form10-q20090930.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 SEPTEMBER 30, 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.
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 November 2, 2009 was 16,042,309.
|
|
|
(Dollars in thousands, |
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
except par value) |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Assets: |
|
|
|
|
|
|
Cash and noninterest-bearing balances due from banks |
|
$ |
28,354 |
|
|
$ |
11,644 |
|
Interest-bearing balances due from banks |
|
|
15,254 |
|
|
|
41,780 |
|
Federal funds sold and securities purchased under resale agreements |
|
|
– |
|
|
|
2,942 |
|
Other short-term investments |
|
|
4,398 |
|
|
|
1,824 |
|
Mortgage loans held for sale |
|
|
7,099 |
|
|
|
2,543 |
|
Securities available for sale, at fair value; |
|
|
|
|
|
|
|
|
amortized cost $716,406 in 2009 and $869,433 in 2008 |
|
|
732,646 |
|
|
|
866,219 |
|
Federal Home Loan Bank stock, at cost |
|
|
42,008 |
|
|
|
42,008 |
|
Loans: |
|
|
|
|
|
|
|
|
Commercial and other |
|
|
976,322 |
|
|
|
880,313 |
|
Residential real estate |
|
|
604,573 |
|
|
|
642,052 |
|
Consumer |
|
|
325,670 |
|
|
|
316,789 |
|
Total loans |
|
|
1,906,565 |
|
|
|
1,839,154 |
|
Less allowance for loan losses |
|
|
26,431 |
|
|
|
23,725 |
|
Net loans |
|
|
1,880,134 |
|
|
|
1,815,429 |
|
Premises and equipment, net |
|
|
26,212 |
|
|
|
25,102 |
|
Accrued interest receivable |
|
|
9,761 |
|
|
|
11,036 |
|
Investment in bank-owned life insurance |
|
|
44,505 |
|
|
|
43,163 |
|
Goodwill |
|
|
58,114 |
|
|
|
58,114 |
|
Identifiable intangible assets, net |
|
|
9,233 |
|
|
|
10,152 |
|
Property acquired through foreclosure or repossession, net |
|
|
1,186 |
|
|
|
392 |
|
Other assets |
|
|
29,161 |
|
|
|
33,118 |
|
Total assets |
|
$ |
2,888,065 |
|
|
$ |
2,965,466 |
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
198,712 |
|
|
$ |
172,771 |
|
NOW accounts |
|
|
185,772 |
|
|
|
171,306 |
|
Money market accounts |
|
|
376,100 |
|
|
|
305,879 |
|
Savings accounts |
|
|
190,707 |
|
|
|
173,485 |
|
Time deposits |
|
|
942,879 |
|
|
|
967,427 |
|
Total deposits |
|
|
1,894,170 |
|
|
|
1,790,868 |
|
Dividends payable |
|
|
3,370 |
|
|
|
3,351 |
|
Federal Home Loan Bank advances |
|
|
636,660 |
|
|
|
829,626 |
|
Junior subordinated debentures |
|
|
32,991 |
|
|
|
32,991 |
|
Other borrowings |
|
|
20,628 |
|
|
|
26,743 |
|
Accrued expenses and other liabilities |
|
|
48,100 |
|
|
|
46,776 |
|
Total liabilities |
|
|
2,635,919 |
|
|
|
2,730,355 |
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity: |
|
|
|
|
|
|
|
|
Common stock of $.0625 par value; authorized 30,000,000 shares; |
|
|
|
|
|
|
|
|
issued 16,045,829 shares in 2009 and 16,018,868 shares in 2008 |
|
|
1,003 |
|
|
|
1,001 |
|
Paid-in capital |
|
|
82,320 |
|
|
|
82,095 |
|
Retained earnings |
|
|
167,135 |
|
|
|
164,679 |
|
Accumulated other comprehensive income (loss) |
|
|
2,189 |
|
|
|
(10,458 |
) |
Treasury stock, at cost; 19,185 shares in 2009 and 84,191 shares in 2008 |
|
|
(501 |
) |
|
|
(2,206 |
) |
Total shareholders’ equity |
|
|
252,146 |
|
|
|
235,111 |
|
Total liabilities and shareholders’ equity |
|
$ |
2,888,065 |
|
|
$ |
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, |
|
|
|
except per share amounts) |
|
|
|
Three Months |
|
|
Nine Months |
|
Periods ended September 30, |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
24,303 |
|
|
$ |
25,520 |
|
|
$ |
72,589 |
|
|
$ |
74,896 |
|
Interest on securities: |
Taxable |
|
|
7,028 |
|
|
|
8,504 |
|
|
|
23,065 |
|
|
|
25,222 |
|
|
Nontaxable |
|
|
781 |
|
|
|
778 |
|
|
|
2,339 |
|
|
|
2,344 |
|
Dividends on corporate stock and Federal Home Loan Bank stock |
|
|
63 |
|
|
|
407 |
|
|
|
190 |
|
|
|
1,516 |
|
Other interest income |
|
|
13 |
|
|
|
128 |
|
|
|
39 |
|
|
|
318 |
|
Total interest income |
|
|
32,188 |
|
|
|
35,337 |
|
|
|
98,222 |
|
|
|
104,296 |
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
7,577 |
|
|
|
9,884 |
|
|
|
25,605 |
|
|
|
31,031 |
|
Federal Home Loan Bank advances |
|
|
7,094 |
|
|
|
8,011 |
|
|
|
21,433 |
|
|
|
23,104 |
|
Junior subordinated debentures |
|
|
545 |
|
|
|
524 |
|
|
|
1,503 |
|
|
|
1,371 |
|
Other interest expense |
|
|
246 |
|
|
|
274 |
|
|
|
735 |
|
|
|
863 |
|
Total interest expense |
|
|
15,462 |
|
|
|
18,693 |
|
|
|
49,276 |
|
|
|
56,369 |
|
Net interest income |
|
|
16,726 |
|
|
|
16,644 |
|
|
|
48,946 |
|
|
|
47,927 |
|
Provision for loan losses |
|
|
1,800 |
