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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
September 30, 2022
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
WASHINGTONTRUSTBANCORP,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 October 31, 2022 was 17,180,903.
The following is a list of acronyms and terms that are used throughout this Quarterly Report on Form 10-Q:
2013 Plan
Washington Trust Bancorp, Inc.'s 2013 Stock Option and Incentive Plan
2021 Repurchase Program
Washington Trust Bancorp, Inc.'s Stock Repurchase Program adopted on November 10, 2021
2022 Long Term Incentive Plan
Washington Trust Bancorp, Inc. 2022 Long Term Incentive Plan
ACL
Allowance for credit losses
ALCO
Asset/Liability Committee
AOCL
Accumulated other comprehensive loss
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
ATM
Automated teller machine
AUA
Assets under administration
Bancorp
Washington Trust Bancorp, Inc.
Bank
The Washington Trust Company, of Westerly
BOLI
Bank-owned life insurance
C&I
Commercial and industrial
CARES Act
Coronavirus Aid, Relief and Economic Security Act
CDARS
Certificate of Deposit Account Registry Service
Corporation
The Bancorp and its subsidiaries
CRE
Commercial real estate
CRRSA Act
Coronavirus Response and Relief Supplemental Appropriations Act
DCF
Discounted cash flow
DDM
Demand Deposit Marketplace
EPS
Earnings per common share
ERM
Enterprise risk management
Exchange Act
Securities Exchange Act of 1934, as amended
FDIC
Federal Deposit Insurance Corporation
FHLB
Federal Home Loan Bank of Boston
FICO
Fair Isaac Corporation
FRBB
Federal Reserve Bank of Boston
FTE
Fully taxable equivalent
GAAP
Accounting principles generally accepted in the United States of America
GDP
Gross domestic product
HPI
National home price index
ICS
Insured Cash Sweep
LTV
Loan to value
NIM
Net interest margin
NUR
National unemployment rate
OREO
Property acquired through foreclosure or repossession
PPP
Paycheck Protection Program
ROU
Right-of-use
S&P
Standard and Poors, Inc.
SBA
Small Business Administration
SEC
U.S. Securities and Exchange Commission
TDR
Troubled debt restructuring
Washington Trust
The Bancorp and its subsidiaries
-3-
PART I. Financial Information
Item 1. Financial Statements
Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
(Dollars in thousands, except par value)
September 30, 2022
December 31, 2021
Assets:
Cash and due from banks
$130,066
$175,259
Short-term investments
2,773
3,234
Mortgage loans held for sale, at fair value
24,054
40,196
Available for sale debt securities, at fair value (amortized cost of $1,165,816, net of allowance for credit losses on securities of $0 at September 30, 2022; and amortized cost of $1,051,800; net of allowance for credit losses on securities of $0 at December 31, 2021)
982,573
1,042,859
Federal Home Loan Bank stock, at cost
32,940
13,031
Loans:
Total loans
4,848,873
4,272,925
Less: allowance for credit losses on loans
36,863
39,088
Net loans
4,812,010
4,233,837
Premises and equipment, net
30,152
28,908
Operating lease right-of-use assets
27,788
26,692
Investment in bank-owned life insurance
101,491
92,592
Goodwill
63,909
63,909
Identifiable intangible assets, net
4,766
5,414
Other assets
195,529
125,196
Total assets
$6,408,051
$5,851,127
Liabilities:
Deposits:
Noninterest-bearing deposits
$938,572
$945,229
Interest-bearing deposits
4,131,285
4,034,822
Total deposits
5,069,857
4,980,051
Federal Home Loan Bank advances
700,000
145,000
Junior subordinated debentures
22,681
22,681
Operating lease liabilities
30,189
29,010
Other liabilities
153,050
109,577
Total liabilities
5,975,777
5,286,319
Commitments and contingencies (Note 17)
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 60,000,000 shares; 17,363,457 shares issued and 17,171,147 shares outstanding at September 30, 2022 and 17,363,457 shares issued and 17,330,818 shares outstanding at December 31, 2021
1,085
1,085
Paid-in capital
127,055
126,511
Retained earnings
485,163
458,310
Accumulated other comprehensive loss
(171,755)
(19,981)
Treasury stock, at cost; 192,310 shares at September 30, 2022 and 32,639 shares at December 31, 2021
(9,274)
(1,117)
Total shareholders’ equity
432,274
564,808
Total liabilities and shareholders’ equity
$6,408,051
$5,851,127
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-4-
Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
(Dollars and shares in thousands, except per share amounts)
Three Months
Nine Months
Periods ended September 30,
2022
2021
2022
2021
Interest income:
Interest and fees on loans
$45,125
$35,691
$115,657
$104,670
Interest on mortgage loans held for sale
361
298
851
1,144
Taxable interest on debt securities
6,061
3,683
15,209
10,366
Dividends on Federal Home Loan Bank stock
88
95
218
338
Other interest income
503
56
769
121
Total interest and dividend income
52,138
39,823
132,704
116,639
Interest expense:
Deposits
6,656
2,789
13,722
9,413
Federal Home Loan Bank advances
3,234
872
3,891
3,253
Junior subordinated debentures
206
92
443
278
Total interest expense
10,096
3,753
18,056
12,944
Net interest income
42,042
36,070
114,648
103,695
Provision for credit losses
800
—
(2,100)
(2,000)
Net interest income after provision for credit losses
41,242
36,070
116,748
105,695
Noninterest income:
Wealth management revenues
9,525
10,455
30,122
30,778
Mortgage banking revenues
2,047
6,373
7,630
24,294
Card interchange fees
1,287
1,265
3,754
3,714
Service charges on deposit accounts
819
673
2,250
1,917
Loan related derivative income
1,041
728
2,011
2,370
Income from bank-owned life insurance
684
618
1,900
1,781
Other income
400
408
1,147
2,233
Total noninterest income
15,803
20,520
48,814
67,087
Noninterest expense:
Salaries and employee benefits
21,609
22,162
62,992
65,771
Outsourced services
3,552
3,294
10,169
9,711
Net occupancy
2,234
2,134
6,708
6,304
Equipment
939
977
2,795
2,946
Legal, audit and professional fees
693
767
2,140
2,042
FDIC deposit insurance costs
430
482
1,198
1,201
Advertising and promotion
799
559
1,874
1,341
Amortization of intangibles
215
223
648
674
Debt prepayment penalties
—
—
—
4,230
Other expenses
2,596
1,922
6,839
6,025
Total noninterest expense
33,067
32,520
95,363
100,245
Income before income taxes
23,978
24,070
70,199
72,537
Income tax expense
5,310
5,319
15,091
15,855
Net income
$18,668
$18,751
$55,108
$56,682
Net income available to common shareholders
$18,615
$18,697
$54,944
$56,520
Weighted average common shares outstanding - basic
17,174
17,320
17,269
17,303
Weighted average common shares outstanding - diluted
17,298
17,444
17,389
17,451
Per share information:
Basic earnings per common share
$1.08
$1.08
$3.18
$3.27
Diluted earnings per common share
$1.08
$1.07
$3.16
$3.24
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-5-
Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss) (unaudited)
(Dollars in thousands)
Three Months
Nine Months
Periods ended September 30,
2022
2021
2022
2021
Net income
$18,668
$18,751
$55,108
$56,682
Other comprehensive (loss) income, net of tax:
Net change in fair value of available for sale debt securities
(47,067)
(3,137)
(132,469)
(12,322)
Net change in fair value of cash flow hedges
(6,973)
(403)
(20,281)
(36)
Net change in defined benefit plan obligations
326
540
976
1,621
Total other comprehensive loss, net of tax
(53,714)
(3,000)
(151,774)
(10,737)
Total comprehensive (loss) income
($35,046)
$15,751
($96,666)
$45,945
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-6-
Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (unaudited)
(Dollars and shares in thousands, except per share amounts)
For the three months ended September 30, 2022
Common Shares Outstanding
Common Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Total
Balance at June 30, 2022
17,190
$1,085
$126,079
$475,889
($118,041)
($8,378)
$476,634
Net income
—
—
—
18,668
—
—
18,668
Total other comprehensive loss, net of tax
—
—
—
—
(53,714)
—
(53,714)
Cash dividends declared ($0.54 per share)
—
—
—
(9,394)
—
—
(9,394)
Share-based compensation
—
—
976
—
—
—
976
Treasury stock purchased under 2021 Repurchase Program
(19)
—
—
—
—
(896)
(896)
Balance at September 30, 2022
17,171
$1,085
$127,055
$485,163
($171,755)
($9,274)
$432,274
For the nine months ended September 30, 2022
Common Shares Outstanding
Common Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Total
Balance at December 31, 2021
17,331
$1,085
$126,511
$458,310
($19,981)
($1,117)
$564,808
Net income
—
—
—
55,108
—
—
55,108
Total other comprehensive loss, net of tax
—
—
—
—
(151,774)
—
(151,774)
Cash dividends declared ($1.62 per share)
—
—
—
(28,255)
—
—
(28,255)
Share-based compensation
—
—
2,589
—
—
—
2,589
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered
34
—
(2,045)
—
—
1,322
(723)
Treasury stock purchased under 2021 Repurchase Program
(194)
—
—
—
—
(9,479)
(9,479)
Balance at September 30, 2022
17,171
$1,085
$127,055
$485,163
($171,755)
($9,274)
$432,274
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-7-
Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (unaudited)
(Dollars and shares in thousands, except per share amounts)
For the three months ended September 30, 2021
Common Shares Outstanding
Common Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Total
Balance at June 30, 2021
17,320
$1,085
$125,442
$437,927
($15,128)
($1,470)
$547,856
Net income
—
—
—
18,751
—
—
18,751
Total other comprehensive loss, net of tax
—
—
—
—
(3,000)
—
(3,000)
Cash dividends declared ($0.52 per share)
—
—
—
(9,112)
—
—
(9,112)
Share-based compensation
—
—
823
—
—
—
823
Balance at September 30, 2021
17,320
$1,085
$126,265
$447,566
($18,128)
($1,470)
$555,318
For the nine months ended September 30, 2021
Common Shares Outstanding
Common Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Total
Balance at December 31, 2020
17,265
$1,085
$125,610
$418,246
($7,391)
($3,355)
$534,195
Net income
—
—
—
56,682
—
—
56,682
Total other comprehensive loss, net of tax
—
—
—
—
(10,737)
—
(10,737)
Cash dividends declared ($1.56 per share)
—
—
—
(27,362)
—
—
(27,362)
Share-based compensation
—
—
2,705
—
—
—
2,705
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered
55
—
(2,050)
—
—
1,885
(165)
Balance at September 30, 2021
17,320
$1,085
$126,265
$447,566
($18,128)
($1,470)
$555,318
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-8-
Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (unaudited)
(Dollars in thousands)
Nine months ended September 30,
2022
2021
Cash flows from operating activities:
Net income
$55,108
$56,682
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
(2,100)
(2,000)
Depreciation of premises and equipment
2,554
2,549
Net amortization of premiums and discounts on debt securities and loans
2,485
2,742
Amortization of intangibles
648
674
Share-based compensation
2,589
2,705
Tax benefit from stock option exercises and other equity awards
71
135
Income from bank-owned life insurance
(1,900)
(1,781)
Net gains on loan sales, including changes in fair value
(6,164)
(24,093)
Proceeds from sales of loans, net
262,907
706,253
Loans originated for sale
(242,153)
(634,451)
(Increase) decrease in operating lease right-of-use assets
(1,096)
2,003
Increase (decrease) in operating lease liabilities
1,179
(1,907)
(Increase) decrease in other assets
(27,734)
34,107
Increase (decrease) in other liabilities
25,451
(36,698)
Net cash provided by operating activities
71,845
106,920
Cash flows from investing activities:
Purchases of:
Available for sale debt securities: Mortgage-backed
(203,826)
(297,810)
Available for sale debt securities: Other
(10,747)
(221,166)
Maturities, calls and principal payments of:
Available for sale debt securities: Mortgage-backed
97,495
274,169
Available for sale debt securities: Other
—
70,500
Net (purchases) redemption of Federal Home Loan Bank stock
(19,909)
15,191
Purchases of other equity investments
(375)
—
Net increase in loans
(571,950)
(80,021)
Purchases of loans
(1,764)
(41,546)
Purchases of premises and equipment
(3,824)
(2,166)
Purchases of bank-owned life insurance
(7,000)
(7,000)
Equity investment in real estate limited partnership
(1,861)
—
Net cash used in investing activities
(723,761)
(289,849)
Cash flows from financing activities:
Net increase in deposits
89,806
679,789
Proceeds from Federal Home Loan Bank advances
1,946,112
1,173,000
Repayment of Federal Home Loan Bank advances
(1,391,112)
(1,544,267)
Treasury stock purchased
(9,479)
—
Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered
(723)
(165)
Cash dividends paid
(28,342)
(27,308)
Net cash provided by financing activities
606,262
281,049
Net (decrease) increase in cash and cash equivalents
(45,654)
98,120
Cash and cash equivalents at beginning of period
178,493
202,268
Cash and cash equivalents at end of period
$132,839
$300,388
Noncash Activities:
Loans charged off
$122
$630
Commitment for equity investment in real estate limited partnership
8,360
—
Supplemental Disclosures:
Interest payments
$15,677
$14,675
Income tax payments
13,021
15,551
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-9-
Condensed Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation
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 Bank, a Rhode Island chartered financial institution founded in 1800, and Weston Securities Corporation. 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. All intercompany balances and transactions have been eliminated in consolidation. 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 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. Management considers the ACL on loans to be a material estimate that is particularly susceptible to change.
The Unaudited Consolidated Financial Statements of the Corporation presented herein have been prepared pursuant to the rules of the 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, 2021.
ASU No. 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”), was issued in October 2021 to clarify the accounting for contract cost assets and contract liabilities acquired in a business combination. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination at fair value on the acquisition date. The provisions of ASU 2021-08 clarify that contract cost assets and contract liabilities acquired in a business combination should be accounted for in accordance with ASC 606 as if the acquirer had originated the contracts. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The provisions under ASU 2021-08 are required to be applied prospectively. The adoption of ASU 2021-08 is not expected to have a material impact on the Corporation’s consolidated financial statements.
Financial Instruments - Credit Losses - ASC 326
ASU No. 2022-02, “Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), was issued in March 2022 to provide updates on the accounting treatment for TDRs and related disclosures requirements, as well as modifying the disclosure requirement associated with the existing credit quality indicators “vintage” disclosure. With respect to TDRs, ASU 2022-02 eliminates the recognition and measurement guidance for TDRs under current GAAP and instead requires that the Corporation evaluate whether the modification represents a new loan or a continuation of existing loan, consistent with the current GAAP treatment for other loan modifications. In addition, ASU 2022-02 eliminates existing disclosure requirements on TDRs and replaces with enhanced disclosure requirements related to loan modifications made to borrowers, including those experiencing financial difficulty. ASU 2022-02 also provides an update to the existing tabular vintage disclosure of credit quality indicators by requiring current period gross write-offs to be disclosed by year of origination for each loan segment. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The provisions under ASU 2022-02 should be applied on a prospective basis. However, the Corporation has the option to use a modified retrospective transition method related to the change in accounting treatment for TDRs with a cumulative effect of the change in accounting principle recognized in the opening balance of retained earnings as of the adoption date. The Corporation is currently evaluating this ASU and has not yet determined the impact that the adoption of ASU 2022-02 will have on its consolidated financial statements.
-10-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 3 - Securities
Available for Sale Debt Securities
The following tables present 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)
September 30, 2022
Amortized Cost
Unrealized Gains
Unrealized Losses
ACL
Fair Value
Available for Sale Debt Securities:
Obligations of U.S. government-sponsored enterprises
$231,204
$5
($33,354)
$—
$197,855
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
912,063
120
(147,919)
—
764,264
Individual name issuer trust preferred debt securities
9,384
—
(584)
—
8,800
Corporate bonds
13,165
—
(1,511)
—
11,654
Total available for sale debt securities
$1,165,816
$125
($183,368)
$—
$982,573
(Dollars in thousands)
December 31, 2021
Amortized Cost
Unrealized Gains
Unrealized Losses
ACL
Fair Value
Available for Sale Debt Securities:
Obligations of U.S. government-sponsored enterprises
$200,953
$12
($4,511)
$—
$196,454
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
828,319
6,850
(10,207)
—
824,962
Individual name issuer trust preferred debt securities
9,373
—
(235)
—
9,138
Corporate bonds
13,155
—
(850)
—
12,305
Total available for sale debt securities
$1,051,800
$6,862
($15,803)
$—
$1,042,859
The Corporation excludes accrued interest from the amortized cost basis of debt securities and reports accrued interest in other assets in the Unaudited Consolidated Balance Sheets. Accrued interest receivable on available for sale debt securities totaled $2.7 million and $2.3 million, respectively, as of September 30, 2022 and December 31, 2021.
As of September 30, 2022 and December 31, 2021, securities with a fair value of $302.7 million and $332.0 million, respectively, were pledged as collateral for FHLB borrowings, potential borrowings with the FRBB, 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)
September 30, 2022
Amortized Cost
Fair Value
Due in one year or less
$122,305
$102,490
Due after one year to five years
407,912
343,570
Due after five years to ten years
418,836
354,503
Due after ten years
216,763
182,010
Total debt securities
$1,165,816
$982,573
-11-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Included in the above table are debt securities with an amortized cost balance of $253.0 million and a fair value of $217.6 million at September 30, 2022 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 2 years to 14 years, with call features ranging from 1 month to 1 year.
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.
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 at September 30, 2022 and 2021 and, therefore there was no accrued interest related to debt securities reversed against interest income for the three and nine months ended September 30, 2022 and 2021.
The following tables summarize available for sale debt securities in an unrealized loss position, for which an ACL on securities has not been recorded, segregated by length of time that the securities have been in a continuous unrealized loss position:
(Dollars in thousands)
Less than 12 Months
12 Months or Longer
Total
September 30, 2022
#
Fair Value
Unrealized Losses
#
Fair Value
Unrealized Losses
#
Fair Value
Unrealized Losses
Obligations of U.S. government-sponsored enterprises
7
$45,972
($4,983)
15
$141,878
($28,371)
22
$187,850
($33,354)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
122
395,493
(52,363)
47
363,645
(95,556)
169
759,138
(147,919)
Individual name issuer trust preferred debt securities
—
—
—
3
8,800
(584)
3
8,800
(584)
Corporate bonds
—
—
—
4
11,654
(1,511)
4
11,654
(1,511)
Total
129
$441,465
($57,346)
69
$525,977
($126,022)
198
$967,442
($183,368)
(Dollars in thousands)
Less than 12 Months
12 Months or Longer
Total
December 31, 2021
#
Fair Value
Unrealized Losses
#
Fair Value
Unrealized Losses
#
Fair Value
Unrealized Losses
Obligations of U.S. government-sponsored enterprises
12
$152,733
($3,313)
6
$43,202
($1,198)
18
$195,935
($4,511)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
41
514,419
(7,270)
21
108,983
(2,937)
62
623,402
(10,207)
Individual name issuer trust preferred debt securities
—
—
—
3
9,138
(235)
3
9,138
(235)
Corporate bonds
—
—
—
4
12,305
(850)
4
12,305
(850)
Total
53
$667,152
($10,583)
34
$173,628
($5,220)
87
$840,780
($15,803)
Deterioration in credit quality of the underlying issuers of the securities, deterioration in the condition of the financial services industry, worsening of the current economic environment, or 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 credit losses.
Obligations of 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-
-12-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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. The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at September 30, 2022. Management believes that the unrealized losses on these debt securities 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, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no allowance for credits losses on securities was recorded at September 30, 2022.
Individual Name Issuer Trust Preferred Debt Securities
Included in debt securities in an unrealized loss position at September 30, 2022 were three trust preferred securities issued by three individual companies in the banking sector. Management reviewed the collectability 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. As of September 30, 2022, there was one individual name issuer trust preferred debt security with an amortized cost of $2.0 million and unrealized losses of $132 thousand that was rated below investment grade by S&P. We noted no downgrades to below investment grade between September 30, 2022 and the filing date of this report. 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 interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates 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, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no ACL on securities was recorded at September 30, 2022.
