XML 50 R11.htm IDEA: XBRL DOCUMENT v2.4.0.8
Securities
 9 Months Ended
Sep. 30, 2013
Investments, Debt and Equity Securities [Abstract]  
Securities
Securities
The following tables present the amortized cost, gross unrealized gains, gross unrealized losses and fair value of securities by major security type and class of security:
(Dollars in thousands)
 
 
 
 
 
 
 
September 30, 2013
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Securities Available for Sale:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$54,461

 

$1,208

 

$—

 

$55,669

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

 
9,943

 
(36
)
 
228,505

States and political subdivisions
64,833

 
2,507

 
—

 
67,340

Trust preferred securities:
 
 
 
 
 
 
 
Individual name issuers
30,705

 
—

 
(5,930
)
 
24,775

Collateralized debt obligations
1,264

 
—

 
(839
)
 
425

Corporate bonds
11,133

 
254

 
(16
)
 
11,371

Total securities available for sale

$380,994

 

$13,912

 

($6,821
)
 

$388,085

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

$31,264

 

$698

 

$—

 

$31,962

Total securities held to maturity

$31,264

 

$698

 

$—

 

$31,962

Total securities

$412,258

 

$14,610

 

($6,821
)
 

$420,047


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

$29,458

 

$2,212

 

$—

 

$31,670

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

 
14,097

 
—

 
231,233

States and political subdivisions
68,196

 
4,424

 
—

 
72,620

Trust preferred securities:
 
 
 
 
 
 
 
Individual name issuers
30,677

 
—

 
(5,926
)
 
24,751

Collateralized debt obligations
4,036

 
—

 
(3,193
)
 
843

Corporate bonds
13,905

 
476

 
—

 
14,381

Total securities available for sale

$363,408

 

$21,209

 

($9,119
)
 

$375,498

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

$40,381

 

$1,039

 

$—

 

$41,420

Total securities held to maturity

$40,381

 

$1,039

 

$—

 

$41,420

Total securities

$403,789

 

$22,248

 

($9,119
)
 

$416,918




At September 30, 2013 and December 31, 2012, securities available for sale and held to maturity with a fair value of $391.7 million and $386.5 million, respectively, were pledged as collateral for Federal Home Loan Bank of Boston (“FHLBB”) borrowings and letters of credit, potential borrowings with the FRB, certain public deposits and for other purposes.

The schedule of maturities of debt securities available for sale and held to maturity as of September 30, 2013 is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments.  All other debt securities are included based on contractual maturities.  Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.  Yields on tax exempt obligations are not computed on a tax equivalent basis.
(Dollars in thousands)
Within 1 Year
 
1-5 Years
 
5-10 Years
 
After 10 Years
 
Totals
Securities Available for Sale:
 
 
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises:
 
 
 
 
 
 
 
 
 
Amortized cost

$54,461

 

$—

 

$—

 

$—

 

$54,461

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

 
106,040

 
37,563

 
14,862

 
218,598

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

 
52,537

 
—

 
—

 
64,833

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

 
—

 
—

 
31,969

 
31,969

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

 
5,704

 
402

 
—

 
11,133

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

$131,917

 

$164,281

 

$37,965

 

$46,831

 

$380,994

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

$133,376

 

$167,772

 

$39,432

 

$47,505

 

$388,085

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

$6,995

 

$15,465

 

$6,710

 

$2,094

 

$31,264

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

$7,151

 

$15,810

 

$6,860

 

$2,141

 

$31,962


Included in debt securities as of September 30, 2013 were debt securities with an amortized cost balance of $111.4 million and a fair value of $106.7 million that are callable at the discretion of the issuers.  Final maturities of these callable securities range from two to twenty-four years, with call features ranging from one month to four years.

