Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended JUNE 30, 2018 or |
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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)
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RHODE ISLAND | | 05-0404671 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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23 BROAD STREET | | |
WESTERLY, RHODE ISLAND | | 02891 |
(Address of principal executive offices) | | (Zip Code) |
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(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, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Mark one)
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Large accelerated filer x | | Accelerated filer o |
Non-accelerated filer o | | Smaller reporting company o |
(Do not check if a smaller reporting company) | | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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, 2018 was 17,278,116.
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FORM 10-Q |
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
For the Quarter Ended June 30, 2018 |
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TABLE OF CONTENTS |
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PART I. Financial Information
Item 1. Financial Statements
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Consolidated Balance Sheets (unaudited) | (Dollars in thousands, except par value) |
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| June 30, 2018 | | December 31, 2017 |
Assets: | | | |
Cash and due from banks |
| $132,068 |
| |
| $79,853 |
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Short-term investments | 2,624 |
| | 3,070 |
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Mortgage loans held for sale, at fair value | 35,207 |
| | 26,943 |
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Securities: | | | |
Available for sale, at fair value | 776,693 |
| | 780,954 |
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Held to maturity, at amortized cost (fair value $11,364 at June 30, 2018 and $12,721 at December 31, 2017) | 11,412 |
| | 12,541 |
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Total securities | 788,105 |
| | 793,495 |
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Federal Home Loan Bank stock, at cost | 46,281 |
| | 40,517 |
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Loans: | | | |
Total loans | 3,490,230 |
| | 3,374,071 |
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Less allowance for loan losses | 26,174 |
| | 26,488 |
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Net loans | 3,464,056 |
| | 3,347,583 |
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Premises and equipment, net | 28,377 |
| | 28,333 |
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Investment in bank-owned life insurance | 79,319 |
| | 73,267 |
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Goodwill | 63,909 |
| | 63,909 |
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Identifiable intangible assets, net | 8,645 |
| | 9,140 |
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Other assets | 88,651 |
| | 63,740 |
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Total assets |
| $4,737,242 |
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| $4,529,850 |
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Liabilities: | | | |
Deposits: | | | |
Noninterest-bearing deposits |
| $577,656 |
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| $578,410 |
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Interest-bearing deposits | 2,743,955 |
| | 2,664,297 |
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Total deposits | 3,321,611 |
| | 3,242,707 |
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Federal Home Loan Bank advances | 901,053 |
| | 791,356 |
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Junior subordinated debentures | 22,681 |
| | 22,681 |
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Other liabilities | 70,326 |
| | 59,822 |
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Total liabilities | 4,315,671 |
| | 4,116,566 |
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Commitments and contingencies (Note 18) |
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Shareholders’ Equity: | | | |
Common stock of $.0625 par value; authorized 60,000,000 shares; issued and outstanding 17,278,116 shares at June 30, 2018 and 17,226,508 shares at December 31, 2017 | 1,080 |
| | 1,077 |
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Paid-in capital | 118,883 |
| | 117,961 |
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Retained earnings | 336,670 |
| | 317,756 |
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Accumulated other comprehensive loss | (35,062 | ) | | (23,510 | ) |
Total shareholders’ equity | 421,571 |
| | 413,284 |
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Total liabilities and shareholders’ equity |
| $4,737,242 |
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| $4,529,850 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
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Consolidated Statements of Income (unaudited) | (Dollars and shares in thousands, except per share amounts) |
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| | Three Months | | Six Months |
Periods ended June 30, | 2018 | | 2017 | | 2018 | | 2017 |
Interest income: | | | | | | | |
Interest and fees on loans |
| $37,101 |
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| $31,642 |
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| $71,679 |
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| $61,994 |
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Taxable interest on securities | 5,358 |
| | 4,844 |
| | 10,476 |
| | 9,553 |
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Nontaxable interest on securities | 20 |
| | 72 |
| | 43 |
| | 184 |
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Dividends on Federal Home Loan Bank stock | 550 |
| | 439 |
| | 1,066 |
| | 826 |
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Other interest income | 257 |
| | 156 |
| | 462 |
| | 260 |
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Total interest and dividend income | 43,286 |
| | 37,153 |
| | 83,726 |
| | 72,817 |
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Interest expense: | |
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Deposits | 5,254 |
| | 3,591 |
| | 9,676 |
| | 7,093 |
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Federal Home Loan Bank advances | 4,707 |
| | 3,509 |
| | 8,690 |
| | 6,853 |
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Junior subordinated debentures | 214 |
| | 149 |
| | 397 |
| | 287 |
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Other interest expense | — |
| | — |
| | — |
| | 1 |
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Total interest expense | 10,175 |
| | 7,249 |
| | 18,763 |
| | 14,234 |
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Net interest income | 33,111 |
| | 29,904 |
| | 64,963 |
| | 58,583 |
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Provision for loan losses | 400 |
| | 700 |
| | 400 |
| | 1,100 |
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Net interest income after provision for loan losses | 32,711 |
| | 29,204 |
| | 64,563 |
| | 57,483 |
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Noninterest income: | | | | | | | |
Wealth management revenues | 9,602 |
| | 9,942 |
| | 19,875 |
| | 19,419 |
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Mortgage banking revenues | 2,941 |
| | 2,919 |
| | 5,779 |
| | 5,259 |
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Service charges on deposit accounts | 903 |
| | 901 |
| | 1,766 |
| | 1,784 |
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Card interchange fees | 961 |
| | 902 |
| | 1,808 |
| | 1,704 |
