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Section 1: 10-Q (FORM 10-Q 3-31-20)

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

FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended
 
March 31, 2020
or
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)
 
(IRS 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
COMMON STOCK, $.0625 PAR VALUE PER SHARE
WASH
The NASDAQ Stock Market LLC
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. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes  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.
 
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
Emerging growth company

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
The number of shares of common stock of the registrant outstanding as of April 30, 2020 was 17,258,482.



FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended March 31, 2020
 
 
TABLE OF CONTENTS
 
Page Number
 
 
 
 


- 2-


PART I.  Financial Information
Item 1.  Financial Statements
Washington Trust Bancorp, Inc. and Subsidiaries
 
Consolidated Balance Sheets (unaudited)
(Dollars in thousands, except par value)
 
March 31,
2020
 
December 31,
2019
Assets:
 
 
 
Cash and due from banks

$178,678

 

$132,193

Short-term investments
6,591

 
6,262

Mortgage loans held for sale, at fair value
49,751

 
27,833

Available for sale debt securities, at fair value (amortized cost $896,435; net of allowance for credit losses on securities of $0 at March 31, 2020)
917,392

 
899,490

Federal Home Loan Bank stock, at cost
53,576

 
50,853

Loans:
 
 
 
Total loans
4,090,396

 
3,892,999

Less: allowance for credit losses on loans
39,665

 
27,014

Net loans
4,050,731

 
3,865,985

Premises and equipment, net
28,543

 
28,700

Operating lease right-of-use assets
26,098

 
26,792

Investment in bank-owned life insurance
83,053

 
82,490

Goodwill
63,909

 
63,909

Identifiable intangible assets, net
6,988

 
7,218

Other assets
155,669

 
100,934

Total assets

$5,620,979

 

$5,292,659

Liabilities:
 
 
 
Deposits:
 
 
 
Noninterest-bearing deposits

$622,893

 

$609,924

Interest-bearing deposits
3,083,421

 
2,888,958

Total deposits
3,706,314

 
3,498,882

Federal Home Loan Bank advances
1,198,534

 
1,141,464

Junior subordinated debentures
22,681

 
22,681

Operating lease liabilities
28,184

 
28,861

Other liabilities
156,669

 
97,279

Total liabilities
5,112,382

 
4,789,167

Commitments and contingencies (Note 18)


 


Shareholders’ Equity:
 
 
 
Common stock of $.0625 par value; authorized 60,000,000 shares; 17,363,457 shares issued and 17,251,532 shares outstanding at March 31, 2020 and 17,363,455 shares issued and outstanding at December 31, 2019
1,085

 
1,085

Paid-in capital
123,167

 
123,281

Retained earnings
387,243

 
390,363

Accumulated other comprehensive income (loss)
929

 
(11,237
)
Treasury stock, at cost; 111,925 shares at March 31, 2020
(3,827
)
 

Total shareholders’ equity
508,597

 
503,492

Total liabilities and shareholders’ equity

$5,620,979

 

$5,292,659


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



Washington Trust Bancorp, Inc. and Subsidiaries


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


Three months ended March 31,
2020

 
2019

Interest income:
 
 
 
Interest and fees on loans

$40,008

 

$41,744

Interest on mortgage loans held for sale
285

 
180

Taxable interest on debt securities
5,834

 
7,226

Nontaxable interest on debt securities

 
9

Dividends on Federal Home Loan Bank stock
640

 
695

Other interest income
349

 
340

Total interest and dividend income
47,116

 
50,194

Interest expense:
 

 
 

Deposits
8,536

 
8,696

Federal Home Loan Bank advances
5,765

 
6,661

Junior subordinated debentures
213

 
253

Total interest expense
14,514

 
15,610

Net interest income
32,602

 
34,584

Provision for credit losses
7,036

 
650

Net interest income after provision for credit losses
25,566

 
33,934

Noninterest income:
 
 
 
