Form 10-Q 2015 Q1
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 MARCH 31, 2015 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 April 30, 2015 was 16,811,770.


FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended March 31, 2015
 
 
TABLE OF CONTENTS
 
Page Number
 
 
 
 



- 2-

PART I.  Financial Information
Item 1.  Financial Statements
Consolidated Balance Sheets (unaudited)
(Dollars in thousands, except par value)
 
March 31,
2015
 
December 31,
2014
Assets:
 
 
 
Cash and due from banks

$84,842

 

$76,386

Short-term investments
4,191

 
3,964

Mortgage loans held for sale (including $36,672 at March 31, 2015 and $30,321 at December 31, 2014 measured at fair value)
47,117

 
45,693

Securities:
 
 
 
Available for sale, at fair value
340,942

 
357,662

Held to maturity, at amortized cost (fair value $24,834 at March 31, 2015 and $26,008 at December 31, 2014)
24,025

 
25,222

Total securities
364,967

 
382,884

Federal Home Loan Bank stock, at cost
37,730

 
37,730

Loans:
 
 
 
Commercial
1,559,523

 
1,535,488

Residential real estate
987,564

 
985,415

Consumer
333,505

 
338,373

Total loans
2,880,592

 
2,859,276

Less allowance for loan losses
27,810

 
28,023

Net loans
2,852,782

 
2,831,253

Premises and equipment, net
27,839

 
27,495

Investment in bank-owned life insurance
64,009

 
63,519

Goodwill
58,114

 
58,114

Identifiable intangible assets, net
4,694

 
4,849

Other assets
56,229

 
54,987

Total assets

$3,602,514

 

$3,586,874

Liabilities:
 
 
 
Deposits:
 
 
 
Demand deposits

$477,046

 

$459,852

NOW accounts
333,321

 
326,375

Money market accounts
821,353

 
802,764

Savings accounts
298,802

 
291,725

Time deposits
852,621

 
874,102

Total deposits
2,783,143

 
2,754,818

Federal Home Loan Bank advances
385,992

 
406,297

Junior subordinated debentures
22,681

 
22,681

Other liabilities
56,819

 
56,799

Total liabilities
3,248,635

 
3,240,595

Commitments and contingencies


 


Shareholders’ Equity:
 
 
 
Common stock of $.0625 par value; authorized 30,000,000 shares; issued and outstanding 16,772,956 shares at March 31, 2015 and 16,746,363 shares at December 31, 2014
1,048

 
1,047

Paid-in capital
102,587

 
101,204

Retained earnings
258,069

 
252,837

Accumulated other comprehensive loss
(7,825
)
 
(8,809
)
Total shareholders’ equity
353,879

 
346,279

Total liabilities and shareholders’ equity

$3,602,514

 

$3,586,874


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


Consolidated Statements of Income (unaudited)
(Dollars and shares in thousands, except per share amounts)


Three months ended March 31,
2015

 
2014

Interest income:
 
 
 
Interest and fees on loans

$28,353

 

$25,589

Interest on securities:
Taxable
2,259

 
2,942

 
Nontaxable
435

 
582

Dividends on Federal Home Loan Bank stock
165

 
142

Other interest income
25

 
35

Total interest and dividend income
31,237

 
29,290

Interest expense:
 
 
 
Deposits
3,389

 
2,969

Federal Home Loan Bank advances
1,902

 
2,241

Junior subordinated debentures
241

 
241

Other interest expense
3

 
3

Total interest expense
5,535

 
5,454

Net interest income
25,702

 
23,836

Provision for loan losses
—

 
300

Net interest income after provision for loan losses
25,702

 
23,536

Noninterest income:
 
 
 
Wealth management revenues
8,435

 
8,065

Merchant processing fees
—

 
1,291

Net gains on loan sales and commissions on loans originated for others
2,585

 
1,239

Service charges on deposit accounts
935

 
754

Card interchange fees
714

 
681

Income from bank-owned life insurance
490

 
445

Net gains on interest rate swap contracts
645

 
260

Equity in earnings (losses) of unconsolidated subsidiaries
(86
)
 
