Form 10-Q 2014 Q2

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 JUNE 30, 2014 or
 o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______.

Commission file number:  001-32991

WASHINGTON TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)

RHODE ISLAND
 
05-0404671
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
23 BROAD STREET
 
 
WESTERLY, RHODE ISLAND
 
02891
(Address of principal executive offices)
 
(Zip Code)

(401) 348-1200
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Mark one)
 
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No

The number of shares of common stock of the registrant outstanding as of July 31, 2014 was 16,713,577.



FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended June 30, 2014
 
 
 
TABLE OF CONTENTS
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




2


PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars in thousands,
CONSOLIDATED BALANCE SHEETS (unaudited)
except par value)
 
 
June 30,
2014
 
December 31,
2013
Assets:
 
 
 
 
Cash and due from banks
 

$145,408

 

$81,939

Short-term investments
 
3,781

 
3,378

Mortgage loans held for sale, at fair value
 
22,407

 
11,636

Securities:
 
 
 
 
Available for sale, at fair value
 
327,578

 
392,903

Held to maturity, at amortized cost (fair value $28,618 in 2014 and $29,865 in 2013)
 
27,814

 
29,905

Total securities
 
355,392

 
422,808

Federal Home Loan Bank stock, at cost
 
37,730

 
37,730

Loans:
 
 
 
 
Commercial
 
1,366,170

 
1,363,335

Residential real estate
 
876,639

 
772,674

Consumer
 
338,315

 
326,875

Total loans
 
2,581,124

 
2,462,884

Less allowance for loan losses
 
27,269

 
27,886

Net loans
 
2,553,855

 
2,434,998

Premises and equipment, net
 
26,518

 
25,402

Investment in bank-owned life insurance
 
57,559

 
56,673

Goodwill
 
58,114

 
58,114

Identifiable intangible assets, net
 
5,165

 
5,493

Other assets
 
51,093

 
50,696

Total assets
 

$3,317,022

 

$3,188,867

Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Demand deposits
 

$411,586

 

$440,785

NOW accounts
 
314,060

 
309,771

Money market accounts
 
772,084

 
666,646

Savings accounts
 
292,112

 
297,357

Time deposits
 
796,255

 
790,762

Total deposits
 
2,586,097

 
2,505,321

Federal Home Loan Bank advances
 
322,056

 
288,082

Junior subordinated debentures
 
22,681

 
22,681

Other liabilities
 
42,738

 
43,137

Total liabilities
 
2,973,572

 
2,859,221

Commitments and contingencies
 


 


Shareholders’ Equity:
 
 
 
 
Common stock of $.0625 par value; authorized 30,000,000 shares; issued and outstanding 16,705,427 shares at June 30, 2014 and 16,613,561 shares at December 31, 2013
 
1,044

 
1,038

Paid-in capital
 
99,288

 
97,566

Retained earnings
 
241,918

 
232,595

Accumulated other comprehensive (gain) loss
 
1,200

 
(1,553
)
Total shareholders’ equity
 
343,450

 
329,646

Total liabilities and shareholders’ equity
 

$3,317,022

 

$3,188,867



The accompanying notes are an integral part of these unaudited consolidated financial statements.
3


WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars and shares in thousands,
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
except per share amounts)
 
 
Three months
 
Six months
Periods ended June 30,
2014
 
2013
 
2014

 
2013

Interest income:
 
 
 
 
 
 
 
Interest and fees on loans

$26,169

 

$25,513

 

$51,758

 

$50,736

Interest on securities:
Taxable
2,699

 
2,576

 
5,641

 
5,421

 
Nontaxable
557

 
647

 
1,139

 
1,306

Dividends on Federal Home Loan Bank stock
138

 
39

 
280

 
77

Other interest income
28

 
24

 
63

 
52

Total interest and dividend income
29,591

 
28,799

 
58,881

 
57,592

Interest expense:
 

 
 

 
 
 
 
