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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, 2020
or
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______.
Commission file number: 001-32991
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, 2020 was 17,264,769.
Available for sale debt securities, at fair value (amortized cost $899,839; net of allowance for credit losses on securities of $0 at September 30, 2020)
913,850
899,490
Federal Home Loan Bank stock, at cost
37,469
50,853
Loans:
Total loans
4,282,047
3,892,999
Less: allowance for credit losses on loans
42,645
27,014
Net loans
4,239,402
3,865,985
Premises and equipment, net
27,711
28,700
Operating lease right-of-use assets
29,861
26,792
Investment in bank-owned life insurance
83,623
82,490
Goodwill
63,909
63,909
Identifiable intangible assets, net
6,530
7,218
Other assets
167,327
100,934
Total assets
$5,849,792
$5,292,659
Liabilities:
Deposits:
Noninterest-bearing deposits
$840,444
$609,924
Interest-bearing deposits
3,445,249
2,888,958
Total deposits
4,285,693
3,498,882
Federal Home Loan Bank advances
713,868
1,141,464
Payment Protection Program Lending Facility
105,746
—
Junior subordinated debentures
22,681
22,681
Operating lease liabilities
32,012
28,861
Other liabilities
162,099
97,279
Total liabilities
5,322,099
4,789,167
Commitments and contingencies (Note 18)
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 60,000,000 shares; 17,363,457 shares issued and 17,260,219 shares outstanding at September 30, 2020 and 17,363,455 shares issued and outstanding at December 31, 2019
1,085
1,085
Paid-in capital
124,768
123,281
Retained earnings
408,773
390,363
Accumulated other comprehensive income (loss)
(3,403)
(11,237)
Treasury stock, at cost; 103,238 shares at September 30, 2020
(3,530)
—
Total shareholders’ equity
527,693
503,492
Total liabilities and shareholders’ equity
$5,849,792
$5,292,659
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-3-
Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
(Dollars and shares in thousands, except per share amounts)
Three Months
Nine Months
Periods ended September 30,
2020
2019
2020
2019
Interest income:
Interest and fees on loans
$34,925
$41,558
$110,938
$125,440
Interest on mortgage loans held for sale
468
410
1,193
878
Taxable interest on debt securities
4,870
6,318
16,181
20,550
Nontaxable interest on debt securities
—
1
—
18
Dividends on Federal Home Loan Bank stock
532
747
1,826
2,162
Other interest income
39
493
424
1,232
Total interest and dividend income
40,834
49,527
130,562
150,280
Interest expense:
Deposits
5,532
9,792
21,180
27,957
Federal Home Loan Bank advances
3,354
6,512
13,501
20,153
Junior subordinated debentures
135
245
519
750
Other interest expense
159
—
161
—
Total interest expense
9,180
16,549
35,361
48,860
Net interest income
31,654
32,978
95,201
101,420
Provision for credit losses
1,325
400
10,561
1,575
Net interest income after provision for credit losses
30,329
32,578
84,640
99,845
Noninterest income:
Wealth management revenues
8,954
9,153
26,248
27,954
Mortgage banking revenues
12,353
4,840
33,300
11,126
Card interchange fees
1,161
1,099
3,139
3,114
Service charges on deposit accounts
598
939
1,975
2,743
Loan related derivative income
1,264
1,407
3,818
2,877
Income from bank-owned life insurance
567
569
1,922
1,784
Net realized losses on securities
—
—
—
(80)
Other income
571
335
1,313
944
Total noninterest income
25,468
18,342
71,715
50,462
Noninterest expense:
Salaries and employee benefits
21,892
18,332
60,824
54,387
Outsourced services
3,160
2,722
8,944
7,846
Net occupancy
2,012
1,933
5,940
5,835
Equipment
934
1,046
2,806
3,085
Legal, audit and professional fees
1,252
645
2,733
1,843
FDIC deposit insurance costs
392
(460)
1,488
509
Advertising and promotion
384
368
829
1,132
Amortization of intangibles
228
236
688
714
Other expenses
2,090
2,048
7,023
6,634
Total noninterest expense
32,344
26,870
91,275
81,985
Income before income taxes
23,453
24,050
65,080
68,322
Income tax expense
5,131
5,236
13,817
14,740
Net income
$18,322
$18,814
$51,263
$53,582
Net income available to common shareholders
$18,285
$18,778
$51,154
$53,477
Weighted average common shares outstanding - basic
17,260
17,338
17,287
17,324
Weighted average common shares outstanding - diluted
17,317
17,414
17,369
17,406
Per share information:
Basic earnings per common share
$1.06
$1.08
$2.96
$3.09
Diluted earnings per common share
$1.06
$1.08
$2.95
$3.07
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-4-
Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
(Dollars in thousands)
Three Months
Nine Months
Periods ended September 30,
2020
2019
2020
2019
Net income
$18,322
$18,814
$51,263
$53,582
Other comprehensive income (loss), net of tax:
Net change in fair value of available for sale debt securities
(3,505)
2,886
7,493
19,940
Net change in fair value of cash flow hedges
154
(171)
(888)
(1,235)
Net change in defined benefit plan obligations
410
227
1,229
680
Total other comprehensive (loss) income, net of tax
(2,941)
2,942
7,834
19,385
Total comprehensive income
$15,381
$21,756
$59,097
$72,967
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-5-
Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (unaudited)
(Dollars and shares in thousands)
For the three months ended September 30, 2020
Common Shares Outstanding
Common Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Total
Balance at June 30, 2020
17,260
$1,085
$123,684
$399,386
($462)
($3,530)
$520,163
Net income
—
—
—
18,322
—
—
18,322
Total other comprehensive loss
—
—
—
—
(2,941)
—
(2,941)
Cash dividends declared ($0.51 per share)
—
—
—
(8,935)
—
—
(8,935)
Share-based compensation
—
—
1,083
—
—
—
1,083
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered
—
—
1
—
—
—
1
Balance at September 30, 2020
17,260
$1,085
$124,768
$408,773
($3,403)
($3,530)
$527,693
For the nine months ended September 30, 2020
Common Shares Outstanding
Common Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive (Loss) Income
Treasury Stock
Total
Balance at December 31, 2019
17,363
$1,085
$123,281
$390,363
($11,237)
$—
$503,492
Cumulative effect of change in accounting principle - Topic 326
—
—
—
(6,108)
—
—
(6,108)
Net income
—
—
—
51,263
—
—
51,263
Total other comprehensive income
—
—
—
—
7,834
—
7,834
Cash dividends declared ($1.53 per share)
—
—
—
(26,745)
—
—
(26,745)
Share-based compensation
—
—
2,696
—
—
—
2,696
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered
22
—
(1,209)
—
—
792
(417)
Treasury stock purchased under 2019 Stock Repurchase Program
(125)
—
—
—
—
(4,322)
(4,322)
Balance at September 30, 2020
17,260
$1,085
$124,768
$408,773
($3,403)
($3,530)
$527,693
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)
For the three months ended September 30, 2019
Common Shares Outstanding
Common Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive (Loss) Income
Treasury Stock
Total
Balance at June 30, 2019
17,336
$1,083
$121,115
$373,873
($11,866)
$—
$484,205
Net income
—
—
—
18,814
—
—
18,814
Total other comprehensive income
—
—
—
—
2,942
—
2,942
Cash dividends declared ($0.51 per share)
—
—
—
(8,922)
—
—
(8,922)
Share-based compensation
—
—
792
—
—
—
792
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered
2
1
(7)
—
—
—
(6)
Balance at September 30, 2019
17,338
$1,084
$121,900
$383,765
($8,924)
$—
$497,825
For the nine months ended September 30, 2019
Common Shares Outstanding
Common Stock
Paid-in Capital
Retained Earnings
Accumulated Other Comprehensive (Loss) Income
Treasury Stock
Total
Balance at December 31, 2018
17,302
$1,081
$119,888
$355,524
($28,309)
$—
$448,184
Cumulative effect of change in accounting principle - Topic 842
—
—
—
722
—
—
722
Net income
—
—
—
53,582
—
—
53,582
Total other comprehensive income
—
—
—
—
19,385
—
19,385
Cash dividends declared ($1.49 per share)
—
—
—
(26,063)
—
—
(26,063)
Share-based compensation
—
—
2,295
—
—
—
2,295
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered
36
3
(283)
—
—
—
(280)
Balance at September 30, 2019
17,338
$1,084
$121,900
$383,765
($8,924)
$—
$497,825
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-7-
Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (unaudited)
(Dollars in thousands)
Nine months ended September 30,
2020
2019
Cash flows from operating activities:
Net income
$51,263
$53,582
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
10,561
1,575
Depreciation of premises and equipment
2,318
2,478
Net amortization of premiums and discounts on debt securities and loans
4,101
3,113
Amortization of intangibles
688
714
Share-based compensation
2,696
2,295
Tax (expense) benefit from stock option exercises and other equity awards
(70)
202
Income from bank-owned life insurance
(1,922)
(1,784)
Net gains on loan sales, including fair value adjustments
(33,799)
(10,749)
Net realized losses on securities
—
80
Proceeds from sales of loans, net
586,677
365,057
Loans originated for sale
(599,789)
(380,635)
(Increase) decrease in operating lease right-of-use assets
(3,069)
1,422
Increase (decrease) in operating lease liabilities
3,151
(1,312)
Increase in other assets
(67,262)
(41,239)
Increase in other liabilities
62,634
42,575
Net cash provided by operating activities
18,178
37,374
Cash flows from investing activities:
Purchases of:
Available for sale debt securities: Mortgage-backed
(247,957)
(72,262)
Available for sale debt securities: Other
(129,000)
(10,507)
Proceeds from sale of:
Other investment securities available for sale
—
9,920
Maturities, calls and principal payments of:
Available for sale debt securities: Mortgage-backed
228,268
96,521
Available for sale debt securities: Other
140,500
51,135
Net redemption (purchases) of Federal Home Loan Bank stock
13,384
1,038
Net increase in loans
(332,850)
(92,135)
Purchases of loans
(51,081)
(7,324)
Proceeds from the sale of property acquired through foreclosure or repossession
1,107
—
Purchases of premises and equipment
(1,331)
(2,768)
Proceeds from surrender of bank-owned life insurance
787
326
Equity investment in real estate limited partnership
—
(1,256)
Net cash used in investing activities
(378,173)
(27,312)
Cash flows from financing activities:
Net increase in deposits
786,811
62,105
Proceeds from Federal Home Loan Bank advances
1,592,500
1,334,000
Repayment of Federal Home Loan Bank advances
(2,020,096)
(1,327,936)
Proceeds from Payment Protection Program Lending Facility
200,628
—
Repayment of Payment Protection Program Lending Facility
(94,882)
—
Treasury stock purchased
(4,322)
—
Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered
(417)
(280)
Cash dividends paid
(26,667)
(25,322)
Net cash provided by financing activities
433,555
42,567
Net increase in cash and cash equivalents
73,560
52,629
Cash and cash equivalents at beginning of period
138,455
93,475
Cash and cash equivalents at end of period
$212,015
$146,104
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 – continued (unaudited)
(Dollars in thousands)
Nine months ended September 30,
2020
2019
Noncash Activities:
Loans charged off
$1,072
$1,888
Loans transferred to property acquired through foreclosure or repossession
28
2,000
In conjunction with the adoption of ASU 2016-02 as detailed in Note 2 to the Unaudited Consolidated Financial Statements, the following assets and liabilities were recognized:
Operating lease right-of-use assets
—
28,923
Operating lease liabilities
—
30,853
In conjunction with the adoption of ASU 2017-12 as detailed in Note 2 to the Unaudited Consolidated Financial Statements, the following qualifying debt securities classified as held to maturity were transferred to available for sale:
Fair value of debt securities transferred from held to maturity to available for sale
—
10,316
Supplemental Disclosures:
Interest payments
$36,868
$47,168
Income tax payments
15,039
14,531
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
Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company that has elected to be a financial holding company. The Bancorp’s subsidiaries include The Washington Trust Company, of Westerly (the “Bank”), a Rhode Island chartered commercial bank founded in 1800, and Weston Securities Corporation (“WSC”). Through its subsidiaries, the Bancorp offers a complete product line of financial services, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut.
