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Section 1: 10-Q (FORM 10-Q 3-31-18)

Document
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, 2018 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, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Mark one)
 
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No

The number of shares of common stock of the registrant outstanding as of April 30, 2018 was 17,270,360.



FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended March 31, 2018
 
 
TABLE OF CONTENTS
 
Page Number
 
 
 
 



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PART I.  Financial Information
Item 1.  Financial Statements
Consolidated Balance Sheets (unaudited)
(Dollars in thousands, except par value)
 
March 31,
2018
 
December 31,
2017
Assets:
 
 
 
Cash and due from banks

$85,680

 

$79,853

Short-term investments
2,322

 
3,070

Mortgage loans held for sale (including $17,494 at March 31, 2018 and $26,943 at December 31, 2017 measured at fair value)
19,269

 
26,943

Securities:
 
 
 
Available for sale, at fair value
787,842

 
780,954

Held to maturity, at amortized cost (fair value $11,995 at March 31, 2018 and $12,721 at December 31, 2017)
11,973

 
12,541

Total securities
799,815

 
793,495

Federal Home Loan Bank stock, at cost
41,127

 
40,517

Loans:
 
 
 
Total loans
3,387,406

 
3,374,071

Less allowance for loan losses
25,864

 
26,488

Net loans
3,361,542

 
3,347,583

Premises and equipment, net
28,316

 
28,333

Investment in bank-owned life insurance
73,782

 
73,267

Goodwill
63,909

 
63,909

Identifiable intangible assets, net
8,893

 
9,140

Other assets
81,671

 
63,740

Total assets

$4,566,326

 

$4,529,850

Liabilities:
 
 
 
Deposits:
 
 
 
Noninterest-bearing deposits

$601,478

 

$578,410

Interest-bearing deposits
2,654,956

 
2,664,297

Total deposits
3,256,434

 
3,242,707

Federal Home Loan Bank advances
808,677

 
791,356

Junior subordinated debentures
22,681

 
22,681

Other liabilities
65,453

 
59,822

Total liabilities
4,153,245

 
4,116,566

Commitments and contingencies


 


Shareholders’ Equity:
 
 
 
Common stock of $.0625 par value; authorized 60,000,000 shares; issued and outstanding 17,261,730 shares at March 31, 2018 and 17,226,508 shares at December 31, 2017
1,079

 
1,077

Paid-in capital
118,172

 
117,961

Retained earnings
326,505

 
317,756

Accumulated other comprehensive loss
(32,675
)
 
(23,510
)
Total shareholders’ equity
413,081

 
413,284

Total liabilities and shareholders’ equity

$4,566,326

 

$4,529,850


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,
2018

 
2017

Interest income:
 
 
 
Interest and fees on loans

$34,578

 

$30,352

Taxable interest on securities
5,118

 
4,709

Nontaxable interest on securities
23

 
112

Dividends on Federal Home Loan Bank stock
516

 
387

Other interest income
205

 
104

Total interest and dividend income
40,440

 
35,664

Interest expense:
 

 
 

Deposits
4,422

 
3,502

Federal Home Loan Bank advances
3,983

 
3,344

Junior subordinated debentures
183

 
138

Other interest expense

 
1

Total interest expense
8,588

 
6,985

Net interest income
31,852

 
28,679

Provision for loan losses

 
400

Net interest income after provision for loan losses
31,852

 
28,279

Noninterest income:
 
 
 
Wealth management revenues
10,273

 
9,477

Mortgage banking revenues
2,838

 
2,340

Service charges on deposit accounts
863

 
883

Card interchange fees
847

 
802

Income from bank-owned life insurance
515

 
536

Loan related derivative income
141

 
148

Other income
266

 
324

Total noninterest income
15,743

 
14,510

Noninterest expense:
 
 
 
Salaries and employee benefits
17,772

 
16,917

Net occupancy
2,002

 
1,967

Outsourced services
1,873

 
1,457

Equipment
1,180

 
1,467

Legal, audit and professional fees
726

 
616

FDIC deposit insurance costs
404

 
481

Advertising and promotion
177

 
237

Amortization of intangibles
248

 
277

Change in fair value of contingent consideration

 
(310
)
Other expenses
2,748

 
2,177

Total noninterest expense
27,130

 
25,286

Income before income taxes
20,465

 
17,503

Income tax expense
4,254

 
5,721

Net income

$16,211

 

$11,782

 
 
 
 
Weighted average common shares outstanding - basic
17,234

 
17,186

Weighted average common shares outstanding - diluted
17,345

 
17,293

Per share information:
Basic earnings per common share

$0.94

 

$0.68

 
Diluted earnings per common share

$0.93

 

$0.68

 
Cash dividends declared per share

$0.43

 

$0.38


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,
2018

 
2017

Net income

$16,211

 

$11,782

Other comprehensive income (loss), net of tax:
 
 
 
Net change in fair value of securities available for sale
(10,414
)
 
401

Net change in fair value of cash flow hedges
889

 
98

Net change in defined benefit plan obligations
360

 
213

Total other comprehensive (loss) income, net of tax
(9,165
)
 