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Income from bank-owned life insurance | 537 |
| | 542 |
| | 1,052 |
| | 1,078 |
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Loan related derivative income | 668 |
| | 1,144 |
| | 809 |
| | 1,292 |
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Other income | 381 |
| | 456 |
| | 647 |
| | 780 |
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Total noninterest income | 15,993 |
| | 16,806 |
| | 31,736 |
| | 31,316 |
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Noninterest expense: | | | | | | | |
Salaries and employee benefits | 17,304 |
| | 17,418 |
| | 35,076 |
| | 34,335 |
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Outsourced services | 2,350 |
| | 1,710 |
| | 4,223 |
| | 3,167 |
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Net occupancy | 1,930 |
| | 1,767 |
| | 3,932 |
| | 3,734 |
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Equipment | 1,069 |
| | 1,313 |
| | 2,249 |
| | 2,780 |
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Legal, audit and professional fees | 555 |
| | 582 |
| | 1,281 |
| | 1,198 |
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FDIC deposit insurance costs | 422 |
| | 469 |
| | 826 |
| | 950 |
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Advertising and promotion | 329 |
| | 362 |
| | 506 |
| | 599 |
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Amortization of intangibles | 247 |
| | 257 |
| | 495 |
| | 534 |
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Change in fair value of contingent consideration | — |
| | — |
| | — |
| | (310 | ) |
Other expenses | 2,082 |
| | 2,428 |
| | 4,830 |
| | 4,605 |
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Total noninterest expense | 26,288 |
| | 26,306 |
| | 53,418 |
| | 51,592 |
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Income before income taxes | 22,416 |
| | 19,704 |
| | 42,881 |
| | 37,207 |
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Income tax expense | 4,742 |
| | 6,505 |
| | 8,996 |
| | 12,226 |
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Net income |
| $17,674 |
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| $13,199 |
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| $33,885 |
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| $24,981 |
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Weighted average common shares outstanding - basic | 17,272 |
| | 17,206 |
| | 17,253 |
| | 17,196 |
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Weighted average common shares outstanding - diluted | 17,387 |
| | 17,316 |
| | 17,384 |
| | 17,312 |
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Per share information: | Basic earnings per common share |
| $1.02 |
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| $0.77 |
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| $1.96 |
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| $1.45 |
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| Diluted earnings per common share |
| $1.01 |
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| $0.76 |
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| $1.94 |
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| $1.44 |
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| Cash dividends declared per share |
| $0.43 |
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| $0.38 |
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| $0.86 |
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| $0.76 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
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Consolidated Statements of Comprehensive Income (unaudited) | (Dollars in thousands) |
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| Three Months | | Six Months |
Periods ended June 30, | 2018 | | 2017 | | 2018 | | 2017 |
Net income |
| $17,674 |
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| $13,199 |
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| $33,885 |
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| $24,981 |
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Other comprehensive income (loss), net of tax: | | | | | | | |
Net change in fair value of securities available for sale | (3,112 | ) | | 1,828 |
| | (13,526 | ) | | 2,229 |
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Net change in fair value of cash flow hedges | 365 |
| | (448 | ) | | 1,254 |
| | (350 | ) |
Net change in defined benefit plan obligations | 360 |
| | (4 | ) | | 720 |
| | 209 |
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Total other comprehensive (loss) income, net of tax | (2,387 | ) | | 1,376 |
| | (11,552 | ) | | 2,088 |
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Total comprehensive income |
| $15,287 |
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| $14,575 |
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| $22,333 |
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| $27,069 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
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Consolidated Statements of Changes in Shareholders' Equity (unaudited) | (Dollars and shares in thousands) |
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| Common Shares Outstanding | | Common Stock | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
Balance at January 1, 2018 | 17,227 |
| |
| $1,077 |
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| $117,961 |
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| $317,756 |
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| ($23,510 | ) | |
| $413,284 |
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Net income | — |
| | — |
| | — |
| | 33,885 |
| | — |
| | 33,885 |
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Total other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (11,552 | ) | | (11,552 | ) |
Cash dividends declared | — |
| | — |
| | — |
| | (14,971 | ) | | — |
| | (14,971 | ) |
Share-based compensation | — |
| | — |
| | 1,319 |
| | — |
| | — |
| | 1,319 |
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Exercise of stock options, issuance of other compensation-related equity awards | 51 |
| | 3 |
| | (397 | ) | | — |
| | — |
| | (394 | ) |
Balance at June 30, 2018 | 17,278 |
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| $1,080 |
| |
| $118,883 |
| |
| $336,670 |
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| ($35,062 | ) | |
| $421,571 |
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| | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Common Stock | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total |
Balance at January 1, 2017 | 17,171 |
| |
| $1,073 |
| |
| $115,123 |
| |
| $294,365 |
| |
| ($19,757 | ) | |
| $390,804 |
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Net income | — |
| | — |
| | — |
| | 24,981 |
| | — |
| | 24,981 |
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Total other comprehensive income, net of tax | — |
| | — |
| | — |
| | — |
| | 2,088 |
| | 2,088 |
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Cash dividends declared | — |
| | — |
| | — |
| | (13,195 | ) | | — |
| | (13,195 | ) |
Share-based compensation | — |
| | — |
| | 1,198 |
| | — |
| | — |
| | 1,198 |
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Exercise of stock options, issuance of other compensation-related equity awards | 39 |
| | 3 |
| | 163 |
| | — |
| | — |
| | 166 |
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Balance at June 30, 2017 | 17,210 |
| |
| $1,076 |
| |
| $116,484 |
| |
| $306,151 |
| |
| ($17,669 | ) | |
| $406,042 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
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Consolidated Statement of Cash Flows (unaudited) | (Dollars in thousands) |
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Six months ended June 30, | 2018 |
| | 2017 |