The Unaudited Consolidated Financial Statements include the accounts of the Bancorp and its subsidiaries (collectively the “Corporation” or “Washington Trust”). All intercompany balances and transactions have been eliminated.
The Bancorp also owns the common stock of two capital trusts, which have issued trust preferred securities. These capital trusts are variable interest entities in which the Bancorp is not the primary beneficiary and, therefore, are not consolidated. The capital trust’s only assets are junior subordinated debentures issued by the Bancorp, which were acquired by the capital trusts using the proceeds from the issuance of the trust preferred securities and common stock. The Bancorp’s equity interest in the capital trusts, classified in other assets, and the junior subordinated debentures are included in the Unaudited Consolidated Balance Sheets. Interest expense on the junior subordinated debentures is included in the Unaudited Consolidated Statements of Income.
The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices of the banking industry.In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates.
The Unaudited Consolidated Financial Statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying Unaudited Consolidated Financial Statements have been included. Interim results are not necessarily indicative of the results of the entire year. The accompanying Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Risks and Uncertainties
The COVID-19 pandemic has caused an unprecedented disruption to the economy and the communities we serve. The U.S. government and regulatory agencies have taken several actions to provide support to the U.S. economy. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion stimulus bill, was signed into law on March 27, 2020. The goal of the CARES Act was to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The CARES Act also included extensive emergency funding for hospitals and providers. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act, as well as other recent legislative and regulatory relief efforts, could have a material impact on the Corporation’s operations. Also, the actions of the Board of Governors of the Federal Reserve System (the “FRB”) to combat the economic contraction caused by the COVID-19 pandemic, including the reduction of the target federal funds rate and quantitative easing programs, could, if prolonged, adversely affect the Corporation’s net interest income and margins, and profitability.
Continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects will continue to affect the accounting for credit losses. It also is possible that asset quality could worsen, expenses associated with collection efforts could increase and loan charge-offs could increase.
Washington Trust is participating in the Small Business Administration's (“SBA’s”) Paycheck Protection Program (“PPP”), providing loans to small businesses negatively impacted by the COVID-19 pandemic. PPP loans are fully guaranteed by the U.S. government, if that should change, Washington Trust could be required to increase its allowance for credit losses through an additional provision for credit losses charged to earnings. PPP loans amounted to $216.8 million as of September 30, 2020.
-10-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The extent to which the COVID-19 pandemic will continue to impact the Corporation’s business, results of operations, and financial condition, as well as regulatory capital and liquidity ratios, will depend on future developments, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic, as well as further actions the Corporation may take as may be required by government authorities or that the Corporation determines is in the best interests of its employees and customers. There is no certainty that such measures will be sufficient to mitigate the risks posed by the pandemic.
Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses” (“ASU 2016-13”), was issued in June 2016. ASU 2016-13 requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures at the reporting date. The measurement is based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. For available for sale debt securities with unrealized losses, Topic 326 requires credit losses to be recognized as an allowance rather than a reduction in the amortized cost of the securities. As a result, improvements to estimated credit losses are recognized immediately in earnings rather than as interest income over time. ASU 2016-13 provides for a modified retrospective transition, resulting in a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective. This ASU was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The Corporation adopted ASU 2016-13, including the subsequent ASUs issued to clarify Topic 326, on January 1, 2020.
The Corporation assembled a cross-functional project team that met regularly to address the additional data requirements, to determine the approach for implementation and to identify new internal controls over enhanced accounting processes for estimating the allowance for credit losses (“ACL”). This included assessing the adequacy of existing loan and loss data, assessing models for default and loss estimates, conducting limited “trial” runs and analytical reviews through December 31, 2019, and completing independent model validation and documentation of ACL processes and controls in the first quarter of 2020.
In accordance with Topic 326, the Corporation has updated its ACL accounting policies. Required policy disclosures are provided in Notes 4, 5, 6 and 18.
Upon adoption of Topic 326 on January 1, 2020, the ACL for loans (a contra-asset) increased by $6.5 million and the ACL for unfunded commitments (a liability) increased by $1.5 million, as compared to December 31, 2019. The increases in the ACL on loans and unfunded commitments upon adoption resulted in a one-time cumulative-effect adjustment that decreased retained earnings by $6.1 million, net of deferred tax balances of $1.9 million.
The Corporation elected the five-year phase-in option, provided by regulatory guidance issued by the Federal Deposit Insurance Corporation (“FDIC”) in March 2020, which delays the estimated impact of Topic 326 on regulatory capital for the first two years and then phases it in over a three-year period beginning in 2022. See Note 8 for additional disclosure on regulatory capital.
Fair Value Measurement - Topic 820
Accounting Standards Update No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), was issued in August 2018 to modify the disclosure requirements related to fair value. ASU 2018-13 was effective for fiscal years beginning after December 15, 2019. Certain provisions under ASU 2018-13 required prospective application, while other provisions required retrospective application to all periods presented in the consolidated financial statements upon adoption. The Corporation adopted the provisions of ASU 2018-13 effective January 1, 2020 and the adoption did not have a material impact on the Corporation’s consolidated financial statements.
-11-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Intangibles - Goodwill and Other - Internal-Use Software - Topic 350
Accounting Standards Update No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” (“ASU 2018-15”), was issued in August 2018 to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those requirements that currently exist in GAAP for capitalizing implementation costs incurred to develop or obtain internal-use software. Implementation costs would either be capitalized or expensed as incurred depending on the project stage. All costs in the preliminary and post-implementation project stages are expensed as incurred, while certain costs within the application development stage are capitalized. ASU 2018-15 was effective for fiscal years beginning after December 15, 2019. Effective January 1, 2020, the Corporation adopted the provision of ASU 2018-15 prospectively, as permitted, and the adoption did not have a material impact on the Corporation’s consolidated financial statements.
Accounting Standards Pending Adoption
Compensation - Retirement Benefits - Topic 715
Accounting Standards Update No. 2018-14, “Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”), was issued in August 2018 to modify the disclosure requirements associated with defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The provisions under ASU 2018-14 are required to be applied retrospectively. The adoption of ASU 2018-14 is not expected to have a material impact on the Corporation’s consolidated financial statements.
Income Taxes - Topic 745
Accounting Standards Update No. 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), was issued in December 2019 to simplify the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective application through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The adoption of ASU 2019-12 is not expected to have a material impact on the Corporation’s consolidated financial statements.
Reference Rate Reform - Topic 848
Accounting Standards Update No. 2020-04, “Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), was issued in March 2020 to ease the potential burden in accounting for recognizing the effects of reference rate reform on financial reporting. Such challenges include the accounting and operational implications for contract modifications and hedge accounting. The provisions in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to loan and lease agreements, contracts, hedging relationships, and other transactions affected by reference rate reform. These provisions apply to contract modifications that reference LIBOR or another reference rate expected to be discounted because of reference rate reform. Qualifying modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification would be considered "minor" so that any existing unamortized deferred loan origination fees and costs would carry forward and continue to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge accounting.
The Corporation has assembled a cross-functional project team that meets periodically to discuss the implementation of ASU 2020-04. The Corporation has completed an inventory of contracts that reference LIBOR and is currently reviewing underlying documents and contracts, as well as assessing the risks with the transition to a new reference rate.
ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Corporation has not yet adopted ASU 2020-04 and is currently evaluating the effect that this ASU will have on the Corporation’s consolidated financial statements.
-12-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Receivables - Topic 310
Accounting Standards Update No. 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs” (“ASU 2020-08”), was issued in October 2020 to provide further clarification and update the previously issued guidance in ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20: Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”). ASU 2017-08 shortened the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. The Corporation early adopted the provisions of ASU 2017-08, effective January 1, 2017. ASU 2020-08 requires that at each reporting period, to the extent that the amortized cost of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess premium shall be amortized to the next call date. ASU 2020-08 is effective for fiscal years ending after December 15, 2020 and early adoption is not permitted. The provisions under ASU 2020-08 are required to be applied prospectively. The adoption of ASU 2020-08 is not expected to have a material impact on the Corporation’s consolidated financial statements.