Wealth management revenues
8,689

 
9,252

Mortgage banking revenues
6,096

 
2,646

Card interchange fees
947

 
997

Service charges on deposit accounts
860

 
875

Loan related derivative income
2,455

 
724

Income from bank-owned life insurance
564

 
649

Other income
316

 
224

Total noninterest income
19,927

 
15,367

Noninterest expense:
 
 
 
Salaries and employee benefits
19,468

 
17,619

Outsourced services
3,000

 
2,606

Net occupancy
2,019

 
1,998

Equipment
977

 
1,011

Legal, audit and professional fees
822

 
534

FDIC deposit insurance costs
422

 
429

Advertising and promotion
259

 
239

Amortization of intangibles
230

 
239

Other expenses
3,256

 
2,289

Total noninterest expense
30,453

 
26,964

Income before income taxes
15,040

 
22,337

Income tax expense
3,139

 
4,842

Net income

$11,901

 

$17,495

 
 
 
 
Net income available to common shareholders

$11,869

 

$17,461

Weighted average common shares outstanding - basic
17,345

 
17,304

Weighted average common shares outstanding - diluted
17,441

 
17,401

Per share information:
Basic earnings per common share

$0.68

 

$1.01

 
Diluted earnings per common share

$0.68

 

$1.00


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



Washington Trust Bancorp, Inc. and Subsidiaries


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


Three months ended March 31,
2020

 
2019

Net income

$11,901

 

$17,495

Other comprehensive income (loss), net of tax:
 
 
 
Net change in fair value of available for sale debt securities
12,806

 
11,021

Net change in fair value of cash flow hedges
(1,050
)
 
(442
)
Net change in defined benefit plan obligations
410

 
227

Total other comprehensive income, net of tax
12,166

 
10,806

Total comprehensive income

$24,067

 

$28,301




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



Washington Trust Bancorp, Inc. and Subsidiaries


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


For the three months ended March 31, 2020
Common
Shares Outstanding
Common
Stock
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Treasury Stock
Total
Balance at January 1, 2020
17,363


$1,085


$123,281


$390,363


($11,237
)

$


$503,492

Cumulative effect of change in accounting principle - Topic 326



(6,108
)


(6,108
)
Net income



11,901



11,901

Total other comprehensive income




12,166


12,166

Cash dividends declared ($0.51 per share)



(8,913
)


(8,913
)
Share-based compensation


758




758

Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered
14


(872
)


495

(377
)
Treasury stock purchased under 2019 Stock Repurchase Program
(125
)




(4,322
)
(4,322
)
Balance at March 31, 2020
17,252


$1,085


$123,167


$387,243


$929


($3,827
)

$508,597

 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2019
Common
Shares Outstanding
Common
Stock
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Treasury Stock
Total
Balance at January 1, 2019
17,302


$1,081


$119,888


$355,524


($28,309
)

$


$448,184

Cumulative effect of change in accounting principle - Topic 842



722



722

Net income



17,495



17,495

Total other comprehensive income




10,806


10,806

Cash dividends declared ($0.47 per share)



(8,220
)


(8,220
)
Share-based compensation


740




740

Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered
3

1

115




116

Balance at March 31, 2019
17,305


$1,082


$120,743


$365,521


($17,503
)

$


$469,843

 
 
 
 
 
 
 
 
 
 
 
 


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



Washington Trust Bancorp, Inc. and Subsidiaries


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


Three months ended March 31,
2020

 
2019

Cash flows from operating activities:
 
 
 
Net income

$11,901

 

$17,495

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
7,036

 
650

Depreciation of premises and equipment
783

 
838

Net amortization of premiums and discounts on debt securities and loans
1,519

 
822

Amortization of intangibles
230

 
239

Share-based compensation
758

 
740

Tax benefit from stock option exercises and other equity awards
(85
)
 
7

Income from bank-owned life insurance
(564
)
 
(649
)
Net gains on loan sales, including fair value adjustments
(6,013
)
 