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Cash flows from operating activities: | | | |
Net income |
| $33,885 |
| |
| $24,981 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Provision for loan losses | 400 |
| | 1,100 |
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Depreciation of premises and equipment | 1,630 |
| | 1,759 |
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Net amortization of premiums and discounts on securities and loans | 1,386 |
| | 1,616 |
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Amortization of intangibles | 495 |
| | 534 |
|
Goodwill impairment | — |
| | 150 |
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Share-based compensation | 1,319 |
| | 1,198 |
|
Tax benefit from stock option exercises and other equity awards | 352 |
| | 350 |
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Income from bank-owned life insurance | (1,052 | ) | | (1,078 | ) |
Net gains on loan sales and commissions on loans originated for others, including fair value adjustments | (5,465 | ) | | (5,052 | ) |
Proceeds from sales of loans | 182,964 |
| | 215,239 |
|
Loans originated for sale | (188,185 | ) | | (213,929 | ) |
Change in fair value of contingent consideration liability | — |
| | (310 | ) |
Increase in other assets | (16,777 | ) | | (6,237 | ) |
Increase in other liabilities | 11,815 |
| | 1,110 |
|
Net cash provided by operating activities | 22,767 |
| | 21,431 |
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Cash flows from investing activities: | | | |
Purchases of: | Mortgage-backed securities available for sale | (61,619 | ) | | (35,213 | ) |
| Other investment securities available for sale | (1,064 | ) | | (19,963 | ) |
Maturities and principal payments of: | Mortgage-backed securities available for sale | 41,270 |
| | 38,861 |
|
| Other investment securities available for sale | 6,795 |
| | 8,955 |
|
| Mortgage-backed securities held to maturity | 1,077 |
| | 1,614 |
|
Purchases of Federal Home Loan Bank stock | (5,764 | ) | | (1,511 | ) |
Net (increase) decrease in loans | (115,986 | ) | | 33,596 |
|
Purchases of loans | (1,676 | ) | | — |
|
Proceeds from the sale of property acquired through foreclosure or repossession | — |
| | 213 |
|
Purchases of premises and equipment | (1,675 | ) | | (1,247 | ) |
Purchases of bank-owned life insurance | (5,000 | ) | | — |
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Net cash (used in) provided by investing activities | (143,642 | ) | | 25,305 |
|
Cash flows from financing activities: | | | |
Net increase (decrease) in deposits | 78,904 |
| | (42,563 | ) |
Proceeds from Federal Home Loan Bank advances | 1,135,000 |
| | 657,500 |
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Repayment of Federal Home Loan Bank advances | (1,025,303 | ) | | (636,697 | ) |
Payment of contingent consideration liability | (1,217 | ) | | — |
|
Net proceeds from stock option exercises and issuance of other equity awards | (394 | ) | | 166 |
|
Cash dividends paid | (14,346 | ) | | (13,007 | ) |
Net cash provided by (used in) financing activities | 172,644 |
| | (34,601 | ) |
Net increase in cash and cash equivalents | 51,769 |
| | 12,135 |
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Cash and cash equivalents at beginning of period | 82,923 |
| | 107,797 |
|
Cash and cash equivalents at end of period |
| $134,692 |
| |
| $119,932 |
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Noncash Investing and Financing Activities: | | | |
Loans charged off |
| $793 |
| |
| $721 |
|
Loans transferred to property acquired through foreclosure or repossession | 3,074 |
| | 576 |
|
Supplemental Disclosures: | | | |
Interest payments |
| $17,576 |
| |
| $14,111 |
|
Income tax payments | 8,570 |
| | 11,849 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
Condensed Notes to Unaudited Consolidated Financial Statements
(1) General Information
Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company that has elected to be a financial holding company. The Bancorp’s subsidiaries include The Washington Trust Company, of Westerly (the “Bank”), a Rhode Island chartered commercial bank founded in 1800, and Weston Securities Corporation (“WSC”). Through its subsidiaries, the Bancorp offers a comprehensive product line of banking and 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; its automated teller machines (“ATMs”); telephone banking; mobile banking and its internet website (www.washtrust.com).
The Unaudited Consolidated Financial Statements include the accounts of the Bancorp and its subsidiaries (collectively the “Corporation” or “Washington Trust”). All intercompany transactions have been eliminated. Certain previously reported amounts have been reclassified to conform to the current year’s presentation.
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.
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 Unaudited 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, 2017.
(2) Recently Issued Accounting Pronouncements
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. As issued, ASU 2014-09 was 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. In August 2015, Accounting Standards Update No. 2015-14, “Deferral of the Effective Date” (“ASU 2015-14”) was issued and delayed the effective date of ASU 2014-09 to annual and interim periods in fiscal years beginning after December 15, 2017. In 2016, Accounting Standards Update No. 2016-08, “Principal versus Agent Considerations” (“ASU 2016-08”), Accounting Standards Update No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”) and Accounting Standards Update No. 2016-12, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”) were issued. These ASUs did not change the core principle for revenue recognition in Topic 606; instead, the amendments provided more detailed guidance in a few areas and additional implementation guidance and examples to reduce the degree of judgment necessary to comply with Topic 606. The effective date and transition requirements for ASU 2016-08, ASU 2016-10 and ASU 2016-12 were the same as those provided by ASU 2015-14. Management assembled a project team to address the changes pursuant to Topic 606. The project team completed a scope assessment and contract review for in-scope revenue streams. Washington Trust's largest source of revenue is net interest income on financial assets and liabilities, which was explicitly excluded from the scope of this ASU. Revenue streams that were within the scope of Topic 606 include wealth management revenues, service charges on deposit accounts and card interchange fees. Management adopted the provisions of ASU 2014-09 effective January 1, 2018, using the modified retrospective transition method. The adoption did not have a material impact on the Corporation’s consolidated financial statements. See Note 12 for further details.
Financial Instruments - Overall - Topic 825
Accounting Standards Update No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), was issued in January 2016 and provides revised guidance related to the accounting for and reporting of financial instruments. Some of the main provisions include: requiring most equity securities to be reported at fair value with unrealized gains and losses reported in the income statement; requiring separate presentation of financial assets and liabilities by
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
measurement category and form (i.e. securities or loans); clarifying that entities must assess valuation allowances on a deferred tax asset related to available for sale debt securities in combination with their other deferred tax assets; and eliminating the requirement to disclose the method and significant assumptions used to estimate fair value for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Management adopted the provisions of ASU 2016-01 effective January 1, 2018. The adoption did not have a material impact on the Corporation’s consolidated financial statements.