Note 3 - Cash and Due from Banks
The Bank maintains certain average reserve balances to meet the requirements of the FRB. Some or all of these reserve requirements may be satisfied with vault cash. Effective March 26, 2020, the FRB reduced the reserve requirement ratios to zero percent to eliminate the need for depository institutions, such as the Bank, to maintain balances in accounts at the FRB to satisfy reserve requirements. At December 31, 2019, the reserve balance was $27.9 million and was included in cash and due from banks in the Unaudited Consolidated Balance Sheets.
As of September 30, 2020 and December 31, 2019, cash and due from banks includes interest-bearing deposits in other banks of $162.8 million and $83.4 million, respectively. See Note 9 for additional disclosure regarding cash collateral pledged to derivative counterparties.
Note 4 - Securities
Adoption of Topic 326
Effective January 1, 2020, the Corporation adopted the provisions of Topic 326 using the modified retrospective method. Therefore, prior period comparative information has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 326. There was no ACL on available for sale debt securities recognized upon the adoption of Topic 326.
Accounting Policy Updates
Effective January 1, 2020, the Corporation has modified its accounting policy for the assessment of available for sale debt securities for impairment. The updated policy is detailed below.
The Corporation has made an accounting policy election to exclude accrued interest from the amortized cost basis of debt securities and reports accrued interest separately in other assets in the Unaudited Consolidated Balance Sheets. The Corporation also excludes accrued interest from the estimate of credit losses. Accrued interest receivable on available for sale debt securities totaled $2.5 million and $2.9 million, respectively, as of September 30, 2020 and December 31, 2019.
A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a debt security placed on nonaccrual is reversed against interest income. There were no debt securities on nonaccrual status and therefore there was no accrued interest related to debt securities reversed against interest income for the three and nine months ended September 30, 2020 and 2019.
For available for sale debt securities in an unrealized loss position, management first assesses whether the Corporation intends to sell, or if it is likely that the Corporation will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit losses charge to earnings. For debt securities available for sale that do not meet either of these criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers both quantitative and qualitative factors.
A substantial portion of available for sale debt securities held by the Corporation are obligations issued by U.S. government agency and U.S. government-sponsored enterprises, including mortgage-backed securities. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies and have a long
-13-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
history of no credit losses. For these securities, management takes into consideration the long history of no credit losses and other factors to assess the risk of nonpayment even if the U.S. government were to default. As such, the Corporation utilized a zero credit loss estimate for these securities. For available for sale debt securities that are not guaranteed by U.S. government agencies and U.S. government-sponsored enterprises, such as individual name issuer trust preferred debt securities and corporate bonds, management utilizes a third party credit modeling tool based on observable market data, which assists management in identifying any potential credit risk associated with these available for sale debt securities. This model estimates probability of default, loss given default and exposure at default for each security. In addition, qualitative factors are also considered, including the extent to which fair value is less than amortized cost, changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If a credit loss exists based on the results of this assessment, an ACL (contra asset) is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is considered market-related and is recognized in other comprehensive income, net of taxes.
Changes in the ACL on available for sale debt securities are recorded as provision for (or reversal of) credit losses. Losses are charged against the ACL when management believes the uncollectibility of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Available for Sale Debt Securities
The following table presents the amortized cost, gross unrealized holding gains, gross unrealized holding losses, ACL on securities and fair value of securities by major security type and class of security:
(Dollars in thousands)
September 30, 2020
Amortized Cost
Unrealized Gains
Unrealized Losses
Allowance for Credit Losses
Fair Value
Available for Sale Debt Securities:
Obligations of U.S. government-sponsored enterprises
$145,778
$1,058
($296)
$—
$146,540
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
729,575
16,239
(743)
—
745,071
Individual name issuer trust preferred debt securities
13,336
—
(973)
—
12,363
Corporate bonds
11,150
—
(1,274)
—
9,876
Total available for sale debt securities
$899,839
$17,297
($3,286)
$—
$913,850
The following table presents the amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of securities by major security type and class of security:
(Dollars in thousands)
December 31, 2019
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Available for Sale Debt Securities:
Obligations of U.S. government-sponsored enterprises
$157,255
$626
($233)
$157,648
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
713,553
8,491
(2,964)
719,080
Individual name issuer trust preferred debt securities
13,324
—
(745)
12,579
Corporate bonds
11,141
—
(958)
10,183
Total available for sale debt securities
$895,273
$9,117
($4,900)
$899,490
As of September 30, 2020 and December 31, 2019, debt securities with a fair value of $312.2 million and $431.9 million, respectively, were pledged as collateral for FHLB borrowings, potential borrowings with the FRB’s discount window, certain public deposits and for other purposes. See Note 7 for additional disclosure on FHLB borrowings.
-14-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The schedule of maturities of available for sale debt securities is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments. All other debt securities are included based on contractual maturities. Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.
(Dollars in thousands)
Available for Sale
September 30, 2020
Amortized Cost
Fair Value
Due in one year or less
$103,108
$105,289
Due after one year to five years
314,187
320,191
Due after five years to ten years
304,576
307,688
Due after ten years
177,968
180,682
Total debt securities
$899,839
$913,850
Included in the above table are debt securities with an amortized cost balance of $169.0 million and a fair value of $167.4 million at September 30, 2020 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 4 years to 16 years, with call features ranging from 1 month to 2 years.
The following table summarizes amounts relating to sales of securities:
(Dollars in thousands)
Three Months
Nine Months
For the periods ended September 30,
2020
2019
2020
2019
Proceeds from sales
$—
$—
$—
$9,920
Gross realized gains
$—
$—
$—
$—
Gross realized losses
—
—
—
(80)
Net realized losses on securities
$—
$—
$—
($80)
Assessment of Available for Sale Debt Securities for Impairment
Management assesses the decline in fair value of investment securities on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates both qualitative and quantitative factors to assess whether an impairment exists. For the accounting policy on the assessment of available for sale debt securities for impairment that was in effect prior to the adoption of Topic 326 on January 1, 2020, see Note 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
The following table summarizes available for sale debt securities in an unrealized loss position for which an allowance for credit losses on securities has not been recorded at September 30, 2020, segregated by length of time the securities have been in a continuous unrealized loss position:
(Dollars in thousands)
Less than 12 Months
12 Months or Longer
Total
September 30, 2020
#
Fair Value
Unrealized Losses
#
Fair Value
Unrealized Losses
#
Fair Value
Unrealized Losses
Obligations of U.S. government-sponsored enterprises
4
$43,704
($296)
—
$—
$—
4
$43,704
($296)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
16
148,609
(743)
—
—
—
16
148,609
(743)
Individual name issuer trust preferred debt securities
—
—
—
5
12,363
(973)
5
12,363
(973)
Corporate bonds
—
—
—
3
9,876
(1,274)
3
9,876
(1,274)
Total
20
$192,313
($1,039)
8
$22,239
($2,247)
28
$214,552
($3,286)
-15-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following tables summarize temporarily impaired securities, segregated by length of time the securities have been in a continuous unrealized loss position:
(Dollars in thousands)
Less than 12 Months
12 Months or Longer
Total
December 31, 2019
#
Fair Value
Unrealized Losses
#
Fair Value
Unrealized Losses
#
Fair Value
Unrealized Losses
Obligations of U.S. government-sponsored enterprises
3
$20,364
($136)
3
$49,902
($97)
6
$70,266
($233)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
4
41,150
(56)
23
216,804
(2,908)
27
257,954
(2,964)
Individual name issuer trust preferred debt securities
—
—
—
5
12,579
(745)
5
12,579
(745)
Corporate bonds
—
—
—
3
10,183
(958)
3
10,183
(958)
Total
7
$61,514
($192)
34
$289,468
($4,708)
41
$350,982
($4,900)
Further 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 additional declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as credit losses, and the Corporation may incur write-downs.
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-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, 2020. 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, 2020.
Individual Name Issuer Trust Preferred Debt Securities
Included in debt securities in an unrealized loss position at September 30, 2020 were five trust preferred securities issued by four individual companies in the banking sector. 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 reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information. As of September 30, 2020, there were two individual name issuer trust preferred debt securities with an amortized cost of $4.0 million and unrealized losses of $358 thousand that were rated below investment grade by Standard & Poors, Inc. (“S&P”). We noted no additional downgrades to below investment grade between September 30, 2020 and the filing date of this report. Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates and not material 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 allowance for credit losses on securities was recorded at September 30, 2020.
Corporate Bonds
At September 30, 2020, the Corporation had three corporate bond holdings with unrealized losses totaling $1.3 million. These investment grade corporate bonds were issued by large corporations in the financial services industry. The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at September 30, 2020. Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as
-16-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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. 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 allowance for credit losses was recorded at September 30, 2020.
Note 5 - Loans
The following is a summary of loans:
(Dollars in thousands)
September 30, 2020
December 31, 2019
Commercial:
Commercial real estate (1)
$1,665,745
$1,547,572
Commercial & industrial (2)
822,269
585,289
Total commercial
2,488,014
2,132,861
Residential Real Estate:
Residential real estate (3)
1,506,726
1,449,090
Consumer:
Home equity
268,551
290,874
Other (4)
18,756
20,174
Total consumer
287,307
311,048
Total loans (5)
$4,282,047
$3,892,999
(1)Commercial real estate (“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)Commercial and industrial (“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 $216.8 million of PPP loans as of September 30, 2020.
(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 fees of $670 thousand at September 30, 2020 and net unamortized loan origination costs of $5.3 million, at December 31, 2019 and net unamortized premiums on purchased loans of $919 thousand and $995 thousand, respectively, at September 30, 2020 and December 31, 2019.
As of September 30, 2020 and December 31, 2019, loans amounting to $2.2 billion and $2.1 billion, respectively, were pledged as collateral to the FHLB under a blanket pledge agreement and to the FRB. See Note 7 for additional disclosure regarding borrowings.
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.