|
|
|
1,100 |
|
|
|
6,500 |
|
|
|
2,950 |
|
Net interest income after provision for loan losses |
|
|
14,926 |
|
|
|
15,544 |
|
|
|
42,446 |
|
|
|
44,977 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth management services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust and investment advisory fees |
|
|
4,717 |
|
|
|
5,238 |
|
|
|
13,241 |
|
|
|
15,901 |
|
Mutual fund fees |
|
|
1,089 |
|
|
|
1,383 |
|
|
|
2,997 |
|
|
|
4,169 |
|
Financial planning, commissions and other service fees |
|
|
243 |
|
|
|
570 |
|
|
|
1,178 |
|
|
|
2,029 |
|
Wealth management services |
|
|
6,049 |
|
|
|
7,191 |
|
|
|
17,416 |
|
|
|
22,099 |
|
Service charges on deposit accounts |
|
|
1,257 |
|
|
|
1,215 |
|
|
|
3,571 |
|
|
|
3,583 |
|
Merchant processing fees |
|
|
2,619 |
|
|
|
2,221 |
|
|
|
6,054 |
|
|
|
5,407 |
|
Income from bank-owned life insurance |
|
|
451 |
|
|
|
452 |
|
|
|
1,342 |
|
|
|
1,352 |
|
Net gains on loan sales and commissions on loans originated for others |
|
|
591 |
|
|
|
239 |
|
|
|
3,187 |
|
|
|
1,163 |
|
Net realized gains on securities |
|
|
– |
|
|
|
– |
|
|
|
314 |
|
|
|
1,909 |
|
Net unrealized gains (losses) on interest rate swaps |
|
|
92 |
|
|
|
(24 |
) |
|
|
493 |
|
|
|
121 |
|
Other income |
|
|
445 |
|
|
|
278 |
|
|
|
1,329 |
|
|
|
1,148 |
|
Noninterest income, excluding other-than-temporary impairment losses |
|
|
11,504 |
|
|
|
11,572 |
|
|
|
33,706 |
|
|
|
36,782 |
|
Total other-than-temporary impairment losses on securities |
|
|
(2,293 |
) |
|
|
(982 |
) |
|
|
(6,537 |
) |
|
|
(2,989 |
) |
Portion of loss recognized in other comprehensive income (before taxes) |
|
|
1,826 |
|
|
|
– |
|
|
|
4,079 |
|
|
|
– |
|
Net impairment losses recognized in earnings |
|
|
(467 |
) |
|
|
(982 |
) |
|
|
(2,458 |
) |
|
|
(2,989 |
) |
Total noninterest income |
|
|
11,037 |
|
|
|
10,590 |
|
|
|
31,248 |
|
|
|
33,793 |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
10,416 |
|
|
|
10,580 |
|
|
|
31,250 |
|
|
|
31,334 |
|
Net occupancy |
|
|
1,232 |
|
|
|
1,123 |
|
|
|
3,580 |
|
|
|
3,325 |
|
Equipment |
|
|
916 |
|
|
|
956 |
|
|
|
2,927 |
|
|
|
2,877 |
|
Merchant processing costs |
|
|
2,213 |
|
|
|
1,857 |
|
|
|
5,136 |
|
|
|
4,523 |
|
Outsourced services |
|
|
683 |
|
|
|
700 |
|
|
|
2,037 |
|
|
|
2,078 |
|
Legal, audit and professional fees |
|
|
546 |
|
|
|
626 |
|
|
|
1,885 |
|
|
|
1,599 |
|
FDIC deposit insurance costs |
|
|
808 |
|
|
|
265 |
|
|
|
3,602 |
|
|
|
772 |
|
Advertising and promotion |
|
|
422 |
|
|
|
376 |
|
|
|
1,214 |
|
|
|
1,229 |
|
Amortization of intangibles |
|
|
303 |
|
|
|
320 |
|
|
|
919 |
|
|
|
972 |
|
Other expenses |
|
|
1,653 |
|
|
|
1,668 |
|
|
|
5,361 |
|
|
|
4,958 |
|
Total noninterest expense |
|
|
19,192 |
|
|
|
18,471 |
|
|
|
57,911 |
|
|
|
53,667 |
|
Income before income taxes |
|
|
6,771 |
|
|
|
7,663 |
|
|
|
15,783 |
|
|
|
25,103 |
|
Income tax expense |
|
|
1,858 |
|
|
|
1,623 |
|
|
|
4,435 |
|
|
|
7,152 |
|
Net income |
|
$ |
4,913 |
|
|
$ |
6,040 |
|
|
$ |
11,348 |
|
|
$ |
17,951 |
|
Weighted average shares outstanding – basic |
|
|
16,016.8 |
|
|
|
13,409.5 |
|
|
|
15,981.3 |
|
|
|
13,383.0 |
|
Weighted average shares outstanding – diluted |
|
|
16,074.5 |
|
|
|
13,588.3 |
|
|
|
16,029.5 |
|
|
|
13,564.5 |
|
Per share information: |
Basic earnings per share |
|
$ |
0.31 |
|
|
$ |
0.45 |
|
|
$ |
0.71 |
|
|
$ |
1.34 |
|
|
Diluted earnings per share |
|
$ |
0.31 |
|
|
$ |
0.44 |
|
|
$ |
0.71 |
|
|
$ |
1.32 |
|
|
Cash dividends declared per share |
|
$ |
0.21 |
|
|
$ |
0.21 |
|
|
$ |
0.63 |
|
|
$ |
0.62 |
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements. |
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
|
(Dollars in thousands) |
|
|
|
|
|
|
|
(unaudited) |
|
Nine months ended September 30, |
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
Net income |
|
$ |
11,348 |
|
|
$ |
17,951 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
6,500 |
|
|
|
2,950 |
|
Depreciation of premises and equipment |
|
|
2,344 |
|
|
|
2,275 |
|
Net amortization of premium and discount |
|
|
291 |
|
|
|
692 |
|
Net amortization of intangibles |
|
|
919 |
|
|
|
972 |
|
Share-based compensation |
|
|
543 |
|
|
|
407 |
|
Earnings from bank-owned life insurance |
|
|
(1,342 |
) |
|
|
(1,352 |
) |
Net gains on loan sales and commissions on loans originated for others |
|
|
(3,187 |
) |
|
|
(1,163 |
) |
Net realized gains on securities |
|
|
(314 |
) |
|
|
(1,909 |
) |
Net impairment losses recognized in earnings |