Accounting Standards Update No. 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2018-03”), was issued in February 2018 to clarify certain aspects of the guidance issued in ASU 2016-01. Companies, such as Washington Trust, were not required to adopt the provisions of ASU 2018-03 until the interim period beginning after June 15, 2018. However, early adoption was permitted, as long as ASU 2016-01 provisions were adopted. Management early adopted the provisions of ASU 2018-03 effective January 1, 2018. The adoption did not have an impact on the Corporation’s consolidated financial statements.
Leases - Topic 842
Accounting Standards Update No. 2016-02, “Leases” (“ASU 2016-02”), was issued in February 2016 and provides revised guidance related to the accounting and reporting of leases. ASU 2016-02 requires lessees to recognize most leases on the balance sheet. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. ASU 2016-02 requires a modified retrospective transition, with a number of practical expedients that entities may elect to apply. In January 2018, Accounting Standards Update No. 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 (“ASU 2018-01”) was issued to address concerns about the costs and complexity of complying with the transition provisions of ASU 2016-02. In July 2018, Accounting Standards Update No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”) was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02. Also in July 2018, Accounting Standards Update No. 2018-11, “Targeted Improvements” (“ASU 2018-11”) was issued and allows for an optional transition method in which the provisions of Topic 842 would be applied upon the adoption date and would not have to be retroactively applied to the earliest reporting period presented in the consolidated financial statements. The Corporation intends to use this optional transition method for the adoption of Topic 842. These ASUs are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Management has assembled a project team that meets regularly to address the changes pursuant to Topic 842. The Corporation rents premises used in business operations under non-cancelable operating leases, which currently are not reflected in its Consolidated Balance Sheets. As disclosed in Note 18, the Corporation was committed to $37.3 million of future minimum lease payments under these non-cancelable operating leases. Upon adoption of ASU 2016-02 on January 1, 2019, the Corporation expects to report increased assets and liabilities as a result of recognizing right-of-use assets and lease liabilities in its Consolidated Balance Sheets. The Corporation does not expect a material change to the timing of expense recognition in the Consolidated Statements of Income.
Financial Instruments - Credit Losses - Topic 326
Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses” (“ASU 2016-13”), was issued in June 2016. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 provides for a modified retrospective transition, resulting in a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective, except for debt securities for which an other-than-temporary impairment has previously been recognized. For these debt securities, a prospective transition approach will be adopted in order to maintain the same amortized cost prior to and subsequent to the effective date of ASU 2016-13. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted in 2019. Washington Trust is evaluating the effect that this ASU will have on consolidated financial statements and disclosures. Management has assembled a project team that meets regularly to evaluate the provisions of this ASU and to address the additional data requirements necessary and the approach for implementation. The Corporation does not plan to early adopt ASU 2016-13 and it has not yet determined the impact it will have on its consolidated financial statements.
Statement of Cash Flows - Topic 230
Accounting Standards Update No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), was issued in August 2016. ASU 2016-15 provides classification guidance on certain cash receipts and cash payments, including,
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
but not limited to, debt prepayment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance policies and distributions received from equity method investees. The adoption of ASU 2016-15 requires a retrospective transition method applied to each period presented. This ASU was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Management adopted the provisions of ASU 2016-15 effective January 1, 2018. The adoption did not have a material impact on the Corporation’s consolidated financial statements.
Accounting Standards Update No. 2016-18, “Restricted Cash” (“ASU 2016-18”), was issued in November 2016. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash. Restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of ASU 2016-18 requires a retrospective transition method applied to each period presented. This ASU was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Management adopted the provisions of ASU 2016-18 effective January 1, 2018. The adoption did not have a material impact on the Corporation’s consolidated financial statements.
Compensation - Retirement Benefits - Topic 715
Accounting Standards Update No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”), was issued in March 2017. ASU 2017-07 requires that employers include the service cost component of net periodic benefit cost in the same line item as other employee compensation costs and all other components of net periodic benefit cost in a separate line item(s) in the statement of income. In addition, the line item in which the components of net periodic benefit cost other than the service cost are included shall be identified as such on the statement of income or in the notes to the financial statements. ASU 2017-07 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 requiring retrospective application for all periods presented. Management adopted the provisions of ASU 2017-07 effective January 1, 2018, utilizing the practical expedient that permitted employers to use the amounts previously disclosed in notes to financial statements as an estimation basis for applying the retrospective application requirements. The adoption of ASU 2017-07 resulted in an increase in salaries and employee benefits, a decrease in other expenses and no change to net income. The adoption did not have a material impact on the Corporation’s consolidated financial statements. See Note 13 for further details.
Compensation - Stock Compensation - Topic 718
Accounting Standards Update No. 2017-09, “Scope of Modification Accounting” (“ASU 2017-09”), was issued in May 2017 to provide clarity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. ASU 2017-09 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with provisions applied on a prospective basis. Management adopted the provisions of ASU 2017-09 effective January 1, 2018. The adoption did not have a material impact on the Corporation’s consolidated financial statements.
Derivatives and Hedging - Topic 815
Accounting Standards Update No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), was issued in August 2017 to better align financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The provisions of ASU 2017-12 should be applied on a modified retrospective transition method in which the Corporation will recognize the cumulative effect of the change in the opening balance of retained earnings as of the adoption date. The Corporation has not yet determined the impact ASU 2017-12 will have on its consolidated financial statements.
(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 $13.3 million at June 30, 2018 and $14.1 million at December 31, 2017 and were included in cash and due from banks in the Unaudited Consolidated Balance Sheets.