(2,474
)
Proceeds from sales of loans, net
148,768

 
51,673

Loans originated for sale
(166,408
)
 
(46,864
)
Decrease in operating lease right-of-use assets
694

 
673

Decrease in operating lease liabilities
(677
)
 
(666
)
Increase in other assets
(57,060
)
 
(11,022
)
Increase in other liabilities
56,292

 
9,532

Net cash (used in) provided by operating activities
(2,826
)
 
20,994

Cash flows from investing activities:
 
 
 
Purchases of:
Available for sale debt securities: Mortgage-backed
(70,924
)
 
(62,109
)
 
Available for sale debt securities: Other
(45,000
)
 
(10,507
)
Maturities, calls and principal payments of:
Available for sale debt securities: Mortgage-backed
43,750

 
19,718

 
Available for sale debt securities: Other
70,000

 
10,000

Purchases of Federal Home Loan Bank stock
(2,723
)
 
(1,957
)
Net increase in loans
(145,740
)
 
(54,147
)
Purchases of loans
(51,081
)
 
(161
)
Proceeds from the sale of property acquired through foreclosure or repossession
1,066

 

Purchases of premises and equipment
(628
)
 
(1,655
)
Proceeds from surrender of bank-owned life insurance

 
326

Net cash used in investing activities
(201,280
)
 
(100,492
)
Cash flows from financing activities:
 
 
 
Net increase (decrease) in deposits
207,432

 
(19,788
)
Proceeds from Federal Home Loan Bank advances
879,000

 
532,000

Repayment of Federal Home Loan Bank advances
(821,930
)
 
(426,593
)
Treasury stock purchased
(4,322
)
 

Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered
(377
)
 
116

Cash dividends paid
(8,883
)
 
(8,153
)
Net cash provided by financing activities
250,920

 
77,582

Net increase (decrease) in cash and cash equivalents
46,814

 
(1,916
)
Cash and cash equivalents at beginning of period
138,455

 
93,475

Cash and cash equivalents at end of period

$185,269

 

$91,559


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



Washington Trust Bancorp, Inc. and Subsidiaries
 
Consolidated Statement of Cash Flows – continued (unaudited)
(Dollars in thousands)


Three months ended March 31,
2020

 
2019

Noncash Activities:
 
 
 
Loans charged off

$635

 

$103

Loans transferred to property acquired through foreclosure or repossession
28

 

In conjunction with the adoption of ASU 2016-02 as detailed in Note 2 to the Unaudited Consolidated Financial Statements, the following assets and liabilities were recognized:
 
 
 
Operating lease right-of-use assets

 
28,923

Operating lease liabilities

 
30,853

In conjunction with the adoption of ASU 2017-12 as detailed in Note 2 to the Unaudited Consolidated Financial Statements, the following qualifying debt securities classified as held to maturity were transferred to available for sale:
 
 
 
Fair value of debt securities transferred from held to maturity to available for sale

 
10,316

Supplemental Disclosures:
 
 
 
Interest payments

$14,479

 

$14,082

Income tax payments
1,036

 
1,136


The accompanying notes are an integral part of these unaudited consolidated financial statements.
- 8-



Condensed Notes to Unaudited Consolidated Financial Statements


Note 1 - Basis of Presentation
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 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 Unaudited Consolidated Financial Statements include the accounts of the Bancorp and its subsidiaries (collectively the “Corporation” or “Washington Trust”).  All intercompany balances and transactions have been eliminated.

The Bancorp also owns the common stock of two capital trusts, which have issued trust preferred securities. These capital trusts are variable interest entities in which the Bancorp is not the primary beneficiary and, therefore, are not consolidated. The capital trust’s only assets are junior subordinated debentures issued by the Bancorp, which were acquired by the capital trusts using the proceeds from the issuance of the trust preferred securities and common stock. The Bancorp’s equity interest in the capital trusts, classified in other assets, and the junior subordinated debentures are included in the Unaudited Consolidated Balance Sheets. Interest expense on the junior subordinated debentures is included in the Unaudited Consolidated Statements of Income.