712

Total comprehensive income

$7,046

 

$12,494




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) Income
 
Total
Balance at January 1, 2018
17,227

 

$1,077

 

$117,961

 

$317,756

 

($23,510
)
 

$413,284

Net income

 

 

 
16,211

 

 
16,211

Total other comprehensive income, net of tax

 

 

 

 
(9,165
)
 
(9,165
)
Cash dividends declared

 

 

 
(7,462
)
 

 
(7,462
)
Share-based compensation

 

 
669

 

 

 
669

Exercise of stock options, issuance of other compensation-related equity awards
35

 
2

 
(458
)
 

 

 
(456
)
Balance at March 31, 2018
17,262

 

$1,079

 

$118,172

 

$326,505

 

($32,675
)
 

$413,081



 
Common
Shares Outstanding
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Balance at January 1, 2017
17,171

 

$1,073

 

$115,123

 

$294,365

 

($19,757
)
 

$390,804

Net income

 

 

 
11,782

 

 
11,782

Total other comprehensive income, net of tax

 

 

 

 
712

 
712

Cash dividends declared

 

 

 
(6,592
)
 

 
(6,592
)
Share-based compensation

 

 
607

 

 

 
607

Exercise of stock options, issuance of other compensation-related equity awards
22

 
2

 
470

 

 

 
472

Balance at March 31, 2017
17,193

 

$1,075

 

$116,200

 

$299,555

 

($19,045
)
 

$397,785



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,
2018

 
2017

Cash flows from operating activities:
 
 
 
Net income

$16,211

 

$11,782

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

 
400

Depreciation of premises and equipment
827

 
901

Net amortization of premium and discount
695

 
893

Amortization of intangibles
248

 
277

Share-based compensation
669

 
607

Tax benefit from stock option exercises and other equity awards
207

 
195

Income from bank-owned life insurance
(515
)
 
(536
)
Net gains on loan sales and commissions on loans originated for others, including fair value adjustments
(2,679
)
 
(2,269
)
Proceeds from sales of loans
89,575

 
92,325

Loans originated for sale
(79,212
)
 
(86,133
)
Change in fair value of contingent consideration liability

 
(310
)
Increase in other assets
(10,973
)
 
(724
)
Increase (decrease) in other liabilities
6,483

 
(530
)
Net cash provided by operating activities
21,536

 
16,878

Cash flows from investing activities:
 
 
 
Purchases of:
Mortgage-backed securities available for sale
(40,657
)
 
(20,248
)
 
Other investment securities available for sale
(1,064
)
 
(19,963
)
Maturities and principal payments of:
Mortgage-backed securities available for sale
20,100

 
19,483

 
Other investment securities available for sale
500

 
5,875

 
Mortgage-backed securities held to maturity
540

 
871

Purchases of Federal Home Loan Bank stock
(610
)
 
(585
)
Net (increase) decrease in loans
(15,571
)
 
9,070

Purchases of loans
(1,520
)
 

Purchases of premises and equipment
(811
)
 
(733
)
Net cash used in investing activities
(39,093
)
 
(6,230
)
Cash flows from financing activities:
 
 
 
Net increase in deposits
13,727

 
51,819

Proceeds from Federal Home Loan Bank advances
515,000

 
175,000

Repayment of Federal Home Loan Bank advances
(497,679
)
 
(225,189
)
Payment of contingent consideration liability
(1,217
)
 

Net proceeds from stock option exercises and issuance of other equity awards
(456
)
 
277

Cash dividends paid
(6,739
)
 
(6,372
)
Net cash provided by (used in) financing activities
22,636

 
(4,465
)
Net increase in cash and cash equivalents
5,079

 
6,183

Cash and cash equivalents at beginning of period
82,923

 
107,797

Cash and cash equivalents at end of period

$88,002

 

$113,980

Noncash Investing and Financing Activities:
 
 
 
Loans charged off

$690

 

$79

Loans transferred to property acquired through foreclosure or repossession
3,074

 
410

Supplemental Disclosures:
 
 
 
Interest payments

$8,047

 

$6,985

Income tax payments
908

 
566


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



Condensed Notes to Unaudited Consolidated Financial Statements


(1) General Information
Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company that has elected to be a financial holding company.  The Bancorp’s subsidiaries include The Washington Trust Company, of Westerly (the “Bank”), a Rhode Island chartered commercial bank founded in 1800, and Weston Securities Corporation (“WSC”).  Through its subsidiaries, the Bancorp offers a comprehensive product line of banking and financial services, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut; its automated teller machines (“ATMs”); telephone banking; mobile banking and its internet website (www.washtrust.com).

The Unaudited Consolidated Financial Statements include the accounts of the Bancorp and its subsidiaries (collectively the “Corporation” or “Washington Trust”).  All intercompany transactions have been eliminated. Certain previously reported amounts have been reclassified to conform to the current year’s presentation.

The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices of the banking industry.  In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.  Actual results could differ from those estimates.