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

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

 
Fair
Value
 
Unrealized
Losses
 
#

 
Fair
Value
 
Unrealized
Losses
 
#

 
Fair
Value
 
Unrealized
Losses
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
2

 

$969

 

($36
)
 
—

 

$—

 

$—

 
2

 

$969

 

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

 
—

 
—

 
11

 
24,775

 
(5,930
)
 
11

 
24,775

 
(5,930
)
Collateralized debt obligations
—

 
—

 
—

 
1

 
425

 
(839
)
 
1

 
425

 
(839
)
Corporate bonds
2

 
407

 
(16
)
 
—

 
—

 
—

 
2

 
407

 
(16
)
Total temporarily impaired securities
4

 

$1,376

 

($52
)
 
12

 

$25,200

 

($6,769
)
 
16

 

$26,576

 

($6,821
)

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

 
Fair
Value
 
Unrealized
Losses
 
#

 
Fair
Value
 
Unrealized
Losses
 
#

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

 

$—

 

$—

 
11

 

$24,751

 

($5,926
)
 
11

 

$24,751

 

($5,926
)
Collateralized debt obligations
—

 
—

 
—

 
2

 
843

 
(3,193
)
 
2

 
843

 
(3,193
)
Total temporarily impaired securities
—

 

$—

 

$—

 
13

 

$25,594

 

($9,119
)
 
13

 

$25,594

 

($9,119
)

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

Trust Preferred Debt Securities of Individual Name Issuers
Included in debt securities in an unrealized loss position at September 30, 2013 and December 31, 2012 were 11 trust preferred security holdings issued by seven individual companies in the financial services industry, specifically, the banking sector.  Management believes the decline in fair value of these trust preferred securities primarily reflects investor concerns about global economic growth and how it will affect the recent and potential future losses in the financial services industry.  These concerns resulted in increased risk premiums for securities in this sector. Based on the information available through the filing date of this report, all individual name trust preferred debt securities held in our portfolio continue to accrue and make payments as expected with no payment deferrals or defaults on the part of the issuers.  As of September 30, 2013, trust preferred debt securities with an amortized cost of $11.9 million and unrealized losses of $2.1 million were rated below investment grade by Standard & Poors, Inc. (“S&P”).  Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report and other information.  We noted no additional downgrades to below investment grade between the reporting period date and the filing date of this report.  Based on these analyses, management concluded that it expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more likely than not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be at maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2013.

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

Valuations of pooled trust preferred holdings are dependent in part on cash flows from underlying issuers.  Unexpected cash flow disruptions could have an adverse impact on the fair value and performance of pooled trust preferred securities.  Management believes the unrealized losses primarily reflect investor concerns about global economic growth and how it will affect the recent and potential future losses in the financial services industry and the possibility of further incremental deferrals of or defaults on interest payments on trust preferred debentures by financial institutions participating in these pools.  These concerns have resulted in a substantial decrease in market liquidity and increased risk premiums for securities in this sector.  Credit spreads for issuers in this sector have remained wide during recent months, causing prices to remain at low levels.

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

$—


$—


$—

 

$2,772


$613


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

425

(839
)
 
1,264

230

(1,034
)
Totals

$1,264


$425


($839
)
 

$4,036


$843


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

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

Washington Trust’s investment in the PreTSL XXV, tranche C1 (“PreTSL”) is subordinate to two senior tranche levels. This investment security has been on nonaccrual status and has been deferring interest payments since December 2008. The September 30, 2013 amortized cost was net of $1.2 million of credit-related impairment losses previously recognized in earnings reflective of payment deferrals and credit deterioration of the underlying collateral.  As of September 30, 2013, this security had unrealized losses of $839 thousand and a below investment grade rating of “C” by Moody’s.  Through the filing date of this report, there have been no additional rating changes on this security.  This credit rating status has been considered by management in its assessment of the impairment status of this security. Based on information available through the filing date of this report, there have been no additional adverse changes in deferral or default status of the underlying issuer institutions. Based on cash flow forecasts for this security, management expects to recover the remaining amortized cost of this security. Furthermore, Washington Trust does not intend to sell this security and it is not more likely than not that Washington Trust will be required to sell this security before recovery of its cost basis, which may be at maturity. Therefore, management does not consider the unrealized losses on this security to be other-than-temporary at September 30, 2013.

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

$6,097

 

$3,313

 

$3,325

 

$3,104

Credit-related impairment loss on debt securities for which an other-than-temporary impairment was not previously recognized
—

 
—

 
—

 
—

Additional increases to the amount of credit-related impairment loss on debt securities for which an other-than-temporary impairment was previously recognized
—

 
—

 
2,772

 
209

Balance at end of period

$6,097

 

$3,313

 

$6,097

 

$3,313


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

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