Corporate Bonds
Included in debt securities in an unrealized loss position at September 30, 2022 were four corporate bond holdings issued by three individual companies in the financial services industry. Management reviewed the collectability 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. As of September 30, 2022, there was one corporate bond debt security with an amortized cost of $2.0 million and unrealized losses of $121 thousand that was rated below investment grade by S&P. We noted no downgrades to below investment grade between September 30, 2022 and the filing date of this report. Based on the information available through the filing date of this report, all corporate bond debt securities held in our portfolio continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates 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, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no ACL was recorded at September 30, 2022.
-13-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 4 - Loans
The following table presents a summary of loans:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Commercial:
Commercial real estate (1)
$1,762,687
$1,639,062
Commercial & industrial (2)
652,758
641,555
Total commercial
2,415,445
2,280,617
Residential Real Estate:
Residential real estate (3)
2,144,098
1,726,975
Consumer:
Home equity
273,742
247,697
Other (4)
15,588
17,636
Total consumer
289,330
265,333
Total loans (5)
$4,848,873
$4,272,925
(1)CRE consists 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)C&I consists of loans to businesses and individuals, a portion of which are fully or partially collateralized by real estate. C&I also includes $1.4 million and $38.0 million, respectively, of PPP loans as of September 30, 2022 and December 31, 2021.
(3)Residential real estate consists of mortgage and homeowner construction loans secured by one- to four-family residential properties.
(4)Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans.
(5)Includes net unamortized loan origination costs of $10.7 million and $6.7 million, respectively, at September 30, 2022 and December 31, 2021 and net unamortized premiums on purchased loans of $329 thousand and $414 thousand, respectively, at September 30, 2022 and December 31, 2021.
Loan balances exclude accrued interest receivable of $14.6 million and $10.3 million, respectively, as of September 30, 2022 and December 31, 2021.
As of September 30, 2022 and December 31, 2021, loans amounting to $2.3 billion and $2.2 billion, respectively, were pledged as collateral to the FHLB under a blanket pledge agreement and to the FRBB for the discount window. See Note 7 for additional disclosure regarding borrowings.
The Corporation elected to account for eligible loan modifications under Section 4013 of the CARES Act, as amended by the CRRSA Act. Eligible loan modifications from March 1, 2020 through January 1, 2022 made in response to the COVID-19 pandemic were not required to be classified as TDRs. The vast majority of the loan payment deferral modifications, or “deferments,” qualified as eligible loan modifications and were not classified as TDRs. All of these loans with qualified deferments exited their payment deferral period prior to March 31, 2022.
Concentrations of Credit Risk
A significant portion of our loan portfolio is concentrated among borrowers in southern New England and a substantial portion of the portfolio is collateralized by real estate in this area. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy, as well as the health of the real estate economic sector in the Corporation’s market area.
-14-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Past Due Loans
Past due status is based on the contractual payment terms of the loan. The following tables present an aging analysis of past due loans, segregated by class of loans:
(Dollars in thousands)
Days Past Due
September 30, 2022
30-59
60-89
Over 90
Total Past Due
Current
Total Loans
Commercial:
Commercial real estate
$—
$—
$—
$—
$1,762,687
$1,762,687
Commercial & industrial
4
—
—
4
652,754
652,758
Total commercial
4
—
—
4
2,415,441
2,415,445
Residential Real Estate:
Residential real estate
1,607
219
5,430
7,256
2,136,842
2,144,098
Consumer:
Home equity
202
—
50
252
273,490
273,742
Other
17
—
—
17
15,571
15,588
Total consumer
219
—
50
269
289,061
289,330
Total loans
$1,830
$219
$5,480
$7,529
$4,841,344
$4,848,873
(Dollars in thousands)
Days Past Due
December 31, 2021
30-59
60-89
Over 90
Total Past Due
Current
Total Loans
Commercial:
Commercial real estate
$—
$—
$—
$—
$1,639,062
$1,639,062
Commercial & industrial
3
—
—
3
641,552
641,555
Total commercial
3
—
—
3
2,280,614
2,280,617
Residential Real Estate:
Residential real estate
1,784
3,176
4,662
9,622
1,717,353
1,726,975
Consumer:
Home equity
580
77
108
765
246,932
247,697
Other
21
—
—
21
17,615
17,636
Total consumer
601
77
108
786
264,547
265,333
Total loans
$2,388
$3,253
$4,770
$10,411
$4,262,514
$4,272,925
Included in past due loans as of September 30, 2022 and December 31, 2021, were nonaccrual loans of $7.1 million and $9.4 million, respectively. In addition, all loans 90 days or more past due at September 30, 2022 and December 31, 2021 were classified as nonaccrual.
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 is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.
-15-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table is a summary of nonaccrual loans, segregated by class of loans:
(Dollars in thousands)
Sep 30, 2022
Dec 31, 2021
Commercial:
Commercial real estate
$—
$—
Commercial & industrial
—
—
Total commercial
—
—
Residential Real Estate:
Residential real estate
11,700
13,576
Consumer:
Home equity
422
627
Other
—
—
Total consumer
422
627
Total nonaccrual loans
$12,122
$14,203
Accruing loans 90 days or more past due
$—
$—
No ACL was deemed necessary on nonaccrual loans with carrying values of $4.3 million and $4.2 million, respectively, as of September 30, 2022 and December 31, 2021.
Nonaccrual loans of $5.1 million and $4.8 million, respectively, at September 30, 2022 and December 31, 2021 were current as to the payment of principal and interest.
As of September 30, 2022 and December 31, 2021, nonaccrual loans secured by one- to four-family residential property amounting to $4.4 million and $1.5 million, respectively, were in process of foreclosure.
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2022.
The following table presents interest income recognized on nonaccrual loans:
(Dollars in thousands)
Three Months
Nine Months
Periods ended September 30,
2022
2021
2022
2021
Commercial:
Commercial real estate
$—
$—
$—
$—
Commercial & industrial
—
—
—
—
Total commercial
—
—
—
—
Residential Real Estate:
Residential real estate
77
131
242
288
Consumer:
Home equity
9
9
21
44
Other
—
—
3
—
Total consumer
9
9
24
44
Total
$86
$140
$266
$332
Troubled Debt Restructurings
A loan that has been modified or renewed is considered to be a TDR when two conditions are met: (1) the borrower is experiencing financial difficulty and (2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or a transaction with similar credit risk characteristics. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance,
-16-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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 of a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection.
The Corporation's ACL reflects the effects of a TDR when management reasonably expects at the reporting date that a TDR will be executed with an individual borrower. A TDR is considered reasonably expected no later than the point when management concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession to avoid a default. Reasonably expected TDRs and executed TDRs are evaluated individually to determine the required ACL. TDRs that did not involve a below-market rate concession and perform in accordance with their modified contractual terms for a reasonable period of time may be included in the Corporation’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.
TDRs are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term and full collection of principal and interest is in doubt.
TDRs are reported as such for at least one year from the date of the restructuring. In years after the restructuring, TDRs are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is performing in accordance with their modified contractual terms for a reasonable period of time.
The recorded investment in TDRs consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. For accruing TDRs, the recorded investment also includes accrued interest.
The following table presents the recorded investment in TDRs and other pertinent information:
(Dollars in thousands)
Sep 30, 2022
Dec 31, 2021
Accruing TDRs
$7,275
$16,564
Nonaccrual TDRs
2,890
2,819
Total TDRs
$10,165
$19,383
Specific reserves on TDRs included in the ACL on loans
$132
$148
Additional commitments to lend to borrowers with TDRs
$—
$—
The following tables present TDRs occurring during the period indicated and the recorded investment pre- and post-modification:
(Dollars in thousands)
Outstanding Recorded Investment
# of Loans
Pre-Modifications
Post-Modifications
Three months ended September 30,
2022
2021
2022
2021
2022
2021
Commercial:
Commercial real estate
—
—
$—
$—
$—
$—
Commercial & industrial
2
—
844
—
844
—
Total commercial
2
—
844
—
844
—
Total
2
—
$844
$—
$844
$—
-17-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
(Dollars in thousands)
Outstanding Recorded Investment
# of Loans
Pre-Modifications
Post-Modifications
Nine months ended September 30,
2022
2021
2022
2021
2022
2021
Commercial:
Commercial real estate
—
—
$—
$—
$—
$—
Commercial & industrial
2
—
844
—
844
—
Total commercial
2
—
844
—
844
—
Total
2
—
$844
$—
$844
$—
The following table presents TDRs occurring during the period indicated by type of modification:
(Dollars in thousands)
Three Months
Nine Months
Periods ended September 30,
2022
2021
2022
2021
Below-market interest rate concession
$—
$—
$—
$—
Payment deferral
—
—
—
—
Maturity / amortization concession
—
—
—
—
Interest only payments
—
—
—
—
Combination (1)
844
—
844
—
Total
$844
$—
$844
$—
(1) Loans included in this classification were modified with a combination of any two of the concessions listed in this table.
The following table presents information on TDRs modified within the previous 12 months for which there was a payment default:
(Dollars in thousands)
Three Months
Nine Months
# of Loans
Recorded Investment
# of Loans
Recorded Investment
Periods ended September 30,
2022
2021
2022
2021
2022
2021
2022
2021
TDRs with a Payment Default:
Residential real estate
—
1
$—
$330
—
1
$—
$330
Individually Analyzed Loans
Individually analyzed loans include nonaccrual commercial loans, reasonably expected TDRs and executed TDRs, as well as certain other loans based on the underlying risk characteristics and the discretion of management to individuallyanalyze such loans.
As of September 30, 2022, the carrying value of individually analyzed loans amounted to $12.0 million, of which $8.3 million were considered collateral dependent. As of December 31, 2021, the carrying value of individually analyzed loans amounted to $21.1 million, of which $14.4 million were considered collateral dependent.
For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. See Note 10 for additional disclosure regarding fair value of individually analyzed collateral dependent loans.
-18-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the carrying value of collateral dependent individually analyzed loans:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Carrying Value
Related Allowance
Carrying Value
Related Allowance
Commercial:
Commercial real estate (1)
$3,609
$—
$10,603
$—
Commercial & industrial
—
—
—
—
Total commercial
3,609
—
10,603
—
Residential Real Estate:
Residential real estate (2)
4,612
520
3,803
534
Consumer:
Home equity (2)
71
—
—
—
Other
—
—
—
—
Total consumer
71
—
—
—
Total
$8,292
$520
$14,406
$534
(1) Secured by income-producing property.
(2) Secured by one- to four-family residential properties.
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 risk 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 Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for loan losses. See Note 5 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 may exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, performance or may be in an industry or of a loan type known to have a higher degree of risk. These weaknesses may be mitigated by secondary sources of repayment, including SBA guarantees.
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 collectability. 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
-19-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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 risk ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. On a quarterly basis, management reviews a watched asset list, which generally consists of commercial loans that are risk-rated 6 or worse, highly leveraged transaction loans, high-volatility commercial real estate and other selected loans. Management’s review focuses on the current status of the loans, the appropriateness of risk ratings and strategies to improve the credit.
An annual credit 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.
Residential and Consumer
Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type.
In addition, other techniques are utilized to monitor indicators of credit deterioration in the residential real estate loans and home equity consumer loans. Among these techniques is the periodic tracking of loans with an updated FICO score and an updated estimated LTV ratio. LTV is estimated based on such factors as geographic location, the original appraised value and changes in median home prices, and takes into consideration the age of the loan. The results of these analyses and other credit review procedures, including selected targeted internal reviews, are taken into account in the determination of qualitative loss factors for residential real estate and home equity consumer credits.
-20-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment as of September 30, 2022:
(Dollars in thousands)
Term Loans Amortized Cost by Origination Year
2022
2021
2020
2019
2018
Prior
Revolving Loans Amortized Cost
Revolving Loans Converted to Term Loans
Total
Commercial:
CRE:
Pass
$461,435
$354,011
$175,390
$193,425
$175,084
$316,290
$3,579
$1,466
$1,680,680
Special Mention
14,142
22,345
406
13,115
17,567
10,633
190
—
78,398
Classified
—
—
510
—
2,685
414
—
—
3,609
Total CRE
475,577
376,356
176,306
206,540
195,336
327,337
3,769
1,466
1,762,687
C&I:
Pass
86,981
63,805
76,341
88,235
94,240
121,837
103,130
798
635,367
Special Mention
1,605
—
—
—
1,444
12,123
1,497
—
16,669
Classified
—
—
—
26
—
—
696
—
722
Total C&I
88,586
63,805
76,341
88,261
95,684
133,960
105,323
798
652,758
Residential Real Estate:
Residential real estate:
Current
622,899
718,371
283,621
127,157
74,789
310,005
—
—
2,136,842
Past Due
—
—
1,397
1,156
2,107
2,596
—
—
7,256
Total residential real estate
622,899
718,371
285,018
128,313
76,896
312,601
—
—
2,144,098
Consumer:
Home equity:
Current
15,354
8,709
3,842
2,643
2,106
3,428
229,083
8,326
273,491
Past Due
—
—
—
—
—
81
95
75
251
Total home equity
15,354
8,709
3,842
2,643
2,106
3,509
229,178
8,401
273,742
Other:
Current
3,182
4,400
1,742
736
258
4,987
266
—
15,571
Past Due
17
—
—
—
—
—
—
—
17
Total other
3,199
4,400
1,742
736
258
4,987
266
—
15,588
Total Loans
$1,205,615
$1,171,641
$543,249
$426,493
$370,280
$782,394
$338,536
$10,665
$4,848,873
-21-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment as of December 31, 2021:
(Dollars in thousands)
Term Loans Amortized Cost by Origination Year
2021
2020
2019
2018
2017
Prior
Revolving Loans Amortized Cost
Revolving Loans Converted to Term Loans
Total
Commercial:
CRE:
Pass
$417,705
$212,649
$260,940
$206,164
$163,132
$266,067
$7,015
$2,202
$1,535,874
Special Mention
9,089
489
33,982
28,432
—
20,273
320
—
92,585
Classified
—
958
—
2,685
6,959
1
—
—
10,603
Total CRE
426,794
214,096
294,922
237,281
170,091
286,341
7,335
2,202
1,639,062
C&I:
Pass
116,959
78,601
104,827
87,619
51,579
83,182
89,686
911
613,364
Special Mention
—
—
606
4,599
6,195
15,605
1,186
—
28,191
Classified
—
—
—
—
—
—
—
—
—
Total C&I
116,959
78,601
105,433
92,218
57,774
98,787
90,872
911
641,555
Residential Real Estate:
Residential real estate:
Current
733,658
353,742
158,140
85,656
88,365
297,792
—
—
1,717,353
Past Due
—
1,402
1,167
2,379
763
3,911
—
—
9,622
Total residential real estate
733,658
355,144
159,307
88,035
89,128
301,703
—
—
1,726,975
Consumer:
Home equity:
Current
10,434
5,850
3,703
2,380
1,064
3,592
211,488
8,421
246,932
Past Due
—
—
185
—
—
245
115
220
765
Total home equity
10,434
5,850
3,888
2,380
1,064
3,837
211,603
8,641
247,697
Other:
Current
5,536
3,264
1,313
407
747
6,090
258
—
17,615
Past Due
21
—
—
—
—
—
—
—
21
Total other
5,557
3,264
1,313
407
747
6,090
258
—
17,636
Total Loans
$1,293,402
$656,955
$564,863
$420,321
$318,804
$696,758
$310,068
$11,754
$4,272,925
Consistent with industry practice, Washington Trust may renew commercial loans at or immediately prior to their maturity. In the tables above, renewals subject to full credit evaluation before being granted are reported as originations in the period renewed.
-22-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 5 - Allowance for Credit Losses on Loans
The ACL on loans is management’s estimate, at the reporting date, of expected credit losses over the expected life of the loans. The level of the ACL on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.
In accordance with the Corporation’s ACL policy, the methodology is reviewed no less than annually. The methodology incorporates a probability of default and loss given default framework. Loss given default is estimated based on historical credit loss experience. Probability of default is estimated using a regression model that incorporates econometric factors. Econometric factors are selected based on the correlation of the factor to historical credit losses for each portfolio segment.
The following table summarizes the econometric factors utilized for each loan portfolio segment as of the dates indicated:
Econometric Factors
Loan portfolio segment
At September 30, 2022
At December 31, 2021
CRE
NUR & GDP
NUR & GDP
C&I
NUR & GDP
NUR
Residential real estate
NUR & HPI
NUR & HPI
Home equity
NUR & HPI
NUR & HPI
Other consumer
GDP
NUR & GDP
The following table presents the activity in the ACL on loans for the three months ended September 30, 2022:
(Dollars in thousands)
Commercial
Consumer
CRE
C&I
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance
$17,197
$10,332
$27,529
$7,308
$1,040
$440
$1,480
$36,317
Charge-offs
—
(10)
(10)
—
—
(53)
(53)
(63)
Recoveries
—
1
1
—
—
8
8
9
Provision
414
24
438
139
31
(8)
23
600
Ending Balance
$17,611
$10,347
$27,958
$7,447
$1,071
$387
$1,458
$36,863
The following table presents the activity in the ACL on loans for the nine months ended September 30, 2022:
(Dollars in thousands)
Commercial
Consumer
CRE
C&I
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance
$18,933
$10,832
$29,765
$7,860
$1,069
$394
$1,463
$39,088
Charge-offs
—
(19)
(19)
—
—
(103)
(103)
(122)
Recoveries
145
22
167
21
4
34
38
226
Provision
(1,467)
(488)
(1,955)
(434)
(2)
62
60
(2,329)
Ending Balance
$17,611
$10,347
$27,958
$7,447
$1,071
$387
$1,458
$36,863
-23-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the activity in the ACL on loans for the three months ended September 30, 2021:
(Dollars in thousands)
Commercial
Consumer
CRE
C&I
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance
$21,450
$11,717
$33,167
$6,877
$1,340
$495
$1,835
$41,879
Charge-offs
—
2
2
(57)
(183)
(11)
(194)
(249)
Recoveries
—
—
—
5
73
3
76
81
Provision
(613)
(392)
(1,005)
1,131
(112)
(14)
(126)
—
Ending Balance
$20,837
$11,327
$32,164
$7,956
$1,118
$473
$1,591
$41,711
The following table presents the activity in the ACL on loans for the nine months ended September 30, 2021:
(Dollars in thousands)
Commercial
Consumer
CRE
C&I
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance
$22,065
$12,228
$34,293
$8,042
$1,300
$471
$1,771
$44,106
Charge-offs
—
(304)
(304)
(107)
(183)
(36)
(219)
(630)
Recoveries
—
3
3
85
79
19
98
186
Provision
(1,228)
(600)
(1,828)
(64)
(78)
19
(59)
(1,951)
Ending Balance
$20,837
$11,327
$32,164
$7,956
$1,118
$473
$1,591
$41,711
Note 6 - Deposits
The following table presents a summary of deposits:
(Dollars in thousands)
Sep 30, 2022
Dec 31, 2021
Noninterest-bearing demand deposits
$938,572
$945,229
Interest-bearing demand deposits (1)
304,275
251,032
NOW accounts
869,984
867,138
Money market accounts
1,146,826
1,072,864
Savings accounts
600,568
555,177
Time deposits (2)
1,209,632
1,288,611
Total deposits
$5,069,857
$4,980,051
(1)Includes wholesale brokered demand deposit balances of $31,044 and $0, respectively, as of September 30, 2022 and December 31, 2021.
(2)Includes wholesale brokered time deposit balances of $412,127 and $515,228, respectively, as of September 30, 2022 and December 31, 2021.
Note 7 - Borrowings
Advances payable to the FHLB amounted to $700.0 million and $145.0 million, respectively, at September 30, 2022 and December 31, 2021.
As of September 30, 2022 and December 31, 2021, the Bank had access to a $40.0 million unused line of credit with the FHLB. Additionally, the Bank had a $102.0 million standby letter of credit with the FHLB at September 30, 2022. The Bank had remaining available borrowing capacity of $967.1 million and $1.6 billion, respectively, with the FHLB at September 30, 2022 and December 31, 2021. The Bank pledges certain qualified investment securities and loans as collateral to the FHLB.
-24-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents maturities and weighted average interest rates on FHLB advances outstanding as of September 30, 2022:
(Dollars in thousands)
Scheduled Maturity
Weighted Average Rate
October 1, 2022 to December 31, 2022
$625,000
2.96
%
2023
55,000
1.92
2024
20,000
4.48
2025
—
—
2026
—
—
2027 and thereafter
—
—
Balance at September 30, 2022
$700,000
2.92
%
Note 8 - Shareholders' Equity
Stock Repurchase Program
The 2021 Repurchase Program authorizes the repurchase of up to 850,000 shares, or approximately 5%, of the Corporation’s outstanding common stock. This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The 2021 Repurchase Program expires on December 31, 2022, and may be modified, suspended, or discontinued at any time. In the nine months ended September 30, 2022, the Corporation has repurchased 194,162 shares, at an average price of $48.82 and a total cost of $9.5 million, under its 2021 Repurchase Program.