The Unaudited Consolidated Financial Statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying Unaudited Consolidated Financial Statements have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

(2) Recently Issued Accounting Pronouncements
Revenue from Contracts with Customers - Topic 606
Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), was issued in May 2014 and provides a revenue recognition framework for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other accounting standards. As issued, ASU 2014-09 was effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period with early adoption not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, Accounting Standards Update No. 2015-14, “Deferral of the Effective Date” (“ASU 2015-14”) was issued and delayed the effective date of ASU 2014-09 to annual and interim periods in fiscal years beginning after December 15, 2017. In 2016, Accounting Standards Update No. 2016-08, “Principal versus Agent Considerations” (“ASU 2016-08”), Accounting Standards Update No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”) and Accounting Standards Update No. 2016-12, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”) were issued. These ASUs did not change the core principle for revenue recognition in Topic 606; instead, the amendments provided more detailed guidance in a few areas and additional implementation guidance and examples to reduce the degree of judgment necessary to comply with Topic 606. The effective date and transition requirements for ASU 2016-08, ASU 2016-10 and ASU 2016-12 were the same as those provided by ASU 2015-14. Management assembled a project team to address the changes pursuant to Topic 606. The project team completed a scope assessment and contract review for in-scope revenue streams. Washington Trust's largest source of revenue is net interest income on financial assets and liabilities, which was explicitly excluded from the scope of this ASU. Revenue streams that were within the scope of Topic 606 include wealth management revenues, service charges on deposit accounts and card interchange fees. Management adopted the provisions of ASU 2014-09 effective January 1, 2018, using the modified retrospective transition method. The adoption did not have a material impact on the Corporation’s consolidated financial statements. See Note 12 for further details.

Financial Instruments - Overall - Topic 825
Accounting Standards Update No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), was issued in January 2016 and provides revised guidance related to the accounting for and reporting of financial instruments. Some of the main provisions include: requiring most equity securities to be reported at fair value with unrealized gains and losses reported in the income statement; requiring separate presentation of financial assets and liabilities by


- 8-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

measurement category and form (i.e. securities or loans); clarifying that entities must assess valuation allowances on a deferred tax asset related to available for sale debt securities in combination with their other deferred tax assets; and eliminating the requirement to disclose the method and significant assumptions used to estimate fair value for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Management adopted the provisions of ASU 2016-01 effective January 1, 2018. The adoption did not have a material impact on the Corporation’s consolidated financial statements.

Accounting Standards Update No. 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2018-03”), was issued in February 2018 to clarify certain aspects of the guidance issued in ASU 2016-01. Companies, such as Washington Trust, were not required to adopt the provisions of ASU 2018-03 until the interim period beginning after June 15, 2018. However, early adoption was permitted, as long as ASU 2016-01 provisions were adopted. Management early adopted the provisions of ASU 2018-03 effective January 1, 2018. The adoption did not have an impact on the Corporation’s consolidated financial statements.

Leases - Topic 842
Accounting Standards Update No. 2016-02, “Leases” (“ASU 2016-02”), was issued in February 2016 and provides revised guidance related to the accounting and reporting of leases. ASU 2016-02 requires lessees to recognize most leases on the balance sheet. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. ASU 2016-02 requires a modified retrospective transition, with a number of practical expedients that entities may elect to apply. In January 2018, Accounting Standards Update No. 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 was issued to address concerns about the costs and complexity of complying with the transition provisions of ASU 2016-02. Both ASU 2016-02 and ASU 2018-01 are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Management has assembled a project team that meets regularly to address the changes pursuant to Topic 842. The Corporation rents premises used in business operations under non-cancelable operating leases, which currently are not reflected in its Consolidated Balance Sheets. As disclosed in Note 18, the Corporation was committed to $38.4 million of future minimum lease payments under these non-cancelable operating leases. Upon adoption of ASU 2016-02 on January 1, 2019, the Corporation expects to report increased assets and liabilities as a result of recognizing right-of-use assets and lease liabilities in its Consolidated Balance Sheets. The Corporation does not expect a material change to the timing of expense recognition in the Consolidated Statements of Income.

Financial Instruments - Credit Losses - Topic 326
Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses” (“ASU 2016-13”), was issued in June 2016. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 provides for a modified retrospective transition, resulting in a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective, except for debt securities for which an other-than-temporary impairment has previously been recognized. For these debt securities, a prospective transition approach will be adopted in order to maintain the same amortized cost prior to and subsequent to the effective date of ASU 2016-13. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted in 2019. Washington Trust is evaluating the effect that this ASU will have on consolidated financial statements and disclosures. Management has assembled a project team that meets regularly to evaluate the provisions of this ASU and to address the additional data requirements necessary and the approach for implementation. The Corporation does not plan to early adopt ASU 2016-13 and it has not yet determined the impact it will have on its consolidated financial statements.

