Form 10-Q 2014 Q3

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, 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 October 31, 2014 was 16,725,247.



FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended September 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)
 
 
September 30,
2014
 
December 31,
2013
Assets:
 
 
 
 
Cash and due from banks
 

$86,132

 

$81,939

Short-term investments
 
3,869

 
3,378

Mortgage loans held for sale, at fair value
 
35,473

 
11,636

Securities:
 
 
 
 
Available for sale, at fair value
 
376,073

 
392,903

Held to maturity, at amortized cost (fair value $27,074 at September 30, 2014 and $29,865 at December 31, 2013)
 
26,480

 
29,905

Total securities
 
402,553

 
422,808

Federal Home Loan Bank stock, at cost
 
37,730

 
37,730

Loans:
 
 
 
 
Commercial
 
1,390,373

 
1,363,335

Residential real estate
 
945,580

 
772,674

Consumer
 
338,094

 
326,875

Total loans
 
2,674,047

 
2,462,884

Less allowance for loan losses
 
27,768

 
27,886

Net loans
 
2,646,279

 
2,434,998

Premises and equipment, net
 
26,367

 
25,402

Investment in bank-owned life insurance
 
63,026

 
56,673

Goodwill
 
58,114

 
58,114

Identifiable intangible assets, net
 
5,004

 
5,493

Other assets
 
51,335

 
50,696

Total assets
 

$3,415,882

 

$3,188,867

Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Demand deposits
 

$476,808

 

$440,785

NOW accounts
 
313,391

 
309,771

Money market accounts
 
833,318

 
666,646

Savings accounts
 
290,561

 
297,357

Time deposits
 
824,810

 
790,762

Total deposits
 
2,738,888

 
2,505,321

Federal Home Loan Bank advances
 
261,685

 
288,082

Junior subordinated debentures
 
22,681

 
22,681

Other liabilities
 
44,066

 
43,137

Total liabilities
 
3,067,320

 
2,859,221

Commitments and contingencies
 


 


Shareholders’ Equity:
 
 
 
 
Common stock of $.0625 par value; authorized 30,000,000 shares; issued and outstanding 16,721,172 shares at September 30, 2014 and 16,613,561 shares at December 31, 2013
 
1,045

 
1,038

Paid-in capital
 
100,044

 
97,566

Retained earnings
 
247,052

 
232,595

Accumulated other comprehensive income (loss)
 
421

 
(1,553
)
Total shareholders’ equity
 
348,562

 
329,646

Total liabilities and shareholders’ equity
 

$3,415,882

 

$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
 
Nine months
Periods ended September 30,
2014
 
2013
 
2014

 
2013

Interest income:
 
 
 
 
 
 
 
Interest and fees on loans

$27,239

 

$26,096

 

$78,997

 

$76,832

Interest on securities:
Taxable
2,397

 
2,582

 
8,038

 
8,003

 
Nontaxable
519

 
629

 
1,658

 
1,935

Dividends on Federal Home Loan Bank stock
140

 
36

 
420

 
113

Other interest income
36

 
47

 
99

 
99

Total interest and dividend income
30,331

 
29,390

 
89,212

 
86,982

Interest expense:
 

 
 

 
 
 
 
Deposits
3,317

 
3,064

 
9,406

 
9,354

Federal Home Loan Bank advances
1,832

 
2,693

 
5,831

 
8,109

Junior subordinated debentures
241

 
241

 
723

 
1,243

Other interest expense
3

 
4

 
10

 
12

Total interest expense
5,393

 
6,002

 
15,970

 
18,718

Net interest income
24,938

 
23,388

 
73,242

 
68,264

Provision for loan losses
600

 
700

 
1,350

 
2,000

Net interest income after provision for loan losses
24,338

 
22,688

 
71,892

 
66,264

Noninterest income:
 

 
 

 
 
 
 
Wealth management revenues
8,374

 
7,629

 
24,969

 
23,015

Merchant processing fees

 
3,359

 
1,291

 
7,949

Net gains on loan sales and commissions on loans originated for others
1,742

 
3,883

 
4,688

 
11,534

Service charges on deposit accounts
881

 
855

 
2,459

 
2,436

Card interchange fees
804

 
731

 
2,264

 
2,013

Income from bank-owned life insurance
468

 
464

 
1,354

 
1,392

Net gains on interest rate swap contracts
339

 
54

 
562

 
225

Equity in earnings (losses) of unconsolidated subsidiaries
(63
)
 