(43
)
Net gain on sale of business line
—

 
6,265

Other income
302

 
413

Total noninterest income
14,020

 
19,370

Noninterest expense:
 

 
 

Salaries and employee benefits
15,494

 
14,558

Net occupancy
1,886

 
1,640

Equipment
1,340

 
1,236

Merchant processing costs
—

 
1,050

Outsourced services
1,247

 
1,044

Legal, audit and professional fees
676

 
618

FDIC deposit insurance costs
473

 
440

Advertising and promotion
267

 
232

Amortization of intangibles
155

 
164

Debt prepayment penalties
—

 
6,294

Other expenses
1,993

 
2,016

Total noninterest expense
23,531

 
29,292

Income before income taxes
16,191

 
13,614

Income tax expense
5,181

 
4,316

Net income

$11,010

 

$9,298

 
 
 
 
Weighted average common shares outstanding - basic
16,759

 
16,626

Weighted average common shares outstanding - diluted
16,939

 
16,800

Per share information:
Basic earnings per common share

$0.65

 

$0.56

 
Diluted earnings per common share

$0.65

 

$0.55

 
Cash dividends declared per share

$0.34

 

$0.29


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


Consolidated Statements of Comprehensive Income (unaudited)
(Dollars in thousands)


Three months ended March 31,
2015

 
2014

Net income

$11,010

 

$9,298

Other comprehensive income, net of tax:
 
 
 
Net change in fair value of securities available for sale
664

 
612

Cash flow hedges:
 
 
 
Change in fair value of cash flow hedges
(8
)
 
(16
)
Net cash flow hedge losses reclassified into earnings
93

 
92

Net change in fair value of cash flow hedges
85

 
76

Defined benefit plan obligation adjustment
235

 
88

Total other comprehensive income, net of tax
984

 
776

Total comprehensive income

$11,994

 

$10,074




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


Consolidated Statements of Changes in Shareholders' Equity (unaudited)
(Dollars and shares in thousands)


 
Common
Shares Outstanding
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance at January 1, 2015
16,746

 

$1,047

 

$101,204

 

$252,837

 

($8,809
)
 

$346,279

Net income
 
 
 
 
 
 
11,010

 
 
 
11,010

Total other comprehensive income, net of tax
 
 
 
 
 
 
 
 
984

 
984

Cash dividends declared
 
 
 
 
 
 
(5,778
)
 
 
 
(5,778
)
Share-based compensation
 
 
 
 
580

 
 
 
 
 
580

Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit
27

 
1

 
803

 
 
 
 
 
804

Balance at March 31, 2015
16,773

 

$1,048

 

$102,587

 

$258,069

 

($7,825
)
 

$353,879



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

 

$1,038

 

$97,566

 

$232,595

 

($1,553
)
 

$329,646

Net income
 
 
 
 
 
 
9,298

 
 
 
9,298

Total other comprehensive income, net of tax
 
 
 
 
 
 
 
 
776

 
776

Cash dividends declared
 
 
 
 
 
 
(4,894
)
 
 
 
(4,894
)
Share-based compensation
 
 
 
 
491

 
 
 
 
 
491

Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit
21

 
2

 
539

 
 
 
 
 
541

Balance at March 31, 2014
16,635

 

$1,040

 

$98,596

 

$236,999

 

($777
)
 

$335,858



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


Consolidated Statement of Cash Flows (unaudited)
(Dollars in thousands)


Three months ended March 31,
2015

 
2014

Cash flows from operating activities:
 
 
 
Net income

$11,010

 

$9,298

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

 
300

Depreciation of premises and equipment
882

 
783

Net amortization of premium and discount
358

 
219

Amortization of intangibles
155

 
164

Share-based compensation
580

 
491

Income from bank-owned life insurance
(490
)
 