Statement of Cash Flows - Topic 230
Accounting Standards Update No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), was issued in August 2016. ASU 2016-15 provides classification guidance on certain cash receipts and cash payments, including, but not limited to, debt prepayment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance policies and distributions received from equity method investees. The adoption of ASU 2016-15 requires a retrospective transition method applied to each period presented. This ASU was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Management adopted the provisions of ASU 2016-15 effective January 1, 2018. The adoption did not


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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

have a material impact on the Corporation’s consolidated financial statements.

Accounting Standards Update No. 2016-18, “Restricted Cash” (“ASU 2016-18”), was issued in November 2016. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash. Restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of ASU 2016-18 requires a retrospective transition method applied to each period presented. This ASU was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Management adopted the provisions of ASU 2016-18 effective January 1, 2018. The adoption did not have a material impact on the Corporation’s consolidated financial statements.

Compensation - Retirement Benefits - Topic 715
Accounting Standards Update No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”), was issued in March 2017. ASU 2017-07 requires that employers include the service cost component of net periodic benefit cost in the same line item as other employee compensation costs and all other components of net periodic benefit cost in a separate line item(s) in the statement of income. In addition, the line item in which the components of net periodic benefit cost other than the service cost are included shall be identified as such on the statement of income or in the notes to the financial statements. ASU 2017-07 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 requiring retrospective application for all periods presented. Management adopted the provisions of ASU 2017-07 effective January 1, 2018, utilizing the practical expedient that permitted employers to use the amounts previously disclosed in notes to financial statements as an estimation basis for applying the retrospective application requirements. The adoption of ASU 2017-07 resulted in an increase in salaries and employee benefits, a decrease in other expenses and no change to net income. The adoption did not have a material impact on the Corporation’s consolidated financial statements. See Note 13 for further details.

Compensation - Stock Compensation - Topic 718
Accounting Standards Update No. 2017-09, “Scope of Modification Accounting” (“ASU 2017-09”), was issued in May 2017 to provide clarity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. ASU 2017-09 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with provisions applied on a prospective basis.  Management adopted the provisions of ASU 2017-09 effective January 1, 2018. The adoption did not have a material impact on the Corporation’s consolidated financial statements.

Derivatives and Hedging - Topic 815
Accounting Standards Update No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), was issued in August 2017 to better align financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The provisions of ASU 2017-12 should be applied on a modified retrospective transition method in which the Corporation will recognize the cumulative effect of the change in the opening balance of retained earnings as of the adoption date. The Corporation has not yet determined the impact ASU 2017-12 will have on its consolidated financial statements.

(3) Cash and Due from Banks
The Bank maintains certain average reserve balances to meet the requirements of the Board of Governors of the Federal Reserve System (“FRB”).  Some or all of these reserve requirements may be satisfied with vault cash. Reserve balances amounted to $14.1 million at both March 31, 2018 and December 31, 2017 and were included in cash and due from banks in the Unaudited Consolidated Balance Sheets.

As of March 31, 2018 and December 31, 2017, cash and due from banks included interest-bearing deposits in other banks of $28.9 million and $31.9 million, respectively.



- 10-



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, 2018
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Securities Available for Sale:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$171,491

 

$9

 

($5,886
)
 

$165,614

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
605,430

 
1,936

 
(17,619
)
 
589,747

Obligations of states and political subdivisions
2,355

 
4

 

 
2,359

Individual name issuer trust preferred debt securities
18,112

 

 
(1,016
)
 
17,096

Corporate bonds
13,914

 

 
(888
)
 
13,026

Total securities available for sale

$811,302

 

$1,949

 

($25,409
)
 

$787,842

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

$11,973

 

$38

 

($16
)
 

$11,995

Total securities held to maturity

$11,973

 

$38

 

($16
)
 

$11,995

Total securities

$823,275

 

$1,987

 

($25,425
)
 

$799,837



(Dollars in thousands)
 
December 31, 2017
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Securities Available for Sale:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$161,479

 

$—

 

($3,875
)
 

$157,604

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
594,944

 
3,671

 
(7,733
)
 
590,882

Obligations of states and political subdivisions
2,355

 
4

 

 
2,359

Individual name issuer trust preferred debt securities
18,106

 

 
(1,122
)
 
16,984

Corporate bonds
13,917

 
13

 
(805
)
 
13,125

Total securities available for sale

$790,801

 

$3,688

 

($13,535
)
 

$780,954

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

$12,541

 

$180

 

$—

 

$12,721

Total securities held to maturity

$12,541

 

$180

 

$—

 

$12,721

Total securities

$803,342

 

$3,868

 

($13,535
)
 

$793,675


As of March 31, 2018 and December 31, 2017, securities with a fair value of $365.1 million and $357.8 million, respectively, were pledged as collateral for Federal Home Loan Bank of Boston (“FHLB”) borrowings, potential borrowings with the FRB, certain public deposits and for other purposes. See Note 7 for additional disclosure on FHLB borrowings.