-17-
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 age analysis of past due loans, segregated by class of loans:
(Dollars in thousands)
Days Past Due
September 30, 2020
30-59
60-89
Over 90
Total Past Due
Current
Total Loans
Commercial:
Commercial real estate
$—
$—
$431
$431
$1,665,314
$1,665,745
Commercial & industrial
21
—
—
21
822,248
822,269
Total commercial
21
—
431
452
2,487,562
2,488,014
Residential Real Estate:
Residential real estate
2,689
890
4,502
8,081
1,498,645
1,506,726
Consumer:
Home equity
969
166
618
1,753
266,798
268,551
Other
18
2
88
108
18,648
18,756
Total consumer
987
168
706
1,861
285,446
287,307
Total loans
$3,697
$1,058
$5,639
$10,394
$4,271,653
$4,282,047
(Dollars in thousands)
Days Past Due
December 31, 2019
30-59
60-89
Over 90
Total Past Due
Current
Total Loans
Commercial:
Commercial real estate
$830
$—
$603
$1,433
$1,546,139
$1,547,572
Commercial & industrial
1
—
—
1
585,288
585,289
Total commercial
831
—
603
1,434
2,131,427
2,132,861
Residential Real Estate:
Residential real estate
4,574
2,155
4,700
11,429
1,437,661
1,449,090
Consumer:
Home equity
971
729
996
2,696
288,178
290,874
Other
42
—
88
130
20,044
20,174
Total consumer
1,013
729
1,084
2,826
308,222
311,048
Total loans
$6,418
$2,884
$6,387
$15,689
$3,877,310
$3,892,999
Included in past due loans as of September 30, 2020 and December 31, 2019, were nonaccrual loans of $8.8 million and $11.5 million, respectively.
All loans 90 days or more past due at September 30, 2020 and December 31, 2019 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 collectibility of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.
-18-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following is a summary of nonaccrual loans, segregated by class of loans:
(Dollars in thousands)
Sep 30, 2020
Dec 31, 2019
Commercial:
Commercial real estate
$431
$603
Commercial & industrial
—
657
Total commercial
431
1,260
Residential Real Estate:
Residential real estate
12,792
14,297
Consumer:
Home equity
1,429
1,763
Other
88
88
Total consumer
1,517
1,851
Total nonaccrual loans
$14,740
$17,408
Accruing loans 90 days or more past due
$—
$—
For nonaccrual loans with a carrying value of $2.9 million as of September 30, 2020, no ACL was deemed necessary.
As of September 30, 2020 and December 31, 2019, nonaccrual loans secured by one- to four-family residential property amounting to $2.9 million and $5.8 million, respectively, were in process of foreclosure.
Nonaccrual loans of $5.9 million were current as to the payment of principal and interest at both September 30, 2020 and December 31, 2019.
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2020.
The following table presents interest income recognized on nonaccrual loans segregated by loan class:
(Dollars in thousands)
Interest Income Recognized
Periods ended September 30, 2020
Three Months
Nine Months
Commercial:
Commercial real estate
$—
$—
Commercial & industrial
—
—
Total commercial
—
—
Residential Real Estate:
Residential real estate
70
341
Consumer:
Home equity
11
51
Other
—
—
Total consumer
11
51
Total
$81
$392
Troubled Debt Restructurings
A loan that has been modified or renewed is considered to be a troubled debt restructuring (“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
-19-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring 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. Troubled debt restructurings 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 collectibility 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, at the time of the restructuring. For accruing TDRs, the recorded investment also includes accrued interest.
The following table presents the recorded investment in TDRs and certain other information related to TDRs:
(Dollars in thousands)
Sep 30, 2020
Dec 31, 2019
Accruing TDRs
$5,756
$377
Nonaccrual TDRs
2,894
492
Total TDRs
$8,650
$869
Specific reserves on TDRs included in the ACL on loans
$101
$97
Additional commitments to lend to borrowers with TDRs
$—
$—
The Corporation has elected to account for eligible loan modifications under Section 4013 of the CARES Act. To be eligible, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) December 31, 2020. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status in accordance with the nonaccrual loans accounting policy described above. Through September 30, 2020, we have executed loan payment deferment modifications on 617 loans totaling $685.4 million. The majority of these modifications qualified as eligible loan modifications under Section 4013 of the CARES Act and therefore, were not required to be classified as TDRs and were not reported as past due. Seventeen of these modifications on loan balances of $7.8 million were past due before the COVID-19 pandemic and therefore, were classified as TDRs and were included in past due loans as of September 30, 2020. Washington Trust has active deferrals on 253 loans totaling $418.2 million as of September 30, 2020.
-20-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following tables present loans modified as a TDR:
(Dollars in thousands)
Outstanding Recorded Investment
# of Loans
Pre-Modifications
Post-Modifications
Three months ended September 30,
2020
2019
2020
2019
2020
2019
Commercial:
Commercial real estate
—
—
$—
$—
$—
$—
Commercial & industrial
—
—
—
—
—
—
Total commercial
—
—
—
—
—
—
Residential Real Estate:
Residential real estate
4
—
2,092
—
2,092
—
Consumer:
Home equity
1
—
71
—
71
—
Other
—
—
—
—
—
—
Total consumer
1
—
$71
$—
$71
$—
Total
5
—
$2,163
$—
$2,163
$—
(Dollars in thousands)
Outstanding Recorded Investment
# of Loans
Pre-Modifications
Post-Modifications
Nine months ended September 30,
2020
2019
2020
2019
2020
2019
Commercial:
Commercial real estate
1
—
$841
$—
$841
$—
Commercial & industrial
2
—
460
—
460
—
Total commercial
3
—
1,301
—
1,301
—
Residential Real Estate:
Residential real estate
10
—
5,604
—
5,604
—
Consumer:
Home equity
4
—
873
—
873
—
Other
—
—
—
—
—
—
Total consumer
4
—
$873
$—
$873
$—
Total
17
—
$7,778
$—
$7,778
$—
The following table presents information on how loans were modified as a TDR:
(Dollars in thousands)
Three Months
Nine Months
Periods ended September 30,
2020
2019
2020
2019
Below-market interest rate concession
$—
$—
$—
$—
Payment deferral
2,163
—
7,365
—
Maturity / amortization concession
—
—
—
—
Interest only payments
—
—
—
—
Combination (1)
—
—
413
—
Total
$2,163
$—
$7,778
$—
(1) Loans included in this classification were modified with a combination of any two of the concessions listed in this table.
-21-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following tables present payment defaults on TDRs modified within the previous 12 months:
(Dollars in thousands)
# of Loans
Recorded Investment
Three months ended September 30,
2020
2019
2020
2019
Residential real estate:
Residential real estate
1
—
$903
$—
Consumer:
Home equity
1
—
47
—
Other
—
—
—
—
Totals
2
—
$950
$—
(Dollars in thousands)
# of Loans
Recorded Investment
Nine months ended September 30,
2020
2019
2020
2019
Residential real estate:
Residential real estate
1
—
$903
$—
Consumer:
Home equity
1
—
47
—
Other
—
—
—
—
Totals
2
—
$950
$—
Individually Analyzed Loans
Effective January 1, 2020, 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, 2020, the carrying value of individually analyzed loans amounted to $15.7 million, of which $7.5 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.
-22-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the carrying value of collateral dependent individually analyzed loans:
(Dollars in thousands)
As of September 30, 2020
Carrying Value
Related Allowance
Commercial:
Commercial real estate (1)
$431
$146
Commercial & industrial (2)
409
—
Total commercial
840
146
Residential Real Estate:
Residential real estate (3)
5,845
—
Consumer:
Home equity (3)
825
232
Other
—
—
Total consumer
825
232
Total
$7,510
$378
(1) Secured by income-producing property.
(2) Secured by business assets.
(3) Secured by one- to four-family residential properties.
-23-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Prior to January 1, 2020, impaired loans included nonaccrual loans and executed TDRs. The Corporation identified loss allocations for impaired loans on an individual loan basis. The following is a summary of impaired loans:
(Dollars in thousands)
As of December 31, 2019
Recorded Investment (1)
Unpaid Principal
Related Allowance
No Related Allowance Recorded
Commercial:
Commercial real estate
$—
$—
$—
Commercial & industrial
—
—
—
Total commercial
—
—
—
Residential Real Estate:
Residential real estate
13,968
14,803
—
Consumer:
Home equity
1,471
1,472
—
Other
88
88
—
Total consumer
1,559
1,560
—
Subtotal
15,527
16,363
—
With Related Allowance Recorded
Commercial:
Commercial real estate
$603
$926
$—
Commercial & industrial
657
657
580
Total commercial
1,260
1,583
580
Residential Real Estate:
Residential real estate
687
714
95
Consumer:
Home equity
292
291
291
Other
18
18
2
Total consumer
310
309
293
Subtotal
2,257
2,606
968
Total impaired loans
$17,784
$18,969
$968
Total:
Commercial
$1,260
$1,583
$580
Residential real estate
14,655
15,517
95
Consumer
1,869
1,869
293
Total impaired loans
$17,784
$18,969
$968
(1)The recorded investment in impaired loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs. For accruing impaired loans (TDRs for which management has concluded that the collectibility of the loan is not in doubt), the recorded investment also includes accrued interest.
-24-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class.
(Dollars in thousands)
Three Months
Nine Months
For the periods ended September 30, 2019
Average Recorded Investment
Interest Income Recognized
Average Recorded Investment
Interest Income Recognized
Commercial:
Commercial real estate
$886
$—
$929
$1
Commercial & industrial
—
—
2,835
103
Total commercial
886
—
3,764
104
Residential Real Estate:
Residential real estate
12,017
109
10,972
331
Consumer:
Home equity
1,414
16
1,409
43
Other
108
3
55
2
Total consumer
1,522
19
1,464
45
Total
$14,425
$128
$16,200
$480
Credit Quality Indicators
Commercial
The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. The Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for credit losses on loans. See Note 6 for additional information.
A description of the commercial loan categories is as follows:
Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality, but 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 collectibility. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined. “Loss” is not intended to imply that the loan has no recovery value, but rather, it is not practical or desirable to continue to carry the asset.
-25-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The Corporation’s procedures call for loan ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. On a quarterly basis, management reviews the 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 and strategies to improve the credit. An annual loan review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio.
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 Fair Isaac Corporation (“FICO”) score and an estimated loan to value (“LTV”) ratio. LTV is estimated based on such factors as the location, the original LTV ratio, and the date of origination of the loan and do not reflect actual appraisal amounts. The results of these analyses and other loan review procedures, including selected targeted internal reviews, are taken into consideration in the determination of qualitative loss factors for residential real estate and home equity consumer credits.