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 indicative 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, 2019.

Risks and Uncertainties
The COVID-19 pandemic has caused an unprecedented disruption to the economy and the communities we serve. In response, we are committed to working with and supporting our customers experiencing financial difficulty due to the COVID-19 pandemic, including loan payment deferrals and participation in the Small Business Administration's (“SBA’s”) Paycheck Protection Program (“PPP”). In addition, we implemented our business continuity and pandemic plans, which include remote working arrangements for the majority of our workforce, closing our branches and offering drive-through banking or special banking services by appointment only, and promoting social distancing.

The U.S. government and regulatory agencies have taken several actions to provide support to the U.S. economy. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion stimulus bill, was signed into law on March 27, 2020. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The CARES Act also includes extensive emergency funding for hospitals and providers. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act, as well as other recent legislative and regulatory relief efforts, are expected to have a material impact on the Corporation’s operations. Also, the actions of the Board of Governors of the Federal Reserve System (the “FRB”) to combat the economic contraction caused by the COVID-19 pandemic, including the reduction of the target federal funds rate and quantitative easing programs, could, if prolonged, adversely affect the Corporation’s net interest income and margins, and profitability. While it is not possible to know the full extent of these impacts as of the date of this filing, detailed below are potentially material items of which we are aware.

As noted above, net interest income could be reduced. Also, in accordance with regulatory guidance, Washington Trust is actively working with borrowers impacted by the COVID-19 pandemic to defer payments. While interest will


- 9-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

continue to be recognized in accordance with GAAP, should eventual credit losses on these deferments emerge, interest income would be negatively impacted.
The provision for credit losses could increase. Continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects will continue to affect the accounting for credit losses. It also is possible that asset quality could worsen, expenses associated with collection efforts could increase and loan charge-offs could increase. Washington Trust is actively participating in the SBA’s PPP, providing loans to small businesses negatively impacted by the COVID-19 pandemic. PPP loans are fully guaranteed by the U.S. government, if that should change, Washington Trust could be required to increase its allowance for credit losses through an additional provision for credit losses charged to earnings.
Noninterest income could be reduced. Uncertainty regarding COVID-19 could cause further volatility in the financial markets. A substantial portion of wealth management revenues is dependent on the value of wealth management assets under administration and is closely tied to the performance of the financial markets. COVID-19 could also cause disruption in the loan origination process. Mortgage banking revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets.
As noted above, the Corporation implemented its business continuity and pandemic plans, which include remote working arrangements for the majority of its workforce. While there has been no material impact to the Corporation’s employees as of this report date, if COVID-19 escalates further it could also potentially create business continuity issues. The Corporation does not currently anticipate significant challenges to its ability to maintain systems and controls in light of the measures the Corporation has taken to prevent the spread of COVID-19.
Valuation and fair value measurement challenges may occur. Management performed an interim impairment assessment on goodwill as a result of changes in the macroeconomic environment resulting from the COVID-19 pandemic in the three month period ended March 31, 2020. Goodwill represents the excess of the purchase price over the net fair value of the acquired businesses.  As of March 31, 2020, the Corporation had $63.9 million in goodwill, of which $41.3 million was allocated to the Wealth Management Services reporting unit and $22.6 million was allocated to the Commercial Banking reporting unit.  The results of the interim impairment assessment indicated that the remaining fair value significantly exceeded the carrying value for both reporting units. The COVID-19 pandemic could cause further and sustained decline in the Corporation’s stock price or the occurrence of additional valuation triggering events that could result in an impairment charge to earnings.

The extent to which the COVID-19 pandemic will continue to impact the Corporation’s business, results of operations, and financial condition, as well as regulatory capital and liquidity ratios, will depend on future developments, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic, as well as further actions the Corporation may take as may be required by government authorities or that the Corporation determines is in the best interests of its employees and customers. There is no certainty that such measures will be sufficient to mitigate the risks posed by the pandemic.