- 11-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The schedule of maturities of debt securities available for sale and held to maturity is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments.  All other debt securities are included based on contractual maturities.  Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.
(Dollars in thousands)
Available for Sale
 
Held to Maturity
March 31, 2018
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less

$63,132

 

$61,513

 

$1,663

 

$1,666

Due after one year to five years
262,288

 
254,949

 
5,192

 
5,202

Due after five years to ten years
290,876

 
281,962

 
3,840

 
3,847

Due after ten years
195,006

 
189,418

 
1,278

 
1,280

Total securities

$811,302

 

$787,842

 

$11,973

 

$11,995


Included in the above table are debt securities with an amortized cost balance of $205.0 million and a fair value of $197.2 million at March 31, 2018 that are callable at the discretion of the issuers.  Final maturities of the callable securities range from 2 months to 19 years, with call features ranging from 1 month to 3 years.

Other-Than-Temporary Impairment Assessment
Washington Trust assesses whether the decline in fair value of investment securities is other-than-temporary on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer.  Management evaluates impairments in value both qualitatively and quantitatively to assess whether they are other-than-temporary.

The following tables summarize temporarily impaired securities, segregated by length of time the securities have been in a continuous unrealized loss position:
(Dollars in thousands)
Less than 12 Months
 
12 Months or Longer
 
Total
March 31, 2018
#
 
Fair
Value
Unrealized
Losses
 
#

 
Fair
Value
Unrealized
Losses
 
#

 
Fair
Value
Unrealized
Losses
Obligations of U.S. government-sponsored enterprises
8

 

$68,706


($1,787
)
 
8

 

$86,901


($4,099
)
 
16

 

$155,607


($5,886
)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
32

 
249,667

(4,807
)
 
22

 
265,077

(12,828
)
 
54

 
514,744

(17,635
)
Individual name issuer trust preferred debt securities

 


 
7

 
17,096

(1,016
)
 
7

 
17,096

(1,016
)
Corporate bonds
6

 
2,112

(18
)
 
3

 
10,914

(870
)
 
9

 
13,026

(888
)
Total temporarily impaired securities
46

 

$320,485


($6,612
)
 
40

 

$379,988


($18,813
)
 
86

 

$700,473


($25,425
)


(Dollars in thousands)
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 2017
#

 
Fair
Value
Unrealized
Losses
 
#

 
Fair
Value
Unrealized
Losses
 
#

 
Fair
Value
Unrealized
Losses
Obligations of U.S. government-sponsored enterprises
8

 

$69,681


($798
)
 
8

 

$87,923


($3,077
)
 
16

 

$157,604


($3,875
)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
20

 
128,965

(613
)
 
22

 
279,693

(7,120
)
 
42

 
408,658

(7,733
)
Individual name issuer trust preferred debt securities

 


 
7

 
16,984

(1,122
)
 
7

 
16,984

(1,122
)
Corporate bonds
3

 
921

(5
)
 
3

 
10,980

(800
)
 
6

 
11,901

(805
)
Total temporarily impaired securities
31

 

$199,567


($1,416
)
 
40

 

$395,580


($12,119
)
 
71

 

$595,147


($13,535
)


- 12-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


Further deterioration in credit quality of the underlying issuers of the securities, further deterioration in the condition of the financial services industry, worsening of the current economic environment, or additional declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods, and the Corporation may incur write-downs.

U.S. Government Agency and U.S. Government-Sponsored Enterprise Securities, including Mortgage-Backed Securities
The gross unrealized losses on U.S. government agency and U.S government-sponsored debt securities, including mortgage-backed securities, were primarily attributable to relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on the assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more-likely-than-not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2018.

Trust Preferred Debt Securities of Individual Name Issuers
Included in debt securities in an unrealized loss position at March 31, 2018 were seven trust preferred security holdings issued by five individual companies in the banking sector.  Management believes the unrealized loss position in these holdings was attributable to the general widening of spreads for this category of debt securities issued by financial services companies since the time these securities were purchased.  Based on the information available through the filing date of this report, all individual name issuer trust preferred debt securities held in our portfolio continue to accrue and make payments as expected with no payment deferrals or defaults on the part of the issuers.  As of March 31, 2018, individual name issuer trust preferred debt securities with an amortized cost of $6.1 million and unrealized losses of $417 thousand were rated below investment grade by Standard & Poors, Inc. (“S&P”).  Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information.  We noted no additional downgrades to below investment grade between March 31, 2018 and the filing date of this report.  Based on this review, management concluded that it expects to recover the entire amortized cost basis of these securities.  Furthermore, Washington Trust does not intend to sell these securities and it is not more-likely-than-not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity.  Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2018.

Corporate Bonds
At March 31, 2018, Washington Trust had nine corporate bond holdings with unrealized losses totaling $888 thousand. These investment grade corporate bonds were issued by large corporations. Management believes the unrealized losses on these bonds are a function of the changes in the investment spreads and interest rate movements and not changes in the credit quality of the issuers of the debt securities. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more-likely-than-not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity.  Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2018.