As of June 30, 2018 and December 31, 2017, cash and due from banks included interest-bearing deposits in other banks of $73.3 million and $31.9 million, respectively.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
(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, 2018 | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Securities Available for Sale: | | | | | | | |
Obligations of U.S. government-sponsored enterprises |
| $171,496 |
| |
| $— |
| |
| ($6,960 | ) | |
| $164,536 |
|
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 604,578 |
| | 1,646 |
| | (20,540 | ) | | 585,684 |
|
Obligations of states and political subdivisions | 935 |
| | 2 |
| | — |
| | 937 |
|
Individual name issuer trust preferred debt securities | 13,299 |
| | — |
| | (799 | ) | | 12,500 |
|
Corporate bonds | 13,913 |
| | — |
| | (877 | ) | | 13,036 |
|
Total securities available for sale |
| $804,221 |
| |
| $1,648 |
| |
| ($29,176 | ) | |
| $776,693 |
|
Held to Maturity: | | | | | | | |
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises |
| $11,412 |
| |
| $— |
| |
| ($48 | ) | |
| $11,364 |
|
Total securities held to maturity |
| $11,412 |
| |
| $— |
| |
| ($48 | ) | |
| $11,364 |
|
Total securities |
| $815,633 |
| |
| $1,648 |
| |
| ($29,224 | ) | |
| $788,057 |
|
|
| | | | | | | | | | | | | | | |
(Dollars in thousands) | |
December 31, 2017 | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
Securities Available for Sale: | | | | | | | |
Obligations of U.S. government-sponsored enterprises |
| $161,479 |
| |
| $— |
| |
| ($3,875 | ) | |
| $157,604 |
|
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 594,944 |
| | 3,671 |
| | (7,733 | ) | | 590,882 |
|
Obligations of states and political subdivisions | 2,355 |
| | 4 |
| | — |
| | 2,359 |
|
Individual name issuer trust preferred debt securities | 18,106 |
| | — |
| | (1,122 | ) | | 16,984 |
|
Corporate bonds | 13,917 |
| | 13 |
| | (805 | ) | | 13,125 |
|
Total securities available for sale |
| $790,801 |
| |
| $3,688 |
| |
| ($13,535 | ) | |
| $780,954 |
|
Held to Maturity: | | | | | | | |
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises |
| $12,541 |
| |
| $180 |
| |
| $— |
| |
| $12,721 |
|
Total securities held to maturity |
| $12,541 |
| |
| $180 |
| |
| $— |
| |
| $12,721 |
|
Total securities |
| $803,342 |
| |
| $3,868 |
| |
| ($13,535 | ) | |
| $793,675 |
|
As of June 30, 2018 and December 31, 2017, securities with a fair value of $361.3 million and $357.8 million, respectively, were pledged as collateral for Federal Home Loan Bank of Boston (“FHLB”) borrowings, potential borrowings with the FRB, certain public deposits and for other purposes. See Note 7 for additional disclosure on FHLB borrowings.
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.
|
| | | | | | | | | | | | | | | |
(Dollars in thousands) | Available for Sale | | Held to Maturity |
June 30, 2018 | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Due in one year or less |
| $63,389 |
| |
| $61,419 |
| |
| $1,419 |
| |
| $1,413 |
|
Due after one year to five years | 270,844 |
| | 261,678 |
| | 4,694 |
| | 4,674 |
|
Due after five years to ten years | 282,932 |
| | 272,643 |
| | 3,882 |
| | 3,866 |
|
Due after ten years | 187,056 |
| | 180,953 |
| | 1,417 |
| | 1,411 |
|
Total securities |
| $804,221 |
| |
| $776,693 |
| |
| $11,412 |
| |
| $11,364 |
|
Included in the above table are debt securities with an amortized cost balance of $198.7 million and a fair value of $190.1 million at June 30, 2018 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 11 months to 19 years, with call features ranging from 1 month to 3 years.
Other-Than-Temporary Impairment Assessment
Washington Trust 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.
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, 2018 | # | | Fair Value | Unrealized Losses | | # |
| | Fair Value | Unrealized Losses | | # |
| | Fair Value | Unrealized Losses |
Obligations of U.S. government-sponsored enterprises | 8 |
| |
| $68,737 |
|
| ($1,759 | ) | | 9 |
| |
| $95,799 |
|
| ($5,201 | ) | | 17 |
| |
| $164,536 |
|
| ($6,960 | ) |
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 39 |
| | 279,362 |
| (6,407 | ) | | 22 |
| | 255,083 |
| (14,181 | ) | | 61 |
| | 534,445 |
| (20,588 | ) |
Individual name issuer trust preferred debt securities | — |
| | — |
| — |
| | 5 |
| | 12,500 |
| (799 | ) | | 5 |
| | 12,500 |
| (799 | ) |
Corporate bonds | 6 |
| | 2,106 |
| (20 | ) | | 3 |
| | 10,930 |
| (857 | ) | | 9 |
| | 13,036 |
| (877 | ) |
Total temporarily impaired securities | 53 |
| |
| $350,205 |
|
| ($8,186 | ) | | 39 |
| |
| $374,312 |
|
| ($21,038 | ) | | 92 |
| |
| $724,517 |
|
| ($29,224 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Less than 12 Months | | 12 Months or Longer | | Total |
December 31, 2017 | # |
| | Fair Value | Unrealized Losses | | # |
| | Fair Value | Unrealized Losses | | # |
| | Fair Value | Unrealized Losses |
Obligations of U.S. government-sponsored enterprises | 8 |
| |
| $69,681 |
|
| ($798 | ) | | 8 |
| |
| $87,923 |
|
| ($3,077 | ) | | 16 |
| |
| $157,604 |
|
| ($3,875 | ) |
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 20 |
| | 128,965 |
| (613 | ) | | 22 |
| | 279,693 |
| (7,120 | ) | | 42 |
| | 408,658 |
| (7,733 | ) |
Individual name issuer trust preferred debt securities | — |
| | — |
| — |
| | 7 |
| | 16,984 |
| (1,122 | ) | | 7 |
| | 16,984 |
| (1,122 | ) |
Corporate bonds | 3 |
| | 921 |
| (5 | ) | | 3 |
| | 10,980 |
| (800 | ) | | 6 |
| | 11,901 |
| (805 | ) |
Total temporarily impaired securities | 31 |
| |
| $199,567 |
|
| ($1,416 | ) | | 40 |
| |
| $395,580 |
|
| ($12,119 | ) | | 71 |
| |
| $595,147 |
|
| ($13,535 | ) |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Further deterioration in credit quality of the underlying issuers of the securities, further deterioration in the condition of the financial services industry, 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 write-downs.
