Form 10-Q 2013 Q2

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
 x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended JUNE 30, 2013 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 August 2, 2013 was 16,564,491.


FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended June 30, 2013
 
 
 
TABLE OF CONTENTS
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




2

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars in thousands,
CONSOLIDATED BALANCE SHEETS (unaudited)
except par value)
 
 
June 30,
2013
 
December 31,
2012
Assets:
 
 
 
 
Cash and due from banks
 

$79,903

 

$73,474

Short-term investments
 
3,764

 
19,176

Mortgage loans held for sale, at fair value; amortized cost $29,163 in 2013 and $48,370 in 2012
 
28,889

 
50,056

Securities:
 
 
 
 
Available for sale, at fair value; amortized cost $309,421 in 2013 and $363,408 in 2012
316,714

 
375,498

Held to maturity, at cost; fair value $33,762 in 2013 and $41,420 in 2012
 
33,803

 
40,381

Total securities
 
350,517

 
415,879

Federal Home Loan Bank stock, at cost
 
37,730

 
40,418

Loans:
 
 
 
 
Commercial
 
1,310,114

 
1,252,419

Residential real estate
 
748,871

 
717,681

Consumer
 
325,995

 
323,903

Total loans
 
2,384,980

 
2,294,003

Less allowance for loan losses
 
27,884

 
30,873

Net loans
 
2,357,096

 
2,263,130

Premises and equipment, net
 
26,392

 
27,232

Investment in bank-owned life insurance
 
55,750

 
54,823

Goodwill
 
58,114

 
58,114

Identifiable intangible assets, net
 
5,827

 
6,173

Other assets
 
57,325

 
63,409

Total assets
 

$3,061,307

 

$3,071,884

Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Demand deposits
 

$358,797

 

$379,889

NOW accounts
 
301,096

 
291,174

Money market accounts
 
540,012

 
496,402

Savings accounts
 
293,405

 
274,934

Time deposits
 
811,299

 
870,232

Total deposits
 
2,304,609

 
2,312,631

Federal Home Loan Bank advances
 
373,341

 
361,172

Junior subordinated debentures
 
22,681

 
32,991

Other borrowings
 
199

 
1,212

Other liabilities
 
57,107

 
68,226

Total liabilities
 
2,757,937

 
2,776,232

Commitments and contingencies
 


 


Shareholders’ Equity:
 
 
 
 
Common stock of $.0625 par value; authorized 30,000,000 shares; issued and outstanding 16,487,305 shares in 2013 and 16,379,771 shares in 2012
 
1,030

 
1,024

Paid-in capital
 
93,274

 
91,453

Retained earnings
 
221,761

 
213,674

Accumulated other comprehensive loss
 
(12,695
)
 
(10,499
)
Total shareholders’ equity
 
303,370

 
295,652

Total liabilities and shareholders’ equity
 

$3,061,307

 

$3,071,884



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

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars and shares in thousands,
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
except per share amounts)
 
 
Three Months
 
Six Months
Periods ended June 30,
2013
 
2012
 
2013
 
2012
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans

$25,513

 

$25,344

 

$50,736

 

$50,707

Interest on securities:
Taxable
2,576

 
4,069

 
5,421

 
8,446

 
Nontaxable
647

 
682

 
1,306

 
1,375

Dividends on corporate stock and Federal Home Loan Bank stock
39

 
78

 
77

 
155

Other interest income
24

 
17

 
52

 
37

Total interest income
28,799

 
30,190

 
57,592

 
60,720

Interest expense:
 

 
 

 
 

 
 

Deposits
3,096

 
3,385

 
6,290

 
6,819

Federal Home Loan Bank advances
2,679

 
3,998

 
5,416

 
8,083

Junior subordinated debentures
612

 
391

 
1,002

 
783

Other interest expense
3

 
5

 
8

 
239

Total interest expense
6,390

 
7,779

 
12,716

 
15,924

Net interest income
22,409

 
22,411

 
44,876

 
44,796

Provision for loan losses
700

 
600

 
1,300

 
1,500

Net interest income after provision for loan losses
21,709

 
21,811

 
43,576

 
43,296

Noninterest income:
 

 
 

 
 

 
 

Wealth management services:
 

 
 

 
 

 
 