-26-
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:
(Dollars in thousands)
Term Loans Amortized Cost by Origination Year
As of September 30, 2020
2020
2019
2018
2017
2016
Prior
Revolving Loans Amortized Cost
Revolving Loans Converted to Term Loans
Total
Commercial:
CRE:
Pass
$231,992
$387,398
$317,206
$253,085
$158,862
$270,453
$14,778
$2,406
$1,636,180
Special Mention
649
—
18,104
9,537
—
844
—
—
29,134
Classified
—
—
—
—
—
431
—
—
431
Total CRE
232,641
387,398
335,310
262,622
158,862
271,728
14,778
2,406
1,665,745
C&I:
Pass
284,453
96,228
83,099
62,716
67,899
98,371
98,285
1,380
792,431
Special Mention
1,398
573
—
2,429
293
15,007
3,273
68
23,041
Classified
409
—
—
—
—
6,388
—
—
6,797
Total C&I
286,260
96,801
83,099
65,145
68,192
119,766
101,558
1,448
822,269
Residential Real Estate:
Residential real estate:
Current
351,153
300,217
176,465
179,310
145,739
345,761
—
—
1,498,645
Past Due
—
238
627
768
401
6,047
—
—
8,081
Total residential real estate
351,153
300,455
177,092
180,078
146,140
351,808
—
—
1,506,726
Consumer:
Home equity:
Current
8,821
8,247
4,425
1,858
1,379
4,432
225,650
11,986
266,798
Past Due
—
—
—
50
—
63
489
1,151
1,753
Total home equity
8,821
8,247
4,425
1,908
1,379
4,495
226,139
13,137
268,551
Other:
Current
2,801
2,437
1,713
1,992
628
8,746
330
1
18,648
Past Due
9
11
—
—
88
—
—
—
108
Total other
2,810
2,448
1,713
1,992
716
8,746
330
1
18,756
Total Loans
$881,685
$795,349
$601,639
$511,745
$375,289
$756,543
$342,805
$16,992
$4,282,047
Consistent with industry practice, Washington Trust may renew commercial loans at or immediately prior to their maturity. In the table above, renewals subject to full credit evaluation before being granted are reported as originations in the period renewed.
The following table presents the commercial loan portfolio, segregated by category of credit quality indicator:
(Dollars in thousands)
As of December 31, 2019
Pass
Special Mention
Classified
Commercial:
Commercial real estate
$1,546,139
$830
$603
Commercial & industrial
549,416
24,961
10,912
Total commercial
$2,095,555
$25,791
$11,515
-27-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the residential and consumer loan portfolios, segregated by category of credit quality indicator:
(Dollars in thousands)
As of December 31, 2019
Current
Past Due
Residential Real Estate:
Residential real estate
$1,437,661
$11,429
Consumer:
Home equity
$288,178
$2,696
Other
20,044
130
Total consumer
$308,222
$2,826
Note 6 - Allowance for Credit Losses on Loans
Adoption of Topic 326
Effective January 1, 2020, the Corporation adopted the provisions of Topic 326 using the modified retrospective method. Therefore, prior period comparative information has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 326. As a result of adopting Topic 326, the Corporation increased the ACL on loans by $6.5 million on January 1, 2020.
Accounting Policy Updates
Effective January 1, 2020, the Corporation has modified its accounting policy for the ACL on loans. The updated policy is detailed below.
The Corporation has made an accounting policy election to exclude accrued interest from the amortized cost basis of loans and reports accrued interest separately in other assets in the Unaudited Consolidated Balance Sheets. The Corporation also excludes accrued interest from the estimate of credit losses. Accrued interest receivable on loans totaled $10.9 million and $11.0 million, respectively, as of September 30, 2020 and December 31, 2019.
The ACL on loans is management’s estimate of expected credit losses over the expected life of the loans at the reporting date. The ACL on loans is increased through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income and by recoveries of amounts previously charged-off. The ACL on loans is reduced by charge-offs on loans. Loan charge-offs are recognized when management believes the collectibility of the principal balance outstanding is unlikely. Full or partial charge-offs on collateral dependent individually analyzed loans are generally recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.
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. Historical credit loss experience provides the basis for the calculation of loss given default and the estimation of expected credit losses. As discussed further below, adjustments to historical information are made for differences in specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, that may not be reflected in historical loss rates.
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. Pooled loan portfolio segments include commercial real estate (including commercial construction loans), commercial and industrial (including PPP loans), residential real estate (including homeowner construction), home equity and other consumer loans. The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments. 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 individually analyze such loans.
For loans that are individually analyzed, the ACL is measured using a discounted cash flow method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan is collateral dependent, at the fair value of the collateral. Factors management considers when measuring the extent of expected credit loss include payment
-28-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due. For collateral dependent loans for which repayment is to be provided substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral dependent loans for which repayment is to be provided substantially through the operation of the collateral, such as accruing TDRs, estimated costs to sell are not incorporated into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the collateral.
For pooled loans, the Corporation utilizes a discounted cash flow (“DCF”) methodology to estimate credit losses over the expected life of the loan. The life of the loan excludes expected extensions, renewal and modifications, unless 1) the extension or renewal options are included in the original or modified contract terms and not unconditionally cancellable by the Corporation, or 2) management reasonably expects at the reporting date that a TDR will be executed with an individual borrower. The methodology incorporates the probability of default and loss given default, which are identified by default triggers such as past due by 90 or more days, whether a charge-off has occurred, the loan has been placed on nonaccrual status, the loan has been modified in a TDR or the loan is risk-rated as special mention or classified. The probability of default for the life of the loan is determined by the use of an econometric factor. Management utilizes the national unemployment rate as an econometric factor with a one-year forecast period and one-year straight-line reversion period to the historical mean of its macroeconomic assumption in order to estimate the probability of default for each loan portfolio segment. Utilizing a third party regression model, the forecasted national unemployment rate is correlated with the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, maturity date and prepayment speeds 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 are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. These qualitative risk factors include: 1) changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; 2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments; 3) changes in the nature and volume of the portfolio and in the terms of loans; 4) changes in the experience, ability, and depth of lending management and other relevant staff; 5) changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or rated loans; 6) changes in the quality of the institution’s loan review system; 7) changes in the value of underlying collateral for collateral dependent loans; 8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and 9) the effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. Qualitative loss factors are applied to each portfolio segment with the amounts determined by historical loan charge-offs of a peer group of similar-sized regional banks.
Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. While significant deterioration in the economic forecast due to the COVID-19 pandemic was estimated in the ACL on loans, continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the ACL. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans. In addition, various regulatory agencies periodically review the ACL on loans. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. The ACL on loans is an estimate, and ultimate losses may vary from management’s estimate.
-29-
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, 2020:
(Dollars in thousands)
Commercial
Consumer
CRE
C&I
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance
$20,283
$11,278
$31,561
$8,053
$1,394
$433
$1,827
$41,441
Charge-offs
—
(2)
(2)
(99)
—
(10)
(10)
(111)
Recoveries
—
2
2
—
4
9
13
15
Provision
1,474
(93)
1,381
(35)
(51)
5
(46)
1,300
Ending Balance
$21,757
$11,185
$32,942
$7,919
$1,347
$437
$1,784
$42,645
The following table presents the activity in the ACL on loans for the nine months ended September 30, 2020:
(Dollars in thousands)
Commercial
Consumer
CRE
C&I
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance
$14,741
$3,921
$18,662
$6,615
$1,390
$347
$1,737
$27,014
Adoption of Topic 326 (1)
3,405
3,029
6,434
221
(106)
(48)
(154)
6,501
Charge-offs
(172)
(585)
(757)
(99)
(174)
(42)
(216)
(1,072)
Recoveries
—
11
11
—
11
23
34
45
Provision
3,783
4,809
8,592
1,182
226
157
383
10,157
Ending Balance
$21,757
$11,185
$32,942
$7,919
$1,347
$437
$1,784
$42,645
(1) Adoption of the CECL accounting standard effective January 1, 2020.
For the accounting policy on the allowance for loan losses that was in effect prior to the adoption of Topic 326, see Note 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
The following table presents the activity in the allowance for loan losses for the three months ended September 30, 2019:
(Dollars in thousands)
Commercial
Consumer
CRE
C&I
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance
$16,882
$4,453
$21,335
$4,857
$913
$293
$1,206
$27,398
Charge-offs
(947)
(1)
(948)
—
—
(18)
(18)
(966)
Recoveries
—
123
123
—
36
6
42
165
Provision
866
(1,128)
(262)
554
64
44
108
400
Ending Balance
$16,801
$3,447
$20,248
$5,411
$1,013
$325
$1,338
$26,997
The following table presents the activity in the allowance for loan losses for the nine months ended September 30, 2019:
(Dollars in thousands)
Commercial
Consumer
CRE
C&I
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance
$15,381
$5,847
$21,228
$3,987
$1,603
$254
$1,857
$27,072
Charge-offs
(947)
(19)
(966)
(486)
(372)
(64)
(436)
(1,888)
Recoveries
—
151
151
—
71
16
87
238
Provision
2,367
(2,532)
(165)
1,910
(289)
119
(170)
1,575
Ending Balance
$16,801
$3,447
$20,248
$5,411
$1,013
$325
$1,338
$26,997
-30-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the Corporation’s loan portfolio and associated allowance for loan losses by portfolio segment and by impairment methodology as of December 31, 2019:
(Dollars in thousands)
Loans
Related Allowance
Loans Individually Analyzed for Credit Losses
Commercial:
Commercial real estate
$603
$—
Commercial & industrial
657
580
Total commercial
1,260
580
Residential Real Estate:
Residential real estate
14,654
95
Consumer:
Home equity
1,763
291
Other
106
2
Total consumer
1,869
293
Subtotal
17,783
968
Loans Collectively Evaluated for Credit Losses
Commercial:
Commercial real estate
1,546,969
14,741
Commercial & industrial
584,632
3,341
Total commercial
2,131,601
18,082
Residential Real Estate:
Residential real estate
1,434,436
6,520
Consumer:
Home equity
289,111
1,099
Other
20,068
345
Total consumer
309,179
1,444
Subtotal
3,875,216
26,046
Total
$3,892,999
$27,014
-31-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 7 - Borrowings
Advances payable to the FHLB amounted to $713.9 million and $1.1 billion, respectively, at September 30, 2020 and December 31, 2019.