U.S. Government Agency and U.S. Government-Sponsored Enterprise Securities, including Mortgage-Backed Securities
The gross unrealized losses on U.S. government agency and U.S government-sponsored debt securities, including mortgage-backed securities, were primarily attributable to relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on the 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 June 30, 2018.
Trust Preferred Debt Securities of Individual Name Issuers
Included in debt securities in an unrealized loss position at June 30, 2018 were five trust preferred security holdings issued by four individual companies in the banking sector. Management believes the unrealized loss position in these holdings was 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 interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. As of June 30, 2018, individual name issuer trust preferred debt securities with an amortized cost of $6.1 million and unrealized losses of $398 thousand 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 June 30, 2018 and the filing date of this report. Based on this review, 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, 2018.
Corporate Bonds
At June 30, 2018, Washington Trust had nine corporate bond holdings with unrealized losses totaling $877 thousand. These investment grade corporate bonds were issued by large corporations. Management believes the unrealized losses on these bonds are a function of the changes in the investment spreads and interest rate movements and not changes in the credit quality of the issuers of the debt securities. 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 June 30, 2018.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
(5) Loans
The following is a summary of loans:
|
| | | | | | | | | | | | | |
(Dollars in thousands) | June 30, 2018 | | December 31, 2017 |
| Amount |
| | % |
| | Amount |
| | % |
|
Commercial: | | | | | | | |
Commercial real estate (1) |
| $1,218,643 |
| | 35 | % | |
| $1,210,495 |
| | 36 | % |
Commercial & industrial (2) | 632,029 |
| | 18 |
| | 612,334 |
| | 18 |
|
Total commercial | 1,850,672 |
| | 53 |
| | 1,822,829 |
| | 54 |
|
Residential Real Estate: | | | | | | | |
Residential real estate (3) | 1,327,418 |
| | 38 |
| | 1,227,248 |
| | 36 |
|
Consumer: | | | | | | | |
Home equity | 283,744 |
| | 8 |
| | 292,467 |
| | 9 |
|
Other (4) | 28,396 |
| | 1 |
| | 31,527 |
| | 1 |
|
Total consumer | 312,140 |
| | 9 |
| | 323,994 |
| | 10 |
|
Total loans (5) |
| $3,490,230 |
| | 100 | % | |
| $3,374,071 |
| | 100 | % |
| |
(1) | Commercial real estate loans consist of commercial mortgages primarily secured by income producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. |
| |
(2) | Commercial & industrial consist of loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate. |
| |
(3) | Residential real estate loans consist of mortgage and homeowner construction loans secured by one- to four- family residential properties. |
| |
(4) | Other consumer loans consists of loans to individuals secured by general aviation aircraft and other personal installment loans. |
| |
(5) | Includes net unamortized loan origination costs of $4.5 million and $3.8 million, respectively, at June 30, 2018 and December 31, 2017 and net unamortized premiums on purchased loans of $794 thousand and $878 thousand, respectively, at June 30, 2018 and December 31, 2017. |
As of June 30, 2018 and December 31, 2017, there were $1.8 billion and $1.6 billion, respectively, of loans pledged as collateral to the FHLB under a blanket pledge agreement and to the FRB for the discount window. See Note 7 for additional disclosure regarding borrowings.
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, 2018 | 30-59 | | 60-89 | | Over 90 | | Total Past Due | | Current | | Total Loans |
Commercial: | | | | | | | | | | | |
Commercial real estate |
| $— |
| |
| $— |
| |
| $— |
| |
| $— |
| |
| $1,218,643 |
| |
| $1,218,643 |
|
Commercial & industrial | 2,454 |
| | — |
| | 397 |
| | 2,851 |
| | 629,178 |
| | 632,029 |
|
Total commercial | 2,454 |
| | — |
| | 397 |
| | 2,851 |
| | 1,847,821 |
| | 1,850,672 |
|
Residential Real Estate: | | | | | | | | | | | |
Residential real estate | 6,540 |
| | 1,150 |
| | 3,553 |
| | 11,243 |
| | 1,316,175 |
| | 1,327,418 |
|
Consumer: | | | | | | | | | | | |
Home equity | 1,713 |
| | 385 |
| | 487 |
| | 2,585 |
| | 281,159 |
| | 283,744 |
|
Other | 15 |
| | 1 |
| | — |
| | 16 |
| | 28,380 |
| | 28,396 |
|
Total consumer | 1,728 |
| | 386 |
| | 487 |
| | 2,601 |
| | 309,539 |
| | 312,140 |
|
Total loans |
| $10,722 |
| |
| $1,536 |
| |
| $4,437 |
| |
| $16,695 |
| |
| $3,473,535 |
| |
| $3,490,230 |
|
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Days Past Due | | | | | | |
December 31, 2017 | 30-59 | | 60-89 | | Over 90 | | Total Past Due | | Current | | Total Loans |
Commercial: | | | | | | | | | | | |
Commercial real estate |
| $6 |
| |
| $— |
| |
| $4,954 |
| |
| $4,960 |
| |
| $1,205,535 |
| |
| $1,210,495 |
|
Commercial & industrial | 3,793 |
| | 2 |
| | 281 |
| | 4,076 |
| | 608,258 |
| | 612,334 |
|
Total commercial | 3,799 |
| | 2 |
| | 5,235 |
| | 9,036 |
| | 1,813,793 |
| | 1,822,829 |
|
Residential Real Estate: | | | | | | | | | | | |
Residential real estate | 1,678 |
| | 2,274 |
| | 3,903 |
| | 7,855 |
| | 1,219,393 |
| | 1,227,248 |
|
Consumer: | | | | | | | | | | | |
Home equity | 2,798 |
| | 75 |
| | 268 |
| | 3,141 |
| | 289,326 |
| | 292,467 |
|
Other | 29 |
| | — |
| | 14 |
| | 43 |
| | 31,484 |
| | 31,527 |
|
Total consumer | 2,827 |
| | 75 |
| | 282 |
| | 3,184 |
| | 320,810 |
| | 323,994 |
|
Total loans |
| $8,304 |
| |
| $2,351 |
| |
| $9,420 |
| |
| $20,075 |
| |
| $3,353,996 |
| |
| $3,374,071 |
|
Included in past due loans as of June 30, 2018 and December 31, 2017, were nonaccrual loans of $8.6 million and $11.8 million, respectively.