(47
)
 
(213
)
 
(65
)
Net gain on sale of business line

 

 
6,265

 

Other income
580

 
472

 
1,670

 
1,233

Noninterest income, excluding other-than-temporary impairment losses
13,125

 
17,400

 
45,309

 
49,732

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
13,125

 
17,400

 
45,309

 
46,960

Noninterest expense:
 

 
 

 
 

 
 

Salaries and employee benefits
14,516

 
14,640

 
43,845

 
45,624

Net occupancy
1,557

 
1,404

 
4,672

 
4,282

Equipment
1,211

 
1,222

 
3,682

 
3,658

Merchant processing costs

 
2,862

 
1,050

 
6,746

Outsourced services
1,138

 
878

 
3,197

 
2,590

Legal, audit and professional fees
494

 
529

 
1,710

 
1,691

FDIC deposit insurance costs
442

 
448

 
1,295

 
1,330

Advertising and promotion
368

 
312

 
1,140

 
1,143

Amortization of intangibles
161

 
170

 
489

 
516

Foreclosed property costs
27

 
38

 
48

 
222

Debt prepayment penalties

 
1,125

 
6,294

 
1,125

Other expenses
2,133

 
1,920

 
6,365

 
5,810

Total noninterest expense
22,047

 
25,548

 
73,787

 
74,737

Income before income taxes
15,416

 
14,540

 
43,414

 
38,487

Income tax expense
4,878

 
4,580

 
13,781

 
12,123

Net income

$10,538

 

$9,960

 

$29,633

 

$26,364

 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
16,714

 
16,563

 
16,673

 
16,473

Weighted average common shares outstanding - diluted
16,855

 
16,696

 
16,832

 
16,600

Per share information:
Basic earnings per common share

$0.63

 

$0.60

 

$1.77

 

$1.59

 
Diluted earnings per common share

$0.62

 

$0.59

 

$1.75

 

$1.58

 
Cash dividends declared per share

$0.32

 

$0.26

 

$0.90

 

$0.76


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
 
Nine Months
Periods ended September 30,
2014
 
2013
 
2014

 
2013

Net income

$10,538

 

$9,960

 

$29,633

 

$26,364

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Changes in fair value of securities available for sale
(953
)
 
(129
)
 
1,476

 
(5,003
)
Net losses on securities reclassified into earnings

 

 

 
393

Net change in fair value of securities available for sale
(953
)
 
(129
)
 
1,476

 
(4,610
)
Reclassification adjustment for other-than-temporary impairment losses transferred into earnings

 

 

 
1,384

Cash flow hedges:
 
 
 
 
 
 
 
Change in fair value of cash flow hedges
1

 
(47
)
 
(29
)
 
(15
)
Net cash flow hedge losses reclassified into earnings
92

 
91

 
277

 
331

Net change in fair value of cash flow hedges
93

 
44

 
248

 
316

Defined benefit plan obligation adjustment
81

 
11,440

 
250

 
12,069

Total other comprehensive (loss) income, net of tax
(779
)
 
11,355

 
1,974

 
9,159

Total comprehensive income

$9,759

 

$21,315

 

$31,607

 

$35,523




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)
Income
 
Total
Balance at January 1, 2014
16,614

 

$1,038

 

$97,566

 

$232,595

 

($1,553
)
 

$329,646

Net income
 
 
 
 
 
 
29,633

 
 
 
29,633

Total other comprehensive income, net of tax
 
 
 
 
 
 
 
 
1,974

 
1,974

Cash dividends declared
 
 
 
 
 
 
(15,176
)
 
 
 
(15,176
)
Share-based compensation
 
 
 
 
1,433

 
 
 
 
 
1,433

Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit
107

 
7

 
1,045

 
 
 
 
 
1,052

Balance at September 30, 2014
16,721

 

$1,045

 

$100,044

 

$247,052

 

$421

 

$348,562



 
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
 
 
 
 
 
 
26,364

 
 
 
26,364

Total other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
9,159

 
9,159

Cash dividends declared
 
 
 
 
 
 
(12,686
)
 
 
 
(12,686
)
Share-based compensation
 
 
 
 
1,377

 
 