As of September 30, 2020 and December 31, 2019, the Bank had access to a $40.0 million unused line of credit and also had remaining available borrowing capacity of $828.4 million and $535.0 million, respectively, with the FHLB. The Bank pledges certain qualified investment securities and loans as collateral to the FHLB.
The following table presents maturities and weighted average interest rates on FHLB advances outstanding as of September 30, 2020:
(Dollars in thousands)
Scheduled Maturity
Weighted Average Rate
October 1, 2020 to December 31, 2020
$365,437
1.33
%
2021
258,222
1.04
2022
813
5.12
2023
5,238
3.80
2024
40,900
2.51
2025 and thereafter
43,258
3.29
Balance at September 30, 2020
$713,868
1.44
%
In the second quarter of 2020, Washington Trust began participating in the FRB’s Paycheck Protection Program Liquidity Facility ("PPPLF"). PPPLF extends credit to depository institutions at a fixed interest rate of 0.35%. Only PPP loans can be pledged as collateral to access the facility. The maturity date of the PPPLF borrowings matches the maturity date of the pledged PPP loans. As of September 30, 2020, PPPLF borrowings amounted to $105.7 million and have scheduled maturities in the second quarter of 2022. PPP loans totaling $105.7 million were pledged as collateral to the FRB as of September 30, 2020.
Note 8 - Shareholders' Equity
2019 Stock Repurchase Program
The Corporation’s 2019 Stock 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 2019 Stock Repurchase Program expired October 31, 2020. As of September 30, 2020, 124,863 shares had been repurchased under the 2019 Stock Repurchase Program, totaling $4.3 million, at an average price of $34.61. All of the shares were repurchased prior to the suspension of the 2019 Stock Repurchase Program effective March 25, 2020.
-32-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Regulatory Capital Requirements
Capital levels at September 30, 2020 exceeded the regulatory minimum levels to be considered “well capitalized.”
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, 2020
Total Capital (to Risk-Weighted Assets):
Corporation
$527,140
13.09
%
$322,243
8.00
%
N/A
N/A
Bank
524,468
13.02
322,164
8.00
$402,705
10.00
%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation
492,683
12.23
241,682
6.00
N/A
N/A
Bank
490,011
12.17
241,623
6.00
322,164
8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
Corporation
470,684
11.69
181,262
4.50
N/A
N/A
Bank
490,011
12.17
181,217
4.50
261,758
6.50
Tier 1 Capital (to Average Assets): (1)
Corporation
492,683
8.77
224,714
4.00
N/A
N/A
Bank
490,011
8.73
224,625
4.00
280,782
5.00
December 31, 2019
Total Capital (to Risk-Weighted Assets):
Corporation
494,603
12.94
305,728
8.00
N/A
N/A
Bank
490,993
12.85
305,693
8.00
382,116
10.00
Tier 1 Capital (to Risk-Weighted Assets):
Corporation
467,296
12.23
229,296
6.00
N/A
N/A
Bank
463,686
12.13
229,270
6.00
305,693
8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
Corporation
445,298
11.65
171,972
4.50
N/A
N/A
Bank
463,686
12.13
171,952
4.50
248,375
6.50
Tier 1 Capital (to Average Assets): (1)
Corporation
467,296
9.04
206,682
4.00
N/A
N/A
Bank
463,686
8.98
206,596
4.00
258,245
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, 2020 and December 31, 2019.
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, 2020 and December 31, 2019, $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 FRB’s capital adequacy guidelines.
In response to the recent disruptions in economic conditions caused by the COVID-19 pandemic and the uncertainty of its overall effects on the economy, the FDIC issued an interim final rule (“IFR”) on March 27, 2020 that delays the estimated impact on regulatory capital stemming from the adoption of Topic 326, often referred to as CECL. The amount of capital relief provided in the CECL IFR is an estimate of the approximate difference in ACL under the CECL accounting methodology relative to the previously used incurred loss accounting methodology for the first two years of the five-year
-33-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
transition period. The cumulative difference at the end of the second year of the transition period will then be phased-in to regulatory capital over a three-year transition period beginning in 2022. As discussed in Note 2, the Corporation has elected this five-year phase-in option.
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, 2020 and December 31, 2019, the Corporation had two interest rate caps with a total notional amount of $22.7 million that were designated as cash flow hedges to hedge the interest rate risk associated with our variable rate junior subordinated debentures. For both interest rate caps, the Corporation obtained the right to receive the difference between 3-month LIBOR and a 4.5% strike. The caps mature in November and December of 2020.
As of September 30, 2020 and December 31, 2019, the Corporation had two interest rate swap contracts with a total notional amount of $60.0 million that were designated as cash flow hedges to hedge the interest rate risk associated with short-term variable rate FHLB advances. The interest rate swaps mature in 2021 and 2023.
As of September 30, 2020, the Corporation had no interest rate floor contracts. As of December 31, 2019, the Corporation had three interest rate floor contracts with a total notional amount of $300.0 million. These contracts were designated as cash flow hedges to hedge the interest rate risk associated with a pool of variable rate commercial loans. The Corporation obtained the right to receive the difference between 1-month LIBOR and a 1.0% strike for each of the interest rate floors. During the nine months ended September 30, 2020, the three interest rate floor contracts matured.
The changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized.
Loan Related Derivative Contracts
Interest Rate Swap Contracts with Customers
The Corporation has entered into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert variable-rate loan payments to fixed-rate loan payments. When the Corporation enters into an interest rate swap contract with a commercial loan borrower, it simultaneously enters into a “mirror” swap contract with a third party. 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, 2020 and December 31, 2019, Washington Trust had interest rate swap contracts with commercial loan borrowers with notional amounts of $995.7 million and $813.5 million, respectively, and equal amounts of “mirror” swap contracts with third party financial institutions. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings.
-34-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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.
As of September 30, 2020, the notional amounts of risk participation-out agreements and risk participation-in agreements were $60.4 million and $92.9 million, respectively, compared to $61.2 million and $72.9 million, respectively, as of December 31, 2019.
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, 2020, the notional amounts of interest rate lock commitments and forward sale commitments were $180.1 million and $312.1 million, respectively, compared to $51.4 million and $94.8 million, respectively, as of December 31, 2019.
-35-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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, 2020
Dec 31, 2019
Balance Sheet Location
Sep 30, 2020
Dec 31, 2019
Derivatives Designated as Cash Flow Hedging Instruments:
Interest rate risk management contracts:
Interest rate caps
Other assets
$—
$—
Other liabilities
$—
$—
Interest rate swaps
Other assets
—
—
Other liabilities
2,224
730
Interest rate floors
Other assets
—
3
Other liabilities
—
—
Derivatives not Designated as Hedging Instruments:
Loan related derivative contracts:
Interest rate swaps with customers
Other assets
86,500
27,736
Other liabilities
—
358
Mirror swaps with counterparties
Other assets
—
351
Other liabilities
86,955
27,819
Risk participation agreements
Other assets
25
1
Other liabilities
3
1
Mortgage loan commitments:
Interest rate lock commitments
Other assets
6,882
1,097
Other liabilities
—
—
Forward sale commitments
Other assets
111
30
Other liabilities
3,726
827
Gross amounts
93,518
29,218
92,908
29,735
Less amounts offset in Consolidated Balance Sheets (1)
—
354
—
354
Net amounts presented in Consolidated Balance Sheets
93,518
28,864
92,908
29,381
Less collateral pledged (2)
—
—
85,516
27,105
Net amounts
$93,518
$28,864
$7,392
$2,276
(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.
The following tables present 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, Net of Tax
Three Months
Nine Months
Periods ended September 30,
2020
2019
2020
2019
Derivatives Designated as Cash Flow Hedging Instruments:
Interest rate risk management contracts:
Interest rate caps
$25
$18
$71
$32
Interest rate swaps
214
(211)
(1,109)
(1,442)
Interest rate floors
(85)
22
150
175
Total
$154
($171)
($888)
($1,235)
For derivatives designated as cash flow hedging instruments, see Note 15 for additional disclosure pertaining to the amounts and location of reclassifications from accumulated other comprehensive income into earnings.
-36-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
(Dollars in thousands)
Amount of Gain (Loss) Recognized in Income on Derivatives
Three Months
Nine Months
Periods ended September 30,
Statement of Income Location
2020
2019
2020
2019
Derivatives not Designated as Hedging Instruments:
Loan related derivative contracts:
Interest rate swaps with customers
Loan related derivative income
$767
$12,284
$67,258
$39,568
Mirror swaps with counterparties
Loan related derivative income
499
(11,108)
(63,655)
(36,958)
Risk participation agreements
Loan related derivative income
(2)
213
215
213
Foreign exchange contracts
Loan related derivative income
—
18
—
54
Mortgage loan commitments:
Interest rate lock commitments
Mortgage banking revenues
(1,499)
(340)
5,785
955
Forward sale commitments
Mortgage banking revenues
(4,743)
(101)
(10,733)
(1,969)
Total
($4,978)
$966
($1,130)
$1,863
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 / impaired loans, property acquired through foreclosure or repossession 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 (“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 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, 2020
December 31, 2019
Aggregate fair value
$68,095
$27,833
Aggregate principal balance
65,263
27,168
Difference between fair value and principal balance
$2,832
$665
Changes in fair value of mortgage loans held for sale accounted for under the fair value option election amounted to increases of $1.1 million and $2.2 million, respectively, in the three and nine months ended September 30, 2020, compared to increases
-37-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
of $82 thousand and $462 thousand, respectively, in the three and nine months ended September 30, 2019. These amounts were partially offset in earnings by the changes in fair value of forward sale commitments used to economically hedge them. The changes in fair value are reported as a component of mortgage banking revenues in the Unaudited Consolidated Statements of Income.
There were no mortgage loans held for sale 90 days or more past due as of September 30, 2020 and December 31, 2019.
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, 2020 and December 31, 2019.
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, 2020 and December 31, 2019.
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.
The fair value of collateral dependent loans that are individually analyzed or were previously deemed impaired 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 for which repayment is to be provided substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral dependent loans for which repayment is to be provided substantially through the operation of the collateral, such as accruing TDRs, estimated costs to sell are not incorporated into the measurement. 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 / impaired loans are categorized as Level 3.