All loans 90 days or more past due at June 30, 2018 and December 31, 2017 were classified as nonaccrual.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Impaired Loans
Impaired loans are nonaccrual loans, which 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, as well as loans restructured in a troubled debt restructuring. The Corporation identifies loss allocations for impaired loans on an individual loan basis.
The following is a summary of impaired loans:
|
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Recorded Investment (1) | | Unpaid Principal | | Related Allowance |
| Jun 30, 2018 | | Dec 31, 2017 | | Jun 30, 2018 | | Dec 31, 2017 | | Jun 30, 2018 | | Dec 31, 2017 |
No Related Allowance Recorded | | | | | | | | | | | |
Commercial: | | | | | | | | | | | |
Commercial real estate |
| $— |
| |
| $— |
| |
| $— |
| |
| $— |
| |
| $— |
| |
| $— |
|
Commercial & industrial | 5,426 |
| | 4,986 |
| | 5,477 |
| | 5,081 |
| | — |
| | — |
|
Total commercial | 5,426 |
| | 4,986 |
| | 5,477 |
| | 5,081 |
| | — |
| | — |
|
Residential Real Estate: | | | | | | | | | | | |
Residential real estate | 9,078 |
| | 9,069 |
| | 9,245 |
| | 9,256 |
| | — |
| | — |
|
Consumer: | | | | | | | | | | | |
Home equity | 1,124 |
| | 557 |
| | 1,124 |
| | 557 |
| | — |
| | — |
|
Other | — |
| | 14 |
| | — |
| | 14 |
| | — |
| | — |
|
Total consumer | 1,124 |
| | 571 |
| | 1,124 |
| | 571 |
| | — |
| | — |
|
Subtotal | 15,628 |
| | 14,626 |
| | 15,846 |
| | 14,908 |
| | — |
| | — |
|
With Related Allowance Recorded | | | | | | | | | | |
Commercial: | | | | | | | | | | | |
Commercial real estate |
| $— |
| |
| $4,954 |
| |
| $— |
| |
| $9,910 |
| |
| $— |
| |
| $1,018 |
|
Commercial & industrial | 337 |
| | 191 |
| | 389 |
| | 212 |
| | 18 |
| | 1 |
|
Total commercial | 337 |
| | 5,145 |
| | 389 |
| | 10,122 |
| | 18 |
| | 1,019 |
|
Residential Real Estate: | | | | | | | | | | | |
Residential real estate | 1,495 |
| | 715 |
| | 1,546 |
| | 741 |
| | 168 |
| | 104 |
|
Consumer: | | | | | | | | | | | |
Home equity | 19 |
| | — |
| | 19 |
| | — |
| | 8 |
| | — |
|
Other | 34 |
| | 133 |
| | 34 |
| | 132 |
| | 4 |
| | 6 |
|
Total consumer | 53 |
| | 133 |
| | 53 |
| | 132 |
| | 12 |
| | 6 |
|
Subtotal | 1,885 |
| | 5,993 |
| | 1,988 |
| | 10,995 |
| | 198 |
| | 1,129 |
|
Total impaired loans |
| $17,513 |
| |
| $20,619 |
| |
| $17,834 |
| |
| $25,903 |
| |
| $198 |
| |
| $1,129 |
|
Total: | | | | | | | | | | | |
Commercial |
| $5,763 |
| |
| $10,131 |
| |
| $5,866 |
| |
| $15,203 |
| |
| $18 |
| |
| $1,019 |
|
Residential real estate | 10,573 |
| | 9,784 |
| | 10,791 |
| | 9,997 |
| | 168 |
| | 104 |
|
Consumer | 1,177 |
| | 704 |
| | 1,177 |
| | 703 |
| | 12 |
| | 6 |
|
Total impaired loans |
| $17,513 |
| |
| $20,619 |
| |
| $17,834 |
| |
| $25,903 |
| |
| $198 |
| |
| $1,129 |
|
| |
(1) | The recorded investment in impaired loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs. For accruing impaired loans (troubled debt restructurings for which management has concluded that the collectibility of the loan is not in doubt), the recorded investment also includes accrued interest. |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following tables present the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class.