(445
)
Net gain on sale of business line
—

 
(6,265
)
Net gains on loan sales and commissions on loans originated for others
(2,585
)
 
(1,239
)
Net gains on interest rate swap contracts
(645
)
 
(260
)
Equity in losses of unconsolidated subsidiaries
86

 
43

Proceeds from sales of loans
117,571

 
48,296

Loans originated for sale
(116,502
)
 
(46,159
)
Decrease (increase) in other assets
814

 
(81
)
Decrease in other liabilities
(1,936
)
 
(3,723
)
Net cash provided by operating activities
9,298

 
1,422

Cash flows from investing activities:
 
 
 
Proceeds from sale of:
Other investment securities available for sale
—

 
547

Maturities and principal payments of:
Mortgage-backed securities available for sale
12,533

 
11,313

 
Other investment securities available for sale
4,986

 
20,844

 
Mortgage-backed securities held to maturity
1,137

 
960

Net proceeds from the sale of business line
—

 
7,205

Net increase in loans
(20,620
)
 
(13,584
)
Purchases of loans, including purchased interest
(856
)
 
(2,934
)
Proceeds from the sale of property acquired through foreclosure or repossession
—

 
659

Purchases of premises and equipment
(1,226
)
 
(1,291
)
Net cash (used in) provided by investing activities
(4,046
)
 
23,719

Cash flows from financing activities:
 
 
 
Net increase in deposits
28,325

 
86,333

Net decrease in other borrowings
(12
)
 
(11
)
Proceeds from Federal Home Loan Bank advances
120,000

 
54,000

Repayment of Federal Home Loan Bank advances
(140,305
)
 
(138,653
)
Proceeds from stock options exercises and issuance of other equity instruments
698

 
496

Tax benefit from stock option exercises and other equity instruments
106

 
45

Cash dividends paid
(5,381
)
 
(4,511
)
Net cash provided by (used in) financing activities
3,431

 
(2,301
)
Net increase in cash and cash equivalents
8,683

 
22,840

Cash and cash equivalents at beginning of period
80,350

 
85,317

Cash and cash equivalents at end of period

$89,033

 

$108,157

Noncash Investing and Financing Activities:
 
 
 
Loans charged off

$321

 

$1,223

Loans transferred to property acquired through foreclosure or repossession
230

 
421

Supplemental Disclosures:
 
 
 
Interest payments

$5,459

 

$5,175

Income tax payments
310

 
265


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


Condensed Notes to Unaudited Consolidated Financial Statements


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

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

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

The unaudited consolidated financial statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying consolidated financial statements have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

(2)
Recently Issued Accounting Pronouncements
Receivables - Troubled Debt Restructurings by Creditors - Topic 310
Accounting Standards Update No. 2014-04, “Reclassifications of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure” (“ASU 2014-04”), was issued in January 2014 and clarifies when banks and similar institutions (creditors) should reclassify mortgage loans collateralized by residential real estate properties from the loan portfolio to other real estate owned (“OREO”). ASU 2014-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Corporation elected the prospective transition method and the adoption of ASU 2014-04 did not have a material impact on the Corporation’s consolidated financial statements.

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

(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 $10.1 million at March 31, 2015 and $8.0 million at December 31, 2014 and were included in cash and due from banks in the Consolidated Balance Sheets.

As of March 31, 2015 and December 31, 2014, cash and due from banks included interest-bearing deposits in other banks of $47.0 million and $42.7 million, respectively.