Loan Servicing Rights
Loans sold with the retention of servicing result in the recognition of loan servicing rights. Loan servicing rights are included in other assets in the Consolidated Balance Sheets and are amortized as an offset to mortgage banking revenues over the estimated period of servicing. Loan servicing rights are evaluated quarterly for impairment based on their fair value. Impairment exists if the carrying value exceeds the estimated fair value. Impairment is measured on an aggregated basis by stratifying the loan servicing rights based on homogeneous characteristics such as note rate and loan type. The fair value is estimated using an independent valuation model that estimates the present value of expected cash flows, incorporating assumptions for discount rates and prepayment rates. Any impairment is recognized through a valuation allowance and as a reduction to mortgage banking revenues. Loan servicing rights are categorized as Level 3.
Property Acquired Through Foreclosure or Repossession
Property acquired through foreclosure or repossession included in other assets in the Unaudited Consolidated Balance Sheets is adjusted to fair value less costs to sell upon transfer out of loans through a charge to allowance for credit losses on loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Such subsequent valuation charges are charged through earnings. Fair value is generally based upon appraised values of the collateral. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.
-38-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Derivatives
Interest rate cap, swap and floor contracts are traded in over-the-counter markets where quoted market prices are not readily available. Fair value measurements are determined using independent pricing models that utilize primarily market observable inputs, such as swap rates of different maturities and LIBOR rates. The Corporation also 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 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. Although the Corporation has determined that the majority of the inputs used to value its interest rate swap, cap and floor contracts fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with interest rate contracts and risk participation agreements utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Corporation and its counterparties. However, as of September 30, 2020 and December 31, 2019, 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 of its derivatives. 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, 2020
Assets:
Available for sale debt securities:
Obligations of U.S. government-sponsored enterprises
$146,540
$—
$146,540
$—
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
745,071
—
745,071
—
Individual name issuer trust preferred debt securities
12,363
—
12,363
—
Corporate bonds
9,876
—
9,876
—
Mortgage loans held for sale
68,095
—
68,095
—
Derivative assets
93,518
—
93,518
—
Total assets at fair value on a recurring basis
$1,075,463
$—
$1,075,463
$—
Liabilities:
Derivative liabilities
$92,908
$—
$92,908
$—
Total liabilities at fair value on a recurring basis
$92,908
$—
$92,908
$—
-39-
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, 2019
Assets:
Available for sale debt securities:
Obligations of U.S. government-sponsored enterprises
$157,648
$—
$157,648
$—
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
719,080
—
719,080
—
Individual name issuer trust preferred debt securities
12,579
—
12,579
—
Corporate bonds
10,183
—
10,183
—
Mortgage loans held for sale
27,833
—
27,833
—
Derivative assets
28,864
—
28,864
—
Total assets at fair value on a recurring basis
$956,187
$—
$956,187
$—
Liabilities:
Derivative liabilities
$29,381
$—
$29,381
$—
Total liabilities at fair value on a recurring basis
$29,381
$—
$29,381
$—
Items Recorded at Fair Value on a Nonrecurring Basis
The following table presents the carrying value of assets held at September 30, 2020, which were written down to fair value during the nine months ended September 30, 2020:
(Dollars in thousands)
Total
Quoted Prices in Active Markets for Identical Assets (Level 1)
Total assets at fair value on a nonrecurring basis
$6,869
$—
$—
$6,869
The following table presents the carrying value of assets held at December 31, 2019, which were written down to fair value during the year ended December 31, 2019:
(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)
Assets:
Collateral dependent impaired loans
$1,448
$—
$—
$1,448
Property acquired through foreclosure or repossession
1,109
—
—
1,109
Total assets at fair value on a nonrecurring basis
$2,557
$—
$—
$2,557
-40-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following tables present 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:
(1)Management may adjust appraisal values to reflect market value declines or other discounts resulting from its knowledge of the property.
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Input
Range of Inputs Utilized (Weighted Average)
December 31, 2019
Collateral dependent impaired loans
$1,448
Appraisals of collateral
Discount for costs to sell
0% - 20% (5%)
Appraisal adjustments (1)
0% - 100% (67%)
Property acquired through foreclosure or repossession
$1,109
Appraisals of collateral
Discount for costs to sell
12%
Appraisal adjustments (1)
22%
(1)Management may adjust appraisal values to reflect market value declines or other discounts resulting from its knowledge of the property.
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, bank-owned life insurance, non-maturity deposits, PPPLF borrowings and accrued interest payable.
(Dollars in thousands)
September 30, 2020
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
$4,239,402
$4,236,032
$—
$—
$4,236,032
Financial Liabilities:
Time deposits
$1,313,223
$1,320,698
$—
$1,320,698
$—
FHLB advances
713,868
724,614
—
724,614
—
Junior subordinated debentures
22,681
18,578
—
18,578
—
-41-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
(Dollars in thousands)
December 31, 2019
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 loan losses
$3,865,985
$3,869,192
$—
$—
$3,869,192
Financial Liabilities:
Time deposits
$1,069,323
$1,082,830
$—
$1,082,830
$—
FHLB advances
1,141,464
1,145,242
—
1,145,242
—
Junior subordinated debentures
22,681
19,628
—
19,628
—
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 Topic 606. As shown below, a substantial portion of our revenues are specifically excluded from the scope of Topic 606.
For the three months ended September 30,
2020
2019
(Dollars in thousands)
Revenue (1)
ASC 606 Revenue (2)
Revenue (1)
ASC 606 Revenue (2)
Net interest income
$31,654
$—
$32,978
$—
Noninterest income:
Asset-based wealth management revenues
8,786
8,786
9,013
9,013
Transaction-based wealth management revenues
168
168
140
140
Total wealth management revenues
8,954
8,954
9,153
9,153
Mortgage banking revenues
12,353
—
4,840
—
Card interchange fees
1,161
1,161
1,099
1,099
Service charges on deposit accounts
598
598
939
939
Loan related derivative income
1,264
—
1,407
—
Income from bank-owned life insurance
567
—
569
—
Net realized losses on securities
—
—
—
—
Other income
571
491
335
323
Total noninterest income
25,468
11,204
18,342
11,514
Total revenues
$57,122
$11,204
$51,320
$11,514
(1)As reported in the Consolidated Statements of Income.
(2)Revenue from contracts with customers in scope of ASC 606.
-42-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
For the nine months ended September 30,
2020
2019
(Dollars in thousands)
Revenue (1)
ASC 606 Revenue (2)
Revenue (1)
ASC 606 Revenue (2)
Net interest income
$95,201
$—
$101,420
$—
Noninterest income:
Asset-based wealth management revenues
25,297
25,297
27,075
27,075
Transaction-based wealth management revenues
951
951
879
879
Total wealth management revenues
26,248
26,248
27,954
27,954
Mortgage banking revenues
33,300
—
11,126
—
Card interchange fees
3,139
3,139
3,114
3,114
Service charges on deposit accounts
1,975
1,975
2,743
2,743
Loan related derivative income
3,818
—
2,877
—
Income from bank-owned life insurance
1,922
—
1,784
—
Net realized losses on securities
—
—
(80)
—
Other income
1,313
1,026
944
917
Total noninterest income
71,715
32,388
50,462
34,728
Total revenues
$166,916
$32,388
$151,882
$34,728
(1)As reported in the 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.
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 financial planning fees, 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,
2020
2019
2020
2019
Revenue recognized at a point in time:
Card interchange fees
$1,161
$1,099
$3,139
$3,114
Service charges on deposit accounts
447
728
1,488
2,109
Other income
441
268
895
771
Revenue recognized over time:
Wealth management revenues
8,954
9,153
26,248
27,954
Service charges on deposit accounts
151
211
487
634
Other income
50
55
131
146
Total revenues from contracts in scope of Topic 606
$11,204
$11,514
$32,388
$34,728
-43-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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 $4.3 million at September 30, 2020, compared to $4.5 million at December 31, 2019 and were included in other assets in the Unaudited Consolidated Balance Sheets.
Deferred revenues, which are considered contract liabilities under Topic 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, 2020 and December 31, 2019 and were included in other liabilities in the Unaudited Consolidated Balance Sheets.
For commissions and incentives that are in-scope of Topic 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 $1.2 million at September 30, 2020, compared to $905 thousand at December 31, 2019 and were included in other assets in the Unaudited Consolidated Balance Sheets.
-44-
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 qualified pension plan is funded on a current basis, in compliance with the requirements of ERISA.
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,
2020
2019
2020
2019
2020
2019
2020
2019
Net Periodic Benefit Cost:
Service cost (1)
$541
$510
$1,623
$1,528
$43
$31
$128
$94
Interest cost (2)
626
741
1,879
2,225
116
140
349
422
Expected return on plan assets (2)
(1,135)
(1,124)
(3,404)
(3,371)
—
—
—
—
Amortization of prior service credit (2)
—
(4)
—
(12)
—
—
—
—
Recognized net actuarial loss (2)
396
198
1,187
594
139
104
419
307
Net periodic benefit cost
$428
$321
$1,285
$964
$298
$275
$896
$823
(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,
2020
2019
2020
2019
Measurement date
Dec 31, 2019
Dec 31, 2018
Dec 31, 2019
Dec 31, 2018
Equivalent single discount rate for benefit obligations
3.42%
4.38%
3.30%
4.28%
Equivalent single discount rate for service cost
3.54
4.44
3.62
4.48
Equivalent single discount rate for interest cost
3.07
4.12
2.93
3.98
Expected long-term return on plan assets
5.75
5.75
N/A
N/A
Rate of compensation increase
3.75
3.75
3.75
3.75
Note 13 - Share-Based Compensation Arrangements
During the nine months ended September 30, 2020, the Corporation granted performance share unit awards and nonvested share unit awards.
Performance share awards were granted to certain key employees of the Corporation to provide them with the opportunity to earn shares of common stock of the Corporation. The performance share awards were valued at fair market value as determined by the closing price of the Corporation’s common stock on the award date. The weighted average fair value of the performance share awards was $34.22. 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 award agreements. The performance share awards will be earned over a 3-year performance period and the current performance assumption estimates that 65,632 shares will be earned.
