Form 10-Q 2013 Q3

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

FORM 10-Q

(Mark One)
 x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended SEPTEMBER 30, 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 November 1, 2013 was 16,600,385.


FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended September 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)
 
 
September 30,
2013
 
December 31,
2012
Assets:
 
 
 
 
Cash and due from banks
 

$136,724

 

$73,474

Short-term investments
 
3,204

 
19,176

Mortgage loans held for sale, at fair value; amortized cost $12,772 in 2013 and $48,370 in 2012
 
13,105

 
50,056

Securities:
 
 
 
 
Available for sale, at fair value; amortized cost $380,994 in 2013 and $363,408 in 2012
388,085

 
375,498

Held to maturity, at cost; fair value $31,962 in 2013 and $41,420 in 2012
 
31,264

 
40,381

Total securities
 
419,349

 
415,879

Federal Home Loan Bank stock, at cost
 
37,730

 
40,418

Loans:
 
 
 
 
Commercial
 
1,297,892

 
1,252,419

Residential real estate
 
731,692

 
717,681

Consumer
 
324,182

 
323,903

Total loans
 
2,353,766

 
2,294,003

Less allowance for loan losses
 
28,008

 
30,873

Net loans
 
2,325,758

 
2,263,130

Premises and equipment, net
 
25,921

 
27,232

Investment in bank-owned life insurance
 
56,214

 
54,823

Goodwill
 
58,114

 
58,114

Identifiable intangible assets, net
 
5,657

 
6,173

Other assets
 
50,182

 
63,409

Total assets
 

$3,131,958

 

$3,071,884

Liabilities:
 
 
 
 
Deposits:
 
 
 
 
Demand deposits
 

$420,075

 

$379,889

NOW accounts
 
301,250

 
291,174

Money market accounts
 
623,631

 
496,402

Savings accounts
 
292,765

 
274,934

Time deposits
 
817,110

 
870,232

Total deposits
 
2,454,831

 
2,312,631

Federal Home Loan Bank advances
 
288,485

 
361,172

Junior subordinated debentures
 
22,681

 
32,991

Other borrowings
 
797

 
1,212

Other liabilities
 
41,579

 
68,226

Total liabilities
 
2,808,373

 
2,776,232

Commitments and contingencies
 


 


Shareholders’ Equity:
 
 
 
 
Common stock of $.0625 par value; authorized 30,000,000 shares; issued and outstanding 16,589,472 shares in 2013 and 16,379,771 shares in 2012
 
1,037

 
1,024

Paid-in capital
 
96,536

 
91,453

Retained earnings
 
227,352

 
213,674

Accumulated other comprehensive loss
 
(1,340
)
 
(10,499
)
Total shareholders’ equity
 
323,585

 
295,652

Total liabilities and shareholders’ equity
 

$3,131,958

 

$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
 
Nine Months
Periods ended September 30,
2013
 
2012
 
2013
 
2012
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans

$26,096

 

$25,840

 

$76,832

 

$76,547

Interest on securities:
Taxable
2,582

 
3,672

 
8,003

 
12,118

 
Nontaxable
629

 
660

 
1,935

 
2,035

Dividends on corporate stock and Federal Home Loan Bank stock
36

 
52

 
113

 
207

Other interest income
47

 
27

 
99

 
64

Total interest income
29,390

 
30,251

 
86,982

 
90,971

Interest expense:
 

 
 

 
 

 
 

Deposits
3,064

 
3,391

 
9,354

 
10,210

Federal Home Loan Bank advances
2,693

 
3,726

 
8,109

 
11,809

Junior subordinated debentures
241

 
393

 
1,243

 
1,176

Other interest expense
4

 
5

 
12

 
244

Total interest expense
6,002

 
7,515

 
18,718

 
23,439

Net interest income
23,388

 
22,736

 
68,264

 
67,532

Provision for loan losses
700

 
600

 
2,000

 
2,100

Net interest income after provision for loan losses
22,688

 
22,136

 
66,264

 
65,432

Noninterest income:
 

 
 

 
 

 
 

Wealth management services:
 

 
 

 
 

 
 