- 8-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

(4)
Securities
The following tables present the amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of securities by major security type and class of security:
(Dollars in thousands)
 
March 31, 2015
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Securities Available for Sale:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$31,203

 

$98

 

$—

 

$31,301

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
222,547

 
10,498

 
—

 
233,045

Obligations of states and political subdivisions
42,664

 
1,515

 
—

 
44,179

Individual name issuer trust preferred debt securities
30,762

 
—

 
(4,475
)
 
26,287

Corporate bonds
6,119

 
36

 
(25
)
 
6,130

Total securities available for sale

$333,295

 

$12,147

 

($4,500
)
 

$340,942

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

$24,025

 

$809

 

$—

 

$24,834

Total securities held to maturity

$24,025

 

$809

 

$—

 

$24,834

Total securities

$357,320

 

$12,956

 

($4,500
)
 

$365,776


(Dollars in thousands)
 
December 31, 2014
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Securities Available for Sale:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$31,205

 

$21

 

($54
)
 

$31,172

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
235,343

 
10,023

 
—

 
245,366

Obligations of states and political subdivisions
47,647

 
1,529

 
—

 
49,176

Individual name issuer trust preferred debt securities
30,753

 
—

 
(4,979
)
 
25,774

Corporate bonds
6,120

 
57

 
(3
)
 
6,174

Total securities available for sale

$351,068

 

$11,630

 

($5,036
)
 

$357,662

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

$25,222

 

$786

 

$—

 

$26,008

Total securities held to maturity

$25,222

 

$786

 

$—

 

$26,008

Total securities

$376,290

 

$12,416

 

($5,036
)
 

$383,670


At March 31, 2015 and December 31, 2014, securities available for sale and held to maturity with a fair value of $347.6 million and $350.5 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. See Note 8 for additional discussion of FHLBB borrowings.



- 9-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The schedule of maturities of debt securities available for sale and held to maturity is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments.  All other debt securities are included based on contractual maturities.  Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.  Yields on tax exempt obligations are not computed on a tax equivalent basis.
(Dollars in thousands)
 
March 31, 2015
Within 1 Year
 
1-5 Years
 
5-10 Years
 
After 10 Years
 
Totals
Securities Available for Sale:
 
 
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises:
 
 
 
 
 
 
 
 
 
Amortized cost

$—

 

$31,003

 

$200

 

$—

 

$31,203

Weighted average yield
—
%
 
1.72
%
 
2.32
%
 
—
%
 
1.73
%
Mortgage-backed securities issued by U.S. government-sponsored enterprises:
 
 
 
 
 
 
 
 
 
Amortized cost
37,723

 
100,409

 
57,461

 
26,954

 
222,547

Weighted average yield
3.71

 
3.30

 
2.81

 
1.76

 
3.06

Obligations of state and political subdivisions:
 
 
 
 
 
 
 
 
 
Amortized cost
3,601

 
24,267

 
14,796

 
—

 
42,664

Weighted average yield
3.78

 
3.94

 
3.99

 
—

 
3.95

Individual name issuer trust preferred debt securities:
 
 
 
 
 
 
 
 
 
Amortized cost
—

 
—

 
—

 
30,762

 
30,762

Weighted average yield
—

 
—

 
—

 
1.11

 
1.11

Corporate bonds:
 
 
 
 
 
 
 
 
 
Amortized cost
5,713

 
203

 
203

 
—

 
6,119

Weighted average yield
2.84

 
1.62

 
3.21

 
—

 
2.81

Total debt securities available for sale:
 
 
 
 
 
 
 
 
 
Amortized cost

$47,037

 

$155,882

 

$72,660

 

$57,716

 

$333,295

Weighted average yield
3.61
%
 
3.09
%
 
3.05
%
 
1.42
%
 
2.86
%
Fair value

$48,955

 

$161,578

 

$75,897

 

$54,512

 

$340,942

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

$3,007

 

$9,323

 

$7,364

 

$4,331

 

$24,025

Weighted average yield
3.11
%
 
3.03
%
 
2.78
%
 
0.89
%
 
2.58
%
Fair value

$3,108

 

$9,637

 

$7,612

 

$4,477

 