 
 
 
1,377

Deferred compensation plan
2

 
 
 
30

 
 
 
 
 
30

Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit
207

 
13

 
3,676

 
 
 
 
 
3,689

Balance at September 30, 2013
16,589

 

$1,037

 

$96,536

 

$227,352

 

($1,340
)
 

$323,585



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)
 
Nine months ended September 30,
2014

 
2013

Cash flows from operating activities:
 
 
 
Net income

$29,633

 

$26,364

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
1,350

 
2,000

Depreciation of premises and equipment
2,350

 
2,489

Foreclosed and repossessed property valuation adjustments
57

 
79

Net amortization of premium and discount
672

 
1,196

Net amortization of intangibles
489

 
516

Share-based compensation
1,433

 
1,377

Income from bank-owned life insurance
(1,354
)
 
(1,392
)
Net gain on sale of business line
(6,265
)
 

Net gains on loan sales and commissions on loans originated for others
(4,688
)
 
(11,534
)
Net impairment losses recognized in earnings

 
2,772

Net gains on interest rate swap contracts
(562
)
 
(225
)
Equity in losses of unconsolidated subsidiaries
213

 
65

Proceeds from sales of loans
176,389

 
356,932

Loans originated for sale
(196,322
)
 
(313,227
)
(Increase) decrease in other assets
(3,082
)
 
12,388

Decrease in other liabilities
(56
)
 
(13,769
)
Net cash provided by operating activities
257

 
66,031

Cash flows from investing activities:
 
 
 
Purchases of:
Mortgage-backed securities available for sale
(53,051
)
 
(66,569
)
 
Other investment securities available for sale
(31,009
)
 
(25,404
)
Proceeds from sale of:
Other investment securities available for sale
547

 

Maturities and principal payments of:
Mortgage-backed securities available for sale
63,938

 
64,270

 
Other investment securities available for sale
38,137

 
6,550

 
Mortgage-backed securities held to maturity
3,248

 
8,704

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
(205,877
)
 
(100,655
)
Proceeds from sale of portfolio loans
1,200

 
49,588

Purchases of loans, including purchased interest
(7,065
)
 
(9,103
)
Proceeds from the sale of property acquired through foreclosure or repossession
1,630

 
2,142

Purchases of premises and equipment
(3,315
)
 
(1,178
)
Purchases of bank-owned life insurance
(5,000
)
 

Net cash used in investing activities
(189,412
)
 
(68,967
)
Cash flows from financing activities:
 
 
 
Net increase in deposits
233,567

 
142,200

Net decrease in other borrowings
(33
)
 
(415
)
Proceeds from Federal Home Loan Bank advances
259,000

 
204,000

Repayment of Federal Home Loan Bank advances
(285,397
)
 
(276,687
)
Proceeds from the exercise of stock options and issuance of other compensation-related equity instruments
592

 
3,287

Tax benefit from stock option exercises and issuance of other compensation-related equity instruments
460

 
432

Redemption of junior subordinated debentures

 
(10,310
)
Cash dividends paid
(14,350
)
 
(12,293
)
Net cash provided by financing activities
193,839

 
50,214

Net increase in cash and cash equivalents
4,684

 
47,278

Cash and cash equivalents at beginning of period
85,317

 
92,650

Cash and cash equivalents at end of period

$90,001

 

$139,928


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)
 
Nine months ended September 30,
2014

 
2013

Noncash Investing and Financing Activities:
 
 
 
Loans charged off

$1,638

 

$5,319

Loans transferred to property acquired through foreclosure or repossession
1,659

 
1,073

Supplemental Disclosures:
 
 
 
Interest payments

$15,779

 

$18,401

Income tax payments
12,734

 
11,528




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, and interim periods within those annual periods, beginning after December 15, 2014. 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 $8.1 million at September 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 September 30, 2014 and December 31, 2013, cash and due from banks included interest-bearing deposits in other banks of $50.6 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)
 
September 30, 2014
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Securities Available for Sale:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$31,008

 

$—

 

($89
)
 

$30,919

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
248,369

 
9,012

 
(160
)
 
257,221

Obligations of states and political subdivisions
52,526

 
1,991

 

 
54,517

Individual name issuer trust preferred debt securities
30,743

 

 
(3,546
)
 
27,197

Corporate bonds
6,122

 
104

 
(7
)
 
6,219

Total securities available for sale

$368,768

 

$11,107

 

($3,802
)
 

$376,073

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

$26,480

 

$594

 

$—

 

$27,074

Total securities held to maturity

$26,480

 

$594

 

$—

 

$27,074

Total securities

$395,248

 

$11,701

 

($3,802
)
 

$403,147


(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




10


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


At September 30, 2014 and December 31, 2013, securities available for sale and held to maturity with a fair value of $378.3 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.