Trust and investment advisory fees
6,230

 
5,819

 
12,296

 
11,597

Mutual fund fees
1,077

 
1,002

 
2,099

 
2,027

Financial planning, commissions and other service fees
605

 
652

 
991

 
1,034

Wealth management services
7,912

 
7,473

 
15,386

 
14,658

Merchant processing fees
2,613

 
2,732

 
4,590

 
4,720

Net gains on loan sales and commissions on loans originated for others
3,485

 
3,015

 
7,651

 
6,112

Service charges on deposit accounts
790

 
764

 
1,581

 
1,523

Card interchange fees
683

 
626

 
1,282

 
1,169

Income from bank-owned life insurance
461

 
477

 
928

 
963

Net realized gains on securities
—

 
299

 
—

 
299

Net gains (losses) on interest rate swap contracts
152

 
(4
)
 
171

 
24

Equity in earnings (losses) of unconsolidated subsidiaries
(57
)
 
124

 
(18
)
 
87

Other income
355

 
668

 
761

 
1,060

Noninterest income, excluding other-than-temporary impairment losses
16,394

 
16,174

 
32,332

 
30,615

Total other-than-temporary impairment losses on securities
—

 
—

 
(613
)
 
(85
)
Portion of loss recognized in other comprehensive income (before tax)
—

 
—

 
(2,159
)
 
(124
)
Net impairment losses recognized in earnings
—

 
—

 
(2,772
)
 
(209
)
Total noninterest income
16,394

 
16,174

 
29,560

 
30,406

Noninterest expense:
 

 
 

 
 

 
 

Salaries and employee benefits
15,542

 
14,451

 
30,984

 
28,911

Net occupancy
1,364

 
1,527

 
2,878

 
3,053

Equipment
1,192

 
1,143

 
2,436

 
2,250

Merchant processing costs
2,211

 
2,320

 
3,884

 
3,983

Outsourced services
871

 
895

 
1,712

 
1,815

Legal, audit and professional fees
554

 
519

 
1,162

 
1,001

FDIC deposit insurance costs
451

 
426

 
882

 
884

Advertising and promotion
476

 
478

 
831

 
850

Amortization of intangibles
173

 
186

 
346

 
373

Foreclosed property costs
137

 
170

 
184

 
468

Debt prepayment penalties
—

 
961

 
—

 
961

Other expenses
2,034

 
2,152

 
3,890

 
4,078

Total noninterest expense
25,005

 
25,228

 
49,189

 
48,627

Income before income taxes
13,098

 
12,757

 
23,947

 
25,075

Income tax expense
4,115

 
4,044

 
7,543

 
7,924

Net income

$8,983

 

$8,713

 

$16,404

 

$17,151

 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
16,454

 
16,358

 
16,428

 
16,344

Weighted average common shares outstanding - diluted
16,581

 
16,392

 
16,558

 
16,381

Per share information:
Basic earnings per common share

$0.54

 

$0.53

 

$0.99

 

$1.04

 
Diluted earnings per common share

$0.54

 

$0.53

 

$0.99

 

$1.04

 
Cash dividends declared per share

$0.25

 

$0.23

 

$0.50

 

$0.46


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

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

 
 
Three Months
 
Six Months
Periods ended June 30,
 
2013
 
2012
 
2013
 
2012
Net income
 

$8,983

 

$8,713

 

$16,404

 

$17,151

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
Changes in fair value of securities available for sale
 
(3,821
)
 
(601
)
 
(4,874
)
 
(458
)
Net losses (gains) on securities reclassified into earnings
 
—

 
(192
)
 
393

 
(138
)
Net change in fair value of securities available for sale
 
(3,821
)
 
(793
)
 
(4,481
)
 
(596
)
Reclassification adjustment for other-than-temporary impairment losses transferred into earnings
 
—

 
—

 
1,384

 
80

Cash flow hedges:
 
 
 
 
 
 
 
 
Change in fair value of cash flow hedges
 
34

 
(128
)
 
32

 
(204
)
Net cash flow hedge losses reclassified into earnings
 
118

 
112

 
240

 
223

Net change in fair value of cash flow hedges
 
152

 
(16
)
 
272

 
19

Defined benefit plan obligation adjustment
 
292

 
171

 
629

 
356

Total other comprehensive loss, net of tax
 
(3,377
)
 
(638
)
 
(2,196
)
 
(141
)
Total comprehensive income
 

$5,606

 