Deposits
3,120

 
3,096

 
6,089

 
6,290

Federal Home Loan Bank advances
1,758

 
2,679

 
3,999

 
5,416

Junior subordinated debentures
241

 
612

 
482

 
1,002

Other interest expense
4

 
3

 
7

 
8

Total interest expense
5,123

 
6,390

 
10,577

 
12,716

Net interest income
24,468

 
22,409

 
48,304

 
44,876

Provision for loan losses
450

 
700

 
750

 
1,300

Net interest income after provision for loan losses
24,018

 
21,709

 
47,554

 
43,576

Noninterest income:
 

 
 

 
 
 
 
Wealth management revenues
8,530

 
7,912

 
16,595

 
15,386

Merchant processing fees

 
2,613

 
1,291

 
4,590

Net gains on loan sales and commissions on loans originated for others
1,707

 
3,485

 
2,946

 
7,651

Service charges on deposit accounts
824

 
790

 
1,578

 
1,581

Card interchange fees
779

 
683

 
1,460

 
1,282

Income from bank-owned life insurance
441

 
461

 
886

 
928

Net (losses) gains on interest rate swap contracts
(37
)
 
152

 
223

 
171

Equity in earnings (losses) of unconsolidated subsidiaries
(107
)
 
(57
)
 
(150
)
 
(18
)
Net gain on sale of business line

 

 
6,265

 

Other income
677

 
355

 
1,090

 
761

Noninterest income, excluding other-than-temporary impairment losses
12,814

 
16,394

 
32,184

 
32,332

Total other-than-temporary impairment losses on securities

 

 

 
(613
)
Portion of loss recognized in other comprehensive income (before tax)

 

 

 
(2,159
)
Net impairment losses recognized in earnings

 

 

 
(2,772
)
Total noninterest income
12,814

 
16,394

 
32,184

 
29,560

Noninterest expense:
 

 
 

 
 

 
 

Salaries and employee benefits
14,771

 
15,542

 
29,329

 
30,984

Net occupancy
1,475

 
1,364

 
3,115

 
2,878

Equipment
1,235

 
1,192

 
2,471

 
2,436

Merchant processing costs

 
2,211

 
1,050

 
3,884

Outsourced services
1,015

 
871

 
2,059

 
1,712

Legal, audit and professional fees
598

 
554

 
1,216

 
1,162

FDIC deposit insurance costs
413

 
451

 
853

 
882

Advertising and promotion
540

 
476

 
772

 
831

Amortization of intangibles
164

 
173

 
328

 
346

Foreclosed property costs
43

 
137

 
21

 
184

Debt prepayment penalties

 

 
6,294

 

Other expenses
2,194

 
2,034

 
4,232

 
3,890

Total noninterest expense
22,448

 
25,005

 
51,740

 
49,189

Income before income taxes
14,384

 
13,098

 
27,998

 
23,947

Income tax expense
4,587

 
4,115

 
8,903

 
7,543

Net income

$9,797

 

$8,983

 

$19,095

 

$16,404

 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
16,678

 
16,454

 
16,653

 
16,428

Weighted average common shares outstanding - diluted
16,831

 
16,581

 
16,817

 
16,558

Per share information:
Basic earnings per common share

$0.59

 

$0.54

 

$1.14

 

$0.99

 
Diluted earnings per common share

$0.58

 

$0.54

 

$1.13

 

$0.99

 
Cash dividends declared per share

$0.29

 

$0.25

 

$0.58

 

$0.50


The accompanying notes are an integral part of these unaudited consolidated financial statements.
4


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

 
Three Months
 
Six Months
Periods ended June 30,
2014
 
2013
 
2014

 
2013

Net income

$9,797

 

$8,983

 

$19,095

 

$16,404

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Changes in fair value of securities available for sale
1,817

 
(3,821
)
 
2,429

 
(4,874
)
Net losses on securities reclassified into earnings

 

 

 
393

Net change in fair value of securities available for sale
1,817

 
(3,821
)
 