$24,834


Included in the above table are debt securities with an amortized cost balance of $98.1 million and a fair value of $95.0 million at March 31, 2015 that are callable at the discretion of the issuers.  Final maturities of the callable securities range from 6 months to 22 years, with call features ranging from 1 month to 2 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-


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
March 31, 2015
#
 
Fair
Value
Unrealized
Losses
 
#

 
Fair
Value
Unrealized
Losses
 
#

 
Fair
Value
Unrealized
Losses
Individual name issuer trust preferred debt securities
—

 

$—


$—

 
11

 

$26,287


($4,475
)
 
11

 

$26,287


($4,475
)
Corporate bonds
1

 
1,975

(25
)
 
—

 
—

—

 
1

 
1,975

(25
)
Total temporarily impaired securities
1

 

$1,975


($25
)
 
11

 

$26,287


($4,475
)
 
12

 

$28,262


($4,500
)

(Dollars in thousands)
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 2014
#

 
Fair
Value
Unrealized
Losses
 
#

 
Fair
Value
Unrealized
Losses
 
#

 
Fair
Value
Unrealized
Losses
Obligations of U.S. government-sponsored enterprises
3

 

$20,952


($54
)
 
—

 

$—


$—

 
3

 

$20,952


($54
)
Individual name issuer trust preferred debt securities
—

 
—

—

 
11

 
25,774

(4,979
)
 
11

 
25,774

(4,979
)
Corporate bonds
—

 
—

—

 
1

 
199

(3
)
 
1

 
199

(3
)
Total temporarily impaired securities
3

 

$20,952


($54
)
 
12

 

$25,973


($4,982
)
 
15

 

$46,925


($5,036
)

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 March 31, 2015 were 11 trust preferred security holdings issued by 7 individual companies in the banking sector.  Management believes the unrealized loss position in these holdings is attributable to the general widening of spreads for this category of debt securities issued by financial services companies since the time these securities were purchased.  Based on the information available through the filing date of this report, all individual name issuer trust preferred debt securities held in our portfolio continue to accrue and make payments as expected with no payment deferrals or defaults on the part of the issuers.  As of March 31, 2015, individual name issuer trust preferred debt securities with an amortized cost of $11.9 million and unrealized losses of $2.0 million were rated below investment grade by Standard & Poors, Inc. (“S&P”).  Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information.  We noted no additional downgrades to below investment grade between the reporting period date and the filing date of this report.  Based on these analyses, management concluded that it expects to recover the entire amortized cost basis of these securities.  Furthermore, Washington Trust does not intend to sell these securities and it is not more‑likely‑than‑not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity.  Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2015.




- 11-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

(5)
Loans
The following is a summary of loans:
(Dollars in thousands)
March 31, 2015
 
December 31, 2014
 
Amount

 
%

 
Amount

 
%

Commercial:
 
 
 
 
 
 
 
Mortgages (1)

$865,042

 
30
%
 

$843,978

 
30
%
Construction & development (2)
89,851

 
3

 
79,592

 
3

Commercial & industrial (3)
604,630

 
21

 
611,918

 
21

Total commercial
1,559,523

 
54

 
1,535,488

 
54

Residential real estate:
 
 
 
 
 
 
 
Mortgages
954,905

 
33

 
948,731

 
33

Homeowner construction
32,659

 
1

 
36,684

 
1

Total residential real estate
987,564

 
34

 
985,415

 
34

Consumer:
 
 
 
 
 
 
 
Home equity lines
239,537

 
8

 
242,480

 
8

Home equity loans
46,727

 
2

 
46,967

 
2

Other (4)
47,241

 
2

 
48,926

 
2

Total consumer
333,505

 
12

 
338,373

 
12

Total loans (5)

$2,880,592

 
100
%
 

$2,859,276

 
100
%
(1)
Loans primarily secured by income producing property.
(2)
Loans for construction of commercial properties, loans to developers for construction of residential properties and loans for land development.
(3)
Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.
(4)
Consumer installment loans and loans secured by general aviation aircraft and automobiles.
(5)
Includes net unamortized loan origination costs of $2.2 million and $2.1 million, respectively, and net unamortized premiums on purchased loans of $92 thousand and $94 thousand, respectively, at March 31, 2015 and December 31, 2014.