$8,075

 

$14,208

 

$17,010




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

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

 
Common
Shares Outstanding
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss)
 
Total
Balance at January 1, 2012
16,292

 

$1,018

 

$88,030

 

$194,198

 

($1,895
)
 

$281,351

Net income
 
 
 
 
 
 
17,151

 
 
 
17,151

Total other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
(141
)
 
(141
)
Cash dividends declared
 
 
 
 
 
 
(7,623
)
 
 
 
(7,623
)
Share-based compensation
 
 
 
 
876

 
 
 
 
 
876

Deferred compensation plan
10

 
1

 
145

 
 
 
 
 
146

Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit
57

 
3

 
971

 
 
 
 
 
974

Balance at June 30, 2012
16,359

 

$1,022

 

$90,022

 

$203,726

 

($2,036
)
 

$292,734


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

 

$1,024

 

$91,453

 

$213,674

 

($10,499
)
 

$295,652

Net income
 
 
 
 
 
 
16,404

 
 
 
16,404

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

 
 
 
 
 
879

Deferred compensation plan
2

 
—

 
30

 
 
 
 
 
30

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

 
6

 
912

 
 
 
 
 
918

Balance at June 30, 2013
16,487

 

$1,030

 

$93,274

 

$221,761

 

($12,695
)
 

$303,370




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

WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
Six months ended June 30,
2013

 
2012

Cash flows from operating activities:
 
 
 
Net income

$16,404

 

$17,151

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
1,300

 
1,500

Depreciation of premises and equipment
1,677

 
1,584

Foreclosed and repossessed property valuation adjustments
72

 
171

Net gain on sale of bank property
—

 
(348
)
Net amortization of premium and discount
887

 
1,113

Net amortization of intangibles
346

 
373

Share-based compensation
879

 
876

Income from bank-owned life insurance
(928
)
 
(963
)
Net gains on loan sales and commissions on loans originated for others
(7,651
)
 
(6,112
)
Net realized gains on securities
—

 
(299
)
Net impairment losses recognized in earnings
2,772

 
209

Net gains on interest rate swap contracts
(171
)
 
(24
)
Equity in losses (earnings) of unconsolidated subsidiaries
18

 
(87
)
Proceeds from sales of loans
256,362

 
213,852

Loans originated for sale
(231,167
)
 
(198,824
)
Decrease (increase) in other assets
5,242

 
(3,108
)
Decrease in other liabilities
(9,246
)
 
(2,932
)
Net cash provided by operating activities
36,796

 
24,132

Cash flows from investing activities:
 

 
 

Purchases of:
Mortgage-backed securities available for sale
(1,036
)
 
—

 
Other investment securities available for sale
(424
)
 
—

Proceeds from sale of:
Mortgage-backed securities available for sale
—

 
6,247

 
Other investment securities available for sale
2,660

 
6,338

Maturities and principal payments of:
Mortgage-backed securities available for sale
45,561

 
57,196

 
Other investment securities available for sale
3,890

 
681

 
Mortgage-backed securities held to maturity
6,279

 
4,842

Remittance of Federal Home Loan Bank stock
2,688

 
1,590

Net increase in loans
(84,443
)
 
(76,517
)
Purchases of loans, including purchased interest
(7,222
)
 
(3,047
)
Proceeds from the sale of property acquired through foreclosure or repossession
1,481

 
1,883

Purchases of premises and equipment
(837
)
 
(3,453
)
Net proceeds from the sale of bank property
—

 
1,571

Net cash used in investing activities
(31,403
)
 
(2,669
)
Cash flows from financing activities:
 

 
 

Net (decrease) increase in deposits
(8,022
)
 
4,138

Net decrease in other borrowings
(1,013
)
 
(19,277
)
Proceeds from Federal Home Loan Bank advances
204,000

 
362,930

Repayment of Federal Home Loan Bank advances
(191,831
)
 
(379,391
)
Proceeds from the exercise of stock options and issuance of other compensation-related equity instruments
672

 
1,007

Tax benefit from stock option exercises and issuance of other compensation-related equity instruments
276

 
113

Redemption of junior subordinated debentures
(10,310
)
—

—

Cash dividends paid
(8,148
)
 
(7,388
)
Net cash used in financing activities
(14,376
)
 
(37,868
)
Net decrease in cash and cash equivalents
(8,983
)
 