2,429

 
(4,481
)
Reclassification adjustment for other-than-temporary impairment losses transferred into earnings

 

 

 
1,384

Cash flow hedges:
 
 
 
 
 
 
 
Change in fair value of cash flow hedges
(14
)
 
34

 
(30
)
 
32

Net cash flow hedge losses reclassified into earnings
93

 
118

 
185

 
240

Net change in fair value of cash flow hedges
79

 
152

 
155

 
272

Defined benefit plan obligation adjustment
81

 
292

 
169

 
629

Total other comprehensive income (loss), net of tax
1,977

 
(3,377
)
 
2,753

 
(2,196
)
Total comprehensive income

$11,774

 

$5,606

 

$21,848

 

$14,208




The accompanying notes are an integral part of these unaudited consolidated financial statements.
5


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

 
Common
Shares Outstanding
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss)
 
Total
Balance at January 1, 2013
16,380

 

$1,024

 

$91,453

 

$213,674

 

($10,499
)
 

$295,652

Net income
 
 
 
 
 
 
16,404

 
 
 
16,404

Total other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
(2,196
)
 
(2,196
)
Cash dividends declared
 
 
 
 
 
 
(8,317
)
 
 
 
(8,317
)
Share-based compensation
 
 
 
 
879

 
 
 
 
 
879

Deferred compensation plan
2

 

 
30

 
 
 
 
 
30

Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit
105

 
6

 
912

 
 
 
 
 
918

Balance at June 30, 2013
16,487

 

$1,030

 

$93,274

 

$221,761

 

($12,695
)
 

$303,370


 
Common
Shares Outstanding
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss)
 
Total
Balance at January 1, 2014
16,614

 

$1,038

 

$97,566

 

$232,595

 

($1,553
)
 

$329,646

Net income
 
 
 
 
 
 
19,095

 
 
 
19,095

Total other comprehensive income, net of tax
 
 
 
 
 
 
 
 
2,753

 
2,753

Cash dividends declared
 
 
 
 
 
 
(9,772
)
 
 
 
(9,772
)
Share-based compensation
 
 
 
 
961

 
 
 
 
 
961

Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit
91

 
6

 
761

 
 
 
 
 
767

Balance at June 30, 2014
16,705

 

$1,044

 

$99,288

 

$241,918

 

$1,200

 

$343,450




The accompanying notes are an integral part of these unaudited consolidated financial statements.
6





WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
Six months ended June 30,
2014

 
2013

Cash flows from operating activities:
 
 
 
Net income

$19,095

 

$16,404

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
750

 
1,300

Depreciation of premises and equipment
1,564

 
1,677

Foreclosed and repossessed property valuation adjustments
39

 
72

Net amortization of premium and discount
373

 
887

Net amortization of intangibles
328

 
346

Share-based compensation
961

 
879

Income from bank-owned life insurance
(886
)
 
(928
)
Net gain on sale of business line
(6,265
)
 

Net gains on loan sales and commissions on loans originated for others
(2,946
)
 
(7,651
)
Net impairment losses recognized in earnings

 
2,772

Net gains on interest rate swap contracts
(223
)
 
(171
)
Equity in (earnings) losses of unconsolidated subsidiaries
150

 
18

Proceeds from sales of loans
111,075

 
256,362

Loans originated for sale
(119,373
)
 
(231,167
)
(Increase) decrease in other assets
(828
)
 
5,242

Decrease in other liabilities
(2,876
)
 
(9,246
)
Net cash provided by operating activities
938

 
36,796

Cash flows from investing activities:
 
 
 
Purchases of:
Mortgage-backed securities available for sale
(9,987
)
 
(1,036
)
 
Other investment securities available for sale

 
(424
)
Proceeds from sale of:
Other investment securities available for sale
547

 

Maturities and principal payments of:
Mortgage-backed securities available for sale
51,724

 
45,561

 
Other investment securities available for sale
26,507

 
6,550

 
Mortgage-backed securities held to maturity
1,977

 
6,279

Remittance of Federal Home Loan Bank stock

 
2,688

Net proceeds from the sale of business line
6,305

 