|
|
2,458 |
|
|
|
2,989 |
|
Net unrealized gains on interest rate swap contracts |
|
|
(493 |
) |
|
|
(121 |
) |
Proceeds from sales of loans |
|
|
205,588 |
|
|
|
47,396 |
|
Loans originated for sale |
|
|
(206,457 |
) |
|
|
(45,747 |
) |
Decrease in accrued interest receivable, excluding purchased interest |
|
|
1,293 |
|
|
|
644 |
|
Increase in other assets |
|
|
(4,040 |
) |
|
|
(2,469 |
) |
Increase (decrease) in accrued expenses and other liabilities |
|
|
944 |
|
|
|
(1,122 |
) |
Other, net |
|
|
1 |
|
|
|
(6 |
) |
Net cash provided by operating activities |
|
|
16,396 |
|
|
|
22,387 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of: |
Mortgage-backed securities available for sale |
|
|
– |
|
|
|
(170,332 |
) |
|
Other investment securities available for sale |
|
|
(304 |
) |
|
|
(1,025 |
) |
Proceeds from sale of: |
Mortgage-backed securities available for sale |
|
|
– |
|
|
|
64,321 |
|
|
Other investment securities available for sale |
|
|
1,604 |
|
|
|
– |
|
Maturities and principal payments of: |
Mortgage-backed securities available for sale |
|
|
133,932 |
|
|
|
70,434 |
|
|
Other investment securities available for sale |
|
|
17,000 |
|
|
|
13,976 |
|
Purchase of Federal Home Loan Bank stock |
|
|
– |
|
|
|
(10,283 |
) |
Net increase in loans |
|
|
(66,797 |
) |
|
|
(167,605 |
) |
Proceeds from sale of portfolio loans |
|
|
– |
|
|
|
18,047 |
|
Purchases of loans, including purchased interest |
|
|
(4,716 |
) |
|
|
(46,324 |
) |
Proceeds from the sale of property acquired through foreclosure or repossession |
|
|
607 |
|
|
|
– |
|
Proceeds from the sale of premises and equipment, net of selling costs |
|
|
– |
|
|
|
1,433 |
|
Purchases of premises and equipment |
|
|
(3,454 |
) |
|
|
(2,602 |
) |
Equity investment in capital trusts |
|
|
– |
|
|
|
(310 |
) |
Payment of deferred acquisition obligation |
|
|
(2,509 |
) |
|
|
(8,065 |
) |
Net cash provided by (used in) investing activities |
|
|
75,363 |
|
|
|
(238,335 |
) |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements. |
|
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
|
(Dollars in thousands) |
|
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) |
|
|
|
|
|
(unaudited) |
|
Nine months ended September 30, |
|
2009 |
|
|
2008 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
Net increase in deposits |
|
$ |
103,302 |
|
|
$ |
91,046 |
|
Net (decrease) increase in other borrowings, excluding deferred acquisition obligation |
|
|
(3,606 |
) |
|
|
305 |
|
Proceeds from Federal Home Loan Bank advances |
|
|
261,670 |
|
|
|
795,421 |
|
Repayment of Federal Home Loan Bank advances |
|
|
(454,628 |
) |
|
|
(664,387 |
) |
Issuance of treasury stock, including deferred compensation plan activity |
|
|
52 |
|
|
|
43 |
|
Net proceeds from the issuance of common stock under dividend reinvestment plan |
|
|
833 |
|
|
|
596 |
|
Net proceeds from the exercise of stock options and issuance of other |
|
|
|
|
|
|
|
|
compensation-related equity instruments |
|
|
141 |
|
|
|
179 |
|
Tax benefit from stock option exercises and issuance of other compensation-related equity instruments |
|
|
363 |
|
|
|
199 |
|
Proceeds from the issuance of junior subordinated debentures |
|
|
– |
|
|
|
10,016 |
|
Cash dividends paid |
|
|
(10,070 |
) |
|
|
(8,174 |
) |
Net cash (used in) provided by financing activities |
|
|
(101,943 |
) |
|
|
225,244 |
|
Net (decrease) increase in cash and cash equivalents |
|
|
(10,184 |
) |
|
|
9,296 |
|
Cash and cash equivalents at beginning of period |
|
|
58,190 |
|
|
|
41,112 |
|
Cash and cash equivalents at end of period |
|
$ |
48,006 |
|
|
$ |
50,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash Investing and Financing Activities: |
Loans charged off |
|
$ |
3,947 |
|
|
$ |
818 |
|
|
Loans transferred to other real estate owned |
|
|
1,423 |
|
|
|
113 |
|
|
Securities proceeds due from broker |
|
|
– |
|
|
|
5,638 |
|
|
Reclassification of other-than-temporary impairment |
|
|
|
|
|
|
|
|
|
charge effective January 1, 2009 (see Note 4) |
|
|
1,859 |
|
|
|
– |
|
Supplemental Disclosures: |
Interest payments |
|
|
47,367 |
|
|
|
56,034 |
|
|
Income tax payments |
|
|
7,225 |
|
|
|
10,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 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 September 30, 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. The Corporation has evaluated subsequent events through the filing date of this quarterly report.