At March 31, 2015 and December 31, 2014, there were $1.24 billion and $1.21 billion, respectively, of loans pledged as collateral to the FHLBB under a blanket pledge agreement and to the FRB for the discount window. See Note 8 for additional disclosure regarding borrowings.

Nonaccrual Loans
Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued but not collected on such loans is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectibility 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.



- 12-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following is a summary of nonaccrual loans, segregated by class of loans:
(Dollars in thousands)
Mar 31,
2015
 
Dec 31,
2014
Commercial:
 
 
 
Mortgages

$5,115

 

$5,315

Construction & development
—

 
—

Commercial & industrial
2,193

 
1,969

Residential real estate:
 
 
 
Mortgages
6,956

 
7,124

Homeowner construction
—

 
—

Consumer:
 
 
 
Home equity lines
1,051

 
1,217

Home equity loans
511

 
317

Other
39

 
3

Total nonaccrual loans

$15,865

 

$15,945

Accruing loans 90 days or more past due

$—

 

$—


As of March 31, 2015 and December 31, 2014, nonaccrual loans of $3.6 million and $3.2 million, respectively, were current as to the payment of principal and interest.

At March 31, 2015, there were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status.

Past Due Loans
Past due status is based on the contractual payment terms of the loan. The following tables present an age analysis of past due loans, segregated by class of loans:
(Dollars in thousands)
Days Past Due
 
 
 
 
 
 
March 31, 2015
30-59
 
60-89
 
Over 90
 
Total Past Due
 
Current
 
Total Loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$497

 

$61

 

$5,115

 

$5,673

 

$859,369

 

$865,042

Construction & development
—

 
—

 
—

 
—

 
89,851

 
89,851

Commercial & industrial
229

 
229

 
721

 
1,179

 
603,451

 
604,630

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
4,470

 
1,352

 
3,607

 
9,429

 
945,476

 
954,905

Homeowner construction
—

 
—

 
—

 
—

 
32,659

 
32,659

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines
1,244

 
429

 
463

 
2,136

 
237,401

 
239,537

Home equity loans
213

 
111

 
255

 
579

 
46,148

 
46,727

Other
55

 
25

 
5

 
85

 
47,156

 
47,241

Total loans

$6,708

 

$2,207

 

$10,166

 

$19,081

 

$2,861,511

 

$2,880,592




- 13-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

(Dollars in thousands)
Days Past Due
 
 
 
 
 
 
December 31, 2014
30-59
 
60-89
 
Over 90
 
Total Past Due
 
Current
 
Total Loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$—

 

$—

 

$5,315

 

$5,315

 

$838,663

 

$843,978

Construction & development
—

 
—

 
—

 
—

 
79,592

 
79,592

Commercial & industrial
2,136

 
1,202

 
181

 
3,519

 
608,399

 
611,918

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
2,943

 
821

 
3,284

 
7,048

 
941,683

 
948,731

Homeowner construction
—

 
—

 
—

 
—

 
36,684

 
36,684

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines
570

 
100

 
841

 
1,511

 
240,969

 
242,480

Home equity loans
349

 
240

 
56

 
645

 
46,322

 
46,967

Other
35

 
5

 
—

 
40

 
48,886

 
48,926

Total loans

$6,033

 

$2,368

 

$9,677

 

$18,078

 

$2,841,198

 

$2,859,276


Included in past due loans as of March 31, 2015 and December 31, 2014, were nonaccrual loans of $12.3 million and $12.7 million, respectively. All loans 90 days or more past due at March 31, 2015 and December 31, 2014 were classified as nonaccrual.