(16,405
)
Cash and cash equivalents at beginning of period
92,650

 
87,020

Cash and cash equivalents at end of period

$83,667

 

$70,615

Noncash Investing and Financing Activities:
 
 
 
Loans charged off

$4,549

 

$1,377

Loans transferred to property acquired through foreclosure or repossession
1,050

 
1,810

Securities proceeds due from broker
—

 
760

Supplemental Disclosures:
 
 
 
 
Interest payments

$12,446

 

$15,602

Income tax payments
7,328

 
7,744




The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
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 and the review of goodwill, other intangible assets and investments for impairment.  The current economic environment has increased the degree of uncertainty inherent in such estimates and assumptions.

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, 2012.

(2)
Recently Issued Accounting Pronouncements
Balance Sheet - Topic 210
Accounting Standards Update No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), was issued in December 2011 and was intended to enhance current disclosure requirements on offsetting financial assets and liabilities. The requirements of ASU 2011-11 enable users to compare balance sheets prepared under U.S. GAAP and International Financial Reporting Standards (“IFRS”), which are subject to different offsetting models. The requirements affect all entities that have financial instruments that are either offset in the balance sheet or subject to an enforceable master netting arrangement or similar agreement. Accounting Standards Update No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU 2013-01”), was issued in January 2013 to address implementation issues about the scope of ASU 2011-11. Both ASU 2011-11 and ASU 2013-01 were effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The required disclosures were effective retrospectively for all comparative periods presented. The adoption of ASU 2011-11 and ASU 2013-01 did not have a material impact on the Corporation’s consolidated financial statements.

Comprehensive Income - Topic 220
Accounting Standards Update No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”) was issued in February 2013 and requires additional disclosure of the effects of reclassifications out of accumulated other comprehensive income (“AOCI”) in a single location, either on the face of the financial statement that reports net income or in the notes to the financial statements. ASU 2013-02 does not change the current requirements and carries forward the existing requirements that reclassifications out of AOCI be separately presented for each component of other comprehensive income. For items reclassified out of AOCI and into net income in their entirety, the effect of the reclassification on each affected net income line must be disclosed. For AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other required disclosures is required. The amendments were effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this standard did not have a material impact on the Corporation’s consolidated financial statements, see Note 15.

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

$6.7 million at June 30, 2013 and $5.5 million at December 31, 2012 and were included in cash and due from banks in the Consolidated Balance Sheets.

As of June 30, 2013 and December 31, 2012, cash and due from banks included interest-bearing deposits in other banks of $31.1 million and $32.2 million, respectively.

(4)
Securities
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and fair value of securities by major security type and class of security:
(Dollars in thousands)
 
 
 
 
 
 
 
June 30, 2013
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Securities Available for Sale:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$29,472

 

$1,466

 

$—

 

$30,938

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
172,014

 
9,239

 
(28
)
 
181,225

States and political subdivisions
64,838

 
2,850

 
—

 
67,688

Trust preferred securities:
 
 
 
 
 
 
 
Individual name issuers
30,696

 
—

 
(5,619
)
 
25,077

Collateralized debt obligations
1,264

 
—

 
(867
)
 
397

Corporate bonds
11,137

 
269

 
(17
)
 
11,389

Total securities available for sale

$309,421

 

$13,824

 

($6,531
)
 

$316,714

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

$33,803

 

$—

 

($41
)
 

$33,762

Total securities held to maturity

$33,803

 

$—

 

($41
)
 

$33,762

Total securities

$343,224

 

$13,824

 

($6,572
)
 

$350,476


(Dollars in thousands)
 
 
 
 
 
 
 
December 31, 2012
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Securities Available for Sale:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$29,458

 

$2,212

 

$—

 

$31,670

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
217,136

 
14,097

 
—

 
231,233

States and political subdivisions
68,196

 
4,424

 
—

 
72,620

Trust preferred securities:
 
 
 
 
 
 
 
Individual name issuers
30,677

 
—

 
(5,926
)
 
24,751

Collateralized debt obligations
4,036

 
—

 
(3,193
)
 
843

Corporate bonds
13,905

 
476

 
—

 
14,381

Total securities available for sale

$363,408

 

$21,209

 

($9,119
)
 

$375,498

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

$40,381

 

$1,039

 

$—

 

$41,420

Total securities held to maturity

$40,381

 