Proceeds received and deferred in connection with sale of business line
900

 

Net increase in loans
(112,951
)
 
(84,443
)
Purchases of loans, including purchased interest
(6,088
)
 
(7,222
)
Proceeds from the sale of property acquired through foreclosure or repossession
671

 
1,481

Purchases of premises and equipment
(2,681
)
 
(837
)
Net cash used in investing activities
(43,076
)
 
(31,403
)
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
80,776

 
(8,022
)
Net decrease in other borrowings
(22
)
 
(1,013
)
Proceeds from Federal Home Loan Bank advances
234,000

 
204,000

Repayment of Federal Home Loan Bank advances
(200,026
)
 
(191,831
)
Proceeds from the exercise of stock options and issuance of other compensation-related equity instruments
376

 
672

Tax benefit from stock option exercises and issuance of other compensation-related equity instruments
391

 
276

Redemption of junior subordinated debentures

 
(10,310
)
Cash dividends paid
(9,485
)
 
(8,148
)
Net cash provided by (used in) financing activities
106,010

 
(14,376
)
Net increase (decrease) in cash and cash equivalents
63,872

 
(8,983
)
Cash and cash equivalents at beginning of period
85,317

 
92,650

Cash and cash equivalents at end of period

$149,189

 

$83,667


The accompanying notes are an integral part of these unaudited consolidated financial statements.
7





WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
Six months ended June 30,
2014

 
2013

Noncash Investing and Financing Activities:
 
 
 
Loans charged off

$1,490

 

$4,549

Loans transferred to property acquired through foreclosure or repossession
1,016

 
1,050

Supplemental Disclosures:
 
 
 
 
Interest payments

$10,440

 

$12,446

Income tax payments
7,965

 
7,328




The accompanying notes are an integral part of these unaudited consolidated financial statements.
8


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



(1)
General Information
Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company and financial holding company.  The Bancorp owns all of the outstanding common stock of The Washington Trust Company (the “Bank”), a Rhode Island chartered commercial bank founded in 1800.  Through its subsidiaries, the Bancorp offers a complete product line of financial services including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut.

The consolidated financial statements include the accounts of the Bancorp and its subsidiaries (collectively, the “Corporation” or “Washington Trust”).  All significant intercompany transactions have been eliminated.

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

The unaudited consolidated financial statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying consolidated financial statements have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

(2)
Recently Issued Accounting Pronouncements
Investments - Equity Method and Joint Ventures - Topic 323
Accounting Standards Update No. 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects” (“ASU 2014-01”), was issued in January 2014 and permits a reporting entity to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The amendments are expected to enable more entities to record the amortization of the investment in income tax expense together with the tax credits and other tax benefits generated from the partnership. ASU 2014-01 is effective retrospectively for public business entities for annual and interim reporting periods, beginning after December 15, 2014. Early adoption is permitted. The adoption of ASU 2014-01 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Receivables - Troubled Debt Restructurings by Creditors - Topic 310
Accounting Standards Update No. 2014-04, “Reclassifications of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure” (“ASU 2014-04”), was issued in January 2014 and clarifies when banks and similar institutions (creditors) should reclassify mortgage loans collateralized by residential real estate properties from the loan portfolio to other real estate owned (OREO). ASU 2014-04 is effective for annual periods beginning after December 15, 2014, and interim periods with annual periods beginning after December 15, 2015. An entity can elect either a modified retrospective or prospective transition method, and early adoption is permitted. The adoption of ASU 2014-04 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Revenue from Contracts with Customers - Topic 606
Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), was issued in May 2014 and provides a revenue recognition framework for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other accounting standards. ASU 2014-09 is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period with early adoption not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Corporation is currently evaluating the impact that ASU 2014-09 will have on the its consolidated financial statements and related disclosures. The Corporation has not yet selected a transition method nor has it determined the effect of ASU 2014-09 on its ongoing financial reporting.