Trust and investment advisory fees
6,291

 
5,877

 
18,587

 
17,474

Mutual fund fees
1,075

 
1,024

 
3,174

 
3,051

Financial planning, commissions and other service fees
263

 
292

 
1,254

 
1,326

Wealth management services
7,629

 
7,193

 
23,015

 
21,851

Merchant processing fees
3,359

 
3,207

 
7,949

 
7,927

Net gains on loan sales and commissions on loans originated for others
3,883

 
3,504

 
11,534

 
9,616

Service charges on deposit accounts
855

 
833

 
2,436

 
2,356

Card interchange fees
731

 
675

 
2,013

 
1,844

Income from bank-owned life insurance
464

 
1,006

 
1,392

 
1,969

Net realized gains on securities
—

 
—

 
—

 
299

Net gains on interest rate swap contracts
54

 
63

 
225

 
87

Equity in earnings (losses) of unconsolidated subsidiaries
(47
)
 
27

 
(65
)
 
114

Other income
472

 
413

 
1,233

 
1,473

Noninterest income, excluding other-than-temporary impairment losses
17,400

 
16,921

 
49,732

 
47,536

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
17,400

 
16,921

 
46,960

 
47,327

Noninterest expense:
 

 
 

 
 

 
 

Salaries and employee benefits
14,640

 
15,214

 
45,624

 
44,125

Net occupancy
1,404

 
1,468

 
4,282

 
4,521

Equipment
1,222

 
1,168

 
3,658

 
3,418

Merchant processing costs
2,862

 
2,707

 
6,746

 
6,690

Outsourced services
878

 
845

 
2,590

 
2,660

Legal, audit and professional fees
529

 
598

 
1,691

 
1,599

FDIC deposit insurance costs
448

 
427

 
1,330

 
1,311

Advertising and promotion
312

 
445

 
1,143

 
1,295

Amortization of intangibles
170

 
182

 
516

 
555

Foreclosed property costs
38

 
136

 
222

 
604

Debt prepayment penalties
1,125

 
1,173

 
1,125

 
2,134

Other expenses
1,920

 
1,927

 
5,810

 
6,005

Total noninterest expense
25,548

 
26,290

 
74,737

 
74,917

Income before income taxes
14,540

 
12,767

 
38,487

 
37,842

Income tax expense
4,580

 
3,867

 
12,123

 
11,791

Net income

$9,960

 

$8,900

 

$26,364

 

$26,051

 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
16,563

 
16,366

 
16,473

 
16,351

Weighted average common shares outstanding - diluted
16,696

 
16,414

 
16,600

 
16,392

Per share information:
Basic earnings per common share

$0.60

 

$0.54

 

$1.59

 

$1.59

 
Diluted earnings per common share

$0.59

 

$0.54

 

$1.58

 

$1.58

 
Cash dividends declared per share

$0.26

 

$0.24

 

$0.76

 

$0.70


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

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

 
 
Three Months
 
Nine Months
Periods ended September 30,
 
2013
 
2012
 
2013
 
2012
Net income
 

$9,960

 

$8,900

 

$26,364

 

$26,051

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
 
Changes in fair value of securities available for sale
 
(129
)
 
(218
)
 
(5,003
)
 
(676
)
Net losses (gains) on securities reclassified into earnings
 
—

 
—

 
393

 
(138
)
Net change in fair value of securities available for sale
 
(129
)
 
(218
)
 
(4,610
)
 
(814
)
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
 
(47
)
 
(127
)
 
(15
)
 
(331
)
Net cash flow hedge losses reclassified into earnings
 
91

 
113

 
331

 
336

Net change in fair value of cash flow hedges
 
44

 
(14
)
 
316

 
5

Defined benefit plan obligation adjustment
 
11,440

 
171

 
12,069

 
527

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

 
(61
)
 
9,159

 
(202
)
Total comprehensive income
 

$21,315

 

$8,839

 

$35,523

 

$25,849




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
 
 
 
 
 
 
26,051

 
 
 
26,051

Total other comprehensive loss, net of tax
 
 
 
 
 
 
 
 
(202
)
 
(202
)
Cash dividends declared
 
 
 
 
 
 
(11,610
)
 
 
 
(11,610
)
Share-based compensation
 
 
 
 
1,404

 
 
 
 
 
1,404

Deferred compensation plan
10

 
1

 
145

 
 
 
 
 
146

Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit
69

 
4

 
1,250

 
 
 
 
 
1,254

Balance at September 30, 2012
16,371

 

$1,023

 

$90,829

 

$208,639

 

($2,097
)
 

$298,394


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

 

$1,024

 

$91,453

 

$213,674

 

($10,499
)
 

$295,652

Net income
 
 
 
 
 
 
26,364

 
 
 
26,364

Total other comprehensive income, net of tax
 
 
 
 
 
 
 
 
9,159

 
9,159

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

 
 
 
 
 
1,377

Deferred compensation plan
2

 
—

 
30

 
 
 
 