(2) Recently Issued Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS No. 168”). The
FASB Accounting Standards Codification™ (“Codification” or “ASC”) was effective for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date, the Codification became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities and replaced all then-existing non-SEC accounting and reporting standards. Rules
and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other nongrandfathered non-SEC accounting literature not included in the Codification became nonauthoritative.
ASC 260, “Earnings Per Share,” incorporates former FASB Staff Position No. Emerging Issues Task Force 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” which 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 January 1, 2009 adoption of these provisions of ASC 260 did not have a material impact on the Corporation’s financial position or results of operations.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
(Continued) |
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
ASC 855, “Subsequent Events,” (formerly SFAS No. 165, “Subsequent Events”) was issued in May 2009 and was effective for interim and annual financial periods ending after June 15, 2009. ASC 855 established general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, ASC 855 set forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements
and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of ASC 855 did not have a material impact on the Corporation’s financial position or results of operations.
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. 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
Corporation is currently evaluating the impact of adopting these provisions of ASC 260 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 pending provisions of ASC 810 revise
former FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” and changes 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 Corporation is currently evaluating the impact of adopting these pending provisions of ASC 810 on its consolidated financial statements.
(3) Federal Home Loan Bank Stock
The Corporation is required to maintain a level of investment in Federal Home Loan Bank of Boston (“FHLB”) stock based on the level of its FHLB advances. As of September 30, 2009 and December 31, 2008, the Corporation’s investment in FHLB stock totaled $42.0 million. At
September 30, 2009, the Corporation’s investment in FHLB stock exceeded its required investment by $8 million. No market exists for shares of the FHLB. FHLB stock may be redeemed at par value five years following termination of FHLB membership, subject to limitations which may be imposed by the FHLB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLB. While the Corporation currently has no intentions to terminate its FHLB
membership, the ability to redeem its investment in FHLB stock is subject to the conditions imposed by the FHLB. On April 10, 2009, the FHLB reiterated to its members that it is focusing on preserving capital in response to ongoing market volatility including the suspension of its quarterly dividend and the extension of a moratorium on excess stock repurchases.
On August 12, 2009, the FHLB filed its Form 10-Q with the SEC, for the quarterly period ended June 30, 2009. The FHLB reported a net loss of $4.2 million and $87.6 million for the three and six months ended June 30, 2009, respectively. This compared to net income of $52.5 million
and $108.6 million for the same periods in 2008. On October 29, 2009, the FHLB released its third quarter results to its members. The FHLB reported a net loss of $105.4 million for the third quarter of 2009, compared to net income of $49.7 million for the same period in 2008. Additionally, it reported total capital of $2.6 billion at September 30, 2009, compared to $3.4 billion at December 31, 2008. These results reflected the
impact on earnings and accumulated other comprehensive loss of fair value declines associated with securities deemed to be other-than-temporarily impaired. Despite these negative trends, the FHLB exceeded the regulatory capital requirements promulgated by the Federal Home Loan Banks Act and the Federal Housing Financing Agency. The FHLB has the capacity to issue additional debt if necessary to raise cash. If needed, the FHLB also has the ability to secure funding available to
government-sponsored entities (“GSEs”) through the U.S. Treasury. Based on the capital adequacy and the liquidity position of the FHLB, management believes there is no impairment related to the carrying amount of the Corporation’s FHLB stock as of September 30, 2009. Further deterioration of the FHLB’s capital levels may require the Corporation to deem its restricted investment in FHLB
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
(Continued) |
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
stock to be other-than-temporarily impaired. If evidence of impairment exists in the future, the FHLB stock would reflect fair value using either observable or unobservable inputs.
(4) Securities
Securities are summarized as follows:
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
September 30, 2009 |
|
Cost (1) |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Securities Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government-sponsored enterprises |
|
$ |
41,555 |
|
|
$ |
4,115 |
|
|
$ |
− |
|
|
$ |
45,670 |
|
Mortgage-backed securities issued by U.S. government |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agencies and U.S. government-sponsored enterprises |
|
|
540,673 |
|
|
|
22,716 |
|
|
|
(1,158 |
) |
|
|
562,231 |
|
States and political subdivisions |
|
|
80,664 |
|
|
|
4,680 |
|
|
|
(27 |
) |
|
|
85,317 |
|
Trust preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual name issuers |
|
|
30,554 |
|
|
|
− |
|
|
|
(11,415 |
) |
|
|
19,139 |
|
Collateralized debt obligations |
|
|
5,675 |
|
|
|
− |
|
|
|
(4,185 |
) |
|
|
1,490 |
|
Corporate bonds |
|
|
13,273 |
|
|
|
1,519 |
|
|
|
− |
|
|
|
14,792 |
|
Common stocks |
|
|
658 |
|
|
|
28 |
|
|
|
− |
|
|
|
686 |
|
Perpetual preferred stocks |
|
|
3,354 |
|
|
|
161 |
|
|
|
(194 |
) |
|
|
3,321 |
|
Total securities available for sale |
|
$ |
716,406 |
|
|
$ |
33,219 |
|
|
$ |
(16,979 |
) |
|
$ |
732,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Net of other-than-temporary impairment write-downs recognized in earnings, other than such noncredit-related amounts reversed on January 1, 2009. |
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
December 31, 2008 |
|
Cost (1) |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Securities Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government-sponsored enterprises |
|
$ |
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 $594.8 million and $712.8 million were pledged in compliance with state regulations concerning trust powers and to secure Treasury Tax and Loan deposits, FHLB advances, other borrowings, and certain public deposits at September 30, 2009 and December 31,
2008, respectively. In addition, securities available for sale with a fair value of $22.4 million and $16.1 million were pledged for potential use at the Federal Reserve Bank discount window at September 30, 2009 and December 31, 2008, respectively. There were no borrowings from the Federal Reserve Bank at either date. Securities available for sale with a fair value of $7.8 million and $9.0 million were designated in rabbi trusts for nonqualified
retirement plans at September 30, 2009 and December 31, 2008, respectively. In addition, securities available for sale with a fair value of $2.4 million and $569 thousand were pledged as collateral to secure certain interest rate swap agreements at September 30, 2009 and December 31, 2008, respectively.