Regulatory Capital Requirements
Capital levels at September 30, 2022 exceeded the regulatory minimum levels to be considered “well capitalized.”
-25-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios, as well as the corresponding minimum and well capitalized regulatory amounts and ratios that were in effect during the respective periods:
(Dollars in thousands)
Actual
For Capital Adequacy Purposes
To Be “Well Capitalized” Under Prompt Corrective Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
September 30, 2022
Total Capital (to Risk-Weighted Assets):
Corporation
$596,341
12.65
%
$377,111
8.00
%
N/A
N/A
Bank
579,854
12.30
376,991
8.00
$471,238
10.00
%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation
564,194
11.97
282,833
6.00
N/A
N/A
Bank
547,707
11.62
282,743
6.00
376,991
8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
Corporation
542,197
11.50
212,125
4.50
N/A
N/A
Bank
547,707
11.62
212,057
4.50
306,305
6.50
Tier 1 Capital (to Average Assets): (1)
Corporation
564,194
8.99
251,121
4.00
N/A
N/A
Bank
547,707
8.73
250,995
4.00
313,743
5.00
December 31, 2021
Total Capital (to Risk-Weighted Assets):
Corporation
578,137
14.01
330,105
8.00
N/A
N/A
Bank
565,087
13.70
330,025
8.00
412,532
10.00
Tier 1 Capital (to Risk-Weighted Assets):
Corporation
546,362
13.24
247,578
6.00
N/A
N/A
Bank
533,312
12.93
247,519
6.00
330,025
8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
Corporation
524,363
12.71
185,684
4.50
N/A
N/A
Bank
533,312
12.93
185,639
4.50
268,146
6.50
Tier 1 Capital (to Average Assets): (1)
Corporation
546,362
9.36
233,534
4.00
N/A
N/A
Bank
533,312
9.14
233,434
4.00
291,793
5.00
(1) Leverage ratio.
In addition to the minimum regulatory capital required for capital adequacy purposes outlined in the table above, the Corporation is required to maintain a minimum capital conservation buffer, in the form of common equity, of 2.50% in order to avoid restrictions on capital distributions and discretionary bonuses. The Corporation’s capital levels exceeded the minimum regulatory capital requirements plus the capital conservation buffer at September 30, 2022 and December 31, 2021.
The Bancorp owns the common stock of two capital trusts, which have issued trust preferred securities. In accordance with GAAP, the capital trusts are treated as unconsolidated subsidiaries. At both September 30, 2022 and December 31, 2021, $22.0 million in trust preferred securities were included in the Tier 1 capital of the Corporation for regulatory capital reporting purposes pursuant to the capital adequacy guidelines of the Federal Reserve.
In accordance with regulatory capital rules, the Corporation elected the option to delay the estimated impact of ASC 326 on its regulatory capital over a two-year deferral and subsequent three-year transition period ending December 31, 2024. As a result, capital ratios exclude the full impact of the increased ACL on loans and unfunded loan commitments attributed to the adoption of ASC 326, adjusted for an approximation of the after-tax provision for credit losses attributable to ASC 326 relative to the incurred loss methodology during the two-year deferral period. The cumulative difference at the end of the deferral period is being phased-in to regulatory capital over the three-year transition period, which began January 1, 2022.
-26-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 9 - Derivative Financial Instruments
The Corporation’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Corporation’s known or expected cash receipts and its known or expected cash payments principally to manage the Corporation’s interest rate risk. Additionally, the Corporation enters into interest rate derivatives to accommodate the business requirements of its customers. All derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and resulting designation.
Interest Rate Risk Management Agreements
Interest rate risk management agreements, such as caps, swaps and floors, are used from time to time as part of the Corporation’s interest rate risk management strategy. Interest rate swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g., fixed-rate for variable-rate payments) computed on a notional principal amount. Interest rate caps and floors represent options purchased by the Corporation to manage the interest rate paid throughout the term of the option contract. The credit risk associated with these transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure.
Cash Flow Hedging Instruments
As of September 30, 2022 and December 31, 2021, the Corporation had an interest rate swap contract with a total notional amount of $20.0 million that was designated as a cash flow hedge to hedge the interest rate risk associated with short-term variable rate FHLB advances. The interest rate swap on borrowings matures in December 2023.
As of September 30, 2022 and December 31, 2021, the Corporation had an interest rate swap contract with a total notional amount of $300.0 million that was designated as a cash flow hedge to hedge the interest rate risk associated with a pool of variable rate commercial loans. The interest rate swap on loans matures in May 2026.
The changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) and subsequently reclassified to earnings when gains or losses are realized.
Loan Related Derivative Contracts
Interest Rate Derivative Contracts with Customers
The Corporation enters into interest rate swap and interest rate cap contracts to help commercial loan borrowers manage their interest rate risk. These interest rate swap contracts allow borrowers to convert variable-rate loan payments to fixed-rate loan payments, while interest rate cap contracts allow borrowers to limit their interest rate exposure in a rising rate environment. When the Corporation enters into an interest rate derivative contract with a commercial loan borrower, it simultaneously enters into a “mirror” interest rate contract with a third party. For interest rate swaps, the third party exchanges the client’s fixed-rate loan payments for variable-rate loan payments. The Corporation retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans.
As of September 30, 2022 and December 31, 2021, Washington Trust had interest rate derivative contracts with commercial loan borrowers (predominantly interest rate swap contracts) with notional amounts of $962.4 million and $1.0 billion, respectively, and equal amounts of “mirror” contracts with third party financial institutions. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings.
Risk Participation Agreements
The Corporation has entered into risk participation agreements with other banks in commercial loan arrangements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings.
Under a risk participation-out agreement, a derivative asset, the Corporation participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Corporation assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower for a fee received from the other bank.
-27-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
As of September 30, 2022, the notional amounts of risk participation-out agreements and risk participation-in agreements were $66.9 million and $177.0 million, respectively, compared to $74.2 million and $163.2 million, respectively, as of December 31, 2021.
Mortgage Loan Commitments
Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Forward sale commitments are contracts for delayed delivery or net settlement of the underlying instrument, such as a residential real estate mortgage loan, where the seller agrees to deliver on a specified future date, either a specified instrument at a specified price or yield or the net cash equivalent of an underlying instrument. Both interest rate lock commitments and forward sale commitments are derivative financial instruments, but do not meet criteria for hedge accounting and therefore, the changes in fair value of these commitments are reflected in earnings.
As of September 30, 2022, the notional amounts of interest rate lock commitments and forward sale commitments were $27.4 million and $64.1 million, respectively, compared to $49.8 million and $103.6 million, respectively, as of December 31, 2021.
The following table presents the fair values of derivative instruments in the Unaudited Consolidated Balance Sheets:
(Dollars in thousands)
Derivative Assets
Derivative Liabilities
Fair Value
Fair Value
Balance Sheet Location
Sep 30, 2022
Dec 31, 2021
Balance Sheet Location
Sep 30, 2022
Dec 31, 2021
Derivatives Designated as Cash Flow Hedging Instruments:
Interest rate risk management contracts:
Interest rate swaps
Other assets
$540
$182
Other liabilities
$32,936
$5,301
Derivatives not Designated as Hedging Instruments:
Loan related derivative contracts:
Interest rate contracts with customers
Other assets
122
32,361
Other liabilities
71,028
2,015
Mirror contracts with counterparties
Other assets
70,679
2,001
Other liabilities
122
32,480
Risk participation agreements
Other assets
—
1
Other liabilities
—
2
Mortgage loan commitments:
Interest rate lock commitments
Other assets
204
1,256
Other liabilities
186
—
Forward sale commitments
Other assets
1,069
54
Other liabilities
211
905
Gross amounts
72,614
35,855
104,483
40,703
Less: amounts offset (1)
24,516
2,167
24,516
2,167
Derivative balances, net of offset
48,098
33,688
79,967
38,536
Less: collateral pledged (2)
—
—
8,542
34,539
Net amounts
$48,098
$33,688
$71,425
$3,997
(1)Interest rate risk management contracts and loan related derivative contracts with counterparties are subject to master netting arrangements.
(2)Collateral pledged to derivative counterparties is in the form of cash. Washington Trust may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.
-28-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the effect of derivative instruments in the Unaudited Consolidated Statements of Changes in Shareholders’ Equity and Unaudited Consolidated Statements of Income:
(Dollars in thousands)
Gain (Loss) Recognized in Other Comprehensive Income (Loss), Net of Tax
Three Months
Nine Months
Periods ended September 30,
2022
2021
2022
2021
Derivatives Designated as Cash Flow Hedging Instruments:
Interest rate risk management contracts:
Interest rate swaps
($6,973)
($403)
($20,281)
($36)
Total
($6,973)
($403)
($20,281)
($36)
For derivatives designated as cash flow hedging instruments, see Note 15 for additional disclosure pertaining to the amounts and location of reclassifications from AOCL into earnings.
(Dollars in thousands)
Amount of Gain (Loss) Recognized in Income on Derivatives
Three Months
Nine Months
Periods ended September 30,
Statement of Income Location
2022
2021
2022
2021
Derivatives not Designated as Hedging Instruments:
Loan related derivative contracts:
Interest rate contracts with customers
Loan related derivative income
($33,605)
($2,715)
($93,227)
($21,281)
Mirror contracts with counterparties
Loan related derivative income
34,646
3,558
95,189
23,173
Risk participation agreements
Loan related derivative income
—
(115)
49
478
Mortgage loan commitments:
Interest rate lock commitments
Mortgage banking revenues
(516)
(17)
(1,238)
(4,859)
Forward sale commitments
Mortgage banking revenues
998
(361)
4,729
4,994
Total
$1,523
$350
$5,502
$2,505
Note 10 - Fair Value Measurements
The Corporation uses fair value measurements to record fair value adjustments on certain assets and liabilities and to determine fair value disclosures. Items recorded at fair value on a recurring basis include securities available for sale, mortgage loans held for sale and derivatives. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent individually analyzed loans, OREO and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets.
Fair value is a market-based measurement, not an entity-specific measurement. Fair value measurements are determined based on the assumptions the market participants would use in pricing the asset or liability. In addition, GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information, or “inputs”, are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Corporation’s market assumptions. These two types of inputs have created the following fair value hierarchy:
•Level 1 – Quoted prices for identical assets or liabilities in active markets.
•Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
•Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in the markets and which reflect the Corporation’s market assumptions.
Fair Value Option Election
GAAP allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain
-29-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
financial assets and liabilities on a contract-by-contract basis. The Corporation has elected the fair value option for mortgage loans held for sale to better match changes in fair value of the loans with changes in the fair value of the forward sale commitment contracts used to economically hedge them.
The following table presents a summary of mortgage loans held for sale accounted for under the fair value option:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Aggregate fair value
$24,054
$40,196
Aggregate principal balance
24,328
39,201
Difference between fair value and principal balance
($274)
$995
Changes in fair value of mortgage loans held for sale accounted for under the fair value option election are included in mortgage banking revenues in the Unaudited Consolidated Statements of Income. Changes in fair value amounted to decreases to mortgage banking revenues of $521 thousand for the three months ended September 30, 2022 and $1.3 million for the nine months ended September 30, 2022. This compared to an increase to mortgage banking revenues of $372 thousand for the three months ended September 30, 2021 and a decrease of $1.1 million for the nine months ended September 30, 2021.
There were no mortgage loans held for sale 90 days or more past due as of September 30, 2022 and December 31, 2021.
Valuation Techniques
Debt Securities
Available for sale debt securities are recorded at fair value on a recurring basis. When available, the Corporation uses quoted market prices to determine the fair value of debt securities; such items are classified as Level 1. There were no Level 1 debt securities held at September 30, 2022 and December 31, 2021.
Level 2 debt securities are traded less frequently than exchange-traded instruments. The fair value of these securities is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category includes obligations of U.S. government-sponsored enterprises, including mortgage-backed securities, individual name issuer trust preferred debt securities and corporate bonds.
Debt securities not actively traded whose fair value is determined through the use of cash flows utilizing inputs that are unobservable are classified as Level 3. There were no Level 3 debt securities held at September 30, 2022 and December 31, 2021.
Mortgage Loans Held for Sale
The fair value of mortgage loans held for sale is estimated based on current market prices for similar loans in the secondary market and therefore are classified as Level 2 assets.
Collateral Dependent Individually Analyzed Loans
The fair value of collateral dependent individually analyzed loans is determined based upon the appraised fair value of the underlying collateral. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For collateral dependent loans that are expected to be repaid substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the collateral. Internal valuations may be utilized to determine the fair value of other business assets. Collateral dependent individually analyzed loans are categorized as Level 3.
Derivatives
Interest rate derivative contracts are traded in over-the-counter markets where quoted market prices are not readily available. Fair value measurements are determined using independent valuation software, which utilizes the present value of future cash flows discounted using market observable inputs such as forward rate assumptions. The Corporation evaluates the credit risk of its counterparties, as well as that of the Corporation. Accordingly, factors such as the likelihood of default by the Corporation and its counterparties, its net exposures and remaining contractual life are considered in determining if
-30-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
any fair value adjustments related to credit risk are required. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position, if any. The Corporation has determined that the majority of the inputs used to value its derivative positions fall within Level 2 of the fair value hierarchy. However, the credit valuation adjustments utilize Level 3 inputs. As of September 30, 2022 and December 31, 2021, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Corporation has classified its derivative valuations in their entirety as Level 2.
Fair value measurements of forward loan commitments (interest rate lock commitments and forward sale commitments) are primarily based on current market prices for similar assets in the secondary market for mortgage loans and therefore are classified as Level 2 assets. The fair value of interest rate lock commitments is also dependent on the ultimate closing of the loans. Pull-through rates are based on the Corporation’s historical data and reflect the Corporation’s best estimate of the likelihood that a commitment will result in a closed loan. Although the pull-through rates are Level 3 inputs, the Corporation has assessed the significance of the impact of pull-through rates on the overall valuation of its interest rate lock commitments and has determined that they are not significant to the overall valuation. As a result, the Corporation has classified its interest rate lock commitments as Level 2.
Items Recorded at Fair Value on a Recurring Basis
The following tables present the balances of assets and liabilities reported at fair value on a recurring basis:
(Dollars in thousands)
Total
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
September 30, 2022
Assets:
Available for sale debt securities:
Obligations of U.S. government-sponsored enterprises
$197,855
$—
$197,855
$—
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
764,264
—
764,264
—
Individual name issuer trust preferred debt securities
8,800
—
8,800
—
Corporate bonds
11,654
—
11,654
—
Mortgage loans held for sale
24,054
—
24,054
—
Derivative assets
48,098
—
48,098
—
Total assets at fair value on a recurring basis
$1,054,725
$—
$1,054,725
$—
Liabilities:
Derivative liabilities
$79,967
$—
$79,967
$—
Total liabilities at fair value on a recurring basis
$79,967
$—
$79,967
$—
-31-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
(Dollars in thousands)
Total
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
December 31, 2021
Assets:
Available for sale debt securities:
Obligations of U.S. government-sponsored enterprises
$196,454
$—
$196,454
$—
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
824,962
—
824,962
—
Individual name issuer trust preferred debt securities
9,138
—
9,138
—
Corporate bonds
12,305
—
12,305
—
Mortgage loans held for sale
40,196
—
40,196
—
Derivative assets
33,688
—
33,688
—
Total assets at fair value on a recurring basis
$1,116,743
$—
$1,116,743
$—
Liabilities:
Derivative liabilities
$38,536
$—
$38,536
$—
Total liabilities at fair value on a recurring basis
$38,536
$—
$38,536
$—
Items Recorded at Fair Value on a Nonrecurring Basis
There were no assets written down to fair value during the nine months ended September 30, 2022.
During 2021, two collateral dependent individually analyzed loans were written down to fair value. One loan with a carrying value of $3.1 million was paid in full in the fourth quarter of 2021. The second loan with a carrying value of $533 thousand was fully reserved for as of December 31, 2021.
The following table presents valuation techniques and unobservable inputs for assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value:
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Input
Inputs Utilized (Weighted Average)
December 31, 2021
Collateral dependent individually analyzed loans
$—
Appraisals of collateral
Discount for costs to sell
14%
Appraisal adjustments
100%
-32-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Valuation of Financial Instruments
The estimated fair values and related carrying amounts for financial instruments for which fair value is only disclosed are presented below as of the periods indicated. The tables exclude financial instruments for which the carrying value approximates fair value such as cash and cash equivalents, FHLB stock, accrued interest receivable, BOLI, non-maturity deposits and accrued interest payable. The Corporation considers cash and cash equivalents, accrued interest receivable and accrued interest payable as level 1 measurements within the fair value hierarchy. The Corporation considers FHLB stock, BOLI and non-maturity deposits as level 2 measurements.
(Dollars in thousands)
September 30, 2022
Carrying Amount
Total Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Financial Assets:
Loans, net of allowance for credit losses on loans
$4,812,010
$4,778,506
$—
$—
$4,778,506
Financial Liabilities:
Time deposits
$1,209,632
$1,212,810
$—
$1,212,810
$—
FHLB advances
700,000
699,221
—
699,221
—
Junior subordinated debentures
22,681
18,763
—
18,763
—
(Dollars in thousands)
December 31, 2021
Carrying Amount
Total Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Financial Assets:
Loans, net of allowance for credit losses on loans
$4,233,837
$4,145,516
$—
$—
$4,145,516
Financial Liabilities:
Time deposits
$1,288,611
$1,294,053
$—
$1,294,053
$—
FHLB advances
145,000
144,862
—
144,862
—
Junior subordinated debentures
22,681
20,181
—
20,181
—
-33-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 11 - Revenue from Contracts with Customers
The following tables summarize total revenues as presented in the Unaudited Consolidated Statements of Income and the related amounts that are from contracts with customers within the scope of ASC 606. As shown below, a substantial portion of our revenues are specifically excluded from the scope of ASC 606.
For the three months ended September 30,
2022
2021
(Dollars in thousands)
Revenue (1)
ASC 606 Revenue (2)
Revenue (1)
ASC 606 Revenue (2)
Net interest income
$42,042
$—
$36,070
$—
Noninterest income:
Asset-based wealth management revenues
9,302
9,302
10,224
10,224
Transaction-based wealth management revenues
223
223
231
231
Total wealth management revenues
9,525
9,525
10,455
10,455
Mortgage banking revenues
2,047
—
6,373
—
Card interchange fees
1,287
1,287
1,265
1,265
Service charges on deposit accounts
819
819
673
673
Loan related derivative income
1,041
—
728
—
Income from bank-owned life insurance
684
—
618
—
Other income
400
316
408
310
Total noninterest income
15,803
11,947
20,520
12,703
Total revenues
$57,845
$11,947
$56,590
$12,703
(1)As reported in the Unaudited Consolidated Statements of Income.
(2)Revenue from contracts with customers in scope of ASC 606.
For the nine months ended September 30,
2022
2021
(Dollars in thousands)
Revenue (1)
ASC 606 Revenue (2)
Revenue (1)
ASC 606 Revenue (2)
Net interest income
$114,648
$—
$103,695
$—
Noninterest income:
Asset-based wealth management revenues
29,154
29,154
29,798
29,798
Transaction-based wealth management revenues
968
968
980
980
Total wealth management revenues
30,122
30,122
30,778
30,778
Mortgage banking revenues
7,630
—
24,294
—
Card interchange fees
3,754
3,754
3,714
3,714
Service charges on deposit accounts
2,250
2,250
1,917
1,917
Loan related derivative income
2,011
—
2,370
—
Income from bank-owned life insurance
1,900
—
1,781
—
Other income
1,147
880
2,233
1,834
Total noninterest income
48,814
37,006
67,087
38,243
Total revenues
$163,462
$37,006
$170,782
$38,243
(1)As reported in the Unaudited Consolidated Statements of Income.
(2)Revenue from contracts with customers in scope of ASC 606.
The Corporation recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), ATM fees, wire transfer fees, overdraft charge fees, and stop-payment and returned check fees. Such revenue is derived from transactional information and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction.