$1,039

 

$—

 

$41,420

Total securities

$403,789

 

$22,248

 

($9,119
)
 

$416,918





9
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS    (Continued)


At June 30, 2013 and December 31, 2012, securities available for sale and held to maturity with a fair value of $333.2 million and $386.5 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 as of June 30, 2013 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.
(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

$29,472

 

$—

 

$—

 

$—

 

$29,472

Weighted average yield
5.40
%
 
—
%
 
—
%
 
—
%
 
5.40
%
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
 
 
 
 
 
 
 
 
 
Amortized cost
59,240

 
87,622

 
19,253

 
5,899

 
172,014

Weighted average yield
4.44
%
 
3.98
%
 
2.63
%
 
2.51
%
 
3.94
%
State and political subdivisions:
 
 
 
 
 
 
 
 
 
Amortized cost
10,666

 
54,172

 
—

 
—

 
64,838

Weighted average yield
3.93
%
 
3.90
%
 
—
%
 
—
%
 
3.91
%
Trust preferred securities:
 
 
 
 
 
 
 
 
 
Amortized cost
—

 
—

 
—

 
31,960

 
31,960

Weighted average yield
—
%
 
—
%
 
—
%
 
1.31
%
 
1.31
%
Corporate bonds:
 
 
 
 
 
 
 
 
 
Amortized cost
5,031

 
5,704

 
402

 
—

 
11,137

Weighted average yield
6.63
%
 
2.84
%
 
2.44
%
 
—
%
 
4.54
%
Total debt securities available for sale:
 
 
 
 
 
 
 
 
 
Amortized cost

$104,409

 

$147,498

 

$19,655

 

$37,859

 

$309,421

Weighted average yield
4.76
%
 
3.91
%
 
2.63
%
 
1.50
%
 
3.82
%
Fair value

$106,699

 

$151,379

 

$20,461

 

$38,175

 

$316,714

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

$8,993

 

$17,810

 

$5,840

 

$1,160

 

$33,803

Weighted average yield
2.40
%
 
2.27
%
 
2.11
%
 
0.80
%
 
2.23
%
Fair value

$8,982

 

$17,788

 

$5,833

 

$1,159

 

$33,762


Included in the securities were debt securities with an amortized cost balance of $86.4 million and a fair value of $82.1 million that are callable at the discretion of the issuers.  Final maturities of the callable securities range from two to twenty-four years, with call features ranging from one month to four 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.




10
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS    (Continued)

The following tables summarize temporarily impaired securities, segregated by length of time the securities have been in a continuous unrealized loss position:
(Dollars in thousands)
Less than 12 Months
 
12 Months or Longer
 
Total
June 30, 2013
#

 
Fair
Value
 
Unrealized
Losses
 
#

 
Fair
Value
 
Unrealized
Losses
 
#

 
Fair
Value
 
Unrealized
Losses
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
4

 

$34,756

 

($69
)
 
—

 

$—

 

$—

 
4

 

$34,756

 

($69
)
Trust preferred securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individual name issuers
—

 
—

 
—

 
11

 
25,077

 
(5,619
)
 
11

 
25,077

 
(5,619
)
Collateralized debt obligations
—

 
—

 
—

 
1

 
397

 
(867
)
 
1

 
397

 
(867
)
Corporate bonds
2

 
406

 
(17
)
 
—

 
—

 
—

 
2

 
406

 
(17
)
Total temporarily impaired securities
6

 

$35,162

 

($86
)
 
12

 

$25,474

 

($6,486
)
 
18

 

$60,636

 

($6,572
)

(Dollars in thousands)
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 2012
#

 
Fair
Value
 
Unrealized
Losses
 
#

 
Fair
Value
 
Unrealized
Losses
 
#

 
Fair
Value
 
Unrealized
Losses
Trust preferred securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individual name issuers
—

 

$—

 

$—

 
11

 

$24,751

 

($5,926
)
 
11

 

$24,751

 

($5,926
)
Collateralized debt obligations
—

 
—

 
—

 
2

 
843

 
(3,193
)
 
2

 
843

 
(3,193
)
Total temporarily impaired securities
—

 

$—

 

$—

 
13

 

$25,594

 

($9,119
)
 
13

 

$25,594

 

($9,119
)

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 downturn, or additional declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods, and the Corporation may incur additional write-downs.