Impaired Loans
Impaired loans consist of nonaccrual commercial loans, troubled debt restructured loans and other loans classified as impaired that are individually evaluated for impairment. 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.



- 14-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following is a summary of impaired loans:
(Dollars in thousands)
Recorded Investment (1)
 
Unpaid Principal
 
Related Allowance
 
Mar 31,
2015
 
Dec 31,
2014
 
Mar 31,
2015
 
Dec 31,
2014
 
Mar 31,
2015
 
Dec 31,
2014
No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$205

 

$432

 

$205

 

$432

 

$—

 

$—

Construction & development
—

 
—

 
—

 
—

 
—

 
—

Commercial & industrial
1,322

 
1,047

 
1,323

 
1,076

 
—

 
—

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
1,618

 
1,477

 
1,912

 
1,768

 
—

 
—

Homeowner construction
—

 
—

 
—

 
—

 
—

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines
—

 
—

 
—

 
—

 
—

 
—

Home equity loans
—

 
—

 
—

 
—

 
—

 
—

Other
—

 
—

 
—

 
—

 
—

 
—

Subtotal
3,145

 
2,956

 
3,440

 
3,276

 
—

 
—

With Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$14,384

 

$14,585

 

$14,564

 

$14,564

 

$1,173

 

$927

Construction & development
—

 
—

 
—

 
—

 
—

 
—

Commercial & industrial
1,754

 
1,878

 
2,305

 
2,437

 
185

 
177

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
1,296

 
2,226

 
1,423

 
2,338

 
222

 
326

Homeowner construction
—

 
—

 
—

 
—

 
—

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines
244

 
250

 
250

 
250

 
76

 
141

Home equity loans
72

 
45

 
116

 
62

 
1

 
12

Other
151

 
112

 
151

 
114

 
—

 
—

Subtotal
17,901

 
19,096

 
18,809

 
19,765

 
1,657

 
1,583

Total impaired loans

$21,046

 

$22,052

 

$22,249

 

$23,041

 

$1,657

 

$1,583

Total:
 
 
 
 
 
 
 
 
 
 
 
Commercial

$17,665

 

$17,942

 

$18,397

 

$18,509

 

$1,358

 

$1,104

Residential real estate
2,914

 
3,703

 
3,335

 
4,106

 
222

 
326

Consumer
467

 
407

 
517

 
426

 
77

 
153

Total impaired loans

$21,046

 

$22,052

 

$22,249

 

$23,041

 

$1,657

 

$1,583

(1)
The recorded investment in impaired loans consists of unpaid principal balance net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs. For impaired accruing loans (troubled debt restructurings for which management has concluded that the collectibility of the loan is not in doubt), the recorded investment also includes accrued interest.



- 15-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class:
 
 
 
 
 
 
 
 
(Dollars in thousands)
Average Recorded Investment
 
Interest Income Recognized
Three months ended March 31,
2015
 
2014
 
2015
 
2014
Commercial:
 
 
 
 
 
 
 
Mortgages

$14,942

 

$28,340

 

$79

 

$165

Construction & development
—

 
—

 
—

 
—

Commercial & industrial
3,036

 
2,366

 
19

 
23

Residential real estate:
 
 
 
 
 
 
 
Mortgages
3,457

 
3,744

 
16

 
14

Homeowner construction
—

 
—

 
—

 
—

Consumer:
 
 
 
 
 
 
 
Home equity lines
247

 
134

 
—

 
1

Home equity loans
74

 
95

 
—

 
1

Other
146

 
125

 
3

 
2

Totals

$21,902

 

$34,804

 

$117

 

$206


Troubled Debt Restructurings
Loans are considered restructured in a troubled debt restructuring when the Corporation has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection.

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectibility of the loan. Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.

Troubled debt restructurings are reported as such for at least one year from the date of the restructuring. In years after the restructuring, troubled debt restructured loans are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement.