-34-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The Corporation recognizes revenue over a period of time, generally monthly, as services are performed and performance obligations are satisfied. Such revenue includes wealth management revenues and service charges on deposit accounts. Wealth management revenues are categorized as either asset-based revenues or transaction-based revenues. Asset-based revenues include trust and investment management fees that are earned based upon a percentage of asset values under administration. Transaction-based revenues include tax preparation fees, commissions and other service fees. Fee revenue from service charges on deposit accounts represent service charges assessed to customers who hold deposit accounts at the Bank.
The following table presents revenue from contracts with customers based on the timing of revenue recognition:
(Dollars in thousands)
Three Months
Nine Months
Periods ended September 30,
2022
2021
2022
2021
Revenue recognized at a point in time:
Card interchange fees
$1,287
$1,265
$3,754
$3,714
Service charges on deposit accounts
628
531
1,782
1,516
Other income
249
247
692
1,678
Revenue recognized over time:
Wealth management revenues
9,525
10,455
30,122
30,778
Service charges on deposit accounts
191
142
468
401
Other income
67
63
188
156
Total revenues from contracts in scope of Topic 606
$11,947
$12,703
$37,006
$38,243
Receivables for revenue from contracts with customers primarily consist of amounts due for wealth management services performed for which the Corporation’s performance obligations have been fully satisfied. Receivables amounted to $5.6 million and $6.6 million, respectively, at September 30, 2022 and December 31, 2021 and were included in other assets in the Unaudited Consolidated Balance Sheets.
Deferred revenues, which are considered contract liabilities under ASC 606, represent advance consideration received from customers for which the Corporation has a remaining performance obligation to fulfill. Contract liabilities are recognized as revenue over the life of the contract as the performance obligations are satisfied. The balances of contract liabilities were insignificant at both September 30, 2022 and December 31, 2021 and were included in other liabilities in the Unaudited Consolidated Balance Sheets.
For commissions and incentives that are in scope of ASC 606, such as those paid to employees in our wealth management services and commercial banking segments in order to obtain customer contracts, contract cost assets are established. The contract cost assets are capitalized and amortized over the estimated useful life that the asset is expected to generate benefits. The carrying value of contract cost assets amounted to $2.0 million and $1.9 million, respectively, at September 30, 2022 and December 31, 2021 and were included in other assets in the Unaudited Consolidated Balance Sheets. The amortization of contract cost assets is recorded within salaries and employee benefits expense in the Unaudited Consolidated Statements of Income.
-35-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 12 - Defined Benefit Pension Plans
Washington Trust maintains a qualified pension plan for the benefit of certain eligible employees who were hired prior to October 1, 2007. Washington Trust also has non-qualified retirement plans to provide supplemental retirement benefits to certain employees, as defined in the plans. The defined benefit pension plans were previously amended to freeze benefit accruals after a 10-year transition period ending in December 2023.
The following table presents components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss), on a pre-tax basis:
(Dollars in thousands)
Qualified Pension Plan
Non-Qualified Retirement Plans
Three Months
Nine Months
Three Months
Nine Months
Periods ended September 30,
2022
2021
2022
2021
2022
2021
2022
2021
Net Periodic Benefit Cost:
Service cost (1)
$516
$592
$1,547
$1,777
$54
$52
$163
$156
Interest cost (2)
592
500
1,776
1,502
105
84
317
253
Expected return on plan assets (2)
(1,159)
(1,203)
(3,476)
(3,611)
—
—
—
—
Recognized net actuarial loss (2)
255
531
765
1,591
173
180
519
542
Net periodic benefit cost
$204
$420
$612
$1,259
$332
$316
$999
$951
(1)Included in salaries and employee benefits expense in the Unaudited Consolidated Statements of Income.
(2)Included in other expenses in the Unaudited Consolidated Statements of Income.
The following table presents the measurement date and weighted-average assumptions used to determine net periodic benefit cost:
Qualified Pension Plan
Non-Qualified Retirement Plans
For the nine months ended September 30,
2022
2021
2022
2021
Measurement date
Dec 31, 2021
Dec 31, 2020
Dec 31, 2021
Dec 31, 2020
Equivalent single discount rate for benefit obligations
3.00%
2.71%
2.89%
2.51%
Equivalent single discount rate for service cost
3.11
2.86
3.16
2.94
Equivalent single discount rate for interest cost
2.67
2.16
2.48
1.97
Expected long-term return on plan assets
5.25
5.75
N/A
N/A
Rate of compensation increase
3.75
3.75
3.75
3.75
Note 13 - Share-Based Compensation Arrangements
The 2022 Long Term Incentive Plan was approved by the shareholders on April 26, 2022. The maximum number of shares of common stock that may be issued under the 2022 Long Term Incentive Plan is 600,000 and is subject to adjustment. The type of permitted equity awards under the 2022 Long Term Incentive Plan include stock options (both incentive and non-qualified options), stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, cash-based awards, and dividend equivalent rights. On February 18, 2022, the Corporation’s Board of Directors voted that no further awards would be granted under the 2013 Plan following shareholder approval of the 2022 Long Term Incentive Plan.
During the nine months ended September 30, 2022, the Corporation granted performance share unit and restricted stock unit awards. Performance share units were granted to certain key employees providing them the opportunity to earn shares of common stock over a 3-year performance period. The weighted average fair value of the performance share units was $59.31. The number of shares to be vested will be contingent upon the Corporation’s attainment of certain performance measures as detailed in the performance share unit award agreements. Based on the most recent performance assumption available, it is estimated that 42,728 shares will be earned.
In addition, the Corporation granted to certain key employees and non-executive directors 10,717 restricted stock units with 3-year cliff vesting. The weighted average grant date fair value of the restricted stock units was $51.57.
-36-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 14 - Business Segments
The Corporation manages its operations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services.
Management uses an allocation methodology to allocate income and expenses to the business lines. Direct activities are assigned to the appropriate business segment to which the activity relates. Indirect activities, such as corporate, technology and other support functions, are allocated to business segments primarily based upon full-time equivalent employee computations.
Commercial Banking
The Commercial Banking segment includes commercial, residential and consumer lending activities; mortgage banking activities; deposit generation; cash management activities; banking activities, including customer support and the operation of ATMs, telephone banking, internet banking and mobile banking services; as well as investment portfolio and wholesale funding activities.
Wealth Management Services
The Wealth Management Services segment includes investment management; holistic financial planning services; personal trust and estate services, including services as trustee, personal representative, custodian and guardian; settlement of decedents’ estates; and institutional trust services, including custody and fiduciary services.
The following table presents the statement of operations and total assets for Washington Trust’s reportable segments:
(Dollars in thousands)
Commercial Banking
Wealth Management Services
Consolidated Total
Three months ended September 30,
2022
2021
2022
2021
2022
2021
Net interest income (expense)
$42,038
$36,085
$4
($15)
$42,042
$36,070
Provision for credit losses
800
—
—
—
800
—
Net interest income (expense) after provision for credit losses
41,238
36,085
4
(15)
41,242
36,070
Noninterest income
6,043
9,962
9,760
10,558
15,803
20,520
Noninterest expenses:
Depreciation and amortization expense
751
740
348
365
1,099
1,105
Other noninterest expenses
23,995
23,538
7,973
7,877
31,968
31,415
Total noninterest expenses
24,746
24,278
8,321
8,242
33,067
32,520
Income before income taxes
22,535
21,769
1,443
2,301
23,978
24,070
Income tax expense
4,878
4,725
432
594
5,310
5,319
Net income
$17,657
$17,044
$1,011
$1,707
$18,668
$18,751
Total assets at period end
$6,332,986
$5,929,230
$75,065
$73,413
$6,408,051
$6,002,643
Expenditures for long-lived assets
1,206
310
137
28
1,343
338
-37-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
(Dollars in thousands)
Commercial Banking
Wealth Management Services
Consolidated Total
Nine months ended September 30,
2022
2021
2022
2021
2022
2021
Net interest income (expense)
$114,709
$103,737
($61)
($42)
$114,648
$103,695
Provision for credit losses
(2,100)
(2,000)
—
—
(2,100)
(2,000)
Net interest income (expense) after provision for credit losses
116,809
105,737
(61)
(42)
116,748
105,695
Noninterest income
18,174
35,032
30,640
32,055
48,814
67,087
Noninterest expenses:
Depreciation and amortization expense
2,168
2,105
1,034
1,118
3,202
3,223
Other noninterest expenses
69,110
74,425
23,051
22,597
92,161
97,022
Total noninterest expenses
71,278
76,530
24,085
23,715
95,363
100,245
Income before income taxes
63,705
64,239
6,494
8,298
70,199
72,537
Income tax expense
13,423
13,810
1,668
2,045
15,091
15,855
Net income
$50,282
$50,429
$4,826
$6,253
$55,108
$56,682
Total assets at period end
$6,332,986
$5,929,230
$75,065
$73,413
$6,408,051
$6,002,643
Expenditures for long-lived assets
3,494
2,027
330
139
3,824
2,166
Note 15 - Other Comprehensive Income (Loss)
The following tables present the activity in other comprehensive income (loss):
Three months ended September 30,
2022
2021
(Dollars in thousands)
Pre-tax Amounts
Income Taxes
Net of Tax
Pre-tax Amounts
Income Taxes
Net of Tax
Securities available for sale:
Change in fair value of available for sale debt securities
($61,931)
($14,864)
($47,067)
($4,127)
($990)
($3,137)
Cash flow hedges:
Change in fair value of cash flow hedges
(10,250)
(2,460)
(7,790)
(288)
(69)
(219)
Net cash flow hedge losses (gains) reclassified into earnings (1)
1,075
258
817
(243)
(59)
(184)
Net change in fair value of cash flow hedges
(9,175)
(2,202)
(6,973)
(531)
(128)
(403)
Defined benefit plan obligations:
Amortization of net actuarial losses (2)
428
102
326
711
171
540
Total other comprehensive loss
($70,678)
($16,964)
($53,714)
($3,947)
($947)
($3,000)
(1)The pre-tax amounts are included in interest and fees on loans and FHLB interest expense in the Unaudited Consolidated Statements of Income.
(2)The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income.
-38-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Nine months ended September 30,
2022
2021
(Dollars in thousands)
Pre-tax Amounts
Income Taxes
Net of Tax
Pre-tax Amounts
Income Taxes
Net of Tax
Securities available for sale:
Change in fair value of available for sale debt securities
($174,302)
($41,833)
($132,469)
($16,212)
($3,890)
($12,322)
Cash flow hedges:
Change in fair value of cash flow hedges
(27,394)
(6,574)
(20,820)
(21)
(5)
(16)
Net cash flow hedge losses (gains) reclassified into earnings (1)
709
170
539
(27)
(7)
(20)
Net change in fair value of cash flow hedges
(26,685)
(6,404)
(20,281)
(48)
(12)
(36)
Defined benefit plan obligations:
Amortization of net actuarial losses (2)
1,284
308
976
2,133
512
1,621
Total other comprehensive loss
($199,703)
($47,929)
($151,774)
($14,127)
($3,390)
($10,737)
(1)The pre-tax amounts are included in interest and fees on loans and FHLB interest expense in the Unaudited Consolidated Statements of Income.
(2)The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income.
The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax:
(Dollars in thousands)
Net Unrealized Losses on Available For Sale Debt Securities
Net Unrealized Losses on Cash Flow Hedges
Net Unrealized Losses on Defined Benefit Plan Obligations
Total
For the three months ended September 30, 2022
Balance at June 30, 2022
($92,197)
($17,321)
($8,523)
($118,041)
Other comprehensive loss before reclassifications
(47,067)
(7,790)
—
(54,857)
Amounts reclassified from accumulated other comprehensive loss
—
817
326
1,143
Net other comprehensive (loss) income
(47,067)
(6,973)
326
(53,714)
Balance at September 30, 2022
($139,264)
($24,294)
($8,197)
($171,755)
(Dollars in thousands)
Net Unrealized Losses on Available For Sale Debt Securities
Net Unrealized Losses on Cash Flow Hedges
Net Unrealized Losses on Defined Benefit Plan Obligations
Total
For the nine months ended September 30, 2022
Balance at December 31, 2021
($6,795)
($4,013)
($9,173)
($19,981)
Other comprehensive loss before reclassifications
(132,469)
(20,820)
—
(153,289)
Amounts reclassified from accumulated other comprehensive loss
—
539
976
1,515
Net other comprehensive (loss) income
(132,469)
(20,281)
976
(151,774)
Balance at September 30, 2022
($139,264)
($24,294)
($8,197)
($171,755)
-39-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
(Dollars in thousands)
Net Unrealized Gains (Losses) on Available For Sale Debt Securities
Net Unrealized Losses on Cash Flow Hedges
Net Unrealized Losses on Defined Benefit Plan Obligations
Total
For the three months ended September 30, 2021
Balance at June 30, 2021
$696
($1,080)
($14,744)
($15,128)
Other comprehensive income before reclassifications
(3,137)
(219)
—
(3,356)
Amounts reclassified from accumulated other comprehensive income (loss)
—
(184)
540
356
Net other comprehensive income
(3,137)
(403)
540
(3,000)
Balance at September 30, 2021
($2,441)
($1,483)
($14,204)
($18,128)
(Dollars in thousands)
Net Unrealized Gains (Losses) on Available For Sale Debt Securities
Net Unrealized Losses on Cash Flow Hedges
Net Unrealized Losses on Defined Benefit Plan Obligations
Total
For the nine months ended September 30, 2021
Balance at December 31, 2020
$9,881
($1,447)
($15,825)
($7,391)
Other comprehensive income (loss) before reclassifications
(12,322)
(16)
—
(12,338)
Amounts reclassified from accumulated other comprehensive income (loss)
—
(20)
1,621
1,601
Net other comprehensive (loss) income
(12,322)
(36)
1,621
(10,737)
Balance at September 30, 2021
($2,441)
($1,483)
($14,204)
($18,128)
Note 16 - Earnings per Common Share
The following table presents the calculation of earnings per common share:
(Dollars and shares in thousands, except per share amounts)
Three Months
Nine Months
Periods ended September 30,
2022
2021
2022
2021
Earnings for basic and diluted earnings per common share:
Net income
$18,668
$18,751
$55,108
$56,682
Less: dividends and undistributed earnings allocated to participating securities
(53)
(55)
(164)
(163)
Net income available to common shareholders
$18,615
$18,696
$54,944
$56,519
Shares:
Weighted average common shares
17,174
17,320
17,269
17,303
Dilutive effect of common stock equivalents
124
124
120
148
Weighted average diluted common shares
17,298
17,444
17,389
17,451
Earnings per common share:
Basic earnings per common share
$1.08
$1.08
$3.18
$3.27
Diluted earnings per common share
$1.08
$1.07
$3.16
$3.24
Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 137,886 and 140,777, respectively, for the three and nine months ended September 30, 2022, compared to 148,542 and 149,675, respectively, for the same periods in 2021.
-40-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 17 - Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Unaudited Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements. Each borrower’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the borrower.
Standby Letters of Credit
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support the financing needs of the Bank’s commercial customers. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The collateral supporting those commitments is essentially the same as for other commitments. Most standby letters of credit extend for one year. The maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered, totaled $9.9 million and $11.8 million, respectively, as of September 30, 2022 and December 31, 2021. At September 30, 2022 and December 31, 2021, there were no liabilities to beneficiaries resulting from standby letters of credit. Fee income on standby letters of credit was insignificant for the three and nine months ended September 30, 2022 and 2021.
A substantial portion of the standby letters of credit were supported by pledged collateral. The collateral obtained is determined based on management’s credit evaluation of the customer. Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required.
Financial Instruments Whose Notional Amounts Exceed the Amount of Credit Risk
Mortgage Loan Commitments
Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with these rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Both interest rate lock commitments and forward sale commitments are derivative financial instruments.
Loan Related Derivative Contracts
The Corporation’s credit policies with respect to interest rate contracts with commercial borrowers are similar to those used for loans. The interest rate contracts with other counterparties are generally subject to bilateral collateralization terms.
-41-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the contractual and notional amounts of financial instruments with off-balance sheet risk:
Financial instruments whose notional amounts exceed the amounts of credit risk:
Mortgage loan commitments:
Interest rate lock commitments
27,370
49,800
Forward sale commitments
64,148
103,626
Loan related derivative contracts:
Interest rate contracts with customers
962,381
1,022,388
Mirror contracts with counterparties
962,381
1,022,388
Risk participation-in agreements
176,992
163,207
Interest rate risk management contracts:
Interest rate swaps
320,000
320,000
See Note 9 for additional disclosure pertaining to derivative financial instruments.
ACL on Unfunded Commitments
The ACL on unfunded commitments is management’s estimate of expected credit losses over the expected contractual term (or life) in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. Unfunded commitments for home equity lines of credit and commercial demand loans are considered unconditionally cancellable for regulatory capital purposes and, therefore, are excluded from the calculation to estimate the ACL on unfunded commitments. For each portfolio, estimated loss rates and funding factors are applied to the corresponding balance of unfunded commitments. For each portfolio, the estimated loss rates applied to unfunded commitments are the same quantitative and qualitative loss rates applied to the corresponding on-balance sheet amounts in determining the ACL on loans. The estimated funding factor applied to unfunded commitments represents the likelihood that the funding will occur and is based upon the Corporation’s average historical utilization rate for each portfolio.
The ACL on unfunded commitments is included in other liabilities in the Unaudited Consolidated Balance Sheets. The ACL on unfunded commitments is adjusted through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income.
The activity in the ACL on unfunded commitments for the three months ended September 30, 2022 is presented below:
(Dollars in thousands)
Commercial
Consumer
CRE
C&I
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance
$1,279
$834
$2,113
$58
$—
$19
$19
$2,190
Provision
185
25
210
(8)
—
(2)
(2)
200
Ending Balance
$1,464
$859
$2,323
$50
$—
$17
$17
$2,390
-42-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The activity in the ACL on unfunded commitments for the nine months ended September 30, 2022 is presented below:
(Dollars in thousands)
Commercial
Consumer
CRE
C&I
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance
$1,267
$816
$2,083
$62
$—
$16
$16
$2,161
Provision
197
43
240
(12)
—
1
1
229
Ending Balance
$1,464
$859
$2,323
$50
$—
$17
$17
$2,390
The activity in the ACL on unfunded commitments for the three months ended September 30, 2021 is presented below:
(Dollars in thousands)
Commercial
Consumer
CRE
C&I
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance
$1,214
$1,045
$2,259
$56
$—
$18
$18
$2,333
Provision
4
(8)
(4)
4
—
—
—
—
Ending Balance
$1,218
$1,037
$2,255
$60
$—
$18
$18
$2,333
The activity in the ACL on unfunded commitments for the nine months ended September 30, 2021 is presented below:
(Dollars in thousands)
Commercial
Consumer
CRE
C&I
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance
$907
$1,402
$2,309
$54
$—
$19
$19
$2,382
Provision
311
(365)
(54)
6
—
(1)
(1)
(49)
Ending Balance
$1,218
$1,037
$2,255
$60
$—
$18
$18
$2,333
Other Contingencies
Litigation
The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated balance sheets or statements of income of the Corporation.
-43-
Management's Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Corporation’s Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2021, and in conjunction with the condensed Unaudited Consolidated Financial Statements and notes thereto included in Item 1 of this report. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results for the full-year ended December 31, 2022 or any future period.
Forward-Looking Statements
This report contains statements that are “forward-looking statements.” We may also make forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “outlook,” “will,” “should,” and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different than the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.
Some of the factors that might cause these differences include the following:
•changes in political, business and economic conditions, including inflation;
•interest rate changes or volatility, as well as changes in the balance and mix of loans and deposits;
•changes in loan demand and collectability;
•the possibility that future credits losses are higher than currently expected due to changes in economic assumptions or adverse economic developments;
•ongoing volatility in national and international financial markets;
•reductions in the market value or outflows of wealth management AUA;
•decreases in the value of securities and other assets;
•increases in defaults and charge-off rates;
•changes in the size and nature of our competition;
•changes in legislation or regulation and accounting principles, policies and guidelines;
•operational risks including, but not limited to, changes in information technology, cybersecurity incidents, fraud, natural disasters, war, terrorism, civil unrest, the ongoing COVID-19 pandemic, and future pandemics;
•reputational risks; and
•changes in the assumptions used in making such forward-looking statements.