|
| | | | | | | | | | | | | | | |
| | | | | | | |
(Dollars in thousands) | Average Recorded Investment | | Interest Income Recognized |
Three months ended June 30, | 2018 | | 2017 | | 2018 | | 2017 |
Commercial: | | | | | | | |
Commercial real estate |
| $— |
| |
| $9,549 |
| |
| $— |
| |
| $26 |
|
Commercial & industrial | 5,983 |
| | 6,864 |
| | 73 |
| | 76 |
|
Total commercial | 5,983 |
| | 16,413 |
| | 73 |
| | 102 |
|
Residential Real Estate: |
|
| |
|
| |
|
| |
|
|
Residential real estate | 10,017 |
| | 15,915 |
| | 85 |
| | 150 |
|
Consumer: |
|
| |
|
| |
|
| |
|
|
Home equity | 1,036 |
| | 697 |
| | 10 |
| | 10 |
|
Other | 88 |
| | 140 |
| | 2 |
| | 2 |
|
Total consumer | 1,124 |
| | 837 |
| | 12 |
| | 12 |
|
Totals |
| $17,124 |
| |
| $33,165 |
| |
| $170 |
| |
| $264 |
|
|
| | | | | | | | | | | | | | | |
| | | | | | | |
(Dollars in thousands) | Average Recorded Investment | | Interest Income Recognized |
Six months ended June 30, | 2018 | | 2017 | | 2018 | | 2017 |
Commercial: | | | | | | | |
Commercial real estate |
| $2,039 |
| |
| $9,664 |
| |
| $— |
| |
| $52 |
|
Commercial & industrial | 5,738 |
| | 6,914 |
| | 139 |
| | 152 |
|
Total commercial | 7,777 |
| | 16,578 |
| | 139 |
| | 204 |
|
Residential Real Estate: | | | | | | | |
Residential real estate | 9,934 |
| | 16,076 |
| | 197 |
| | 272 |
|
Consumer: | | | | | | | |
Home equity | 853 |
| | 832 |
| | 19 |
| | 20 |
|
Other | 116 |
| | 142 |
| | 5 |
| | 6 |
|
Total consumer | 969 |
| | 974 |
| | 24 |
| | 26 |
|
Totals |
| $18,680 |
| |
| $33,628 |
| |
| $360 |
| |
| $502 |
|
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. When loans are placed on nonaccrual status, 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 generally for a period of six months, 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.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following is a summary of nonaccrual loans, segregated by class of loans:
|
| | | | | | | |
(Dollars in thousands) | Jun 30, 2018 | | Dec 31, 2017 |
Commercial: | | | |
Commercial real estate |
| $— |
| |
| $4,954 |
|
Commercial & industrial | 397 |
| | 283 |
|
Total commercial | 397 |
| | 5,237 |
|
Residential Real Estate: | | | |
Residential real estate | 10,206 |
| | 9,414 |
|
Consumer: | | | |
Home equity | 1,133 |
| | 544 |
|
Other | 9 |
| | 16 |
|
Total consumer | 1,142 |
| | 560 |
|
Total nonaccrual loans |
| $11,745 |
| |
| $15,211 |
|
Accruing loans 90 days or more past due |
| $— |
| |
| $— |
|
As of June 30, 2018 and December 31, 2017, loans secured by one- to four-family residential property amounting to $2.2 million and $4.4 million, respectively, were in process of foreclosure.
Nonaccrual loans of $3.2 million and $3.4 million, respectively, were current as to the payment of principal and interest at June 30, 2018 and December 31, 2017.
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2018.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Troubled Debt Restructurings
Loans are considered restructured in a troubled debt restructuring when the Corporation has granted concessions, that it otherwise would not have considered, to a borrower experiencing financial difficulties. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection.
Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectibility of the loan. Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately 6 months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.
Troubled debt restructurings are reported as such for at least one year from the date of the restructuring. In years after the restructuring, troubled debt restructured loans are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement.
Troubled debt restructurings are classified as impaired loans. The recorded investment in troubled debt restructurings consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs, at the time of the restructuring. For accruing troubled debt restructured loans, the recorded investment also includes accrued interest. The recorded investment in troubled debt restructurings was $6.6 million and $11.2 million, respectively, at June 30, 2018 and December 31, 2017. These amounts included insignificant balances of accrued interest. The allowance for loan losses included specific reserves for these troubled debt restructurings of $123 thousand and $1.1 million, respectively, at June 30, 2018 and December 31, 2017.
As of June 30, 2018, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.
For the three months ended June 30, 2018, there were no loans modified as a troubled debt restructuring. For the six months ended June 30, 2018, there was one loan modified as a troubled debt restructuring with a pre-modification and post-modification recorded investment of $608 thousand. This troubled debt restructuring included a combination of concessions pertaining to maturity and interest only payment terms. There were no loans modified as a troubled debt restructuring for the three and six months ended June 30, 2017.
For the three and six months ended June 30, 2018, there were no payment defaults on troubled debt restructured loans modified within the previous 12 months. For the three and six months ended June 30, 2017, payment defaults on troubled debt restructured loans modified within the previous 12 months occurred on three loans totaling $1.1 million and four loans totaling $1.9 million, respectively.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Credit Quality Indicators
Commercial
The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. The weighted average risk rating of the Corporation’s commercial loan portfolio was 4.73 at June 30, 2018 and 4.70 at December 31, 2017. For non-impaired loans, the Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for loan losses. See
Note 6 for additional information.
A description of the commercial loan categories is as follows:
Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality but exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, secondary sources of repayment, or performance inconsistency or may be in an industry or of a loan type known to have a higher degree of risk.
Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies.
Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectibility. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined. “Loss” is not intended to imply that the loan has no recovery value, but rather, it is not practical or desirable to continue to carry the asset.
The Corporation’s procedures call for loan ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. The criticized loan portfolio, which generally consists of commercial loans that are risk-rated special mention or worse, and other selected loans are reviewed by management on a quarterly basis, focusing on the current status and strategies to improve the credit. An annual loan review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the commercial loan portfolio, segregated by category of credit quality indicator:
|
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Pass | | Special Mention | | Classified |
| Jun 30, 2018 | | Dec 31, 2017 | | Jun 30, 2018 | | Dec 31, 2017 | | Jun 30, 2018 | | Dec 31, 2017 |
Commercial: | | | | | | | | | | | |
Mortgages |
| $1,041,127 |
| |
| $1,067,373 |
| |
| $1,831 |
| |
| $— |
| |
| $— |
| |
| $5,114 |
|
Construction & development | 175,685 |
| | 138,008 |
| | — |
| | — |
| | — |
| | — |
|
Commercial real estate | 1,216,812 |
| | 1,205,381 |
| | 1,831 |
| | — |
| | — |
| | 5,114 |
|
Commercial & industrial | 586,941 |
| | 592,749 |
| | 35,612 |
| |