Troubled debt restructurings are classified as impaired loans. The Corporation identifies loss allocations for impaired loans on an individual loan basis. The recorded investment in troubled debt restructurings was $17.7 million and $18.4 million, respectively, at March 31, 2015 and December 31, 2014. These amounts included accrued interest of $30 thousand and $33 thousand, respectively. The allowance for loan losses included specific reserves for these troubled debt restructurings of $1.5 million and $1.2 million, respectively, at March 31, 2015 and December 31, 2014. As of March 31, 2015, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.



- 16-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

 
 
 
 
 
 
 
 
 
 
 
 
The following table presents loans modified as a troubled debt restructuring:
(Dollars in thousands)
 
 
 
 
Outstanding Recorded Investment (1)
 
# of Loans
 
Pre-Modifications
 
Post-Modifications
Three months ended March 31,
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
—

 
—

 

$—

 

$—

 

$—

 

$—

Construction & development
—

 
—

 
—

 
—

 
—

 
—

Commercial & industrial
1

 
—

 
300

 
—

 
300

 
—

Residential real estate:
 
 
 
 
 
 
 
 
 
 
 
Mortgages
1

 
2

 
93

 
479

 
93

 
479

Homeowner construction
—

 
—

 
—

 
—

 
—

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines
—

 
—

 
—

 
—

 
—

 
—

Home equity loans
—

 
—

 
—

 
—

 
—

 
—

Other
1

 
—

 
35

 
—

 
35

 
—

Totals
3

 
2

 

$428

 

$479

 

$428

 

$479

(1)
The recorded investment in troubled debt restructurings consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs, at the time of the restructuring. For accruing troubled debt restructured loans, the recorded investment also includes accrued interest.

The following table provides information on how loans were modified as a troubled debt restructuring:
(Dollars in thousands)
 
 
 
Three months ended March 31,
2015

 
2014

Below-market interest rate concession

$335

 

$—

Payment deferral
93

 
479

Maturity / amortization concession
—

 
—

Interest only payments
—

 
—

Combination (1)
—

 
—

Total

$428

 

$479

(1)
Loans included in this classification were modified with a combination of any two of the concessions listed in this table.
 
 
 
 
 
 
 
 


- 17-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents loans modified in a troubled debt restructuring within the previous twelve months for which there was a payment default:
(Dollars in thousands)
# of Loans
 
Recorded Investment (1)
Three months ended March 31,
2015
 
2014
 
2015
 
2014
Commercial:
 
 
 
 
 
 
 
Mortgages
—

 
—

 

$—

 

$—

Construction & development
—

 
—

 
—

 
—

Commercial & industrial
2

 
6

 
11

 
1,191

Residential real estate:
 
 
 
 
 
 
 
Mortgages
2

 
—

 
338

 
—

Homeowner construction
—

 
—

 
—

 
—

Consumer:
 
 
 
 
 
 
 
Home equity lines
—

 
—

 
—

 
—

Home equity loans
—

 
—

 
—

 
—

Other
—

 
—

 
—

 
—

Totals
4

 
6

 

$349

 

$1,191

(1)
The recorded investment in troubled debt restructurings consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. For accruing troubled debt restructured loans, the recorded investment also includes accrued interest.

Credit Quality Indicators
Commercial
The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. As of March 31, 2015 and December 31, 2014, the weighted average risk rating of the Corporation’s commercial loan portfolio was 4.68 and 4.67, respectively. For non-impaired loans, the Corporation assigns a loss allocation factor to each loan, based on its risk rating for purposes of establishing an appropriate allowance for loan losses. See Note 6 for additional information.

A description of the commercial loan categories are as follows:

Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality but exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, secondary sources of repayment, or performance inconsistency or may be in an industry or of a loan type known to have a higher degree of risk.

Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies.

Classified - Loans identified as “substandard”, “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such l