In addition, the factors described under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC, may result in these differences. You should carefully review all of these factors and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
Overview
The Corporation offers a comprehensive product line of banking and financial services to individuals and businesses, 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 ATMs; telephone banking; mobile banking and its internet website (www.washtrust.com).
Our largest source of operating income is net interest income, which is the difference between interest earned on loans and securities and interest paid on deposits and borrowings. In addition, we generate noninterest income from a number of sources, including wealth management services, mortgage banking activities and deposit services. Our principal noninterest
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Management's Discussion and Analysis
expenses include salaries and employee benefit costs, outsourced services provided by third party vendors, occupancy and facility-related costs and other administrative expenses.
We continue to leverage our strong regional brand to build market share and remain steadfast in our commitment to provide superior service. We believe the key to future growth is providing customers with convenient in-person service and digital banking solutions. In July 2022, we opened a new commercial lending office in New Haven, Connecticut. In August 2022, we opened a new full-service branch in Cumberland, Rhode Island. In addition, we recently announced that we submitted applications to establish a branch office in three northern Rhode Island locations in 2023 to further expand our branch footprint and serve the broader Rhode Island community. The three branch offices will be located in Barrington, Providence and Smithfield, Rhode Island and are subject to federal, state, local, and regulatory approvals.
Risk Management
The Corporation has a comprehensive ERM program through which the Corporation identifies, measures, monitors and controls current and emerging material risks.
The Board of Directors is responsible for oversight of the ERM program. The ERM program enables the aggregation of risk across the Corporation and ensures the Corporation has the tools, programs and processes in place to support informed decision making, to anticipate risks before they materialize and to maintain the Corporation’s risk profile consistent with its risk strategy.
The Board of Directors has approved an enterprise risk management policy that addresses each category of risk. The risk categories include: credit risk, interest rate risk, liquidity risk, price and market risk, compliance risk, strategic and reputation risk, and operational risk. A description of each risk category is provided below.
Credit risk represents the possibility that borrowers or other counterparties may not repay loans or other contractual obligations according to their terms due to changes in the financial capacity, ability and willingness of such borrowers or counterparties to meet their obligations. In some cases, the collateral securing payment of the loans may be sufficient to assure repayment, but in other cases the Corporation may experience significant credit losses which could have an adverse effect on its operating results. The Corporation makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of the real estate and other assets serving as collateral for the repayment of loans. Credit risk also exists with respect to investment securities. For further discussion regarding the credit risk and the credit quality of the Corporation’s loan portfolio, see Note 4 and Note 5 to the Unaudited Consolidated Financial Statements. For further discussion regarding credit risk associated with unfunded commitments, see Note 17 to the Unaudited Consolidated Financial Statements. For further discussion regarding the Corporation’s securities portfolio, see Note 3 to the Unaudited Consolidated Financial Statements.
Interest rate risk is the risk of loss to future earnings due to changes in interest rates. It exists because the repricing frequency and magnitude of interest-earning assets and interest-bearing liabilities are not identical. See the “Asset/Liability Management and Interest Rate Risk” section below for additional disclosure.
Liquidity risk is the risk that the Corporation will not have the ability to generate adequate amounts of cash for it to meet its maturing liability obligations and customer loan demand. For detailed disclosure regarding liquidity management, see the “Liquidity and Capital Resources” section below.
Price and market risk refers to the risk of loss arising from adverse changes in interest rates and other relevant market rates and prices, such as equity prices. Interest rate risk, discussed above, is the most significant market risk to which the Corporation is exposed. The Corporation is also exposed to financial market risk and housing market risk.
Compliance risk represents the risk of regulatory sanctions or financial loss resulting from the failure to comply with laws, rules and regulations and standards of good banking practice. Activities which may expose the Corporation to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, adherence to all applicable laws and regulations, and employment and tax matters.
Strategic and reputation risk represent the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, and failure to assess existing and new opportunities and threats in business, markets, and products.
-45-
Management's Discussion and Analysis
Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, natural disasters and security risks.
ERM is an overarching program that includes all areas of the Corporation. A framework approach is utilized to assign responsibility and to ensure that the various business units and activities involved in the risk management life-cycle are effectively integrated. The Corporation has adopted the “three lines of defense” strategy that is an industry best practice for ERM. Business units are the first line of defense in managing risk. They are responsible for identifying, measuring, monitoring, and controlling current and emerging risks. They report on and escalate their concerns. Corporate functions such as Credit Risk Management, Financial Administration, Information Assurance and Compliance, represent the second line of defense. They are responsible for policy setting and for reviewing and challenging the risk management activities of the business units. They collaborate closely with business units on planning and resource allocation with respect to risk management. Internal Audit and third party credit review represent the third line of defense. They provide independent assurance to the Board of Directors of the effectiveness of the first and second lines in fulfilling their risk management responsibilities.
For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC.
-46-
Management's Discussion and Analysis
Results of Operations
The following table presents a summarized consolidated statement of operations:
(Dollars in thousands)
Three Months
Nine Months
Change
Change
Periods ended September 30,
2022
2021
$
%
2022
2021
$
%
Net interest income
$42,042
$36,070
$5,972
17
%
$114,648
$103,695
$10,953
11
%
Noninterest income
15,803
20,520
(4,717)
(23)
48,814
67,087
(18,273)
(27)
Total revenues
57,845
56,590
1,255
2
163,462
170,782
(7,320)
(4)
Provision for credit losses
800
—
800
100
(2,100)
(2,000)
(100)
(5)
Noninterest expense
33,067
32,520
547
2
95,363
100,245
(4,882)
(5)
Income before income taxes
23,978
24,070
(92)
—
70,199
72,537
(2,338)
(3)
Income tax expense
5,310
5,319
(9)
—
15,091
15,855
(764)
(5)
Net income
$18,668
$18,751
($83)
—
%
$55,108
$56,682
($1,574)
(3
%)
The following table presents a summary of performance metrics and ratios:
Three Months
Nine Months
Periods ended September 30,
2022
2021
2022
2021
Diluted earnings per common share
$1.08
$1.07
$3.16
$3.24
Return on average assets (net income divided by average assets)
1.19
%
1.26
%
1.23
%
1.30
%
Return on average equity (net income available for common shareholders divided by average equity)
15.16
%
13.37
%
14.35
%
13.93
%
Net interest income as a percentage of total revenues
73
%
64
%
70
%
61
%
Noninterest income as a percentage of total revenues
27
%
36
%
30
%
39
%
Net income totaled $18.7 million and $55.1 million, respectively, for the three and nine months ended September 30, 2022, compared to $18.8 million and $56.7 million, respectively, for the same periods in 2021.
In 2022, growth in net interest income was driven by higher yields on, and growth in, average interest-earning assets, partially offset by a higher cost of funds. The decline in noninterest income reflected lower mortgage banking revenues resulting from an overall reduction in mortgage origination and sales activity, and lower wealth management asset-based revenues attributable to recent declines in the financial markets. The provision for credit losses recognized in 2022 provided for loan growth and was also reflective of low loss rates, strong asset and credit quality metrics and our current estimate of forecasted economic conditions. We experienced modest increases across a variety of noninterest expense categories, however declines in debt prepayment penalties and volume-related mortgage originator compensation expense resulted in an overall decline in year-to-date noninterest expenses in 2022.
-47-
Management's Discussion and Analysis
Average Balances / Net Interest Margin - Fully Taxable Equivalent Basis
The following table presents average balance and interest rate information. Tax-exempt income is converted to a FTE basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. Unrealized gains (losses) on available for sale securities and changes in fair value on mortgage loans held for sale are excluded from the average balance and yield calculations. Nonaccrual loans, as well as interest recognized on these loans, are included in amounts presented for loans.
Three months ended September 30,
2022
2021
Change
(Dollars in thousands)
Average Balance
Interest
Yield/ Rate
Average Balance
Interest
Yield/ Rate
Average Balance
Interest
Yield/ Rate
Assets:
Cash, federal funds sold and short-term investments
$92,708
$503
2.15
$179,574
$56
0.12
($86,866)
$447
2.03
Mortgage loans held for sale
34,503
361
4.15
41,261
298
2.87
(6,758)
63
1.28
Taxable debt securities
1,150,674
6,061
2.09
1,045,997
3,683
1.40
104,677
2,378
0.69
FHLB stock
25,377
88
1.38
18,909
95
1.99
6,468
(7)
(0.61)
Commercial real estate
1,692,374
17,974
4.21
1,648,972
12,209
2.94
43,402
5,765
1.27
Commercial & industrial
630,360
7,114
4.48
736,073
7,886
4.25
(105,713)
(772)
0.23
Total commercial
2,322,734
25,088
4.29
2,385,045
20,095
3.34
(62,311)
4,993
0.95
Residential real estate
2,045,833
17,379
3.37
1,623,913
13,511
3.30
421,920
3,868
0.07
Home equity
269,654
2,804
4.13
252,938
2,043
3.20
16,716
761
0.93
Other
15,299
171
4.43
19,822
247
4.94
(4,523)
(76)
(0.51)
Total consumer
284,953
2,975
4.14
272,760
2,290
3.33
12,193
685
0.81
Total loans
4,653,520
45,442
3.87
4,281,718
35,896
3.33
371,802
9,546
0.54
Total interest-earning assets
5,956,782
52,455
3.49
5,567,459
40,028
2.85
389,323
12,427
0.64
Noninterest-earning assets
259,347
351,678
(92,331)
Total assets
$6,216,129
$5,919,137
$296,992
Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits (in-market)
$267,670
$822
1.22
$206,237
$51
0.10
$61,433
$771
1.12
NOW accounts
871,038
212
0.10
782,963
129
0.07
88,075
83
0.03
Money market accounts
1,137,875
2,231
0.78
1,014,204
586
0.23
123,671
1,645
0.55
Savings accounts
582,513
100
0.07
530,956
70
0.05
51,557
30
0.02
Time deposits (in-market)
797,199
1,983
0.99
672,012
1,695
1.00
125,187
288
(0.01)
Interest-bearing in-market deposits
3,656,295
5,348
0.58
3,206,372
2,531
0.31
449,923
2,817
0.27
Wholesale brokered demand deposits
31,014
166
2.12
—
—
—
31,014
166
2.12
Wholesale brokered time deposits
381,984
1,142
1.19
722,233
258
0.14
(340,249)
884
1.05
Wholesale brokered deposits
412,998
1,308
1.26
722,233
258
0.14
(309,235)
1,050
1.12
Total interest-bearing deposits
4,069,293
6,656
0.65
3,928,605
2,789
0.28
140,688
3,867
0.37
FHLB advances
549,729
3,234
2.33
317,766
872
1.09
231,963
2,362
1.24
Junior subordinated debentures
22,681
206
3.60
22,681
92
1.61
—
114
1.99
Total interest-bearing liabilities
4,641,703
10,096
0.86
4,269,052
3,753
0.35
372,651
6,343
0.51
Noninterest-bearing demand deposits
944,153
952,676
(8,523)
Other liabilities
143,043
142,562
481
Shareholders’ equity
487,230
554,847
(67,617)
Total liabilities and shareholders’ equity
$6,216,129
$5,919,137
$296,992
Net interest income (FTE)
$42,359
$36,275
$6,084
Interest rate spread
2.63
2.50
0.13
Net interest margin
2.82
2.58
0.24
-48-
Management's Discussion and Analysis
Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:
(Dollars in thousands)
Three months ended September 30,
2022
2021
Change
Commercial loans
$317
$205
$112
Nine months ended September 30,
2022
2021
Change
(Dollars in thousands)
Average Balance
Interest
Yield/ Rate
Average Balance
Interest
Yield/ Rate
Average Balance
Interest
Yield/ Rate
Assets:
Cash, federal funds sold and short-term investments
$128,606
$769
0.80
$160,350
$121
0.10
($31,744)
$648
0.70
Mortgage loans held for sale
29,985
851
3.79
53,307
1,144
2.87
(23,322)
(293)
0.92
Taxable debt securities
1,106,632
15,209
1.84
997,741
10,366
1.39
108,891
4,843
0.45
FHLB stock
15,745
218
1.85
24,265
338
1.86
(8,520)
(120)
(0.01)
Commercial real estate
1,648,061
43,360
3.52
1,638,200
35,269
2.88
9,861
8,091
0.64
Commercial & industrial
628,574
19,456
4.14
794,091
23,865
4.02
(165,517)
(4,409)
0.12
Total commercial
2,276,635
62,816
3.69
2,432,291
59,134
3.25
(155,656)
3,682
0.44
Residential real estate
1,875,175
46,376
3.31
1,531,529
39,248
3.43
343,646
7,128
(0.12)
Home equity
257,814
6,753
3.50
255,959
6,220
3.25
1,855
533
0.25
Other
15,995
550
4.60
20,301
742
4.89
(4,306)
(192)
(0.29)
Total consumer
273,809
7,303
3.57
276,260
6,962
3.37
(2,451)
341
0.20
Total loans
4,425,619
116,495
3.52
4,240,080
105,344
3.32
185,539
11,151
0.20
Total interest-earning assets
5,706,587
133,542
3.13
5,475,743
117,313
2.86
230,844
16,229
0.27
Noninterest-earning assets
268,744
346,514
(77,770)
Total assets
$5,975,331
$5,822,257
$153,074
Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits (in-market)
$255,014
$1,114
0.58
$190,979
$196
0.14
$64,035
$918
0.44
NOW accounts
867,464
492
0.08
747,385
350
0.06
120,079
142
0.02
Money market accounts
1,193,599
3,984
0.45
958,812
1,852
0.26
234,787
2,132
0.19
Savings accounts
570,129
246
0.06
513,110
211
0.05
57,019
35
0.01
Time deposits (in-market)
800,037
5,997
1.00
687,278
5,822
1.13
112,759
175
(0.13)
Interest-bearing in-market deposits
3,686,243
11,833
0.43
3,097,564
8,431
0.36
588,679
3,402
0.07
Wholesale brokered demand deposits
17,197
212
1.65
—
—
—
17,197
212
1.65
Wholesale brokered time deposits
396,465
1,677
0.57
655,165
982
0.20
(258,700)
695
0.37
Wholesale brokered deposits
413,662
1,889
0.61
655,165
982
0.20
(241,503)
907
0.41
Total interest-bearing deposits
4,099,905
13,722
0.45
3,752,729
9,413
0.34
347,176
4,309
0.11
FHLB advances
285,590
3,891
1.82
438,213
3,253
0.99
(152,623)
638
0.83
Junior subordinated debentures
22,681
443
2.61
22,681
278
1.64
—
165
0.97
Total interest-bearing liabilities
4,408,176
18,056
0.55
4,213,623
12,944
0.41
194,553
5,112
0.14
Noninterest-bearing demand deposits
925,433
918,760
6,673
Other liabilities
129,967
147,244
(17,277)
Shareholders’ equity
511,755
542,630
(30,875)
Total liabilities and shareholders’ equity
$5,975,331
$5,822,257
$153,074
Net interest income (FTE)
$115,486
$104,369
$11,117
Interest rate spread
2.58
2.45
0.13
Net interest margin
2.71
2.55
0.16
-49-
Management's Discussion and Analysis
Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:
(Dollars in thousands)
Nine months ended September 30,
2022
2021
Change
Commercial loans
$838
$674
$164
Net Interest Income
Net interest income, the primary source of our operating income, totaled $42.0 million and $114.6 million, respectively, for the three and nine months ended September 30, 2022, compared to $36.1 million and $103.7 million, respectively, for the same periods in 2021. Net interest income is affected by the level of and changes in interest rates, and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Prepayment penalty income associated with loan payoffs is included in net interest income.
The following discussion presents net interest income on an FTE basis by adjusting income and yields on tax-exempt loans and securities to be comparable to taxable loans and securities.
The analysis of net interest income, NIM and the yield on loans may be impacted by the periodic recognition of prepayment penalty fee income associated with commercial loan payoffs. Prepayment penalty fee income amounted to $30 thousand (or 0 basis point benefit to NIM) and $168 thousand (or 1 basis point benefit to NIM), respectively, for the three and nine months ended September 30, 2022. There was no prepayment penalty fee income recognized in the third quarter of 2021 and $934 thousand (or 2 basis points benefit to NIM) recognized in the nine months ended September 30, 2021.
The analysis of net interest income, NIM and the yield on loans is also impacted by changes in the level of net amortization of premiums and discounts on securities and loans, which is included in interest income. Changes in market interest rates affect the level of loan prepayments and the receipt of payments on mortgage-backed securities. Prepayment speeds generally increase as market interest rates decline and decrease as market interest rates rise. Changes in prepayment speeds could increase or decrease the level of net amortization of premiums and discounts, thereby affecting interest income. Additionally, as PPP loans were forgiven by the SBA, related unamortized net fee balances were accelerated and amortized, increasing net interest income. As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to interest income) amounted to $2.5 million for the nine months ended September 30, 2022, compared $2.7 million for the same period in 2021.
Accelerated amortization of net deferred fee balances on PPP loans forgiven by the SBA amounted to $21 thousand (or 0 basis point benefit to NIM) and $1.2 million (or 3 basis points benefit to NIM), respectively, for the three and nine months ended September 30, 2022. This compared to $2.0 million (or 13 basis points benefit to NIM) and $4.3 million (or 11 basis points benefit to NIM), respectively, for the same periods in 2021.
FTE net interest income for the three and nine months ended September 30, 2022 amounted to $42.4 million and $115.5 million, respectively, up by $6.1 million and $11.1 million, respectively, from the same periods in 2021. Increases in asset yields outpaced increases in funding costs, contributing $4.3 million and $6.9 million, respectively, of net interest income for the three and nine months ended September 30, 2022. In the three months ended September 30, 2022, growth in average interest-earning assets, net of increased average interest-bearing liability balances, contributed approximately $1.8 million of net interest income. In the nine months ended September 30, 2022, growth in average interest-earning assets and declines in average interest-bearing liability balances contributed approximately $4.2 million of net interest income.
NIM was 2.82% and 2.71%, respectively, for the three and nine months ended September 30, 2022, compared to 2.58% and 2.55%, respectively, for the same periods in 2021 as NIM benefited from higher market interest rates.
Total average securities for the three and nine months ended September 30, 2022 increased by $104.7 million and $108.9 million, respectively, from the average balances for the same periods a year earlier. The FTE rate of return on the securities portfolio for the three and nine months ended September 30, 2022 was 2.09% and 1.84%, respectively, compared to 1.40% and 1.39%, respectively, for the same periods in 2021, reflecting the impact of higher market interest rates in 2022.
Total average loan balances for the three and nine months ended September 30, 2022 increased by $371.8 million and $185.5 million, respectively, from the average loan balances for the comparable 2021 periods. The increase reflected growth
-50-
Management's Discussion and Analysis
in average residential real estate loan balances, partially offset by a decline in commercial & industrial loans due to PPP loans that were forgiven by the SBA. The yield on total loans for the three and nine months ended September 30, 2022 was 3.87% and 3.52%, respectively, compared to 3.33% and 3.32%, respectively, in the corresponding periods in 2021. The yield on total loans may be impacted by the periodic recognition of commercial loan prepayment fee income, as well as the accelerated amortization of net deferred fee balances on PPP loans when such loans were forgiven by the SBA. Excluding the impact of these items for both periods, the yield on total loans for the three and nine months ended September 30, 2022 was 3.87% and 3.48%, respectively, up from 3.14% and 3.16%, respectively, for the same periods in 2021, reflecting higher market interest rates.
The average balance of FHLB advances for the three and nine months ended September 30, 2022 increased by $232.0 million and decreased by $152.6 million, respectively, compared to the average balances for the same periods in 2021. The average rate paid on such advances for the three and nine months ended September 30, 2022 was 2.33% and 1.82%, respectively, up from 1.09% and 0.99%, respectively, for the same periods in 2021, reflecting recent increases in market interest rates.
Included in total average interest-bearing deposits were wholesale brokered deposits, which decreased by $309.2 million and $241.5 million, respectively, from the same periods in 2021. The average rate paid on wholesale brokered deposits for the three and nine months ended September 30, 2022 was 1.26% and 0.61%, respectively, compared to 0.14% and 0.20%, respectively, for the same periods in 2021, reflecting recent increases in market interest rates.
Average in-market interest-bearing deposits, which excludes wholesale brokered deposits, for the three and nine months ended September 30, 2022 increased by $449.9 million and $588.7 million, respectively, from the average balances for the same periods in 2021. The increases reflected growth across all deposit categories. The average rate paid on in-market interest-bearing deposits for the three and nine months ended September 30, 2022 increased by 27 basis points and 7 basis points, respectively, from the same periods in 2021, reflecting recent increases in market interest rates.