 
30

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

 
13

 
3,676

 
 
 
 
 
3,689

Balance at September 30, 2013
16,589

 

$1,037

 

$96,536

 

$227,352

 

($1,340
)
 

$323,585




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

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

 
2012

Cash flows from operating activities:
 
 
 
Net income

$26,364

 

$26,051

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
2,000

 
2,100

Depreciation of premises and equipment
2,489

 
2,370

Foreclosed and repossessed property valuation adjustments
79

 
298

Net gain on sale of bank property
—

 
(358
)
Net amortization of premium and discount
1,196

 
1,679

Net amortization of intangibles
516

 
555

Share-based compensation
1,377

 
1,404

Income from bank-owned life insurance
(1,392
)
 
(1,969
)
Net gains on loan sales and commissions on loans originated for others
(11,534
)
 
(9,616
)
Net realized gains on securities
—

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

 
209

Net gains on interest rate swap contracts
(225
)
 
(87
)
Equity in losses (earnings) of unconsolidated subsidiaries
65

 
(114
)
Proceeds from sales of loans
356,932

 
336,919

Loans originated for sale
(313,227
)
 
(344,532
)
Decrease (increase) in other assets
12,388

 
(7,567
)
(Decrease) increase in other liabilities
(13,769
)
 
1,711

Net cash provided by operating activities
66,031

 
8,754

Cash flows from investing activities:
 

 
 

Purchases of:
Mortgage-backed securities available for sale
(66,569
)
 
—

 
Other investment securities available for sale
(25,404
)
 
—

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
64,270

 
85,059

 
Other investment securities available for sale
3,890

 
911

 
Mortgage-backed securities held to maturity
8,704

 
8,138

Remittance of Federal Home Loan Bank stock
2,688

 
1,590

Net increase in loans
(100,655
)
 
(103,402
)
Proceeds from sale of portfolio loans
49,588

 
—

Purchases of loans, including purchased interest
(9,103
)
 
(5,007
)
Proceeds from the sale of property acquired through foreclosure or repossession
2,142

 
3,146

Purchases of premises and equipment
(1,178
)
 
(4,513
)
Net proceeds from the sale of bank property
—

 
1,571

Proceeds from bank-owned life insurance
—

 
1,419

Net cash (used in) provided by investing activities
(68,967
)
 
1,497

Cash flows from financing activities:
 

 
 

Net increase in deposits
142,200

 
108,344

Net decrease in other borrowings
(415
)
 
(19,529
)
Proceeds from Federal Home Loan Bank advances
204,000

 
472,930

Repayment of Federal Home Loan Bank advances
(276,687
)
 
(595,705
)
Proceeds from the exercise of stock options and issuance of other compensation-related equity instruments
3,287

 
1,251

Tax benefit from stock option exercises and issuance of other compensation-related equity instruments
432

 
149

Redemption of junior subordinated debentures
(10,310
)
—

—

Cash dividends paid
(12,293
)
 
(11,177
)
Net cash provided by (used in) financing activities
50,214

 
(43,737
)
Net increase (decrease) in cash and cash equivalents
47,278

 
(33,486
)
Cash and cash equivalents at beginning of period
92,650

 
87,020

Cash and cash equivalents at end of period

$139,928

 

$53,534

Noncash Investing and Financing Activities:
 
 
 
Loans charged off

$5,319

 

$1,801

Loans transferred to property acquired through foreclosure or repossession
1,073

 
3,255

Supplemental Disclosures:
 
 
 
 
Interest payments

$18,401

 

$22,869

Income tax payments
11,528

 
12,729




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)

$7.7 million at September 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 September 30, 2013 and December 31, 2012, cash and due from banks included interest-bearing deposits in other banks of $87.8 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)
 
 
 
 
 
 
 
September 30, 2013
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Securities Available for Sale:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$54,461

 

$1,208

 

$—

 

$55,669

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
218,598

 
9,943

 
(36
)
 
228,505

States and political subdivisions
64,833

 
2,507

 
—

 
67,340

Trust preferred securities:
 
 
 
 
 
 
 
Individual name issuers
30,705

 
—

 
(5,930
)
 
24,775

Collateralized debt obligations
1,264

 
—

 
(839
)
 
425

Corporate bonds
11,133

 
254

 
(16
)
 
11,371

Total securities available for sale

$380,994

 

$13,912

 

($6,821
)
 

$388,085

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

$31,264

 

$698

 

$—

 

$31,962

Total securities held to maturity

$31,264

 

$698

 

$—

 

$31,962

Total securities

$412,258

 