9


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

(3)
Cash and Due from Banks
The Bank maintains certain average reserve balances to meet the requirements of the Board of Governors of the Federal Reserve System (“FRB”).  Some or all of these reserve requirements may be satisfied with vault cash. Reserve balances amounted to $5.9 million at June 30, 2014 and $6.7 million at December 31, 2013 and were included in cash and due from banks in the Consolidated Balance Sheets.

As of June 30, 2014 and December 31, 2013, cash and due from banks included interest-bearing deposits in other banks of $92.9 million and $51.8 million, respectively.

(4)
Securities
The following tables present the amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of securities by major security type and class of security:
(Dollars in thousands)
 
June 30, 2014
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Securities Available for Sale:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$9,999

 

$13

 

$—

 

$10,012

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
217,767

 
10,531

 
(13
)
 
228,285

Obligations of states and political subdivisions
54,161

 
2,230

 

 
56,391

Individual name issuer trust preferred debt securities
30,734

 

 
(4,099
)
 
26,635

Corporate bonds
6,123

 
133

 
(1
)
 
6,255

Total securities available for sale

$318,784

 

$12,907

 

($4,113
)
 

$327,578

Held to Maturity:
 
 
 
 
 
 
 
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises

$27,814

 

$804

 

$—

 

$28,618

Total securities held to maturity

$27,814

 

$804

 

$—

 

$28,618

Total securities

$346,598

 

$13,711

 

($4,113
)
 

$356,196





10


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

(Dollars in thousands)
 
December 31, 2013
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Securities Available for Sale:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$54,474

 

$720

 

($79
)
 

$55,115

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
230,387

 
8,369

 
(401
)
 
238,355

Obligations of states and political subdivisions
60,659

 
2,200

 

 
62,859

Trust preferred securities:
 
 
 
 
 
 
 
Individual name issuers
30,715

 

 
(6,031
)
 
24,684

Collateralized debt obligations
547

 

 

 
547

Corporate bonds
11,128

 
231

 
(16
)
 
11,343

Total securities available for sale

$387,910

 

$11,520

 

($6,527
)
 

$392,903

Held to Maturity:
 
 
 
 
 
 
 
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises

$29,905

 

$14

 

($54
)
 

$29,865

Total securities held to maturity

$29,905

 

$14

 

($54
)
 

$29,865

Total securities

$417,815

 

$11,534

 

($6,581
)
 

$422,768


At June 30, 2014 and December 31, 2013, securities available for sale and held to maturity with a fair value of $339.9 million and $397.5 million, respectively, were pledged as collateral for Federal Home Loan Bank of Boston (“FHLBB”) borrowings and letters of credit, potential borrowings with the FRB, certain public deposits and for other purposes.




11


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

The schedule of maturities of debt securities available for sale and held to maturity is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments.  All other debt securities are included based on contractual maturities.  Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.  Yields on tax exempt obligations are not computed on a tax equivalent basis.
 
June 30, 2014
(Dollars in thousands)
Within 1 Year
 
1-5 Years
 
5-10 Years
 
After 10 Years
 
Totals
Securities Available for Sale:
 
 
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises:
 
 
 
 
 
 
 
 
 
Amortized cost

$9,999

 

$—

 

$—

 

$—

 

$9,999

Weighted average yield
2.87
%
 
%
 
%
 
%
 
2.87
%
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
 
 
 
 
 
 
 
 
 
Amortized cost
38,199

 
100,451

 
53,538

 
25,579

 
217,767

Weighted average yield
3.98
%
 
3.61
%
 
2.85
%
 
2.12
%
 
3.31
%
Obligations of state and political subdivisions:
 
 
 
 
 
 
 
 
 
Amortized cost
18,072

 
36,089

 

 

 
54,161

Weighted average yield
3.85
%
 
3.93
%
 
%
 
%
 
3.90
%
Individual name issuer trust preferred debt securities:
 
 
 
 
 