Washington Trust elected to early adopt the provisions of FASB Staff Position Nos. FAS 115-2 and FAS 124-2,
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
(Continued) |
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
“Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP Nos. FAS 115-2 and FAS 124-2”). FSP Nos. FAS 115-2 and FAS 124-2 is now a sub-topic within ASC 320, “Investments – Debt and Equity Securities.” These
provisions 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, the credit-related
portion of other-than-temporary impairment losses is recognized in earnings while the noncredit-related portion is recognized in other comprehensive income, net of related taxes.
As a result of adopting these provisions of ASC 320, “Investments – Debt and Equity Securities” and as more fully described below, in the first quarter of 2009 a $1.4 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. In addition, Washington Trust reclassified the noncredit-related portion of an other-than-temporary impairment loss previously recognized in earnings in the fourth quarter of 2008 on the Corporation’s other pooled trust preferred debt security. 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. In the third quarter of 2009, a $467 thousand credit-related impairment loss was recognized in earnings and a $1.8 million noncredit-related impairment loss was recognized
in other comprehensive income for this pooled trust preferred debt security.
The following table summarizes the credit-related portion of other-than-temporary impairment losses on securities recognized in earnings in the periods indicated:
(Dollars in thousands) |
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
Periods ended September 30, |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Trust preferred debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations |
|
$ |
(467 |
) |
|
$ |
– |
|
|
$ |
(1,817 |
) |
|
$ |
– |
|
Common and perpetual preferred stocks: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (financials) |
|
|
– |
|
|
|
– |
|
|
|
(146 |
) |
|
|
– |
|
Fannie Mae and Freddie Mac perpetual preferred stocks |
|
|
– |
|
|
|
(982 |
) |
|
|
– |
|
|
|
(1,412 |
) |
Other perpetual preferred stocks (financials) |
|
|
– |
|
|
|
– |
|
|
|
(495 |
) |
|
|
(1,577 |
) |
Total |
|
$ |
(467 |
) |
|
$ |
(982 |
) |
|
$ |
(2,458 |
) |
|
$ |
(2,989 |
) |
The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at September 30, 2009 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:
(Dollars in thousands) |
|
Three |
|
|
Nine |
|
|
|
Months |
|
|
Months |
|
Periods ended September 30, |
|
2009 |
|
|
2009 |
|
Balance at beginning of period |
|
$ |
1,350 |
|
|
$ |
– |
|
Credit-related impairment loss on debt securities for which an |
|
|
|
|
|
|
|
|
other-than-temporary impairment was not previously recognized |
|
|
467 |
|
|
|
1,817 |
|
Balance at end of period |
|
$ |
1,817 |
|
|
$ |
1,817 |
|
For the three and nine months ended September 30, 2009, credit-related impairment losses of $467 thousand and $1.8 million, respectively, were recognized in earnings on pooled trust preferred debt securities not intended to be sold and where it is not more likely than not that the Corporation will
be required to sell these securities before recovery of the cost basis, which may be maturity. 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
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
(Continued) |
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
trust preferred debt tranche at the time of measurement. Prospective deferral, default and recovery estimates affecting projected cash flows were based on analysis of the underlying financial condition of individual issuers, and took into account capital adequacy, credit quality, lending concentrations,
and other factors. All cash flow estimates were based on the underlying security’s tranche structure and contractual rate and maturity terms. The present value of the expected cash flows was compared to the current outstanding balance of the tranche to determine the ratio of the estimated present value of expected cash flows to the total current balance for the tranche. This ratio was then multiplied by the principal balance of Washington Trust’s holding to determine
the credit-related impairment loss. The estimates used in the determination of the present value of the expected cash flows are susceptible to changes in future periods, which could result in additional credit-related impairment losses.
The following table summarizes temporarily impaired securities as of September 30, 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 September 30, 2009 |
# |
Value |
Losses |
# |
Value |
Losses |
# |
Value |
Losses |
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
issued by U.S. government agencies and U.S. government-sponsored enterprises |
8 |
$3,086 |
$24 |
26 |
$44,758 |
$1,134 |
34 |
$47,844 |
$1,158 |
States and |
|
|
|
|
|
|
|
|
|
political subdivisions |
– |
– |
– |
3 |
2,239 |
27 |
3 |
2,239 |
27 |
Trust preferred securities: |
|
|
|
|
|
|
|
|
|
Individual name issuers |
– |
– |
– |
11 |
19,138 |
11,415 |
11 |
19,138 |
11,415 |
Collateralized debt obligations |
– |
– |
– |
2 |
1,490 |
4,185 |
2 |
1,490 |
4,185 |
Subtotal, debt securities |
8 |
3,086 |
24 |
42 |
67,625 |
16,761 |
50 |
70,711 |
16,785 |
Perpetual preferred stocks |
1 |
422 |
78 |
3 |
884 |
116 |
4 |
1,306 |
194 |
Total temporarily |
|
|
|
|
|
|
|
|
|
impaired securities |
9 |
$3,508 |
$102 |
45 |
$68,509 |
$16,877 |
54 |
$72,017 |
$16,979 |
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
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
(Continued) |
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
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.
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 $1.2 million at September 30, 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 September 30, 2009.
Trust preferred debt securities of individual name issuers:
Included in debt securities in an unrealized loss position at September 30, 2009 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 $11.4 million at September 30, 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. Based on the information available through the filing date of this report, all individual name trust preferred debt securities held in our portfolio continue to accrue and make payments as expected with no payment deferrals or defaults
on the part of the issuers. As of September 30, 2009, trust preferred debt securities with a carrying value of $6.7 million and unrealized losses of $5.1 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 quarterly 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 at maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2009.