- 13-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

(5) Loans
The following is a summary of loans:
(Dollars in thousands)
March 31, 2018
 
December 31, 2017
 
Amount

 
%

 
Amount

 
%

Commercial:
 
 
 
 
 
 
 
Commercial real estate (1)

$1,217,278

 
36
%
 

$1,210,495

 
36
%
Commercial & industrial (2)
603,830

 
18

 
612,334

 
18

Total commercial
1,821,108

 
54

 
1,822,829

 
54

Residential Real Estate:
 
 
 
 
 
 
 
Residential real estate (3)
1,249,890

 
37

 
1,227,248

 
36

Consumer:
 
 
 
 
 
 
 
Home equity
285,723

 
8

 
292,467

 
9

Other (4)
30,685

 
1

 
31,527

 
1

Total consumer
316,408

 
9

 
323,994

 
10

Total loans (5)

$3,387,406

 
100
%
 

$3,374,071

 
100
%
(1)
Commercial real estate loans consist of commercial mortgages primarily secured by income producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.
(2)
Commercial & industrial consist of loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.
(3)
Residential real estate loans consist of mortgage and homeowner construction loans secured by one- to four- family residential properties.
(4)
Other consumer loans consists of loans to individuals secured by general aviation aircraft and other personal installment loans.
(5)
Includes net unamortized loan origination costs of $4.1 million and $3.8 million, respectively, at March 31, 2018 and December 31, 2017 and net unamortized premiums on purchased loans of $855 thousand and $878 thousand, respectively, at March 31, 2018 and December 31, 2017.

As of March 31, 2018 and December 31, 2017, there were $1.9 billion and $1.6 billion, respectively, of loans pledged as collateral to the FHLB under a blanket pledge agreement and to the FRB for the discount window. See Note 7 for additional disclosure regarding borrowings.

Past Due Loans
Past due status is based on the contractual payment terms of the loan. The following tables present an age analysis of past due loans, segregated by class of loans:
(Dollars in thousands)
Days Past Due
 
 
 
 
 
 
March 31, 2018
30-59
 
60-89
 
Over 90
 
Total Past Due
 
Current
 
Total Loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate

$—

 

$—

 

$—

 

$—

 

$1,217,278

 

$1,217,278

Commercial & industrial
2,898

 

 
397

 
3,295

 
600,535

 
603,830

Total commercial
2,898

 

 
397

 
3,295

 
1,817,813

 
1,821,108

Residential Real Estate:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
6,909

 
789

 
4,108

 
11,806

 
1,238,084

 
1,249,890

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
3,203

 
744

 
288

 
4,235

 
281,488

 
285,723

Other
20

 
2

 

 
22

 
30,663

 
30,685

Total consumer
3,223

 
746

 
288

 
4,257

 
312,151

 
316,408

Total loans

$13,030

 

$1,535

 

$4,793

 

$19,358

 

$3,368,048

 

$3,387,406




- 14-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

(Dollars in thousands)
Days Past Due
 
 
 
 
 
 
December 31, 2017
30-59
 
60-89
 
Over 90
 
Total Past Due
 
Current
 
Total Loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate

$6

 

$—

 

$4,954

 

$4,960

 

$1,205,535

 

$1,210,495

Commercial & industrial
3,793

 
2

 
281

 
4,076

 
608,258

 
612,334

Total commercial
3,799

 
2

 
5,235

 
9,036

 
1,813,793

 
1,822,829

Residential Real Estate:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
1,678

 
2,274

 
3,903

 
7,855

 
1,219,393

 
1,227,248

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
2,798

 
75

 
268

 
3,141

 
289,326

 
292,467

Other
29

 

 
14

 
43

 
31,484

 
31,527

Total consumer
2,827

 
75

 
282

 
3,184

 
320,810

 
323,994

Total loans

$8,304

 

$2,351

 

$9,420

 

$20,075

 

$3,353,996

 

$3,374,071


Included in past due loans as of March 31, 2018 and December 31, 2017, were nonaccrual loans of $7.1 million and $11.8 million, respectively.

All loans 90 days or more past due at March 31, 2018 and December 31, 2017 were classified as nonaccrual.



- 15-



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.

The following is a summary of impaired loans:
(Dollars in thousands)
Recorded Investment (1)
 
Unpaid Principal
 
Related Allowance
 
Mar 31,
2018
 
Dec 31,
2017
 
Mar 31,
2018
 
Dec 31,
2017
 
Mar 31,
2018
 
Dec 31,
2017
No Related Allowance Recorded
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate

$—

 

$—

 

$—

 

$—

 

$—

 

$—

Commercial & industrial
5,427

 
4,986

 
6,257

 
5,081

 

 

Total commercial
5,427

 
4,986

 
6,257

 
5,081

 

 

Residential Real Estate:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
8,288

 
9,069

 
8,455

 
9,256

 

 

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
560

 
557

 
560

 
557

 

 

Other
114

 
14

 
115

 
14

 

 

Total consumer
674

 
571

 
675

 
571

 

 

Subtotal
14,389

 
14,626

 
15,387

 
14,908

 

 

With Related Allowance Recorded
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate

$—

 

$4,954

 

$—

 

$9,910

 

$—

 