Trust Preferred Debt Securities of Individual Name Issuers
Included in debt securities in an unrealized loss position at June 30, 2013 and December 31, 2012 were 11 trust preferred security holdings issued by seven individual companies in the financial services industry, specifically, the banking sector.  Management believes the decline in fair value of these trust preferred securities primarily reflects investor concerns about global economic growth and how it will affect the recent and potential future losses in the financial services industry.  These concerns resulted in increased risk premiums for securities in this sector. Based on the information available through the filing date of this report, all individual name trust preferred debt securities held in our portfolio continue to accrue and make payments as expected with no payment deferrals or defaults on the part of the issuers.  As of June 30, 2013, trust preferred debt securities with an amortized cost of $11.9 million and unrealized losses of $2.2 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 its is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be at maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at June 30, 2013.

Trust Preferred Debt Securities in the Form of Collateralized Debt Obligations (“CDO”)
Washington Trust has pooled trust preferred holdings in the form of collateralized debt obligations. The pooled trust preferred holdings consist of trust preferred obligations of banking industry companies and, to a lesser extent, insurance industry companies.

Valuations of pooled trust preferred holdings is dependent in part on cash flows from underlying issuers.  Unexpected cash flow disruptions could have an adverse impact on the fair value and performance of pooled trust preferred securities.  Management believes the unrealized losses primarily reflect investor concerns about global economic growth and how it will affect the recent and potential future losses in the financial services industry and the possibility of further incremental deferrals of or defaults on



11
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS    (Continued)

interest payments on trust preferred debentures by financial institutions participating in these pools.  These concerns have resulted in a substantial decrease in market liquidity and increased risk premiums for securities in this sector.  Credit spreads for issuers in this sector have remained wide during recent months, causing prices to remain at low levels.

The following table summarizes Washington Trust’s pooled trust preferred holdings:
(Dollars in thousands)
June 30, 2013
 
December 31, 2012
 
Amortized Cost (1)
Fair Value
Unrealized Losses
 
Amortized Cost (1)
Fair Value
Unrealized Losses
Deal Name
Tropic CDO 1, tranche A4L

$—


$—


$—

 

$2,772


$613


($2,159
)
Preferred Term Securities [PreTSL] XXV, tranche C1
1,264

397

(867
)
 
1,264

230

(1,034
)
Totals

$1,264


$397


($867
)
 

$4,036


$843


($3,193
)
(1)
Net of other-than-temporary impairment losses recognized in earnings.

The carrying value of Washington Trust’s investment in the Tropic CDO 1, tranche A4L (“Tropic”) was zero at June 30, 2013, compared to $2.8 million at December 31, 2012. This investment security had been classified in nonaccruing status with no interest recognition since 2009. In the first quarter of 2013, Washington Trust recognized an other-than-temporary impairment charge of $2.8 million on the Tropic security due to an announcement of liquidation by the trustee. On March 22, 2013, the trustee for the Tropic security issued a notice that a liquidation of the CDO entity, Tropic CDO I, Ltd., would take place at the direction of holders of the CDO tranches that are senior to certain subordinate tranches, of which Washington Trust is a note holder.  The estimated proceeds from the liquidation event are expected to be insufficient to satisfy the amount owed to the note holders of the CDO's subordinate tranches.  The Corporation had recognized other-than-temporary losses amounting to $2.1 million on this security in years prior to 2013; however, prior to the March 2013 announcement of the liquidation event, the expected future cash flows through the maturity of the CDO in the year 2033 were considered to be sufficient to recover the Corporation's remaining $2.8 million amortized cost.

Washington Trust’s investment in the PreTSL XXV, tranche C1 (“PreTSL”) is subordinate to two senior tranche levels. This investment security has been on nonaccrual status and has been deferring interest payments since December 2008. The June 30, 2013 amortized cost was net of $1.2 million of credit-related impairment losses previously recognized in earnings reflective of payment deferrals and credit deterioration of the underlying collateral.  As of June 30, 2013, this security had unrealized losses of $867 thousand and a below investment grade rating of “C” by Moody’s.  Through the filing date of this report, there have been no additional rating changes on this security.  This credit rating status has been considered by management in its assessment of the impairment status of this security. Based on information available through the filing date of this report, there have been no additional adverse changes in deferral or default status of the underlying issuer institutions. Based on cash flow forecasts for this security, management expects to recover the remaining amortized cost of this security. Furthermore, Washington Trust does not intend to sell this security and its is not more likely than not that Washington Trust will be required to sell this security before recovery of its cost basis, which may be at maturity. Therefore, management does not consider the unrealized losses on this security to be other-than-temporary at June 30, 2013.