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.
 
September 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

$—

 

$31,008

 

$—

 

$—

 

$31,008

Weighted average yield
%
 
1.72
%
 
%
 
%
 
1.72
%
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
 
 
 
 
 
 
 
 
 
Amortized cost
41,207

 
111,399

 
63,797

 
31,966

 
248,369

Weighted average yield
3.73
%
 
3.38
%
 
2.79
%
 
1.80
%
 
3.08
%
Obligations of state and political subdivisions:
 
 
 
 
 
 
 
 
 
Amortized cost
2,546

 
26,690

 
23,290

 

 
52,526

Weighted average yield
3.64
%
 
3.92
%
 
3.98
%
 
%
 
3.93
%
Individual name issuer trust preferred debt securities:
 
 
 
 
 
 
 
 
 
Amortized cost

 

 

 
30,743

 
30,743

Weighted average yield
%
 
%
 
%
 
1.08
%
 
1.08
%
Corporate bonds:
 
 
 
 
 
 
 
 
 
Amortized cost
5,714

 
204

 
204

 

 
6,122

Weighted average yield
2.81
%
 
1.62
%
 
3.20
%
 
%
 
2.78
%
Total debt securities available for sale:
 
 
 
 
 
 
 
 
 
Amortized cost

$49,467

 

$169,301

 

$87,291

 

$62,709

 

$368,768

Weighted average yield
3.62
%
 
3.16
%
 
3.11
%
 
1.45
%
 
2.92
%
Fair value

$51,123

 

$174,197

 

$90,451

 

$60,302

 

$376,073

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

$3,261

 

$10,120

 

$8,015

 

$5,084

 

$26,480

Weighted average yield
3.10
%
 
3.03
%
 
2.82
%
 
1.02
%
 
2.59
%
Fair value

$3,334

 

$10,347

 

$8,195

 

$5,198

 

$27,074


Included in the above table are debt securities with an amortized cost balance of $106.1 million and a fair value of $104.1 million at September 30, 2014 that are callable at the discretion of the issuers.  Final maturities of the callable securities range from twelve months to twenty-two 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.



11


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
September 30, 2014
#
 
Fair
Value
 
Unrealized
Losses
 
#

 
Fair
Value
 
Unrealized
Losses
 
#

 
Fair
Value
 
Unrealized
Losses
Obligations of U.S. government-sponsored enterprises
4

 

$30,919

 

($89
)
 

 

$—

 

$—

 
4

 

$30,919

 

($89
)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
4

 
42,231

 
(147
)
 
1

 
912

 
(13
)
 
5

 
43,143

 
(160
)
Individual name issuer trust preferred debt securities

 

 

 
11

 
27,197

 
(3,546
)
 
11

 
27,197

 
(3,546
)
Corporate bonds
1

 
214

 
(3
)
 
1

 
198

 
(4
)
 
2

 
412

 
(7
)
Total temporarily impaired securities
9

 

$73,364

 

($239
)
 
13

 

$28,307

 

($3,563
)
 
22

 

$101,671

 

($3,802
)

(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 September 30, 2014 were eleven trust preferred security holdings issued by seven individual companies in the banking sector.  Management believes the unrealized loss position in these holdings is attributable to the general widening of spreads for this category of debt securities issued by financial services companies since the time these securities were purchased.  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 September 30, 2014, individual name issuer trust preferred debt securities with an amortized cost of $11.9 million and unrealized losses of $1.4 million were rated below investment grade by Standard & Poors, Inc. (“S&P”).  Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information.  We noted no additional downgrades to below investment grade between the reporting period date and the filing date of this report.  Based on these analyses, management concluded that it expects to recover the entire amortized cost basis of these securities.  Furthermore, Washington Trust does not intend to sell these securities and it is not more-likely-than-not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity.  Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2014.