Note 2 - Recently Issued Accounting Pronouncements
Accounting Standards Adopted in 2020
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 expected lifetime credit losses for financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures at the reporting date. The measurement is 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. For available for sale debt securities with unrealized losses, Topic 326 requires credit losses to be recognized as an allowance rather than a reduction in the amortized cost of the securities. As a result, improvements to estimated credit losses are recognized immediately in earnings rather than as interest income over time. 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. This ASU was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The Corporation adopted ASU 2016-13, including the subsequent ASUs issued to clarify Topic 326 (“Topic 326”), on January 1, 2020.

The Corporation assembled a cross-functional project team that met regularly to address the additional data requirements, to determine the approach for implementation and to identify new internal controls over enhanced accounting processes for


- 10-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

estimating the allowance for credit losses (“ACL”). This included assessing the adequacy of existing loan and loss data, assessing models for default and loss estimates, conducting limited “trial” runs and analytical reviews through December 31, 2019, and completing independent model validation and documentation of ACL processes and controls in the first quarter of 2020.

In accordance with Topic 326, the Corporation has updated its ACL accounting policies. Required policy disclosures are provided in Notes 4, 5, 6 and 18.

Upon adoption of Topic 326 on January 1, 2020, the ACL for loans (a contra-asset) increased by $6.5 million and the ACL for unfunded commitments (a liability) increased by $1.5 million, as compared to December 31, 2019. The increases in the ACL on loans and unfunded commitments upon adoption resulted in a one-time cumulative-effect adjustment that decreased retained earnings by $6.1 million, net of deferred tax balances of $1.9 million.

The Corporation has elected the five-year phase-in option, provided by regulatory guidance issued by the Federal Deposit Insurance Corporation (“FDIC”) in March 2020, which delays the estimated impact of Topic 326 on regulatory capital for the first two years and then phases it in over a three-year period beginning in 2022. See Note 8 for additional disclosure on regulatory capital.

Fair Value Measurement - Topic 820
Accounting Standards Update No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), was issued in August 2018 to modify the disclosure requirements related to fair value. ASU 2018-13 was effective for fiscal years beginning after December 15, 2019. Certain provisions under ASU 2018-13 required prospective application, while other provisions required retrospective application to all periods presented in the consolidated financial statements upon adoption. The Corporation adopted the provisions of ASU 2018-13 effective January 1, 2020 and the adoption did not have a material impact on the Corporation’s consolidated financial statements.

Intangibles - Goodwill and Other - Internal-Use Software - Topic 350
Accounting Standards Update No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” (“ASU 2018-15”), was issued in August 2018 to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those requirements that currently exist in GAAP for capitalizing implementation costs incurred to develop or obtain internal-use software. Implementation costs would either be capitalized or expensed as incurred depending on the project stage. All costs in the preliminary and post-implementation project stages are expensed as incurred, while certain costs within the application development stage are capitalized. ASU 2018-15 was effective for fiscal years beginning after December 15, 2019. Effective January 1, 2020, the Corporation adopted the provision of ASU 2018-15 prospectively, as permitted, and the adoption did not have a material impact on the Corporation’s consolidated financial statements.

Accounting Standards Pending Adoption
Compensation - Retirement Benefits - Topic 715
Accounting Standards Update No. 2018-14, “Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”), was issued in August 2018 to modify the disclosure requirements associated with defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The provisions under ASU 2018-14 are required to be applied retrospectively. The adoption of ASU 2018-14 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Income Taxes - Topic 745
Accounting Standards Update No. 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), was issued in December 2019 to simplify the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective application through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The adoption of ASU 2019-12 is not expected to have a material impact on the Corporation’s consolidated financial statements.