 
 
 
 
Amortized cost

 

 

 
30,734

 
30,734

Weighted average yield
%
 
%
 
%
 
1.07
%
 
1.07
%
Corporate bonds:
 
 
 
 
 
 
 
 
 
Amortized cost

 
5,919

 
204

 

 
6,123

Weighted average yield
%
 
2.76
%
 
3.20
%
 
%
 
2.78
%
Total debt securities available for sale:
 
 
 
 
 
 
 
 
 
Amortized cost

$66,270

 

$142,459

 

$53,742

 

$56,313

 

$318,784

Weighted average yield
3.77
%
 
3.66
%
 
2.85
%
 
1.55
%
 
3.17
%
Fair value

$68,872

 

$144,962

 

$56,196

 

$57,548

 

$327,578

Securities Held to Maturity:
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
 
 
 
 
 
 
 
 
 
Amortized cost

$3,400

 

$10,557

 

$8,373

 

$5,484

 

$27,814

Weighted average yield
3.10
%
 
3.03
%
 
2.83
%
 
1.08
%
 
2.59
%
Fair value

$3,498

 

$10,862

 

$8,615

 

$5,643

 

$28,618


Included in the above table were debt securities with an amortized cost balance of $85.1 million and a fair value of $82.8 million at June 30, 2014 that are callable at the discretion of the issuers.  Final maturities of the callable securities range from fifteen months to twenty-three years, with call features ranging from one month to three years.

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




12


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

The following tables summarize temporarily impaired securities, segregated by length of time the securities have been in a continuous unrealized loss position:
(Dollars in thousands)
Less than 12 Months
 
12 Months or Longer
 
Total
June 30, 2014
#
 
Fair
Value
 
Unrealized
Losses
 
#

 
Fair
Value
 
Unrealized
Losses
 
#

 
Fair
Value
 
Unrealized
Losses
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises

 

$—

 

$—

 
1

 

$935

 

($13
)
 
1

 

$935

 

($13
)
Individual name issuer trust preferred debt securities

 

 

 
11

 
26,635

 
(4,099
)
 
11

 
26,635

 
(4,099
)
Corporate bonds

 

 

 
1

 
201

 
(1
)
 
1

 
201

 
(1
)
Total temporarily impaired securities

 

 

$—

 
13

 

$27,771

 

($4,113
)
 
13

 

$27,771

 

($4,113
)

(Dollars in thousands)
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 2013
#

 
Fair
Value
 
Unrealized
Losses
 
#

 
Fair
Value
 
Unrealized
Losses
 
#

 
Fair
Value
 
Unrealized
Losses
Obligations of U.S. government-sponsored enterprises
1

 

$9,909

 

($79
)
 

 

$—

 

$—

 
1

 

$9,909

 

($79
)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
7

 
76,748

 
(455
)
 

 

 

 
7

 
76,748

 
(455
)
Individual name issuer trust preferred debt securities

 

 

 
11

 
24,684

 
(6,031
)
 
11

 
24,684

 
(6,031
)
Corporate bonds
2

 
407

 
(16
)
 

 

 

 
2

 
407

 
(16
)
Total temporarily impaired securities
10

 

$87,064

 

($550
)
 
11

 

$24,684

 

($6,031
)
 
21

 

$111,748

 

($6,581
)

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

Trust Preferred Debt Securities of Individual Name Issuers
Included in debt securities in an unrealized loss position at June 30, 2014 were eleven trust preferred security holdings issued by seven individual companies in the banking sector.  Management believes the decline in fair value of these trust preferred securities primarily reflects investor concerns about global economic growth and how it will affect potential future losses in the financial services industry.  These concerns resulted in increased risk premiums for securities in this sector. Based on the information available through the filing date of this report, all individual name issuer 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 June 30, 2014, individual name issuer trust preferred debt securities with an amortized cost of $11.9 million and unrealized losses of $1.6 million were rated below investment grade by Standard & Poors, Inc. (“S&P”).  Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report and other information.  We noted no additional downgrades to below investment grade between the reporting period date and the filing date of this report.  Based on these analyses, management concluded that it expects to recover the entire amortized cost basis of these securities.  Furthermore, Washington Trust does not intend to sell these securities and it is not more-likely-than-not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity.  Therefore, management does not consider these investments to be other-than-temporarily impaired at June 30, 2014.