The average balance of noninterest-bearing demand deposits for the three and nine months ended September 30, 2022 decreased by $8.5 million and increased by $6.7 million, respectively, from the average balance for the same periods in 2021.
-51-
Management's Discussion and Analysis
Volume / Rate Analysis - Interest Income and Expense (FTE Basis)
The following table presents certain information on an FTE basis regarding changes in our interest income and interest expense for the period indicated. The net change attributable to both volume and rate has been allocated proportionately.
(Dollars in thousands)
Three Months Ended September 30, 2022 vs. 2021
Nine Months Ended September 30, 2022 vs. 2021
Change Due to
Change Due to
Volume
Rate
Net Change
Volume
Rate
Net Change
Interest on Interest-Earning Assets:
Cash, federal funds sold and other short-term investments
($39)
$486
$447
($28)
$676
$648
Mortgage loans held for sale
(55)
118
63
(592)
299
(293)
Taxable debt securities
401
1,977
2,378
1,221
3,622
4,843
FHLB stock
27
(34)
(7)
(118)
(2)
(120)
Commercial real estate
331
5,434
5,765
213
7,878
8,091
Commercial & industrial
(1,181)
409
(772)
(5,104)
695
(4,409)
Total commercial
(850)
5,843
4,993
(4,891)
8,573
3,682
Residential real estate
3,576
292
3,868
8,545
(1,417)
7,128
Home equity
141
620
761
46
487
533
Other
(52)
(24)
(76)
(150)
(42)
(192)
Total consumer
89
596
685
(104)
445
341
Total loans
2,815
6,731
9,546
3,550
7,601
11,151
Total interest income
3,149
9,278
12,427
4,033
12,196
16,229
Interest on Interest-Bearing Liabilities:
Interest-bearing demand deposits (in-market)
23
748
771
88
830
918
NOW accounts
17
66
83
46
96
142
Money market accounts
80
1,565
1,645
535
1,597
2,132
Savings accounts
6
24
30
13
22
35
Time deposits (in-market)
305
(17)
288
888
(713)
175
Interest-bearing in-market deposits
431
2,386
2,817
1,570
1,832
3,402
Wholesale brokered demand deposits
166
—
166
212
—
212
Wholesale brokered time deposits
(174)
1,058
884
(516)
1,211
695
Wholesale brokered deposits
(8)
1,058
1,050
(304)
1,211
907
Total interest-bearing deposits
423
3,444
3,867
1,266
3,043
4,309
FHLB advances
923
1,439
2,362
(1,410)
2,048
638
Junior subordinated debentures
—
114
114
—
165
165
Total interest expense
1,346
4,997
6,343
(144)
5,256
5,112
Net interest income (FTE)
$1,803
$4,281
$6,084
$4,177
$6,940
$11,117
Provision for Credit Losses
The provision for credit losses results from management’s review of the adequacy of the ACL. The ACL is management’s estimate of expected lifetime credit losses as of the reporting date and includes consideration of current forecasted economic conditions. Estimating an appropriate level of ACL necessarily involves a high degree of judgment.
The Corporation recorded a positive provision for credit losses (or a charge) of $800 thousand for the three months ended September 30, 2022, compared to no provision for credit losses recognized in the third quarter of 2021. On a year-to-date basis, the Corporation recognized a negative provision for credit losses (or a benefit) of $2.1 million in 2022, compared to a negative provision (or a benefit) of $2.0 million in 2021. The year-to-date negative provision recognized in 2022 was reflective of low loss rates, strong asset and credit quality metrics, our current estimate of forecasted economic conditions, and also provided for loan growth. The year-to-date negative provision recorded in 2021 largely reflected an improvement in
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Management's Discussion and Analysis
forecasted economic conditions following higher credit provisioning in 2020, which was attributable to the emergence of the COVID-19 pandemic.
Net charge-offs totaled $54 thousand for the three months ended September 30, 2022, compared to $168 thousand for the same period in 2021. Net recoveries totaled $104 thousand for the nine months ended September 30, 2022, compared to net charge-offs of $444 thousand for the same period in 2021.
The ACL on loans was $36.9 million, or 0.76% of total loans, at September 30, 2022, compared to an ACL on loans of $39.1 million, or 0.91% of total loans, at December 31, 2021.
See additional discussion under the caption “Asset Quality” for further information on the ACL on loans.
Noninterest Income
Noninterest income is an important source of revenue for Washington Trust. The principal categories of noninterest income are shown in the following table:
(Dollars in thousands)
Three Months
Nine Months
Change
Change
Periods ended September 30,
2022
2021
$
%
2022
2021
$
%
Noninterest income:
Wealth management revenues
$9,525
$10,455
($930)
(9
%)
$30,122
$30,778
($656)
(2
%)
Mortgage banking revenues
2,047
6,373
(4,326)
(68)
7,630
24,294
(16,664)
(69)
Card interchange fees
1,287
1,265
22
2
3,754
3,714
40
1
Service charges on deposit accounts
819
673
146
22
2,250
1,917
333
17
Loan related derivative income
1,041
728
313
43
2,011
2,370
(359)
(15)
Income from bank-owned life insurance
684
618
66
11
1,900
1,781
119
7
Other income
400
408
(8)
(2)
1,147
2,233
(1,086)
(49)
Total noninterest income
$15,803
$20,520
($4,717)
(23
%)
$48,814
$67,087
($18,273)
(27
%)
Noninterest Income Analysis
Revenue from wealth management services represented 62% of total noninterest income for the nine months ended September 30, 2022, compared to 46% for the same period in 2021. A substantial portion of wealth management revenues is dependent on the value of wealth management AUA and is closely tied to the performance of the financial markets. This portion of wealth management revenues is referred to as “asset-based” and includes trust and investment management fees. Wealth management revenues also include “transaction-based” revenues, such as commissions and other service fees that are not primarily derived from the value of assets.
The categories of wealth management revenues are shown in the following table:
(Dollars in thousands)
Three Months
Nine Months
Change
Change
Periods ended September 30,
2022
2021
$
%
2022
2021
$
%
Wealth management revenues:
Asset-based revenues
$9,302
$10,224
($922)
(9
%)
$29,154
$29,798
($644)
(2
%)
Transaction-based revenues
223
231
(8)
(3)
968
980
(12)
(1)
Total wealth management revenues
$9,525
$10,455
($930)
(9
%)
$30,122
$30,778
($656)
(2
%)
Wealth management revenues for the three and nine months ended September 30, 2022 decreased by $930 thousand and $656 thousand, respectively, from the same periods in 2021, reflecting decreases in asset-based revenues. The change in asset-based revenues correlated with the change in average AUA balances. The average balance of AUA for the three and nine months ended September 30, 2022 decreased by approximately 11% and 2%, respectively, from the average balance for the same periods in 2021.
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Management's Discussion and Analysis
The following table presents the changes in wealth management AUA balances:
(Dollars in thousands)
Three Months
Nine Months
Periods ended September 30,
2022
2021
2022
2021
Wealth management assets under administration:
Balance at the beginning of period
$6,650,097
$7,441,519
$7,784,211
$6,866,737
Net investment (depreciation) appreciation & income
(239,762)
(4,830)
(1,444,785)
572,506
Net client asset (outflows) inflows
(87,578)
6,707
(16,669)
4,153
Balance at the end of period
$6,322,757
$7,443,396
$6,322,757
$7,443,396
Wealth management AUA amounted to $6.3 billion at September 30, 2022. Wealth management AUA balances declined in 2022, primarily due to net investment depreciation as a result of recent declines in the financial markets.
Recently, four client-facing wealth management advisors in our registered investment adviser subsidiary resigned. These four employees were associated with approximately $1.0 billion of AUA as of September 30, 2022. From October 1, 2022 through November 4, 2022, we have been notified of client AUA withdrawals of approximately $546 million. We estimate a decline in annual revenues of approximately $3.2 million associated with these withdrawals. Washington Trust could experience additional AUA outflows in upcoming months associated with the departure of the former advisors.
Mortgage banking revenues represented 16% of total noninterest income for the nine months ended September 30, 2022, compared to 36% for the same period in 2021. These revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets. The composition of mortgage banking revenues and the volume of loans sold to the secondary market are shown in the following table:
(Dollars in thousands)
Three Months
Nine Months
Change
Change
Periods ended September 30,
2022
2021
$
%
2022
2021
$
%
Mortgage banking revenues:
Realized gains on loan sales, net (1)
$1,718
$5,750
($4,032)
(70
%)
$6,962
$28,057
($21,095)
(75
%)
Changes in fair value, net (2)
(226)
467
(693)
(148)
(798)
(3,964)
3,166
80
Loan servicing fee income, net (3)
555
156
399
256
1,466
201
1,265
629
Total mortgage banking revenues
$2,047
$6,373
($4,326)
(68
%)
$7,630
$24,294
($16,664)
(69
%)
Loans sold to the secondary market (4)
$75,324
$173,861
($98,537)
(57
%)
$285,193
$756,438
($471,245)
(62
%)
(1)Includes gains on loan sales, commission income on loans originated for others, servicing right gains, and gains (losses) on forward loan commitments.
(2)Represents fair value changes on mortgage loans held for sale and forward loan commitments.
(3)Represents loan servicing fee income, net of servicing right amortization and valuation adjustments.
(4)Includes brokered loans (loans originated for others).
For the three and nine months ended September 30, 2022, mortgage banking revenues were down by $4.3 million and $16.7 million, respectively, compared to the same periods in 2021. The decline in mortgage banking revenues was mainly attributable to a decline in sales volume and a reduction in the sales yield. Mortgage loans sold to the secondary market totaled $75.3 million and $285.2 million, respectively, for the three and nine months ended September 30, 2022, compared to $173.9 million and $756.4 million, respectively, for the same periods in 2021, reflecting an overall reduction in mortgage origination and sales activity, as well as a shift to a higher proportion of loans originated for retention in portfolio in 2022. Mortgage banking revenues were also impacted by changes in the fair value of mortgage loans held for sale and forward loan commitments, which are primarily based on current market prices in the secondary market and correlate to changes in the size of the mortgage pipeline. In addition, the decline in mortgage banking revenues was partially offset by higher net loan servicing fee income associated with loans sold with servicing retained. The increase in net loan servicing fee income was largely due to lower amortization of servicing rights, reflecting lower prepayment speeds on the serviced mortgage portfolio.
-54-
Management's Discussion and Analysis
Other income for the nine months ended September 30, 2022 decreased by $1.1 million from the same period in 2021, due to $1.0 million of income associated with a litigation settlement that was recognized in the first quarter of 2021.
Noninterest Expense
The following table presents noninterest expense comparisons:
(Dollars in thousands)
Three Months
Nine Months
Change
Change
Periods ended September 30,
2022
2021
$
%
2022
2021
$
%
Noninterest expense:
Salaries and employee benefits
$21,609
$22,162
($553)
(2
%)
$62,992
$65,771
($2,779)
(4
%)
Outsourced services
3,552
3,294
258
8
10,169
9,711
458
5
Net occupancy
2,234
2,134
100
5
6,708
6,304
404
6
Equipment
939
977
(38)
(4)
2,795
2,946
(151)
(5)
Legal, audit and professional fees
693
767
(74)
(10)
2,140
2,042
98
5
FDIC deposit insurance costs
430
482
(52)
(11)
1,198
1,201
(3)
—
Advertising and promotion
799
559
240
43
1,874
1,341
533
40
Amortization of intangibles
215
223
(8)
(4)
648
674
(26)
(4)
Debt prepayment penalties
—
—
—
—
—
4,230
(4,230)
(100)
Other
2,596
1,922
674
35
6,839
6,025
814
14
Total noninterest expense
$33,067
$32,520
$547
2
%
$95,363
$100,245
($4,882)
(5
%)
Noninterest Expense Analysis
Salaries and employee benefits expense, the largest component of noninterest expense, for the three and nine months ended September 30, 2022 decreased by $553 thousand and $2.8 million, respectively, compared to the same periods in 2021. This included volume-related decreases in mortgage originator compensation expense, annual merit increases and higher staffing levels.
Debt prepayment penalty expense for the nine months ended September 30, 2021 totaled $4.2 million, due to the prepayment of higher-yielding FHLB advances. There were no such debt prepayments in the comparable period in 2022.
Other expense for the three and nine months ended September 30, 2022 increased by $674 thousand and $814 thousand, respectively, compared to the same periods in 2021, reflecting modest increases across a variety of other noninterest expense categories.
Income Taxes
The following table presents the Corporation’s income tax provision and applicable tax rates for the periods indicated:
(Dollars in thousands)
Three Months
Nine Months
Periods ended September 30,
2022
2021
2022
2021
Income tax expense
$5,310
$5,319
$15,091
$15,855
Effective income tax rate
22.1
%
22.1
%
21.5
%
21.9
%
The effective income tax rates for the three and nine months endedSeptember 30, 2022 and 2021 differed from the federal rate of 21%, primarily due to state income tax expense, partially offset by the benefits of tax-exempt income, income from BOLI, federal tax credits and the recognition of excess tax expense or benefits associated with the settlement of share-based awards.
-55-
Management's Discussion and Analysis
The decrease in the effective tax rate for the nine months ended September 30, 2022 compared to the same period in 2021 largely reflected an increase in benefits from federal tax credits and a decrease in state tax expense, partially offset by a decrease in benefits from tax-exempt income.
The Corporation’s net deferred tax assets amounted to $62.1 million at September 30, 2022, compared to $14.0 million at December 31, 2021. The Corporation has determined that a valuation allowance is not required for any of the deferred tax assets since it is more-likely-than-not that these assets will be realized primarily through future reversals of existing taxable temporary differences or by offsetting projected future taxable income. Net deferred tax assets increased in 2022, largely reflecting increases in deferred tax assets associated with the declines in fair value of securities available for sale and cash flow hedges that were primarily attributable to relative changes in market interest rates.
Segment Reporting
The Corporation manages its operations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services. See Note 14 to the Unaudited Consolidated Financial Statements for additional disclosure related to business segments.
Commercial Banking
The following table presents a summarized statement of operations for the Commercial Banking business segment:
(Dollars in thousands)
Three Months
Nine Months
Change
Change
Periods ended September 30,
2022
2021
$
%
2022
2021
$
%
Net interest income
$42,038
$36,085
$5,953
16
%
$114,709
$103,737
$10,972
11
%
Provision for credit losses
800
—
800
100
(2,100)
(2,000)
(100)
5
Net interest income after provision for credit losses
41,238
36,085
5,153
14
116,809
105,737
11,072
10
Noninterest income
6,043
9,962
(3,919)
(39)
18,174
35,032
(16,858)
(48)
Noninterest expense
24,746
24,278
468
2
71,278
76,530
(5,252)
(7)
Income before income taxes
22,535
21,769
766
4
63,705
64,239
(534)
(1)
Income tax expense
4,878
4,725
153
3
13,423
13,810
(387)
(3)
Net income
$17,657
$17,044
$613
4
%
$50,282
$50,429
($147)
—
%
Net interest income for the Commercial Banking segment for the three and nine months ended September 30, 2022, increased by $6.0 million and $11.0 million, respectively, from the same periods in 2021. Net interest income largely benefited from higher yields on and growth in average interest-earning assets, partially offset by a higher cost of funds.
The Corporation recorded a positive provision for credit losses (or a charge) of $800 thousand for the three months ended September 30, 2022, compared to no provision for the same period in 2021. For the nine months ended September 30, 2022, the Corporation recorded a negative provision for credit losses (or a benefit) of $2.1 million, compared to a negative provision (or a benefit) of $2.0 million for the same period in 2021. See additional discussion under the caption “Provision for Credit Losses.”
Noninterest income derived from the Commercial Banking segment for the three and nine months ended September 30, 2022 was down by $3.9 million and $16.9 million, respectively, from the comparable periods in 2021, primarily due to lower mortgage banking revenues. See additional discussion regarding mortgage banking revenues under the caption “Noninterest Income” above.
Commercial Banking noninterest expenses for the three months ended September 30, 2022 were up by $468 thousand from the same period in 2021. For the nine months ended September 30, 2022, noninterest expenses for the commercial banking segment were down by $5.3 million from the same period in 2021, largely reflecting decreases in debt prepayment penalties and salaries and employee benefits expense. See additional discussion under the caption “Noninterest Expense” above.
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Management's Discussion and Analysis
Wealth Management Services
The following table presents a summarized statement of operations for the Wealth Management Services business segment:
(Dollars in thousands)
Three Months
Nine Months
Change
Change
Periods ended September 30,
2022
2021
$
%
2022
2021
$
%
Net interest expense
$4
($15)
$19
127
%
($61)
($42)
($19)
45
%
Noninterest income
9,760
10,558
(798)
(8)
30,640
32,055
(1,415)
(4)
Noninterest expense
8,321
8,242
79
1
24,085
23,715
370
2
Income before income taxes
1,443
2,301
(858)
(37)
6,494
8,298
(1,804)
(22)
Income tax expense
432
594
(162)
(27)
1,668
2,045
(377)
(18)
Net income
$1,011
$1,707
($696)
(41
%)
$4,826
$6,253
($1,427)
(23
%)
For the three and nine months ended September 30, 2022, noninterest income derived from the Wealth Management Services segment decreased by $798 thousand and $1.4 million, respectively, from the same periods in 2021, reflecting a decrease in asset-based revenues. The decline in year-to-date revenues also included income of $1.0 million associated with a litigation settlement that was recognized in the first quarter of 2021. See further discussion under the caption “Noninterest Income” above.
For the three and nine months ended September 30, 2022, noninterest expenses for the Wealth Management Services segment increased by $79 thousand and $370 thousand, respectively, from the comparable periods in 2021. These included modest changes across a variety of noninterest expense categories.
Financial Condition
Summary
The following table presents selected financial condition data:
(Dollars in thousands)
Change
September 30, 2022
December 31, 2021
$
%
Cash and due from banks
$130,066
$175,259
($45,193)
(26
%)
Total securities
982,573
1,042,859
(60,286)
(6)
Total loans
4,848,873
4,272,925
575,948
13
Allowance for credit losses on loans
36,863
39,088
(2,225)
(6)
Total assets
6,408,051
5,851,127
556,924
10
Total deposits
5,069,857
4,980,051
89,806
2
FHLB advances
700,000
145,000
555,000
383
Total shareholders’ equity
432,274
564,808
(132,534)
(23)
Total assets amounted to $6.4 billion at September 30, 2022, up by $556.9 million, or 10%, from the end of 2021, due to loan growth.
Cash and due from banks balances declined by $45.2 million, or 26%, from the end of 2021, including a reduction in cash collateral pledged to derivative counterparties and lower cash balances with correspondent banks. See Note 9 to the Unaudited Consolidated Financial Statements for additional disclosure regarding derivative financial instruments.
The securities portfolio decreased by $60.3 million, or 6%, from the end of 2021, reflecting a temporary decline in fair value and routine pay-downs on mortgage-backed securities, partially offset by purchases of debt securities.
Total loans increased by $575.9 million, or 13%, from the end of 2021, led by growth in the residential real estate portfolio.
-57-
Management's Discussion and Analysis
Total deposits increased by $89.8 million, or 2%, from the end of 2021, with an increase of $161.9 million, or 4%, in in-market deposits partially offset by a decrease of $72.1 million, or 14%, in wholesale brokered deposits.
FHLB advances increased by $555.0 million, or 383%, from December 31, 2021. Higher levels of wholesale funding were utilized to fund loan growth and purchases of debt securities.
Shareholders’ equity decreased by $132.5 million, or 23%, largely reflecting a decline in the AOCL component of shareholders' equity due to decreases in the fair value of available for sale debt securities and cash flow hedges that were primarily attributable to relative changes in market interest rates.
Securities
Investment security activity is monitored by the Investment Committee, the members of which also sit on the ALCO. Asset and liability management objectives are the primary influence on the Corporation’s investment activities. However, the Corporation also recognizes that there are certain specific risks inherent in investment activities. The securities portfolio is managed in accordance with regulatory guidelines and established internal corporate investment policies that provide limitations on specific risk factors such as market risk, credit risk and concentration, liquidity risk and operational risk to help monitor risks associated with investing in securities. Reports on the activities conducted by the Investment Committee and the ALCO are presented to the Board of Directors on a regular basis.