Trust preferred debt securities in the form of collateralized debt obligations:
At September 30, 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 of these pooled trust preferred securities, Washington Trust’s investment is senior to one or more subordinated tranches which have first loss exposure. Valuations of the pooled trust preferred holdings are dependent in part on cash flows from underlying issuers. Unexpected cash flow disruptions could have an adverse impact on the fair value and performance of pooled trust preferred securities. Management believes
the unrealized losses on these pooled trust preferred securities primarily reflect 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
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
(Continued) |
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
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 three months 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. 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. 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. This investment security was placed on nonaccrual status as of March 31, 2009 and was current with respect to its quarterly debt service (interest) payments as of the most recent quarterly payment date of October 15, 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 $1.9 million. This investment security was also placed on nonaccrual status as of December 31, 2008. In connection with the early adoption of 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 has concluded that there was no credit loss portion of the other-than-temporary impairment charge as of December 31, 2008. 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 the amount of $1.3 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 three months ended September 30, 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 will not receive all contractual amounts due under the instrument and will 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.
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 September 30, 2009.
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 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 September 30, 2009, the Corporation had four perpetual preferred stock holdings of financial and utility companies with a total fair value of $1.3 million and unrealized losses of $194 thousand, or 13% of their aggregate
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
(Continued) |
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
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 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 September 30, 2009.
(5) Loan Portfolio
The following is a summary of loans:
(Dollars in thousands) |
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages (1) |
|
$ |
484,478 |
|
|
|
25 |
% |
|
$ |
407,904 |
|
|
|
22 |
% |
Construction and development (2) |
|
|
68,069 |
|
|
|
4 |
% |
|
|
49,599 |
|
|
|
3 |
% |
Other (3) |
|
|
423,775 |
|
|
|
22 |
% |
|
|
422,810 |
|
|
|
23 |
% |
Total commercial |
|
|
976,322 |
|
|
|
51 |
% |
|
|
880,313 |
|
|
|
48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages (4) |
|
|
595,270 |
|
|
|
32 |
% |
|
|
626,663 |
|
|
|
34 |
% |
Homeowner construction |
|
|
9,303 |
|
|
|
– |
% |
|
|
15,389 |
|
|
|
1 |
% |
Total residential real estate |
|
|
604,573 |
|
|
|
32 |
% |
|
|
642,052 |
|
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines (5) |
|
|
200,512 |
|
|
|
11 |
% |
|
|
170,662 |
|
|
|
9 |
% |
Home equity loans (5) |
|
|
66,439 |
|
|
|
3 |
% |
|
|
89,297 |
|
|
|
5 |
% |
Other |
|
|
58,719 |
|
|
|
3 |
% |
|
|
56,830 |
|
|
|
3 |
% |
Total consumer |
|
|
325,670 |
|
|
|
17 |
% |
|
|
316,789 |
|
|
|
17 |
% |
Total loans (6) |
|
$ |
1,906,565 |
|
|
|
100 |
% |
|
$ |
1,839,154 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Amortizing mortgages and lines of credit, primarily secured by income producing property. $141.7 million of these loans at September 30, 2009 were pledged as collateral for Federal Home Loan Bank 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 September 30, 2009, $40.4 million of these loans were pledged as collateral for Federal Home Loan Bank borrowings and $86.1 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 was pledged as collateral for Federal Home Loan Bank borrowings (See Note 7). |
(5) |
A significant portion of these loans was pledged as collateral for Federal Home Loan Bank borrowings. (See Note 7) |
(6) |
Net of unamortized loan origination costs, net of fees, totaling $39 thousand at September 30, 2009 and net of unamortized loan origination fees, net of costs $2 thousand at December 31, 2008. Also includes $250 thousand and $259 thousand of net discounts on purchased loans at September 30, 2009 and December 31, 2008, respectively. |
Nonaccrual Loans
Nonaccrual loans totaled $25.2 million at September 30, 2009, compared to $7.8 million at December 31, 2008. This reflects a $13.3 million increase in nonaccrual commercial loans and a $3.6 million increase in nonaccrual residential mortgages.
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 |
|
|
Nine months |
|
Periods ended September 30, |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Balance at beginning of period |
|
$ |
26,051 |
|
|
$ |
21,963 |
|
|
$ |
23,725 |
|
|
$ |
20,277 |
|
Provision charged to expense |
|
|
1,800 |
|
|
|
1,100 |
|
|
|
6,500 |
|
|
|
2,950 |
|
Recoveries of loans previously charged off |
|
|
18 |
|
|
|
60 |
|
|
|
153 |
|
|
|
222 |
|
Loans charged off |
|
|
(1,438 |
) |
|
|
(492 |
) |
|
|
(3,947 |
) |
|
|
(818 |
) |
Balance at end of period |
|
$ |
26,431 |
|
|
$ |
22,631 |
|
|
$ |
26,431 |
|
|
$ |
22,631 |
|
(7) Borrowings
Federal Home Loan Bank Advances
Advances payable to the FHLB are summarized as follows:
(Dollars in thousands) |
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
FHLB advances |
|
$ |
636,660 |
|
|
$ |
829,626 |
|
In addition to outstanding advances, the Corporation also has access to an unused line of credit amounting to $8.0 million at September 30, 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, commercial mortgages and other commercial loans, U.S. government 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 September 30, 2009. Included in the collateral were securities available for sale with a fair value of $396.0 million and $512.3 million that were specifically pledged to secure FHLB borrowings at September 30, 2009 and December 31, 2008, respectively. See Note 5 for discussion on loans pledged as collateral for FHLB borrowings. 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) |
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Treasury, Tax and Loan demand note balance |
|
$ |
795 |
|
|
$ |