13


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

Credit-Related Impairment Losses Recognized on Debt Securities
The following table presents a rollforward of the cumulative credit-related impairment losses on debt securities held by the Corporation:
(Dollars in thousands)
Three months
 
Six months
Periods ended June 30,
2014
 
2013
 
2014

 
2013

Balance at beginning of period

$—

 

$1,229

 

$—

 

$3,325

Credit-related impairment loss on debt securities for which an other-than-temporary impairment was not previously recognized

 

 

 

Additional increases to the amount of credit-related impairment loss on debt securities for which an other-than-temporary impairment was previously recognized

 

 

 
2,772

Reductions for securities for which a liquidation notice was received during the period

 

 

 
(4,868
)
Balance at end of period

$—

 

$1,229

 

$—

 

$1,229


The January 1, 2014 beginning balance of the cumulative credit-related impairment losses was corrected from the $6.8 million reported in our Form 10-K for the fiscal year ended December 31, 2013 to reflect the impact of the notice of liquidation of a pooled trust preferred security that occurred during the first quarter of 2013 and management’s change in intent to no longer hold its other pooled trust preferred security, which was made in December 2013.


(5)
Loans
The following is a summary of loans:
(Dollars in thousands)
June 30, 2014
 
December 31, 2013
 
Amount

 
%

 
Amount

 
%

Commercial:
 
 
 
 
 
 
 
Mortgages (1)

$772,772

 
30
%
 

$796,249

 
32
%
Construction and development (2)
38,574

 
1

 
36,289

 
1

Other (3)
554,824

 
22

 
530,797

 
22

Total commercial
1,366,170

 
53

 
1,363,335

 
55

Residential real estate:
 
 
 
 
 
 
 
Mortgages
846,187

 
33

 
749,163

 
30

Homeowner construction
30,452

 
1

 
23,511

 
1

Total residential real estate
876,639

 
34

 
772,674

 
31

Consumer:
 
 
 
 
 
 
 
Home equity lines
237,390

 
9

 
231,362

 
9

Home equity loans
45,632

 
2

 
40,212

 
2

Other (4)
55,293

 
2

 
55,301

 
3

Total consumer
338,315

 
13

 
326,875

 
14

Total loans (5)

$2,581,124

 
100
%
 

$2,462,884

 
100
%
(1)
Amortizing mortgages and lines of credit, primarily secured by income producing property.
(2)
Loans for construction commercial properties, loans to developers for construction of residential properties and loans for land development.
(3)
Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.
(4)
Fixed-rate consumer installment loans.
(5)
Includes net unamortized loan origination costs of $1.5 million and $879 thousand, respectively, and net unamortized premiums on purchased loans of $100 thousand and $99 thousand, respectively, at June 30, 2014 and December 31, 2013.




14


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

At June 30, 2014 and December 31, 2013, there were $1.18 billion and $1.14 billion, respectively, of loans pledged as collateral to the FHLBB under a blanket pledge agreement and to the FRB for the discount window. See Note 8 for additional disclosure regarding borrowings.

Nonaccrual Loans
Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued but not collected on such loans is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.

The following is a summary of nonaccrual loans, segregated by class of loans:
(Dollars in thousands)
Jun 30,
2014
 
Dec 31,
2013
Commercial:
 
 
 
Mortgages

$2,290

 

$7,492

Construction and development

 

Other
1,615

 
1,291

Residential real estate:
 
 
 
Mortgages
7,417

 
8,315

Homeowner construction

 

Consumer:
 
 
 
Home equity lines
724

 
469

Home equity loans
321

 
687

Other
168

 
48

Total nonaccrual loans

$12,535

 

$18,302

Accruing loans 90 days or more past due

$—

 

$—


As of June 30, 2014 and December 31, 2013, nonaccrual loans of $2.1 million and $2.7 million, respectively, were current as to the payment of principal and interest.