$1,018

Commercial & industrial
456

 
191

 
508

 
212

 
53

 
1

Total commercial
456

 
5,145

 
508

 
10,122

 
53

 
1,019

Residential Real Estate:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
1,421

 
715

 
1,467

 
741

 
112

 
104

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
223

 

 
223

 

 
108

 

Other
28

 
133

 
26

 
132

 
5

 
6

Total consumer
251

 
133

 
249

 
132

 
113

 
6

Subtotal
2,128

 
5,993

 
2,224

 
10,995

 
278

 
1,129

Total impaired loans

$16,517

 

$20,619

 

$17,611

 

$25,903

 

$278

 

$1,129

Total:
 
 
 
 
 
 
 
 
 
 
 
Commercial

$5,883

 

$10,131

 

$6,765

 

$15,203

 

$53

 

$1,019

Residential real estate
9,709

 
9,784

 
9,922

 
9,997

 
112

 
104

Consumer
925

 
704

 
924

 
703

 
113

 
6

Total impaired loans

$16,517

 

$20,619

 

$17,611

 

$25,903

 

$278

 

$1,129

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



- 16-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following tables present the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class.
 
 
 
 
 
 
 
 
(Dollars in thousands)
Average Recorded Investment
 
Interest Income Recognized
Three months ended March 31,
2018
 
2017
 
2018
 
2017
Commercial:
 
 
 
 
 
 
 
Commercial real estate

$4,100

 

$9,780

 

$—

 

$26

Commercial & industrial
5,492

 
6,965

 
66

 
76

Total commercial
9,592

 
16,745

 
66

 
102

Residential Real Estate:


 


 


 


Residential real estate
9,850

 
16,240

 
112

 
122

Consumer:


 


 


 


Home equity
667

 
969

 
9

 
10

Other
144

 
143

 
3

 
4

Total consumer
811

 
1,112

 
12

 
14

Totals

$20,253

 

$34,097

 

$190

 

$238

 
 
 
 
 
 
 
 
Nonaccrual Loans
Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. When loans are placed on nonaccrual status, interest previously accrued but not collected on such loans is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest generally for a period of six months, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.

The following is a summary of nonaccrual loans, segregated by class of loans:
(Dollars in thousands)
Mar 31,
2018
 
Dec 31,
2017
Commercial:
 
 
 
Commercial real estate

$—

 

$4,954

Commercial & industrial
397

 
283

Total commercial
397

 
5,237

Residential Real Estate:
 
 
 
Residential real estate
9,340

 
9,414

Consumer:
 
 
 
Home equity
771

 
544

Other
13

 
16

Total consumer
784

 
560

Total nonaccrual loans

$10,521

 

$15,211

Accruing loans 90 days or more past due

$—

 

$—


As of March 31, 2018 and December 31, 2017, loans secured by one- to four-family residential property amounting to $4.0 million


- 17-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

and $4.4 million, respectively, were in process of foreclosure.

Nonaccrual loans of $3.5 million and $3.4 million, respectively, were current as to the payment of principal and interest at March 31, 2018 and December 31, 2017.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2018.

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

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectibility of the loan. Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately 6 months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.

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

Troubled debt restructurings are classified as impaired loans. The Corporation identifies loss allocations for impaired loans on an individual loan basis. The recorded investment in troubled debt restructurings consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs, at the time of the restructuring. For accruing troubled debt restructured loans, the recorded investment also includes accrued interest. The recorded investment in troubled debt restructurings was $6.8 million and $11.2 million, respectively, at March 31, 2018 and December 31, 2017. These amounts included insignificant balances of accrued interest. The allowance for loan losses included specific reserves for these troubled debt restructurings of $159 thousand and $1.1 million, respectively, at March 31, 2018 and December 31, 2017.

As of March 31, 2018, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

For the three months ended March 31, 2018, there was one loan modified as a troubled debt restructuring with a pre-modification and post-modification recorded investment of $608 thousand. This troubled debt restructuring included a combination of concessions pertaining to maturity and interest only payment terms. There were no loans modified as a troubled debt restructuring for the three months ended March 31, 2017.

For the three months ended March 31, 2018, there were no payment defaults on troubled debt restructured loans modified within the previous 12 months. For the three months ended March 31, 2017, payment defaults on troubled debt restructured loans modified within the previous 12 months occurred on one loan totaling $779 thousand.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


- 18-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Credit Quality Indicators
Commercial
The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. The weighted average risk rating of the Corporation’s commercial loan portfolio was 4.73 at March 31, 2018 and 4.70 at December 31, 2017. For non-impaired loans, the Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for loan losses. See
Note 6 for additional information.

A description of the commercial loan categories is as follows:

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

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

Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectibility. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined. “Loss” is not intended to imply that the loan has no recovery value but rather it is not practical or desirable to continue to carry the asset.

The Corporation’s procedures call for loan ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. The criticized loan portfolio, which generally consists of commercial loans that are risk-rated special mention or worse, and other selected loans are reviewed by management on a quarterly basis, focusing on the current status and strategies to improve the credit. An annual loan review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio.