Credit-Related Impairment Losses Recognized on Debt Securities
The following table presents a roll forward of the balance of cumulative credit-related impairment losses recognized on debt securities for the periods indicated:
(Dollars in thousands)
Three months
 
Six months
Periods ended June 30,
2013
 
2012
 
2013
 
2012
Balance at beginning of period

$6,097

 

$3,313

 

$3,325

 

$3,104

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

 
209

Balance at end of period

$6,097

 

$3,313

 

$6,097

 

$3,313





12
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS    (Continued)

The anticipated cash flows expected to be collected from pooled trust preferred debt securities were discounted at the rate equal to the yield used to accrete the current and prospective beneficial interest for each security.  Significant inputs included estimated cash flows and prospective defaults and recoveries.  Estimated cash flows were generated based on the underlying seniority status and subordination structure of the pooled trust preferred debt tranche at the time of measurement.  Prospective default and recovery estimates affecting projected cash flows were based on analysis of the underlying financial condition of individual issuers, and took into account capital adequacy, credit quality, lending concentrations, and other factors.

All cash flow estimates were based on the underlying security’s tranche structure and contractual rate and maturity terms.  The present value of the expected cash flows was compared to the current outstanding balance of the tranche to determine the ratio of the estimated present value of expected cash flows to the total current balance for the tranche.  This ratio was then multiplied by the principal balance of Washington Trust’s holding to determine the credit-related impairment loss.  The estimates used in the determination of the present value of the expected cash flows are susceptible to changes in future periods, which could result in additional credit-related impairment losses.

(5)
Loans
The following is a summary of loans:
(Dollars in thousands)
June 30, 2013
 
December 31, 2012
 
Amount

 
%

 
Amount

 
%

Commercial:
 
 
 
 
 
 
 
Mortgages (1)

$758,437

 
32
%
 

$710,813

 
31
%
Construction and development (2)
39,449

 
2

 
27,842

 
1

Other (3)
512,228

 
21

 
513,764

 
23

Total commercial
1,310,114

 
55

 
1,252,419

 
55

Residential real estate:
 
 
 
 
 
 
 
Mortgages (4)
728,158

 
30

 
692,798

 
30

Homeowner construction
20,713

 
1

 
24,883

 
1

Total residential real estate
748,871

 
31

 
717,681

 
31

Consumer:
 
 
 
 
 
 
 
Home equity lines (5)
228,367

 
10

 
226,861

 
10

Home equity loans (5)
41,312

 
2

 
39,329

 
2

Other (6)
56,316

 
2

 
57,713

 
2

Total consumer
325,995

 
14

 
323,903

 
14

Total loans (7)

$2,384,980

 
100
%
 

$2,294,003

 
100
%
(1)
Amortizing mortgages and lines of credit, primarily secured by income producing property. As of June 30, 2013 and December 31, 2012, $213.9 million and $238.6 million, respectively, were pledged as collateral for FHLBB borrowings and letters of credit.
(2)
Loans for construction of residential and commercial properties and for land development.
(3)
Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate. As of June 30, 2013, $48.1 million and $24.9 million, respectively, were pledged as collateral for FHLBB borrowings and letters of credit and were collateralized for the discount window at the Federal Reserve Bank.  Comparable amounts for December 31, 2012 were $51.8 million and $29.5 million, respectively.
(4)
As of June 30, 2013 and December 31, 2012, $658.6 million and $627.4 million, respectively, were pledged as collateral for FHLBB borrowings and letters of credit.
(5)
As of June 30, 2013 and December 31, 2012, $190.8 million and $189.4 million, respectively, were pledged as collateral for FHLBB borrowings and letters of credit.
(6)
Fixed-rate consumer installment loans.
(7)
Includes net unamortized loan origination costs of $439 thousand and $39 thousand, respectively, and net unamortized premiums on purchased loans of $97 thousand and $83 thousand, respectively, at June 30, 2013 and December 31, 2012.