4,382 |
|
Deferred acquisition obligations |
|
|
– |
|
|
|
2,506 |
|
Securities sold under repurchase agreements |
|
|
19,500 |
|
|
|
19,500 |
|
Other |
|
|
333 |
|
|
|
355 |
|
Other borrowings |
|
$ |
20,628 |
|
|
$ |
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.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
(Continued) |
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
(8) 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 nine months ended September 30,
2009. As of September 30, 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 September 30, 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 September 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
242,346 |
|
|
|
12.31 |
% |
|
$ |
157,506 |
|
|
|
8.00 |
% |
|
$ |
196,882 |
|
|
|
10.00 |
% |
Bank |
|
$ |
240,761 |
|
|
|
12.24 |
% |
|
$ |
157,367 |
|
|
|
8.00 |
% |
|
$ |
196,709 |
|
|
|
10.00 |
% |
Tier 1 Capital (to Risk-Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
217,710 |
|
|
|
11.06 |
% |
|
$ |
78,753 |
|
|
|
4.00 |
% |
|
$ |
118,129 |
|
|
|
6.00 |
% |
Bank |
|
$ |
216,146 |
|
|
|
10.99 |
% |
|
$ |
78,684 |
|
|
|
4.00 |
% |
|
$ |
118,026 |
|
|
|
6.00 |
% |
Tier 1 Capital (to Average Assets): (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
217,710 |
|
|
|
7.68 |
% |
|
$ |
113,461 |
|
|
|
4.00 |
% |
|
$ |
141,826 |
|
|
|
5.00 |
% |
Bank |
|
$ |
216,146 |
|
|
|
7.63 |
% |
|
$ |
113,356 |
|
|
|
4.00 |
% |
|
$ |
141,695 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
235,728 |
|
|
|
12.54 |
% |
|
$ |
150,339 |
|
|
|
8.00 |
% |
|
$ |
187,923 |
|
|
|
10.00 |
% |
Bank |
|
$ |
237,023 |
|
|
|
12.62 |
% |
|
$ |
150,201 |
|
|
|
8.00 |
% |
|
$ |
187,751 |
|
|
|
10.00 |
% |
Tier 1 Capital (to Risk-Weighted Assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
212,231 |
|
|
|
11.29 |
% |
|
$ |
75,169 |
|
|
|
4.00 |
% |
|
$ |
112,754 |
|
|
|
6.00 |
% |
Bank |
|
$ |
213,547 |
|
|
|
11.37 |
% |
|
$ |
75,101 |
|
|
|
4.00 |
% |
|
$ |
112,651 |
|
|
|
6.00 |
% |
Tier 1 Capital (to Average Assets): (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
212,231 |
|
|
|
7.53 |
% |
|
$ |
112,799 |
|
|
|
4.00 |
% |
|
$ |
140,999 |
|
|
|
5.00 |
% |
Bank |
|
$ |
213,547 |
|
|
|
7.58 |
% |
|
$ |
112,724 |
|
|
|
4.00 |
% |
|
$ |
140,905 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation’s capital ratios at September 30, 2009 place the Corporation in the “well-capitalized” category according to regulatory standards.
As of September 30, 2009, Bancorp has sponsored the creation of three statutory trusts for the sole purpose of issuing trust preferred securities and investing the proceeds in junior subordinated debentures of the Bancorp. In accordance with the provisions of ASC 810, “Consolidations,”
(formerly FASB Interpretation 46-R, “Consolidation of Variable Interest Entities – Revised,”) these statutory trusts created by Bancorp are not consolidated into the Corporation’s financial statements; however, the Corporation reflects the amounts of junior subordinated debentures payable to the preferred shareholders of statutory trusts as debt in its financial statements. The trust preferred securities qualify as Tier 1 capital.
On March 1, 2005, the Federal Reserve Board issued a final rule that would retain trust preferred securities in Tier 1 capital of bank holding companies, but with stricter quantitative limits and clearer standards. On March 17, 2009, the Federal Reserve Board announced the adoption of a final
rule that delays until March 31, 2011, the effective date of new limits whereby the aggregate amount of trust preferred securities would be limited to 25% of Tier 1 capital elements, net of goodwill. The Corporation has evaluated the potential impact of such a change on its Tier 1 capital ratio and has concluded that the regulatory capital treatment of the trust preferred securities in the Corporation’s total capital ratio would be unchanged.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
(Continued) |
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
(9) Financial Instruments with Off-Balance Sheet Risk and Derivative Financial Instruments
Effective January 1, 2009, Washington Trust adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 is now a sub-topic within ASC 815, “Derivatives and Hedging.” These provisions
changed the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosures about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedge items are accounted for under former SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance
and cash flows. The adoption of these provisions did not have a material impact on the Corporation’s consolidated financial statement. The Corporation complied with this guidance and has provided the required disclosures below.
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, 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:
(Dollars in thousands) |
|
September 30,
2009 |
|
|
December 31, 2008 |
|
Financial instruments whose contract amounts represent credit risk: |
|
|
|
|
|
|
Commitments to extend credit: |
|
|
|
|
|
|
Commercial loans |
|
$ |
187,442 |
|
|
$ |
206,515 |
|
Home equity lines |
|
|
181,695 |
|
|
|
178,371 |
|
Other loans |
|
|
20,902 |
|
|
|
22,979 |
|
Standby letters of credit |
|
|
9,210 |
|
|
|
7,679 |
|
Financial instruments whose notional amounts exceed the amount of credit risk: |
|
|
|
|
|
|
|
|
Forward loan commitments: |
|
|
|
|
|
|
|
|
Commitments to originate fixed rate mortgage loans to be sold |
|
|
13,057 |
|
|
|
25,662 |
|
Commitments to sell fixed rate mortgage loans |
|
|
20,167 |
|
|
|
28,192 |
|
Customer related derivative contracts: |
|
|
|
|
|
|
|
|
Interest rate swaps with customers |
|
|
41,453 |
|
|
|
13,981 |
|
Mirror swaps with counterparties |
|
|
41,453 |
|
|
|
13,981 |
|
Interest rate risk management contract: |
|
|
|
|
|
|
|
|
Interest rate swap |
|
|
10,000 |
|
|
|
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 up to a maximum stated amount 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 September 30, 2009 and December 31, 2008, the maximum potential amount of
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
(Continued) |
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
undiscounted future payments, not reduced by amounts that may be recovered, totaled $9.2 million and $7.7 million, respectively. At September 30, 2009 and December 31, 2008, there was no liability to beneficiaries resulting from standby letters of credit. Fee income on
standby letters of credit for the three and nine months ended September 30, 2009 totaled $19 thousand and $77 thousand, respectively. Comparable amounts for the same periods in 2008 were $21 thousand and $69 thousand, respectively.