$14,610

 

($6,821
)
 

$420,047


(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 September 30, 2013 and December 31, 2012, securities available for sale and held to maturity with a fair value of $391.7 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 September 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

$54,461

 

$—

 

$—

 

$—

 

$54,461

Weighted average yield
4.04
%
 
—
%
 
—
%
 
—
%
 
4.04
%
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
 
 
 
 
 
 
 
 
 
Amortized cost
60,133

 
106,040

 
37,563

 
14,862

 
218,598

Weighted average yield
4.30
%
 
3.76
%
 
2.65
%
 
2.43
%
 
3.63
%
State and political subdivisions:
 
 
 
 
 
 
 
 
 
Amortized cost
12,296

 
52,537

 
—

 
—

 
64,833

Weighted average yield
3.89
%
 
3.91
%
 
—
%
 
—
%
 
3.91
%
Trust preferred securities:
 
 
 
 
 
 
 
 
 
Amortized cost
—

 
—

 
—

 
31,969

 
31,969

Weighted average yield
—
%
 
—
%
 
—
%
 
1.38
%
 
1.38
%
Corporate bonds:
 
 
 
 
 
 
 
 
 
Amortized cost
5,027

 
5,704

 
402

 
—

 
11,133

Weighted average yield
6.64
%
 
2.82
%
 
2.45
%
 
—
%
 
4.53
%
Total debt securities available for sale:
 
 
 
 
 
 
 
 
 
Amortized cost

$131,917

 

$164,281

 

$37,965

 

$46,831

 

$380,994

Weighted average yield
4.25
%
 
3.77
%
 
2.65
%
 
1.71
%
 
3.57
%
Fair value

$133,376

 

$167,772

 

$39,432

 

$47,505

 

$388,085

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

$6,995

 

$15,465

 

$6,710

 

$2,094

 

$31,264

Weighted average yield
2.57
%
 
2.48
%
 
2.37
%
 
0.88
%
 
2.37
%
Fair value

$7,151

 

$15,810

 

$6,860

 

$2,141

 

$31,962


Included in debt securities as of September 30, 2013 were debt securities with an amortized cost balance of $111.4 million and a fair value of $106.7 million that are callable at the discretion of the issuers.  Final maturities of these 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
September 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
2

 

$969

 

($36
)
 
—

 

$—

 

$—

 
2

 

$969

 

($36
)
Trust preferred securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individual name issuers
—

 
—

 
—

 
11

 
24,775

 
(5,930
)
 
11

 
24,775

 
(5,930
)
Collateralized debt obligations
—

 
—

 
—

 
1

 
425

 
(839
)
 
1

 
425

 
(839
)
Corporate bonds
2

 
407

 
(16
)
 
—

 
—

 
—

 
2

 
407

 
(16
)
Total temporarily impaired securities
4

 

$1,376

 

($52
)
 
12

 

$25,200

 

($6,769
)
 
16

 

$26,576

 

($6,821
)

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

Trust Preferred Debt Securities of Individual Name Issuers
Included in debt securities in an unrealized loss position at September 30, 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 September 30, 2013, trust preferred debt securities with an amortized cost of $11.9 million and unrealized losses of $2.1 million were rated below investment grade by Standard & Poors, Inc. (“S&P”).  Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report and other information.  We noted no additional downgrades to below investment grade between the reporting period date and the filing date of this report.  Based on these analyses, management concluded that it expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be at maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2013.

Trust Preferred Debt Securities in the Form of Collateralized Debt Obligations (“CDO”)
Washington Trust has invested in 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 are dependent in part on cash flows from underlying issuers.  Unexpected cash flow disruptions could have an adverse impact on the fair value and performance of pooled trust preferred securities.  Management



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

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 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)
September 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

425

(839
)
 
1,264

230

(1,034
)
Totals

$1,264


$425


($839
)
 

$4,036


$843


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

On March 22, 2013, the trustee for the Tropic CDO I security issued a notice that liquidation of the CDO entity would take place at the direction of holders of the CDO tranches senior to the subordinate tranche interest held by Washington Trust. Accordingly, Washington Trust recognized an other-than-temporary impairment charge in the first quarter of 2013 on the entire $2.8 million million carrying value of this security, based on the expectation that proceeds from the liquidation would be insufficient to satisfy the amount owed to the subordinate tranche. The liquidation was conducted in August 2013 and was insufficient to satisfy any amount owed on the subordinate tranche.