The Corporation’s securities portfolio is managed to generate interest income, to implement interest rate risk management strategies, and to provide a readily available source of liquidity for balance sheet management. Securities are designated as either available for sale, held to maturity or trading at the time of purchase. The Corporation does not have securities designated as held to maturity and does not maintain a portfolio of trading securities. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Debt securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized.
Determination of Fair Value
The Corporation uses an independent pricing service to obtain quoted prices. The prices provided by the independent pricing service are generally based on observable market data in active markets. The determination of whether markets are active or inactive is based upon the level of trading activity for a particular security class. Management reviews the independent pricing service’s documentation to gain an understanding of the appropriateness of the pricing methodologies. Management also reviews the prices provided by the independent pricing service for reasonableness based upon current trading levels for similar securities. If the prices appear unusual, they are re-examined and the value is either confirmed or revised. In addition, management periodically performs independent price tests of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of September 30, 2022 and December 31, 2021, management did not make any adjustments to the prices provided by the pricing service.
Our fair value measurements generally utilize Level 2 inputs, representing quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and model-derived valuations in which all significant input assumptions are observable in active markets.
See Notes 3 and 10 to the Unaudited Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities.
-58-
Management's Discussion and Analysis
Securities Portfolio
The carrying amounts of securities held are as follows:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Amount
%
Amount
%
Available for Sale Debt Securities:
Obligations of U.S. government-sponsored enterprises
$197,855
20
%
$196,454
19
%
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
764,264
78
824,962
79
Individual name issuer trust preferred debt securities
8,800
1
9,138
1
Corporate bonds
11,654
1
12,305
1
Total available for sale debt securities
$982,573
100
%
$1,042,859
100
%
The securities portfolio amounted to $1.0 billion, or 15% of total assets, as of September 30, 2022 compared to $1.0 billion, or 18% of total assets, as of December 31, 2021. The largest component of the securities portfolio is mortgage-backed securities, all of which are issued by U.S. government agencies or U.S. government-sponsored enterprises.
The securities portfolio decreased by $60.3 million, or 6%, from the end of 2021, reflecting a temporary decline in the fair value of available for sale securities and routine pay-downs on mortgage-backed securities. These decreases were partially offset by purchases of U.S. government agency and U.S. government-sponsored debt securities, including mortgage-backed securities, totaling $214.6 million, with a weighted average yield of 3.45%.
The carrying amount of available for sale debt securities included net unrealized losses of $183.2 million and $8.9 million, respectively, as of September 30, 2022 and December 31, 2021. The decline in fair value of available for sale debt securities from the end of 2021 was primarily concentrated in obligations of U.S. government agencies and U.S. government-sponsored enterprises, including mortgage-backed securities, and primarily attributable to relative changes in interest rates since the time of purchase. See Note 3 to the Unaudited Consolidated Financial Statements for additional information.
Loans
Total loans amounted to $4.8 billion at September 30, 2022, up by $575.9 million, or 13.5%, from the end of 2021, led by growth in the residential real estate portfolio.
The following is a summary of loans:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Amount
%
Amount
%
Commercial:
Commercial real estate (1)
$1,762,687
36
%
$1,639,062
38
%
Commercial & industrial (2)
652,758
14
641,555
15
Total commercial
2,415,445
50
2,280,617
53
Residential Real Estate:
Residential real estate (3)
2,144,098
44
1,726,975
40
Consumer:
Home equity
273,742
6
247,697
6
Other (4)
15,588
—
17,636
1
Total consumer
289,330
6
265,333
7
Total loans
$4,848,873
100
%
$4,272,925
100
%
(1)CRE consists 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)C&I consists of loans to businesses and individuals, a portion of which are fully or partially collateralized by real estate. C&I also includes PPP loans.
(3)Residential real estate consists of mortgage and homeowner construction loans secured by one- to four-family residential properties.
(4)Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans.
-59-
Management's Discussion and Analysis
COVID-19 Pandemic Related
The Corporation elected to account for eligible loan modifications under Section 4013 of the CARES Act, as amended by the CRRSA Act. Eligible loan modifications from March 1, 2020 through January 1, 2022 made in response to the COVID-19 pandemic were not required to be classified as TDRs. During this period of time, we processed loan payment deferral modifications, or “deferments”, on 654 loans totaling $727.7 million. The vast majority of the deferments qualified as eligible loan modifications and were not classified as TDRs. All of these loans with qualified deferments exited their payment deferral period prior to March 31, 2022.
Commercial Loans
The commercial loan portfolio represented 50% of total loans at September 30, 2022.
In making commercial loans, we may occasionally solicit the participation of other banks. The Bank also participates in commercial loans originated by other banks. In such cases, these loans are individually underwritten by us using standards similar to those employed for our self-originated loans. Our participation in commercial loans originated by other banks amounted to $431.9 million and $451.6 million, respectively, at September 30, 2022 and December 31, 2021. Our participation in commercial loans originated by other banks also includes shared national credits. Shared national credits are defined as participation in loans or loan commitments of at least $100.0 million that are shared by three or more banks.
Commercial loans fall into two main categories, CRE and C&I loans. CRE loans consist of commercial mortgages secured by real property where the primary source of repayment is derived from rental income associated with the property or the proceeds of the sale, refinancing or permanent financing of the property. CRE loans also include construction loans made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. C&I loans primarily provide working capital, equipment financing and financing for other business-related purposes. C&I loans are frequently collateralized by equipment, inventory, accounts receivable, and/or general business assets. A portion of the Bank’s C&I loans is also collateralized by real estate. C&I loans also include PPP loans that are fully guaranteed by the U.S. government, tax-exempt loans made to states and political subdivisions, as well as industrial development or revenue bonds issued through quasi-public corporations for the benefit of a private or non-profit entity where that entity rather than the governmental entity is obligated to pay the debt service.
Commercial Real Estate Loans
CRE loans totaled $1.8 billion at September 30, 2022, up by $123.6 million, or 8%, from the balance at December 31, 2021. Loan originations and advances of approximately $420 million were partially offset by payoffs and pay-downs.
Included in CRE loans were construction and development loans with carrying values of $118.3 million and $122.4 million, respectively, as of September 30, 2022 and December 31, 2021.
Shared national credit balances outstanding included in the CRE loan portfolio totaled $8.1 million at September 30, 2022. The balance was included in the pass-rated category of commercial loan credit quality and current with respect to contractual payment terms at September 30, 2022.
The following table presents a summary of CRE loans by property location:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Outstanding Balance
% of Total
Outstanding Balance
% of Total
Connecticut
$674,816
38
%
$643,182
39
%
Massachusetts
529,364
30
464,018
28
Rhode Island
396,869
23
408,496
25
Subtotal
1,601,049
91
1,515,696
92
All other states
161,638
9
123,366
8
Total
$1,762,687
100
%
$1,639,062
100
%
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Management's Discussion and Analysis
The following table presents a summary of CRE loans by property type segmentation:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Count
Outstanding Balance
% of Total
Count
Outstanding Balance
% of Total
CRE Portfolio Segmentation:
Retail
109
$441,631
25
%
121
$389,487
24
%
Multi-family dwelling
123
429,796
24
127
474,229
29
Office
55
253,816
14
57
216,602
13
Hospitality
32
196,503
11
31
184,990
11
Industrial and warehouse
39
176,081
10
35
137,254
8
Healthcare
15
138,475
8
13
128,189
8
Commercial mixed use
20
43,235
2
20
38,978
2
Other
36
83,150
6
36
69,333
5
Total CRE loans
429
$1,762,687
100
%
440
$1,639,062
100
%
Average CRE loan size
$4,109
$3,725
Largest individual CRE loan outstanding
$65,424
$39,945
Commercial and Industrial Loans
C&I loans amounted to $652.8 million at September 30, 2022, up by $11.2 million, or 2%, from the balance at December 31, 2021. This included a net reduction in PPP loans of $36.6 million, reflecting loans forgiven by the SBA. Excluding PPP loans, C&I loans increased by approximately $47.8 million, with loan originations and advances of $99 million, partially offset by payoffs and pay-downs.
As of September 30, 2022, the carrying value of PPP loans was $1.4 million and included net unamortized loan origination fee balances of $58 thousand. The carrying value of PPP loans at December 31, 2021 was $38.0 million.
Shared national credit balances outstanding included in the C&I loan portfolio totaled $40.3 million at September 30, 2022. All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at September 30, 2022.
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Management's Discussion and Analysis
The following table presents a summary of C&I loan by industry segmentation:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Count
Outstanding Balance
% of Total
Count
Outstanding Balance
% of Total
C&I Portfolio Segmentation:
Healthcare and social assistance
70
$194,128
30
%
101
$174,376
27
%
Owner occupied and other real estate
162
71,431
11
185
72,957
11
Manufacturing
54
55,489
9
65
55,341
9
Transportation and warehousing
20
50,597
8
31
35,064
5
Retail
55
49,365
8
79
47,290
7
Educational services
20
48,208
7
28
52,211
8
Finance and insurance
58
31,579
5
59
31,279
5
Entertainment and recreation
24
26,050
4
37
32,087
5
Information
8
22,258
3
14
25,045
4
Accommodation and food services
49
17,499
3
114
28,320
4
Professional, scientific and technical
37
6,357
1
69
8,912
1
Public administration
12
4,223
1
16
5,441
1
Other
164
75,574
10
281
73,232
13
Total C&I loans
733
$652,758
100
%
1,079
$641,555
100
%
Average C&I loan size
$891
$595
Largest individual C&I loan outstanding
$27,671
$18,721
Residential Real Estate Loans
The residential real estate loan portfolio represented 44% of total loans at September 30, 2022.
Residential real estate loans held in portfolio amounted to $2.1 billion at September 30, 2022, up by $417.1 million, or 24%, from the balance at December 31, 2021, reflecting a higher proportion of loans originated for portfolio in 2022.
The following is a summary of residential real estate mortgages by property location:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Amount
% of Total
Amount
% of Total
Massachusetts
$1,552,728
72
%
$1,207,789
70
%
Rhode Island
423,070
20
365,831
21
Connecticut
143,701
7
132,430
8
Subtotal
2,119,499
99
1,706,050
99
All other states
24,599
1
20,925
1
Total (1)
$2,144,098
100
%
$1,726,975
100
%
(1)Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $62.7 million and $78.7 million, respectively, as of September 30, 2022 and December 31, 2021.
Residential real estate loans are originated both for sale to the secondary market as well as for retention in the Bank’s loan portfolio. We also originate residential real estate loans for various investors in a broker capacity, including conventional mortgages and reverse mortgages.
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Management's Discussion and Analysis
The table below presents residential real estate loan origination activity:
(Dollars in thousands)
Three Months
Nine Months
Periods ended September 30,
2022
2021
2022
2021
Amount
% of Total
Amount
% of Total
Amount
% of Total
Amount
% of Total
Originations for retention in portfolio (1)
$225,132
74
%
$205,293
52
%
$653,295
71
%
$581,905
44
%
Originations for sale to the secondary market (2)
77,242
26
190,702
48
270,320
29
744,589
56
Total
$302,374
100
%
$395,995
100
%
$923,615
100
%
$1,326,494
100
%
(1)Includes the full commitment amount of homeowner construction loans.
(2)Includes brokered loans (loans originated for others).
The table below presents residential real estate loan sales activity:
(Dollars in thousands)
Three Months
Nine Months
Periods ended September 30,
2022
2021
2022
2021
Amount
% of Total
Amount
% of Total
Amount
% of Total
Amount
% of Total
Loans sold with servicing rights retained
$34,659
46
%
$108,445
62
%
$72,764
26
%
$570,370
75
%
Loans sold with servicing rights released (1)
40,665
54
65,416
38
212,429
74
186,068
25
Total
$75,324
100
%
$173,861
100
%
$285,193
100
%
$756,438
100
%
(1)Includes brokered loans (loans originated for others).
Residential real estate loan origination, refinancing and sales activity decreased year-over-year in response to increases in market interest rates.
Loans are sold with servicing retained or released. Loans sold with servicing rights retained result in the capitalization of servicing rights. Loan servicing rights are included in other assets and are subsequently amortized as an offset to mortgage banking revenues over the estimated period of servicing. The net balance of capitalized servicing rights amounted to $9.2 million and $9.8 million, respectively, as of September 30, 2022 and December 31, 2021. The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $1.5 billion as of both September 30, 2022 and December 31, 2021.
Consumer Loans
Consumer loans include home equity loans and lines of credit and personal installment loans. Home equity lines of credit and home equity loans represented 95% of the total consumer portfolio at September 30, 2022. Our home equity line and home equity loan origination activities are conducted primarily in southern New England. The Bank estimates that approximately 55% of the combined home equity lines of credit and home equity loan balances are first lien positions or subordinate to other Washington Trust mortgages.
The consumer loan portfolio totaled $289.3 million at September 30, 2022, up by $24.0 million, or 9%, from December 31, 2021, reflecting increases in home equity lines and loans. Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $8.9 million and $9.4 million, respectively, at September 30, 2022 and December 31, 2021.
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Management's Discussion and Analysis
Asset Quality
Nonperforming Assets
Nonperforming assets include nonaccrual loans and OREO.
The following table presents nonperforming assets and additional asset quality data:
(Dollars in thousands)
Sep 30, 2022
Dec 31, 2021
Commercial:
Commercial real estate
$—
$—
Commercial & industrial
—
—
Total commercial
—
—
Residential Real Estate:
Residential real estate
11,700
13,576
Consumer:
Home equity
422
627
Other
—
—
Total consumer
422
627
Total nonaccrual loans
12,122
14,203
OREO, net
—
—
Total nonperforming assets
$12,122
$14,203
Nonperforming assets to total assets
0.19
%
0.24
%
Nonperforming loans to total loans
0.25
%
0.33
%
Total past due loans to total loans
0.16
%
0.24
%
Accruing loans 90 days or more past due
$—
$—
Total nonperforming assets decreased by $2.1 million from December 31, 2021, reflecting a decline in nonaccrual loans.
Nonaccrual Loans
During the nine months ended September 30, 2022, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.
The following table presents the activity in nonaccrual loans:
(Dollars in thousands)
Three Months
Nine Months
For the periods ended September 30,
2022
2021
2022
2021
Balance at beginning of period
$12,414
$10,481
$14,203
$13,197
Additions to nonaccrual status
521
2,583
1,106
3,854
Loans returned to accruing status
(400)
—
(699)
(877)
Loans charged-off
(63)
(249)
(122)
(630)
Payments, payoffs and other changes
(350)
(1,839)
(2,366)
(4,568)
Balance at end of period
$12,122
$10,976
$12,122
$10,976
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Management's Discussion and Analysis
The following table presents additional detail on nonaccrual loans:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Days Past Due
Days Past Due
Over 90
Under 90
Total
% (1)
Over 90
Under 90
Total
% (1)
Commercial:
Commercial real estate
$—
$—
$—
—
%
$—
$—
$—
—
%
Commercial & industrial
—
—
—
—
—
—
—
—
Total commercial
—
—
—
—
—
—
—
—
Residential Real Estate:
Residential real estate
5,430
6,270
11,700
0.55
4,662
8,914
13,576
0.79
Consumer:
Home equity
50
372
422
0.15
108
519
627
0.25
Other
—
—
—
—
—
—
—
—
Total consumer
50
372
422
0.15
108
519
627
0.24
Total nonaccrual loans
$5,480
$6,642
$12,122
0.25
%
$4,770
$9,433
$14,203
0.33
%
(1) Percentage of nonaccrual loans to the total loans outstanding within the respective category.
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2022.
As of both September 30, 2022 and December 31, 2021, the composition of nonaccrual loans was 100% residential and consumer.
Nonaccrual residential real estate mortgage loans amounted to $11.7 million at September 30, 2022, down by $1.9 million from the end of 2021. As of September 30, 2022, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Connecticut and Rhode Island. Included in total nonaccrual residential real estate loans at September 30, 2022 were four loans purchased for portfolio and serviced by others amounting to $1.1 million. Management monitors the collection efforts of its third party servicers as part of its assessment of the collectability of nonperforming loans.
Troubled Debt Restructurings
In the course of resolving problem loans, the Corporation may choose to restructure the contractual terms of certain loans. A loan that has been modified or renewed is considered to be a TDR when two conditions are met: (1) the borrower is experiencing financial difficulty and (2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or a transaction with similar credit risk characteristics. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection.
TDRs are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term and full collection of principal and interest is in doubt.
TDRs are reported as such for at least one year from the date of the restructuring. In years after the restructuring, a TDR is removed from this classification if the restructuring did not involve a below-market rate concession and the loan is performing in accordance with its modified contractual terms for a reasonable period of time.
As of September 30, 2022, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured in a TDR.
See Note 2 for discussion on ASU No. 2022-02, a recently issued accounting pronouncement that is pending adoption. ASU
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Management's Discussion and Analysis
No. 2022-02, which becomes effective on January 1, 2023, updates the accounting treatment and related disclosure requirements for TDRs. As noted above under the caption “Loans,” the Corporation elected to account for eligible loan modifications under Section 4013 of the CARES Act, as amended by the CRRSA Act. Loan modifications that did not qualify for the TDR accounting relief provided under the CARES Act were classified as TDRs.
The following table sets forth information on TDRs as of the dates indicated. The amounts below consist of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. Accrued interest is not included in the carrying amounts set forth below.
(Dollars in thousands)
Sep 30, 2022
Dec 31, 2021
Accruing TDRs
Commercial:
Commercial real estate
$3,609
$10,603
Commercial & industrial
844
2,792
Total commercial
4,453
13,395
Residential Real Estate:
Residential real estate
2,204
2,372
Consumer:
Home equity
557
561
Other
—
—
Total consumer
557
561
Accruing TDRs
7,214
16,328
Nonaccrual TDRs
Commercial:
Commercial real estate
—
—
Commercial & industrial
—
—
Total commercial
—
—
Residential Real Estate:
Residential real estate
2,819
2,748
Consumer:
Home equity
71
71
Other
—
—
Total consumer
71
71
Nonaccrual TDRs
2,890
2,819
Total TDRs
$10,104
$19,147
As of September 30, 2022, the composition of TDRs was 44% commercial and 56% residential and consumer, compared to 70% commercial and 30% residential and consumer at December 31, 2021.
TDRs amounted to $10.1 million at September 30, 2022, down by $9.0 million from the end of 2021. The net decline reflected a pay-down of $6.5 million on one accruing CRE TDR loan and the declassification from TDR status of one accruing C&I loan with a carrying value of $2.8 million that was declassified in accordance with policy.
The ACL included specific reserves for TDRs of $132 thousand at September 30, 2022, compared to $148 thousand at December 31, 2021.
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Management's Discussion and Analysis
Past Due Loans
The following table presents past due loans by category:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Amount
% (1)
Amount
% (1)
Commercial:
Commercial real estate
$—
—
%
$—
—
%
Commercial & industrial
4
—
3
—
Total commercial
4
—
3
—
Residential Real Estate:
Residential real estate
7,256
0.34
9,622
0.56
Consumer:
Home equity
252
0.09
765
0.31
Other
17
0.11
21
0.12
Total consumer
269
0.09
786
0.30
Total past due loans
$7,529
0.16
%
$10,411
0.24
%
(1)Percentage of past due loans to the total loans outstanding within the respective category.
As of both September 30, 2022 and December 31, 2021, the composition of past due loans (loans past due 30 days or more) was essentially 100% residential and consumer. Total past due loans decreased by $2.9 million from the end of 2021.
Total past due loans included $7.1 million of nonaccrual loans as of September 30, 2022, compared to $9.4 million as of December 31, 2021.
All loans 90 days or more past due at September 30, 2022 and December 31, 2021 were classified as nonaccrual.
Potential Problem Loans
The Corporation classifies certain loans as “substandard,” “doubtful,” or “loss” based on criteria consistent with guidelines provided by banking regulators. Potential problem loans include classified accruing commercial loans that were less than 90 days past due at September 30, 2022 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future.
Potential problem loans are not included in the amounts of nonaccrual or TDRs presented above. They are assessed for loss exposure using the methods described in Note 4 to the Unaudited Consolidated Financial Statements under the caption “Credit Quality Indicators.” Management cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require an increased allowance coverage and provision for credit losses on loans.
Management has identified two loans associated with one C&I relationship with carrying values totaling $722 thousand as potential problem loans at September 30, 2022. These two loans were current with respect to payment terms at September 30, 2022. There were no potential problem loans identified at December 31, 2021.