- 11-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Reference Rate Reform - Topic 848
Accounting Standards Update No. 2020-04, “Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), was issued in March 2020 to ease the potential burden in accounting for recognizing the effects of reference rate reform on financial reporting. Such challenges include the accounting and operational implications for contract modifications and hedge accounting. The provisions in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to loan and lease agreements, contracts, hedging relationships, and other transactions affected by reference rate reform. These provisions apply to contract modifications that reference LIBOR or another reference rate expected to be discounted because of reference rate reform. Qualifying modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification would be considered "minor" so that any existing unamortized deferred loan origination fees and costs would carry forward and continue to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge accounting.

ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Corporation is currently evaluating the effect that this ASU will have on the Corporation’s consolidated financial statements.

Note 3 - Cash and Due from Banks
The Bank maintains certain average reserve balances to meet the requirements of the FRB.  Some or all of these reserve requirements may be satisfied with vault cash. Effective March 26, 2020, the FRB reduced the reserve requirement ratios to zero percent to eliminate the need for depository institutions, such as the Bank, to maintain balances in accounts at the FRB to satisfy reserve requirements. At December 31, 2019, the reserve balance was $27.9 million and was included in cash and due from banks in the Unaudited Consolidated Balance Sheets.

As of March 31, 2020 and December 31, 2019, cash and due from banks includes interest-bearing deposits in other banks of $136.8 million and $83.4 million, respectively. See Note 9 for additional disclosure regarding cash collateral pledged to derivative counterparties.

Note 4 - Securities
Adoption of Topic 326
Effective January 1, 2020, the Corporation adopted the provisions of Topic 326 using the modified retrospective method. Therefore, prior period comparative information has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 326. There was no ACL on available for sale debt securities recognized upon the adoption of Topic 326.

Accounting Policy Updates
Effective January 1, 2020, the Corporation has modified its accounting policy for the assessment of available for sale debt securities for impairment. The updated policy is detailed below.

The Corporation has made an accounting policy election to exclude accrued interest from the amortized cost basis of debt securities and reports accrued interest separately in other assets in the Unaudited Consolidated Balance Sheets. The Corporation also excludes accrued interest from the estimate of credit losses. Accrued interest receivable on available for sale debt securities totaled $2.8 million and $2.9 million, respectively, as of March 31, 2020 and December 31, 2019.

A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a debt security placed on nonaccrual is reversed against interest income. There were no debt securities on nonaccrual status and therefore there was no accrued interest related to debt securities reversed against interest income for the three months ended March 31, 2020 and 2019.

For available for sale debt securities in an unrealized loss position, management first assesses whether the Corporation intends to sell, or if it is likely that the Corporation will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit losses charge to earnings. For debt securities available for sale that do not meet either these criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this


- 12-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

assessment, management considers both quantitative and qualitative factors.

A substantial portion of available for sale debt securities held by the Corporation are obligations issued by U.S. government agency and U.S. government-sponsored enterprises, including mortgage-backed securities. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies and have a long history of no credit losses. For these securities, management takes into consideration the long history of no credit losses and other factors to assess the risk of nonpayment even if the U.S. government were to default. As such, the Corporation has elected the practical expedient of a zero loss estimate due to credit for these securities. For available for sale debt securities that are not guaranteed by U.S. government agencies and U.S. government-sponsored enterprises, such as individual name issuer trust preferred debt securities and corporate bonds, management utilizes a third party credit modeling tool based on observable market data, which assists management in identifying any potential credit risk associated with its available for sale debt securities. This model estimates probability of default, loss given default and exposure at default for each security. In addition, qualitative factors are also considered, including the extent to which fair value is less than amortized cost, changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If a credit loss exists based on the results of this assessment, an ACL (contra asset) is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is considered market-related and is recognized in other comprehensive income, net of taxes.