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 September 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 September 30, 2013, this security had unrealized losses of $839 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 it 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 September 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
 
Nine months
Periods ended September 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


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



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

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)
September 30, 2013
 
December 31, 2012
 
Amount

 
%

 
Amount

 
%

Commercial:
 
 
 
 
 
 
 
Mortgages (1)

$727,375

 
31
%
 

$710,813

 
31
%
Construction and development (2)
51,951

 
2

 
27,842

 
1

Other (3)
518,566

 
22

 
513,764

 
23

Total commercial
1,297,892

 
55

 
1,252,419

 
55

Residential real estate:
 
 
 
 
 
 
 
Mortgages (4)
711,427

 
30

 
692,798

 
30

Homeowner construction
20,265

 
1

 
24,883

 
1

Total residential real estate
731,692

 
31

 
717,681

 
31

Consumer:
 
 
 
 
 
 
 
Home equity lines (5)
227,063

 
10

 
226,861

 
10

Home equity loans (5)
41,158

 
2

 
39,329

 
2

Other (6)
55,961

 
2

 
57,713

 
2

Total consumer
324,182

 
14

 
323,903

 
14

Total loans (7)

$2,353,766

 
100
%
 

$2,294,003

 
100
%
(1)
Amortizing mortgages and lines of credit, primarily secured by income producing property. As of September 30, 2013 and December 31, 2012, $204.1 million and $238.6 million, respectively, were pledged as collateral for FHLBB borrowings and letters of credit.
(2)
Loans for construction commercial properties, loans to developers for construction of residential properties, and loans for land development.
(3)
Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate. As of September 30, 2013, $47.5 million and $24.3 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 September 30, 2013 and December 31, 2012, $647.3 million and $627.4 million, respectively, were pledged as collateral for FHLBB borrowings and letters of credit.
(5)
As of September 30, 2013 and December 31, 2012, $191.8 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 $531 thousand and $39 thousand, respectively, and net unamortized premiums on purchased loans of $100 thousand and $83 thousand, respectively, at September 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)
Sep 30,
2013
 
Dec 31,
2012
Commercial:
 
 
 
Mortgages

$8,956

 

$10,681

Construction and development
—

 
—

Other
1,248

 
4,412

Residential real estate:
 
 
 
Mortgages
8,095

 
6,158

Homeowner construction
—

 
—

Consumer:
 
 
 
Home equity lines
412

 
840

Home equity loans
768

 
371

Other
24

 
81

Total nonaccrual loans

$19,503

 

$22,543

Accruing loans 90 days or more past due

$—

 

$—


As of September 30, 2013 and December 31, 2012, nonaccrual loans of $2.2 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
 
 
 
 
 
 
September 30, 2013
30-59
 
60-89
 
Over 90
 
Total Past Due
 
Current
 
Total Loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$—

 

$730

 

$8,226

 

$8,956

 

$718,419

 

$727,375

Construction and development
—

 
—

 
—

 
—

 
51,951

 
51,951

Other
2,648

 
8

 
929

 
3,585

 
514,981

 
518,566

Residential real estate:
 
 
 
 
 
 
 

 
 
 
 

Mortgages
2,624

 
1,960

 
4,843

 
9,427

 
702,000

 
711,427

Homeowner construction
—

 
—

 
—

 
—

 
20,265

 
20,265

Consumer:
 
 
 
 
 
 
 

 
 
 
 

Home equity lines
636

 
220

 
262

 
1,118

 
225,945

 
227,063

Home equity loans
339

 
104

 
416

 
859

 
40,299

 
41,158

Other
38

 
4

 
15

 
57

 
55,904

 
55,961

Total loans

$6,285

 

$3,026

 

$14,691

 

$24,002

 

$2,329,764

 

$2,353,766


(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 September 30, 2013 and December 31, 2012, were nonaccrual loans of $17.3 million and $21.0 million, respectively. All loans 90 days or more past due at September 30, 2013 and 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
 
Sep 30,
2013
 
Dec 31,
2012
 
Sep 30,
2013
 
Dec 31,
2012
 
Sep 30,
2013
 
Dec 31,
2012
No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$2,913

 

$2,357

 

$6,940

 

$2,360

 

$—

 

$—

Construction and development
—

 
—

 
—

 
—

 
—

 
—

Other
1,633

 
1,058

 
1,629

 
1,057

 
—

 
—

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
182

 
1,294

 
199

 
1,315

 
—

 
—

Homeowner construction
—

 
—

 
—

 
—

 
—

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines
—

 
—

 
—

 
—

 
—

 
—

Home equity loans
—

 
—

 
—

 
—

 
—

 
—