At September 30, 2009, 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.
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.
In April 2008, the Bancorp entered into an interest rate swap contract with Lehman Brothers Special Financing, Inc. to hedge the interest rate risk associated with $10 million of the variable rate junior subordinated debentures. The interest rate swap contract has a notional amount of $10 million
and matures in 2013. At inception, the swap was intended to convert the debt from variable rate to fixed rate and qualify for cash flow hedge accounting. In September 2008, Lehman Brothers Holdings Inc., the parent guarantor of the swap counterparty, filed for bankruptcy protection, followed in October 2008 by the swap counterparty itself. Due to the change in the creditworthiness of the derivative counterparty, the hedging relationship was deemed to be not highly effective. As
a result, cash flow hedge accounting was discontinued prospectively and all subsequent changes in fair value of the interest rate swap were recognized directly in earnings as noninterest income. As of the date of discontinuance in September 2008, Washington Trust had a net unrealized gain on the swap contract of $30 thousand, which was recorded in accumulated other comprehensive loss, net of taxes. This amount was subsequently reclassified into earnings through amortization during the
first quarter of 2009. On March 31, 2009, this interest rate swap contract was reassigned to a new creditworthy counterparty, unrelated to the prior counterparty. On May 1, 2009, this interest rate swap contract qualified for cash flow hedge accounting to hedge the interest rate risk associated with $10 million of the variable rate junior subordinated debentures. Effective May 1, 2009, the effective portion of changes in fair value of the swap is recorded in
other comprehensive income and subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the variable rate debentures affect earnings. The ineffective portion of changes in fair value is recognized directly in earnings as interest expense.
The Corporation 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 September 30, 2009 and December 31, 2008, Washington Trust had interest rate swap contracts with commercial
loan borrowers with notional amounts of $41.5 million and $14.0 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.
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.
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
(Continued) |
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
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 |
|
|
|
|
Fair Value |
|
|
|
Fair Value |
|
|
Balance Sheet Location |
|
Sept. 30, 2009 |
|
|
Dec. 31, 2008 |
|
Balance Sheet Location |
|
Sept. 30, 2009 |
|
|
Dec. 31, 2008 |
|
Derivatives designated as cash
flow hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate risk management contract: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
|
$ |
– |
|
|
$ |
– |
|
Accrued expenses |
|
$ |
500 |
|
|
$ |
– |
|
|
|
|
|
|
|
|
|
|
|
& other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated
as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward loan commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to originate fixed rate mortgage loans to be sold |
Other assets |
|
|
131 |
|
|
|
152 |
|
Accrued expenses & other liabilities |
|
|
1 |
|
|
|
18 |
|
Commitments to sell fixed rate mortgage loans |
Other assets |
|
|
1 |
|
|
|
18 |
|
Accrued expenses & other liabilities |
|
|
243 |
|
|
|
177 |
|
Customer related derivative contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps with customers |
Other assets |
|
|
2,049 |
|
|
|
1,413 |
|
|
|
|
– |
|
|
|
– |
|
Mirror swaps with counterparties |
|
|
|
– |
|
|
|
– |
|
Accrued expenses & other liabilities |
|
|
2,069 |
|
|
|
1,479 |
|
Interest rate risk management contract: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
|
|
– |
|
|
|
– |
|
Accrued expenses |
|
|
– |
|
|
|
601 |
|
|
|
|
|
|
|
|
|
|
|
& other liabilities |
|
|
|
|
|
|
|
|
Total |
|
|
$ |
2,181 |
|
|
$ |
1,583 |
|
|
|
$ |
2,813 |
|
|
$ |
2,275 |
|
The following tables present the effect of derivative instruments in the Corporations’ 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 |
|
|
Comprehensive |
(Ineffective Portion |
Gain Recognized in Income |
|
Income |
and Amount |
on Derivative |
|
(Effective Portion) |
Excluded from |
(Ineffective Portion) |
|
Three Months |
Nine Months |
Effectiveness |
Three Months |
Nine Months |
Periods ended Sept. 30, |
2009 |
2008 |
2009 |
2008 |
Testing) |
2009 |
2008 |
2009 |
2008 |
Derivatives in cash flow hedging relationships: |
|
|
|
|
|
|
|
|
|
Interest rate risk management contract: |
|
|
|
|
|
|
|
|
|
Interest rate swap (1) |
$65 |
$179 |
$1 |
$(30) |
Interest Expense |
$24 |
$ – |
$ – |
$ – |
Total |
$65 |
$179 |
$1 |
$(30) |
|
$24 |
$ – |
$ – |
$ – |
(1) |
In addition to the amounts reported in the table above, a $30 thousand gain was reclassified from accumulated other comprehensive income into net unrealized gains on interest rate swaps in the first quarter of 2009. |
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
(Continued) |
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS |
|
|
|
|
|
|
(Dollars in thousands) |
|
|
Amount of Gain (Loss) |
|
|
Location of Gain |
|
Recognized in Income on Derivative |
|
|
(Loss) Recognized in |
|
Three Months |
|
|
Nine Months |
|
Periods ended September 30, |
Income on Derivative |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
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 |
|
$ |
396 |
|
|
$ |
(3 |
) |
|
$ |
(37 |
) |
|
$ |
(1 |
) |
Commitments to sell fixed rate mortgage loans |
Net gains on loan sales & commissions on loans originated for others |
|
|
(556 |
) |
|
|
(9 |
) |
|
|
(49 |
|