13
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS    (Continued)

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, as of the dates indicated:
(Dollars in thousands)
Jun 30,
2013
 
Dec 31,
2012
Commercial:
 
 
 
Mortgages

$9,976

 

$10,681

Construction and development
—

 
—

Other
1,400

 
4,412

Residential real estate:
 
 
 
Mortgages
7,526

 
6,158

Homeowner construction
—

 
—

Consumer:
 
 
 
Home equity lines
325

 
840

Home equity loans
775

 
371

Other
24

 
81

Total nonaccrual loans

$20,026

 

$22,543

Accruing loans 90 days or more past due

$2,431

 

$—


As of June 30, 2013 and December 31, 2012, nonaccrual loans of $2.8 million and $1.6 million, respectively, were current as to the payment of principal and interest.




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, as of the dates indicated:
(Dollars in thousands)
Days Past Due
 
 
 
 
 
 
June 30, 2013
30-59
 
60-89
 
Over 90
 
Total Past Due
 
Current
 
Total Loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$—

 

$536

 

$8,895

 

$9,431

 

$749,006

 

$758,437

Construction and development
—

 
—

 
—

 
—

 
39,449

 
39,449

Other
505

 
34

 
3,428

 
3,967

 
508,261

 
512,228

Residential real estate:
 
 
 
 
 
 
 

 
 
 
 

Mortgages
4,051

 
1,697

 
4,266

 
10,014

 
718,144

 
728,158

Homeowner construction
—

 
—

 
—

 
—

 
20,713

 
20,713

Consumer:
 
 
 
 
 
 
 

 
 
 
 

Home equity lines
1,155

 
205

 
27

 
1,387

 
226,980

 
228,367

Home equity loans
402

 
451

 
375

 
1,228

 
40,084

 
41,312

Other
31

 
33

 
13

 
77

 
56,239

 
56,316

Total loans

$6,144

 

$2,956

 

$17,004

 

$26,104

 

$2,358,876

 

$2,384,980


(Dollars in thousands)
Days Past Due
 
 
 
 
 
 
December 31, 2012
30-59
 
60-89
 
Over 90
 
Total Past Due
 
Current
 
Total Loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$373

 

$408

 

$10,300

 

$11,081

 

$699,732

 

$710,813

Construction and development
—

 
—

 
—

 
—

 
27,842

 
27,842

Other
260

 
296

 
3,647

 
4,203

 
509,561

 
513,764

Residential real estate:
 
 
 
 
 
 
 

 
 
 
 

Mortgages
4,840

 
1,951

 
3,658

 
10,449

 
682,349

 
692,798

Homeowner construction
—

 
—

 
—

 
—

 
24,883

 
24,883

Consumer:
 
 
 
 
 
 
 

 
 
 
 

Home equity lines
753

 
207

 
528

 
1,488

 
225,373

 
226,861

Home equity loans
252

 
114

 
250

 
616

 
38,713

 
39,329

Other
129

 
64

 
66

 
259

 
57,454

 
57,713

Total loans

$6,607

 

$3,040

 

$18,449

 

$28,096

 

$2,265,907

 

$2,294,003


Included in past due loans as of June 30, 2013 and December 31, 2012, were nonaccrual loans of $17.2 million and $21.0 million, respectively. Accruing loans 90 days or more past due amounted to 2.4 million at June 30, 2013, consisting of one well-secured commercial and industrial loan. This loan was current with respect to interest payments; however, it was past maturity. This loan was renewed in July of 2013 and is no longer past due. All loans 90 days or more past due at December 31, 2012 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, as of the dates indicated:
(Dollars in thousands)
Recorded
Investment (1)
 
Unpaid
Principal
 
Related
Allowance
 
Jun 30,
2013
 
Dec 31,
2012
 
Jun 30,
2013
 
Dec 31,
2012
 
Jun 30,
2013
 
Dec 31,
2012
No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$3,399

 

$2,357

 

$7,421

 

$2,360

 

$—

 

$—

Construction and development
—

 
—

 
—

 
—

 
—

 
—

Other
2,621

 
1,058

 
2,620

 
1,057

 
—

 
—

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
329

 
1,294

 
345

 
1,315

 
—

 
—

Homeowner construction
—

 
—

 
—

 
—

 
—

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines
—

 
—

 
—

 
—

 
—

 
—

Home equity loans
—

 
—

 
—

 
—