- 19-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the commercial loan portfolio, segregated by category of credit quality indicator:
(Dollars in thousands)
Pass
 
Special Mention
 
Classified
 
Mar 31,
2018
 
Dec 31,
2017
 
Mar 31,
2018
 
Dec 31,
2017
 
Mar 31,
2018
 
Dec 31,
2017
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Mortgages

$1,044,335

 

$1,067,373

 

$1,077

 

$—

 

$—

 

$5,114

Construction & development
171,866

 
138,008

 

 

 

 

Commercial real estate
1,216,201

 
1,205,381

 
1,077

 

 

 
5,114

Commercial & industrial
559,377

 
592,749

 
37,290

 
9,804

 
7,163

 
9,781

Total commercial

$1,775,578

 

$1,798,130

 

$38,367

 

$9,804

 

$7,163

 

$14,895


Residential and Consumer
The residential and consumer portfolios are monitored on an ongoing basis by the Corporation using delinquency information and loan type as credit quality indicators. These credit quality indicators are assessed on an aggregate basis in these relatively homogeneous portfolios. For non-impaired loans, the Corporation assigns loss allocation factors to each respective loan type. See Note 6 for additional information.

Various other techniques are utilized to monitor indicators of credit deterioration in the portfolios of residential real estate loans and consumer loans. Among these techniques is the periodic tracking of loans with an updated FICO score and an estimated loan to value (“LTV”) ratio. LTV ratio is determined via statistical modeling analyses. The indicated LTV levels are estimated based on such factors as the location, the original LTV ratio, and the date of origination of the loan and do not reflect actual appraisal amounts. The results of these analyses and other loan review procedures are taken into consideration in the determination of loss allocation factors for residential mortgage and home equity consumer credits. See Note 6 for additional information.

The following table presents the residential and consumer loan portfolios, segregated by category of credit quality indicator:
(Dollars in thousands)
Current
 
Past Due
 
Mar 31,
2018
 
Dec 31,
2017
 
Mar 31,
2018
 
Dec 31,
2017
Residential Real Estate:
 
 
 
 
 
 
 
Self-originated mortgages

$1,112,533

 

$1,091,291

 

$10,347

 

$6,413

Purchased mortgages
125,551

 
128,102

 
1,459

 
1,442

Total residential real estate

$1,238,084

 

$1,219,393

 

$11,806

 

$7,855

Consumer:
 
 
 
 
 
 
 
Home equity

$281,488

 

$289,326

 

$4,235

 

$3,141

Other
30,663

 
31,484

 
22

 
43

Total consumer

$312,151

 

$320,810

 

$4,257

 

$3,184


(6) Allowance for Loan Losses
The allowance for loan losses is management’s best estimate of incurred losses inherent in the loan portfolio as of the balance sheet date. The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes: (1) the identification of loss allocations for individual loans deemed to be impaired and (2) the application of loss allocation factors for non-impaired loans based on historical loss experience and estimated loss emergence period, with adjustments for various exposures that management believes are not adequately represented by historical loss experience.



- 20-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the activity in the allowance for loan losses for the three months ended March 31, 2018:
(Dollars in thousands)
Commercial
 
 
Consumer
 
 
 
CRE (1)
C&I (2)
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance

$12,729


$5,580


$18,309


$5,427


$2,412


$340


$2,752


$26,488

Charge-offs
(627
)
(6
)
(633
)

(35
)
(22
)
(57
)
(690
)
Recoveries
25

29

54


7

5

12

66

Provision
(308
)
268

(40
)
67

(192
)
165

(27
)

Ending Balance

$11,819


$5,871


$17,690


$5,494


$2,192


$488


$2,680


$25,864

(1) Commercial real estate loans.
(2) Commercial & industrial loans.
 
 
 
 
 
 
 
 
 
The following table presents the activity in the allowance for loan losses for the three months ended March 31, 2017:
(Dollars in thousands)
Commercial
 
 
Consumer
 
 
 
CRE (1)
C&I (2)
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance

$11,166


$6,992


$18,158


$5,252


$1,889


$705


$2,594


$26,004

Charge-offs

(2
)
(2
)

(45
)
(32
)
(77
)
(79
)
Recoveries

107

107

4

2

8

10

121

Provision
1,200

(800
)
400

103

(106
)
3

(103
)
400

Ending Balance

$12,366


$6,297


$18,663


$5,359


$1,740


$684


$2,424


$26,446

(1) Commercial real estate loans.
(2) Commercial & industrial loans.
 
 
 
 
 
 
 
 
 


- 21-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the Corporation’s loan portfolio and associated allowance for loan loss by portfolio segment and by impairment methodology:
(Dollars in thousands)
March 31, 2018
 
December 31, 2017
 
Loans
 
Related Allowance
 
Loans
 
Related Allowance
Loans Individually Evaluated for Impairment
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Commercial real estate

$—

 

$—

 

$4,954

 

$1,018

Commercial & industrial
5,861

 
53

 
5,157

 
1

Total commercial
5,861

 
53

 
10,111