12


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
 
Nine months
Periods ended September 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)
September 30, 2014
 
December 31, 2013
 
Amount

 
%

 
Amount

 
%

Commercial:
 
 
 
 
 
 
 
Mortgages (1)

$766,703

 
29
%
 

$796,249

 
32
%
Construction and development (2)
58,750

 
2

 
36,289

 
1

Other (3)
564,920

 
21

 
530,797

 
22

Total commercial
1,390,373

 
52

 
1,363,335

 
55

Residential real estate:
 
 
 
 
 
 
 
Mortgages
912,956

 
34

 
749,163

 
30

Homeowner construction
32,624

 
1

 
23,511

 
1

Total residential real estate
945,580

 
35

 
772,674

 
31

Consumer:
 
 
 
 
 
 
 
Home equity lines
240,567

 
9

 
231,362

 
9

Home equity loans
46,455

 
2

 
40,212

 
2

Other (4)
51,072

 
2

 
55,301

 
3

Total consumer
338,094

 
13

 
326,875

 
14

Total loans (5)

$2,674,047

 
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 $2.1 million and $879 thousand, respectively, and net unamortized premiums on purchased loans of $97 thousand and $99 thousand, respectively, at September 30, 2014 and December 31, 2013.




13


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

At September 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)
Sep 30,
2014
 
Dec 31,
2013
Commercial:
 
 
 
Mortgages

$6,022

 

$7,492

Construction and development

 

Other
1,326

 
1,291

Residential real estate:
 
 
 
Mortgages
7,890

 
8,315

Homeowner construction

 

Consumer:
 
 
 
Home equity lines
1,426

 
469

Home equity loans
300

 
687

Other
1

 
48

Total nonaccrual loans

$16,965

 

$18,302

Accruing loans 90 days or more past due

$—

 

$—


As of September 30, 2014 and December 31, 2013, nonaccrual loans of $2.6 million and $2.7 million, respectively, were current as to the payment of principal and interest.

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




14


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
 
 
 
 
 
 
September 30, 2014
30-59
 
60-89
 
Over 90
 
Total Past Due
 
Current
 
Total Loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$—

 

$—

 

$5,995

 

$5,995

 

$760,708

 

$766,703

Construction and development

 

 

 

 
58,750

 
58,750

Other
1,129

 
314

 
970

 
2,413

 
562,507

 
564,920

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
2,582

 
2,001

 
3,922

 
8,505

 
904,451

 
912,956

Homeowner construction

 

 

 

 
32,624

 
32,624

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines
1,441

 
346

 
852

 
2,639

 
237,928

 
240,567

Home equity loans
188

 
8

 
136

 
332

 
46,123

 
46,455

Other
48

 
2

 
1

 
51

 
51,021

 
51,072

Total loans

$5,388

 

$2,671

 

$11,876

 

$19,935

 

$2,654,112

 

$2,674,047


(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

 
348

 
862

 
39,350

 
40,212

Other
43

 

 
39

 
82

 
55,219

 
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 September 30, 2014 and December 31, 2013, were nonaccrual loans of $14.4 million and $15.6 million, respectively. All loans 90 days or more past due at September 30, 2014 and December 31, 2013 were classified as nonaccrual.




15


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
 
Sep 30,
2014
 
Dec 31,
2013
 
Sep 30,
2014
 
Dec 31,
2013
 
Sep 30,
2014
 
Dec 31,
2013
No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$1,147

 

$998

 

$1,176

 

$998

 

$—

 

$—

Construction and development

 

 

 

 

 

Other
1,031

 
1,055

 
1,031

 
1,050

 

 

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
2,302

 
1,167

 
2,659

 
1,259

 

 

Homeowner construction

 

 

 

 

 

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines

 

 

 

 

 

Home equity loans

 

 

 

 

 

Other
113

 

 
112

 

 

 

Subtotal

$4,593

 

$3,220

 

$4,978

 

$3,307

 

$—

 

$—

With Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$14,579

 

$29,335

 

$14,558

 

$31,731

 

$927

 

$552

Construction and development

 

 

 

 

 

Other
1,335

 
1,506

 
1,753

 
1,945

 
207

 
463

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
1,734

 
3,122

 
1,790

 
3,507

 
256

 
463

Homeowner construction

 

 

 

 

 

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines
82

 
173

 
82