, current market-based or independently sourced market parameters, such as interest rates. If observable market-based inputs are not available, the Corporation uses unobservable inputs to determine appropriate valuation adjustments using methodologies applied consistently over time.

The following is a description of valuation methodologies for assets and liabilities recorded at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.

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Table of Contents

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

Items Measured at Fair Value on a Recurring Basis

Securities Available for Sale

Securities available for sale are recorded at fair value on a recurring basis. When available, the Corporation uses quoted market prices to determine the fair value of securities; such items are classified as Level 1. This category includes exchange-traded equity securities.

Level 2 securities include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes obligations of U.S. government-sponsored enterprises, mortgage-backed securities issued by U.S. government agencies and U.S government-sponsored enterprises, municipal bonds, trust preferred securities, corporate bonds and certain preferred equity securities.

In certain cases where there is limited activity or less transparency around inputs to the valuation, securities may be classified as Level 3. As of March 31, 2010 and December 31, 2009, Level 3 securities were comprised of two pooled trust preferred debt securities, in the form of collateralized debt obligations, which were not actively traded. As of March 31, 2010, the Corporation concluded that there has been a significant decrease in the volume and level of activity for its Level 3 pooled trust preferred debt securities and, therefore, quoted market prices are not indicative of fair value. The Corporation obtained valuations including broker quotes and cash flow scenario analyses prepared by a third party valuation consultant. The fair values were assigned a weighting that was dependent upon the methods used to calculate the prices. The cash flow scenarios (Level 3) were given substantially more weight than the broker quotes (Level 2) as management believed that the broker quotes reflected highly limited sales evidenced by an inactive market. The cash flow scenarios were prepared using discounted cash flow methodologies based on detailed cash flow and credit analysis of the pooled securities. The weighting was then used to determine an overall fair value of the securities. Management believes that this approach is most representative of fair value for these particular securities in current market conditions.

Our internal review procedures have confirmed that the fair values provided by the aforementioned third party valuation sources utilized by the Corporation are consistent with GAAP. Our fair values assumed liquidation in an orderly market and not under distressed circumstances. Due to the continued market illiquidity and credit risk for securities in the financial sector, the fair value of these securities is highly sensitive to assumption changes and market volatility.

Derivatives

Substantially all of our derivatives are traded in over-the-counter markets where quoted market prices are not readily available. Fair value measurements are determined using independent pricing models that utilize primarily market observable inputs, such as swap rates of different maturities and LIBOR rates and, accordingly, are classified as Level 2. Examples include interest rate swap contracts. Our internal review procedures have confirmed that the fair values determined with independent pricing models and utilized by the Corporation are consistent with GAAP. Any derivative for which we measure fair value using significant assumptions that are unobservable are classified as Level 3. Level 3 derivatives include commitments to sell fixed rate residential mortgages and interest rate lock commitments written for our residential mortgage loans that we intend to sell. The valuation of these items is determined by management based on internal calculations using external market inputs.

For purposes of potential valuation adjustments to its interest rate swap contracts, the Corporation evaluates the credit risk of its counterparties as well as that of the Corporation. Accordingly, Washington Trust considers factors such as the likelihood of default by the Corporation and its counterparties, its net exposures and remaining contractual life, among other factors, in determining if any fair value adjustments related to credit risk are required. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position.

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Table of Contents

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

Items Measured at Fair Value on a Nonrecurring Basis

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried on an aggregate basis at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics. As such, we classify loans subjected to nonrecurring fair value adjustments as Level 2.

Collateral Dependent Impaired Loans

Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For those collateral dependent loans for which the inputs used in the appraisals of the collateral are observable, such loans are categorized as Level 2. For other collateral dependent loans, management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, or use internal valuations for other business assets utilizing significant assumptions that are unobservable, and such loans are categorized as Level 3.

Loan Servicing Rights

Loan servicing rights do not trade in an active market with readily observable prices. Accordingly, we determine the fair value of loan servicing rights using a valuation model that calculates the present value of the estimated future net servicing income. The model incorporates assumptions used in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service and contractual servicing fee income. Loan servicing rights are subject to fair value measurements on a nonrecurring basis. Fair value measurements of our loan servicing rights use significant unobservable inputs and, accordingly, are classified as Level 3.

Items Recorded at Fair Value on a Recurring Basis

The table below presents the balances of assets and liabilities reported at fair value on a recurring basis.

(Dollars in thousands)							Assets/
	Fair Value Measurements Using						Liabilities at
March 31, 2010	Level 1		Level 2		Level 3		Fair Value
Assets:
Securities available for sale:
Obligations of U.S. government-sponsored enterprises	$	–	$	60,095	$	–	$	60,095
Mortgage-backed securities issued by U.S. government
agencies and U.S. government-sponsored enterprises		–		532,953		–		532,953
States and political subdivisions		–		81,374		–		81,374
Trust preferred securities:
Individual name issuers		–		22,154		–		22,154
Collateralized debt obligations		–		–		1,154		1,154
Corporate bonds		–		14,756		–		14,756
Common stocks		814		–		–		814
Perpetual preferred stocks		3,249		415		–		3,664
Derivative assets (1)
Interest rate swap contracts with customers		–		2,382		–		2,382
Forward loan commitments		–		–		97		97
Total assets at fair value on a recurring basis	$	4,063	$	714,129	$	1,251	$	719,443
Liabilities:
Derivative liabilities (1)
Mirror swaps with counterparties	$