At June 30, 2014, there were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status.




15


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

Past Due Loans
Past due status is based on the contractual payment terms of the loan. The following tables present an age analysis of past due loans, segregated by class of loans:
(Dollars in thousands)
Days Past Due
 
 
 
 
 
 
June 30, 2014
30-59
 
60-89
 
Over 90
 
Total Past Due
 
Current
 
Total Loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$311

 

$1,583

 

$2,250

 

$4,144

 

$768,628

 

$772,772

Construction and development

 

 

 

 
38,574

 
38,574

Other
1,785

 
773

 
417

 
2,975

 
551,849

 
554,824

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
5,249

 
855

 
4,335

 
10,439

 
835,748

 
846,187

Homeowner construction

 

 

 

 
30,452

 
30,452

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines
1,227

 
554

 
280

 
2,061

 
235,329

 
237,390

Home equity loans
309

 
18

 
106

 
433

 
45,199

 
45,632

Other
353

 
530

 
126

 
1,009

 
54,284

 
55,293

Total loans

$9,234

 

$4,313

 

$7,514

 

$21,061

 

$2,560,063

 

$2,581,124


(Dollars in thousands)
Days Past Due
 
 
 
 
 
 
December 31, 2013
30-59
 
60-89
 
Over 90
 
Total Past Due
 
Current
 
Total Loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$—

 

$—

 

$7,492

 

$7,492

 

$788,757

 

$796,249

Construction and development

 

 

 

 
36,289

 
36,289

Other
276

 
302

 
731

 
1,309

 
529,488

 
530,797

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
4,040

 
1,285

 
5,633

 
10,958

 
738,205

 
749,163

Homeowner construction

 

 

 

 
23,511

 
23,511

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines
831

 
100

 
269

 
1,200

 
230,162

 
231,362

Home equity loans
448

 
66

 
349

 
863

 
39,349

 
40,212

Other
43

 

 
38

 
81

 
55,220

 
55,301

Total loans

$5,638

 

$1,753

 

$14,512

 

$21,903

 

$2,440,981

 

$2,462,884


Included in past due loans as of June 30, 2014 and December 31, 2013, were nonaccrual loans of $10.4 million and $15.6 million, respectively. All loans 90 days or more past due at June 30, 2014 and December 31, 2013 were classified as nonaccrual.




16


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

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

The following is a summary of impaired loans:
(Dollars in thousands)
Recorded
Investment (1)
 
Unpaid
Principal
 
Related
Allowance
 
Jun 30,
2014
 
Dec 31,
2013
 
Jun 30,
2014
 
Dec 31,
2013
 
Jun 30,
2014
 
Dec 31,
2013
No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$9,160

 

$998

 

$9,135

 

$998

 

$—

 

$—

Construction and development

 

 

 

 

 

Other
1,032

 
1,055

 
1,032

 
1,050

 

 

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
2,226

 
1,167

 
2,354

 
1,259

 

 

Homeowner construction

 

 

 

 

 

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines

 

 

 

 

 

Home equity loans

 

 

 

 

 

Other

 

 

 

 

 

Subtotal

$12,418

 

$3,220

 

$12,521

 

$3,307

 

$—

 

$—

With Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$15,788

 

$29,335

 

$16,275

 

$31,731

 

$747

 

$552

Construction and development

 

 

 

 

 

Other
1,556

 
1,506

 
1,843

 
1,945

 
324

 
463

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
2,253

 
3,122

 
2,538

 
3,507

 
390

 
463

Homeowner construction

 

 

 

 

 

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines
82

 
173

 
82

 
174

 
41

 
1

Home equity loans
94

 
55

 
91

 
54

 
21

 

Other
119

 
127

 
117