Allowance for Credit Losses on Loans
The ACL on loans is management’s estimate, at the reporting date, of expected credit losses over the expected life of the loans. The ACL on loans is established through a provision for credit losses recognized in earnings. The ACL on loans is reduced by charge-offs on loans and is increased by recoveries of amounts previously charged off.
The Corporation’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely. Full or partial charge-offs on collateral dependent individually analyzed loans are recognized when the collateral is deemed to be insufficient to support the carrying
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Management's Discussion and Analysis
value of the loan. The Corporation does not recognize a recovery when new appraisals indicate a subsequent increase in value.
Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status. New appraisals are generally obtained for TDRs or nonaccrual loans or when management believes it is warranted. The Corporation has continued to maintain appropriate professional standards regarding the professional qualifications of appraisers and has an internal review process to monitor the quality of appraisals.
For residential real estate loans and real estate collateral dependent consumer loans that are in the process of collection, valuations are obtained from independent appraisal firms with values determined on an “as is” basis.
The following table presents additional detail on the Corporation’s loan portfolio and associated allowance:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Loans
Related Allowance
Allowance / Loans
Loans
Related Allowance
Allowance / Loans
Individually analyzed loans
$12,024
$652
5.42
%
$21,080
$682
3.24
%
Pooled (collectively evaluated) loans
4,836,849
36,211
0.75
4,251,845
38,406
0.90
Total
$4,848,873
$36,863
0.76
%
$4,272,925
$39,088
0.91
%
Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components. The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics. The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments.
The ACL for individually analyzed loans is measured using a DCF method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan was collateral dependent, at the fair value of the collateral.
The ACL for pooled loans is measured utilizing a DCF methodology to estimate credit losses for each pooled portfolio segment. The methodology incorporates a probability of default and loss given default framework. Loss given default is estimated based on historical credit loss experience. Probability of default is estimated using a regression model that incorporates econometric factors. Management utilizes forecasted econometric factors with a one-year reasonable and supportable forecast period and one-year straight-line reversion period in order to estimate the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, prepayment speeds and remaining life of the loan to estimate a reserve for each loan. The sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived. Quantitative loss factors for pooled loans are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates.
The ACL on loans amounted to $36.9 million at September 30, 2022, down by $2.2 million from the balance at December 31, 2021. The ACL on loans as a percentage of total loans, also known as the reserve coverage ratio, was 0.76% at September 30, 2022, compared to 0.91% at December 31, 2021.
The Corporation recorded a positive provision for credit losses (or a charge) of $800 thousand for the three months ended September 30, 2022, compared to no provision for the same period in 2021. On a year-to-date basis, the Corporation recognized a negative provision for credit losses (or a benefit) of $2.1 million, compared to a negative provision (or a benefit) of $2.0 million for the same period in 2021. The provision for credit losses recognized in 2022 provided for loan growth and was also reflective of low loss rates, strong asset and credit quality metrics and our current estimate of forecasted economic conditions.
Net recoveries totaled $54 thousand and $104 thousand, respectively, for the three and nine months ended September 30, 2022.
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Management's Discussion and Analysis
The ACL on loans is an estimate and ultimate losses may vary from management’s estimate. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans; conversely, improving conditions or assumptions could lead to further reductions in the ACL on loans.
The following table presents the allocation of the ACL on loans by portfolio segment. The total ACL on loans is available to absorb losses from any segment of the loan portfolio.
(Dollars in thousands)
September 30, 2022
December 31, 2021
Allocated ACL
ACL to Loans
Loans to Total Portfolio (1)
Allocated ACL
ACL to Loans
Loans to Total Portfolio (1)
Commercial:
Commercial real estate
$17,611
1.00
%
36
%
$18,933
1.16
%
38
%
Commercial & industrial
10,347
1.59
14
10,832
1.69
15
Total commercial
27,958
1.16
50
29,765
1.31
53
Residential Real Estate:
Residential real estate
7,447
0.35
44
7,860
0.46
40
Consumer:
Home equity
1,071
0.39
6
1,069
0.43
6
Other
387
2.48
—
394
2.23
1
Total consumer
1,458
0.50
6
1,463
0.55
7
Total allowance for credit losses on loans at end of period
$36,863
0.76
%
100
%
$39,088
0.91
%
100
%
(1)Percentage of loans outstanding in respective category to total loans outstanding.
Sources of Funds
Our sources of funds include in-market deposits, wholesale brokered deposits, FHLB advances, other borrowings and proceeds from the sales, maturities and payments of loans and investment securities. The Corporation uses funds to originate and purchase loans, purchase investment securities, conduct operations, expand the branch network and pay dividends to shareholders.
Deposits
The Corporation offers a wide variety of deposit products to consumer and business customers. Deposits provide an important source of funding for the Bank, as well as an ongoing stream of fee revenue.
The Bank is a participant in the DDM program, ICS program and the CDARS program. The Bank uses these deposit sweep services to place customer and client funds into interest-bearing demand accounts, money market accounts, and/or time deposits issued by other participating banks. Customer and client funds are placed at one or more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a program participant, we receive reciprocal amounts of deposits from other participating banks. We consider these reciprocal deposit balances to be in-market deposits as distinguished from traditional wholesale brokered deposits.
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Management's Discussion and Analysis
The following table presents a summary of deposits:
(Dollars in thousands)
Change
September 30, 2022
December 31, 2021
$
%
Noninterest-bearing demand deposits
$938,572
$945,229
($6,657)
(1
%)
Interest-bearing demand deposits (in market)
273,231
251,032
22,199
9
NOW accounts
869,984
867,138
2,846
—
Money market accounts
1,146,826
1,072,864
73,962
7
Savings accounts
600,568
555,177
45,391
8
Time deposits (in-market)
797,505
773,383
24,122
3
In-market deposits
4,626,686
4,464,823
161,863
4
Wholesale brokered demand deposits
31,044
—
31,044
100
Wholesale brokered time deposits
412,127
515,228
(103,101)
(20)
Wholesale brokered deposits
443,171
515,228
(72,057)
(14)
Total deposits
$5,069,857
$4,980,051
$89,806
2
%
In-market deposits were up by $161.9 million, or 4%, from the balance at December 31, 2021, while wholesale brokered deposits declined by $72.1 million, or 14%.
Total deposits amounted to $5.1 billion at September 30, 2022, up by $89.8 million, or 2%, from December 31, 2021.
Borrowings
Borrowings primarily consist of FHLB advances, which are used as a source of funding for liquidity and interest rate risk management purposes.
FHLB advances totaled $700.0 million at September 30, 2022, up by $555.0 million, or 383%, from the balance at the end of 2021, as higher levels of wholesale funding were utilized to fund loan growth and purchases of debt securities.
For additional information regarding FHLB advances see Note 7 to the Unaudited Consolidated Financial Statements.
Liquidity and Capital Resources
Liquidity Management
Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 77% of total average assets in the nine months ended September 30, 2022. While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and brokered deposits), cash flows from the investment securities portfolios and loan repayments. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs, although management has no intention to do so at this time.
The Corporation has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management employs stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as usual” cash flows. In management’s estimation, risks are concentrated in two major categories: (1) runoff of in-market deposit balances; and (2) unexpected drawdown of loan commitments. Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our stress test scenarios, therefore, emphasize attempts to quantify deposits at risk over selected time horizons. In addition to these unexpected outflow risks, several other “business as usual” factors enter into the calculation of the adequacy of contingent liquidity including: (1) payment proceeds from loans and investment securities; (2) maturing debt obligations; and (3) maturing time deposits. The Corporation has established collateralized borrowing capacity with the FRBB and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business. Borrowing capacity is impacted by the amount and type of assets available to be pledged.
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Management's Discussion and Analysis
The table below presents unused funding capacity by source as of the dates indicated:
(Dollars in thousands)
September 30, 2022
December 31, 2021
Additional Funding Capacity:
Federal Home Loan Bank of Boston (1)
$967,133
$1,642,377
Federal Reserve Bank of Boston (2)
24,392
16,919
Unencumbered investment securities
672,024
702,963
Total
$1,663,549
$2,362,259
(1)As of September 30, 2022 and December 31, 2021, loans with a carrying value of $2.3 billion and $2.2 billion, respectively, and securities available for sale with carrying values of $121.4 million and $163.2 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.
(2)As of September 30, 2022 and December 31, 2021, loans with a carrying value of $17.8 million and $8.2 million, respectively, and securities available for sale with a carrying value of $12.8 million and $13.5 million, respectively, were pledged to the FRBB for the discount window resulting in this additional unused borrowing capacity.
In addition to the amounts presented above, the Bank also had access to a $40.0 million unused line of credit with the FHLB, as well as a $102.0 million standby letter of credit with the FHLB.
The ALCO establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained within target ranges established by the ALCO during the nine months ended September 30, 2022. Based on its assessment of the liquidity considerations described above, management believes the Corporation’s sources of funding meet anticipated funding needs.
Net cash provided by operating activities amounted to $71.8 million for the nine months ended September 30, 2022, reflecting net income of $55.1 million and mortgage banking related adjustments to reconcile net income to net cash provided by operating activities. Net cash used in investing activities totaled $723.8 million for the nine months ended September 30, 2022, reflecting an increase in loans, outflows to fund purchases of debt securities and a purchase of BOLI. These outflows were partially offset by net inflows from maturities, calls and principal payments of debt securities. For the nine months ended September 30, 2022, net cash provided by financing activities amounted to $606.3 million, with a net increase in FHLB advances and growth in deposits, partially offset by the payment of dividends to shareholders and purchases of treasury stock. See the Unaudited Consolidated Statements of Cash Flows for further information about sources and uses of cash.
In the normal course of business, the Corporation engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. Such transactions are used to meet the financing needs of its customers and to manage the exposure to fluctuations in interest rates. These financial transactions include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. The Corporation’s credit policies with respect to interest rate contracts with commercial borrowers, commitments to extend credit, and standby letters of credit are similar to those used for loans. Interest rate risk management contracts with other counterparties are generally subject to bilateral collateralization terms.
For additional information on derivative financial instruments and financial instruments with off-balance sheet risk see Notes 9 and 17 to the Unaudited Consolidated Financial Statements.
Capital Resources
Total shareholders’ equity amounted to $432.3 million at September 30, 2022, down by $132.5 million from December 31, 2021. The decline reflected a decrease of $151.8 million in the AOCL component of shareholders' equity, due to decreases in the fair value of available for sale debt securities and cash flow hedges primarily attributable to relative changes in market interest rates. In addition, the decline also reflected $28.3 million in dividend declarations and a net increase in treasury stock repurchases of $8.2 million, partially offset by net income of $55.1 million.
The Corporation declared a quarterly dividend of 54 cents per share for the three months ended September 30, 2022, compared to 52 cents per share declared for the same period in 2021. On a year-to-date basis, dividend declarations totaled $1.62 per share in 2022, compared to $1.56 per share in 2021.
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Management's Discussion and Analysis
The ratio of total equity to total assets was 6.75% at September 30, 2022, compared to a ratio of 9.65% at December 31, 2021. Book value per share at September 30, 2022 and December 31, 2021 was $25.17 and $32.59, respectively.
The Bancorp and the Bank are subject to various regulatory capital requirements and are considered “well capitalized” with a total risk-based capital ratio of 12.65% at September 30, 2022, compared to 14.01% at December 31, 2021. See Note 8 to the Unaudited Consolidated Financial Statements for additional discussion of regulatory capital requirements and the election of the ASC 326 phase-in option provided by regulatory guidance, which phases in the impact of ASC 326 on regulatory capital over a three-year period that commenced January 1, 2022.
Asset/Liability Management and Interest Rate Risk
Interest rate risk is the risk of loss to future earnings due to changes in interest rates. The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. Periodically, the ALCO reports on the status of liquidity and interest rate risk matters to the Bank’s Board of Directors. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with the Corporation’s liquidity, capital adequacy, growth, risk and profitability goals.
The Corporation utilizes the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, off-balance sheet interest rate contracts and the pricing and structure of loans and deposits, to manage interest rate risk. The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract. The notional amount of the interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk. See Notes 9 and 17 to the Unaudited Consolidated Financial Statements for additional information.
The ALCO uses income simulation to measure interest rate risk inherent in the Corporation’s on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 12-month horizon, a 13- to 24-month horizon and a 60-month horizon. The simulations assume that the size and general composition of the Corporation’s balance sheet remain static over the simulation horizons, with the exception of certain deposit mix shifts from low-cost core savings to higher-cost time deposits in selected interest rate scenarios. Additionally, the simulations take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency.
The ALCO reviews simulation results to determine whether the Corporation’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. As of September 30, 2022 and December 31, 2021, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation. All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where both interest rates and the composition of the Corporation’s balance sheet remain stable for a 60-month period. In addition to measuring the change in net interest income as compared to an unchanged rate scenario, the ALCO also measures the trend of both net interest income and NIM over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.
The ALCO regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve of up to 500 basis points, as well as parallel changes in interest rates of up to 400 basis points. Because income simulations assume that the Corporation’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.
The following table sets forth the estimated change in net interest income from an unchanged rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on- and off-balance sheet financial instruments as of September 30, 2022 and December 31, 2021. Interest rates are assumed to shift by a parallel 100, 200 or 300 basis points upward or 100 basis points downward over a 12-month period, except for core savings deposits, which are assumed to shift by lesser amounts due to their relative historical insensitivity to market interest rate movements. Further, deposits are
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Management's Discussion and Analysis
assumed to have certain minimum rate levels below which they will not fall. It should be noted that the rate scenarios shown do not necessarily reflect the ALCO’s view of the “most likely” change in interest rates over the periods indicated.
September 30, 2022
December 31, 2021
Months 1 - 12
Months 13 - 24
Months 1 - 12
Months 13 - 24
100 basis point rate decrease
(1.68)
%
(0.01)
%
(1.32)
%
(5.42)
%
100 basis point rate increase
0.58
(2.66)
3.34
3.91
200 basis point rate increase
2.23
(3.69)
6.87
8.18
300 basis point rate increase
3.77
(5.42)
10.32
11.72
The ALCO estimates that negative exposure of net interest income to falling rates as compared to an unchanged rate scenario results from a more rapid decline in earning asset yields compared to rates paid on deposits. If market interest rates were to fall and remain lower for a sustained period, certain core savings and time deposit rates could decline more slowly and by a lesser amount than other market interest rates. Asset yields would likely decline more rapidly than deposit costs as current asset holdings mature or reprice, since cash flow from mortgage-related prepayments and redemption of callable securities would increase as market interest rates fall.
As of September 30, 2022, the ALCO estimates that positive exposure of net interest income to rising rates in Year 1 as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term. For simulation purposes, deposit rate changes are anticipated to lag behind other market interest rates in both timing and magnitude. The ALCO’s estimate of interest rate risk exposure to rising rate environments, including those involving changes to the shape of the yield curve, incorporates certain assumptions regarding the shift in deposit balances from low-cost core savings categories to higher-cost deposit categories, which has characterized a shift in funding mix during the past rising interest rate cycles.
As of September 30, 2022, the negative exposure of net interest income to rising rates as compared to an unchanged rate scenario is primarily attributable to a projected increase in funding costs. As market rates increase, ALCO modeling assumes that deposits will shift from low cost to higher cost deposits. This assumption reflects historical operating conditions in rising rate cycles. Although asset yields would increase in a rising interest rate environment, the cumulative impact of relative growth in rate-sensitive higher cost deposit categories and wholesale funds suggests that by Year 2 of rising interest rate scenarios, the increase in the Corporation’s cost of funds could result in a relative decline in net interest margin compared to an unchanged rate scenario.
The overall decline in interest rate sensitivity to rising rates from December 31, 2021, as shown in the above table, was largely attributable to a higher level of longer-term fixed rate assets, as well as an increase in the proportion of wholesale funds to total sources of funds at September 30, 2022. Fixed rate assets would not reprice upward in a rising rate environment. Wholesale funds would reprice more quickly and by a greater amount than the repricing of core deposits in response to changes in market interest rates.
While the ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future NIM. Over time, the repricing, maturity and prepayment characteristics of financial instruments and the composition of the Corporation’s balance sheet may change to a different degree than estimated. Simulation modeling assumes a static balance sheet, with the exception of certain modeled deposit mix shifts from low-cost core savings deposits to higher-cost time deposits in rising rate scenarios as noted above.
As market interest rates declined, the banking industry attracted low-cost core savings deposits. The ALCO recognizes that a portion of these increased levels of low-cost balances could shift into higher yielding alternatives in the future, particularly as interest rates rise and as confidence in financial markets strengthens, and has modeled deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above. Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment, which may cause interest rate sensitivity to differ from the results as presented. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The relationship between short-term interest rate changes and core deposit rate and balance changes may differ from the ALCO’s estimates used in income simulation.
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Management's Discussion and Analysis
It should also be noted that the static balance sheet assumption does not necessarily reflect the Corporation’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior.
Mortgage-backed securities and residential real estate loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.
The Corporation also monitors the potential change in market value of its available for sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to the Corporation’s capital position. Results are calculated using industry-standard analytical techniques and securities data.
The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of September 30, 2022 and December 31, 2021 resulting from immediate parallel rate shifts:
(Dollars in thousands)
Security Type
Down 100 Basis Points
Up 200 Basis Points
U.S. government-sponsored enterprise securities (callable)
$28,038
($3,760)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
55,880
(104,798)
Trust preferred debt and other corporate debt securities
(18)
7
Total change in market value as of September 30, 2022
$83,900
($108,551)
Total change in market value as of December 31, 2021
$10,166
($119,505)
Critical Accounting Policies and Estimates
Estimates and assumptions are necessary in the application of certain accounting policies and procedures and can be susceptible to significant change. Critical accounting policies are defined as those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Corporation’s financial condition or results of operations.
Management considers its accounting policy relating to the ACL on loans to be a critical accounting policy. There have been no significant changes in the Corporation’s critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Recently Issued Accounting Pronouncements
See Note 2 to the Unaudited Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Corporation’s financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information regarding quantitative and qualitative disclosures about market risk appears under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Interest Rate Risk.”
For factors that could adversely impact Washington Trust’s future results of operations and financial condition, see the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, the Corporation carried out an evaluation under the supervision and with the participation of the Corporation’s management, including the Corporation’s principal executive officer and principal financial officer, of the Corporation’s disclosure controls and procedures as of the period ended September 30, 2022. Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Corporation’s disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Corporation’s management including its Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosures. The Corporation will continue to review and document its disclosure controls and procedures and consider such changes in future evaluations of the effectiveness of such controls and procedures, as it deems appropriate.
Internal Control Over Financial Reporting
There has been no change in the Corporation’s internal controls over financial reporting during the quarter ended September 30, 2022 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated financial position or results of operations of the Corporation.
Item 1A. Risk Factors
There have been no material changes in the risk factors described in Item IA to Part I of Washington Trust’s Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes repurchases of the Corporation’s shares of common stock in the third quarter of 2022:
Issuer Purchases of Equity Securities
Period
(a) Total number of shares purchased
(b) Average price paid per share
(c) Total number of shares purchased as part of publicly announced plans
(d) Maximum number of shares that may yet be purchased under plans
July 1 - 31, 2022
18,754
$47.79
18,754
655,838
August 1 - 31, 2022
—
—
—
655,838
September 1 - 30, 2022
—
—
—
655,838
Total
18,754
$47.79
18,754
655,838
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Item 6. Exhibits
(a) Exhibits. The following exhibits are included as part of this Form 10-Q:
The following materials from Washington Trust Bancorp, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2022 formatted in Inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related Notes to these consolidated financial statements.
104
The cover page from the Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 2022 has been formatted in Inline XBRL and contained in Exhibit 101.
(1)Management contract or compensatory plan or arrangement.
(2)These certifications are not “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Securities Exchange Act.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WASHINGTON TRUST BANCORP, INC.
(Registrant)
Date:
November 7, 2022
By:
/s/ Edward O. Handy III
Edward O. Handy III
Chairman and Chief Executive Officer
(principal executive officer)
Date:
November 7, 2022
By:
/s/ Ronald S. Ohsberg
Ronald S. Ohsberg
Senior Executive Vice President, Chief Financial Officer and Treasurer
(principal financial officer)
Date:
November 7, 2022
By:
/s/ Maria N. Janes
Maria N. Janes
Executive Vice President, Chief Accounting Officer and Controller