Changes in the ACL on available for sale debt securities are recorded as provision for (or reversal of) credit losses. Losses are charged against the ACL when management believes the uncollectibility of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Available for Sale Debt Securities
The following table presents the amortized cost, gross unrealized holding gains, gross unrealized holding losses, ACL on securities and fair value of securities by major security type and class of security:
(Dollars in thousands)
 
March 31, 2020
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Allowance for Credit Losses
 
Fair Value
Available for Sale Debt Securities:
 
 
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$132,262

 

$1,408

 

($169
)
 

$

 

$133,501

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
739,701

 
24,689

 
(46
)
 

 
764,344

Individual name issuer trust preferred debt securities
13,328

 

 
(2,232
)
 

 
11,096

Corporate bonds
11,144

 

 
(2,693
)
 

 
8,451

Total available for sale debt securities

$896,435

 

$26,097

 

($5,140
)
 

$

 

$917,392

Total securities

$896,435

 

$26,097

 

($5,140
)
 

$

 

$917,392


The following table presents 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)
 
December 31, 2019
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Available for Sale Debt Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$157,255

 

$626

 

($233
)
 

$157,648

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
713,553

 
8,491

 
(2,964
)
 
719,080

Individual name issuer trust preferred debt securities
13,324

 

 
(745
)
 
12,579

Corporate bonds
11,141

 

 
(958
)
 
10,183

Total available for sale debt securities

$895,273

 

$9,117

 

($4,900
)
 

$899,490

Total securities

$895,273

 

$9,117

 

($4,900
)
 

$899,490




- 13-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


As of March 31, 2020 and December 31, 2019, debt securities with a fair value of $400.0 million and $431.9 million, respectively, were pledged as collateral for FHLB borrowings, potential borrowings with the FRB, certain public deposits and for other purposes. See Note 7 for additional disclosure on FHLB borrowings.

The schedule of maturities of available for sale debt securities 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
March 31, 2020
Amortized Cost
 
Fair Value
Due in one year or less

$110,903

 

$114,238

Due after one year to five years
339,369

 
349,303

Due after five years to ten years
269,847

 
273,824

Due after ten years
176,316

 
180,027

Total debt securities

$896,435

 

$917,392


Included in the above table are debt securities with an amortized cost balance of $155.4 million and a fair value of $151.7 million at March 31, 2020 that are callable at the discretion of the issuers.  Final maturities of the callable securities range from 1 month to 17 years, with call features ranging from 1 month to 2 years.

Assessment of Available for Sale Debt Securities for Impairment
Management assesses the decline in fair value of investment securities 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 both qualitative and quantitative factors to assess whether an impairment exists. For the accounting policy on the assessment of available for sale debt securities for impairment that was in effect prior to the adoption of Topic 326, see Note 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The following table summarizes available for sale debt securities in an unrealized loss position for which an allowance for credit losses on securities has not been recorded at March 31, 2020, 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, 2020
#
 
Fair
Value
Unrealized
Losses
 
#

 
Fair
Value
Unrealized
Losses
 
#

 
Fair
Value
Unrealized
Losses
Obligations of U.S. government-sponsored enterprises
1

 

$24,831


($169
)
 

 

$


$

 
1

 

$24,831


($169
)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
4

 
12,178

(46
)
 

 


 
4

 
12,178

(46
)
Individual name issuer trust preferred debt securities

 


 
5

 
11,096

(2,232
)
 
5

 
11,096

(2,232
)
Corporate bonds

 


 
3

 
8,451

(2,693
)
 
3

 
8,451

(2,693
)
Total
5

 

$37,009


($215
)
 
8

 

$19,547


($4,925
)
 
13

 

$56,556


($5,140
)



- 14-



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
December 31, 2019
#

 
Fair
Value
Unrealized
Losses
 
#

 
Fair
Value
Unrealized
Losses
 
#

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

 

$20,364


($136
)
 
3

 

$49,902


($97
)
 
6

 

$70,266


($233
)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
4

 
41,150

(56
)
 
23

 
216,804

(2,908
)
 
27

 
257,954

(2,964
)
Individual name issuer trust preferred debt securities

 


 
5

 
12,579

(745
)
 
5

 
12,579

(745
)
Corporate bonds

 


 
3