The Corporation granted to certain key employees and non-executive directors 11,765 nonvested share units, with 3-year cliff vesting. The weighted average grant date fair value of the nonvested share units was $39.56.
-45-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 14 - Business Segments
Washington Trust segregates financial information in assessing its results among its Commercial Banking and Wealth Management Services operating segments. The amounts in the Corporate unit include activity not related to the segments.
Management uses certain methodologies to allocate income and expenses to the business lines. The methodologies are periodically reviewed and revised. Results may be restated, when necessary, to reflect changes in organizational structure or allocation methodology. A funds transfer pricing (“FTP”) methodology is used to assign interest income and interest expense to each interest-earning asset and interest-bearing liability on a matched maturity funding basis. The matched maturity funding concept considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated. Loans are assigned a FTP rate for funds used and deposits are assigned a FTP rate for funds provided. Certain indirect expenses are allocated to segments. These include indirect expenses such as technology, operations and other support functions.
Commercial Banking
The Commercial Banking segment includes commercial, residential and consumer lending activities; mortgage banking activities; deposit generation; cash management activities; and direct banking activities, which include the operation of automated teller machines (“ATMs”), telephone and internet banking services and customer support and sales.
Wealth Management Services
Wealth Management Services includes investment management; financial planning; personal trust and estate services, including services as trustee, personal representative, custodian and guardian; and settlement of decedents’ estates. Institutional trust services are also provided, including fiduciary services.
Corporate
Corporate includes the Treasury Unit, which is responsible for managing the wholesale investment portfolio and wholesale funding needs. It also includes income from bank-owned life insurance (“BOLI”), as well as administrative and executive expenses not allocated to the operating segments and the residual impact of methodology allocations such as FTP offsets.
-46-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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
Corporate
Consolidated Total
Three months ended September 30,
2020
2019
2020
2019
2020
2019
2020
2019
Net interest income (expense)
$33,103
$28,515
($24)
($114)
($1,425)
$4,577
$31,654
$32,978
Provision for credit losses
1,325
400
—
—
—
—
1,325
400
Net interest income (expense) after provision for credit losses
31,778
28,115
(24)
(114)
(1,425)
4,577
30,329
32,578
Noninterest income
15,940
8,607
8,954
9,153
574
582
25,468
18,342
Noninterest expenses:
Depreciation and amortization expense
601
642
350
360
38
40
989
1,042
Other noninterest expenses
20,273
16,255
7,178
6,217
3,904
3,356
31,355
25,828
Total noninterest expenses
20,874
16,897
7,528
6,577
3,942
3,396
32,344
26,870
Income (loss) before income taxes
26,844
19,825
1,402
2,462
(4,793)
1,763
23,453
24,050
Income tax expense (benefit)
5,828
4,347
403
646
(1,100)
243
5,131
5,236
Net income (loss)
$21,016
$15,478
$999
$1,816
($3,693)
$1,520
$18,322
$18,814
Total assets at period end
$4,588,419
$3,994,458
$74,942
$78,812
$1,186,431
$1,125,608
$5,849,792
$5,198,878
Expenditures for long-lived assets
360
662
20
87
26
48
406
797
(Dollars in thousands)
Commercial Banking
Wealth Management Services
Corporate
Consolidated Total
Nine months ended September 30,
2020
2019
2020
2019
2020
2019
2020
2019
Net interest income (expense)
$94,692
$83,684
($117)
($361)
$626
$18,097
$95,201
$101,420
Provision for credit losses
10,561
1,575
—
—
—
—
10,561
1,575
Net interest income (expense) after provision for loan losses
84,131
82,109
(117)
(361)
626
18,097
84,640
99,845
Noninterest income
43,515
20,753
26,248
27,961
1,952
1,748
71,715
50,462
Noninterest expenses:
Depreciation and amortization expense
1,832
1,985
1,058
1,089
116
118
3,006
3,192
Other noninterest expenses
56,571
48,676
20,408
19,631
11,290
10,486
88,269
78,793
Total noninterest expenses
58,403
50,661
21,466
20,720
11,406
10,604
91,275
81,985
Income (loss) before income taxes
69,243
52,201
4,665
6,880
(8,828)
9,241
65,080
68,322
Income tax expense (benefit)
14,769
11,371
1,216
1,845
(2,168)
1,524
13,817
14,740
Net income (loss)
$54,474
$40,830
$3,449
$5,035
($6,660)
$7,717
$51,263
$53,582
Total assets at period end
$4,588,419
$3,994,458
$74,942
$78,812
$1,186,431
$1,125,608
$5,849,792
$5,198,878
Expenditures for long-lived assets
1,147
2,259
86
379
98
130
1,331
2,768
-47-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 15 - Other Comprehensive Income (Loss)
The following tables present the activity in other comprehensive income (loss):
Three months ended September 30,
2020
2019
(Dollars in thousands)
Pre-tax Amounts
Income Taxes
Net of Tax
Pre-tax Amounts
Income Taxes
Net of Tax
Securities available for sale:
Changes in fair value of available for sale debt securities
($4,582)
($1,077)
($3,505)
$3,772
$886
$2,886
Net losses on debt securities reclassified into earnings (1)
—
—
—
—
—
—
Net change in fair value of available for sale debt securities
(4,582)
(1,077)
(3,505)
3,772
886
2,886
Cash flow hedges:
Change in fair value of cash flow hedges
(146)
(39)
(107)
(283)
(66)
(217)
Net cash flow hedge gains reclassified into earnings (2)
344
83
261
60
14
46
Net change in fair value of cash flow hedges
198
44
154
(223)
(52)
(171)
Defined benefit plan obligations:
Amortization of net actuarial losses (3)
535
125
410
300
70
230
Amortization of net prior service credits (3)
—
—
—
(4)
(1)
(3)
Net change in defined benefit plan obligations
535
125
410
296
69
227
Total other comprehensive (loss) income
($3,849)
($908)
($2,941)
$3,845
$903
$2,942
(1)The pre-tax amount is reported in net realized losses on securities in the Unaudited Consolidated Statements of Income.
(2)The pre-tax amounts are included in interest expense on FHLB advances, interest expense on junior subordinated debentures and interest and fees on loans in the Unaudited Consolidated Statements of Income.
(3)The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income.
Nine months ended September 30,
2020
2019
(Dollars in thousands)
Pre-tax Amounts
Income Taxes
Net of Tax
Pre-tax Amounts
Income Taxes
Net of Tax
Securities available for sale:
Changes in fair value of available for sale debt securities
$9,794
$2,301
$7,493
$25,985
$6,106
$19,879
Net losses on debt securities reclassified into earnings (1)
—
—
—
80
19
61
Net change in fair value of available for sale debt securities
9,794
2,301
7,493
26,065
6,125
19,940
Cash flow hedges:
Change in fair value of cash flow hedges
(1,994)
(473)
(1,521)
(1,653)
(388)
(1,265)
Net cash flow hedge gains (losses) reclassified into earnings (2)
829
196
633
39
9
30
Net change in fair value of cash flow hedges
(1,165)
(277)
(888)
(1,614)
(379)
(1,235)
Defined benefit plan obligations:
Amortization of net actuarial losses (3)
1,606
377
1,229
900
211
689
Amortization of net prior service credits (3)
—
—
—
(12)
(3)
(9)
Net change in defined benefit plan obligations
1,606
377
1,229
888
208
680
Total other comprehensive income
$10,235
$2,401
$7,834
$25,339
$5,954
$19,385
(1)The pre-tax amount is reported in net realized losses on securities in the Unaudited Consolidated Statements of Income.
(2)The pre-tax amounts are included in interest expense on FHLB advances, interest expense on junior subordinated debentures and interest and fees on loans in the Unaudited Consolidated Statements of Income.
(3)The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income.
-48-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax:
(Dollars in thousands)
Net Unrealized Gains (Losses) on Available For Sale Debt Securities
Net Unrealized (Losses) Gains on Cash Flow Hedges
Defined Benefit Pension Plan Adjustment
Total
For the three months ended September 30, 2020
Balance at June 30, 2020
$14,224
($1,835)
($12,851)
($462)
Other comprehensive loss before reclassifications
(3,505)
(107)
—
(3,612)
Amounts reclassified from accumulated other comprehensive income
—
261
410
671
Net other comprehensive (loss) income
(3,505)
154
410
(2,941)
Balance at September 30, 2020
$10,719
($1,681)
($12,441)
($3,403)
(Dollars in thousands)
Net Unrealized Gains on Available For Sale Debt Securities
Net Unrealized (Losses) Gains on Cash Flow Hedges
Defined Benefit Pension Plan Adjustment
Total
For the nine months ended September 30, 2020
Balance at December 31, 2019
$3,226
($793)
($13,670)
($11,237)
Other comprehensive income (loss) before reclassifications
7,493
(1,521)
—
5,972
Amounts reclassified from accumulated other comprehensive income
—
633
1,229
1,862
Net other comprehensive income (loss)
7,493
(888)
1,229
7,834
Balance at September 30, 2020
$10,719
($1,681)
($12,441)
($3,403)
(Dollars in thousands)
Net Unrealized Gains on Available For Sale Debt Securities
Net Unrealized (Losses) Gains on Cash Flow Hedges
Defined Benefit Pension Plan Adjustment
Total
For the three months ended September 30, 2019
Balance at June 30, 2019
$292
($873)
($11,285)
($11,866)
Other comprehensive income (loss) before reclassifications
2,886
(217)
—
2,669
Amounts reclassified from accumulated other comprehensive income
—
46
227
273
Net other comprehensive income (loss)
2,886
(171)
227
2,942
Balance at September 30, 2019
$3,178
($1,044)
($11,058)
($8,924)
(Dollars in thousands)
Net Unrealized (Losses) Gains on Available For Sale Debt Securities
Net Unrealized Gains (Losses) on Cash Flow Hedges
Defined Benefit Pension Plan Adjustment
Total
For the nine months ended September 30, 2019
Balance at December 31, 2018
($16,762)
$191
($11,738)
($28,309)
Other comprehensive income (loss) before reclassifications
19,879
(1,265)
—
18,614
Amounts reclassified from accumulated other comprehensive income
61
30
680
771
Net other comprehensive income (loss)
19,940
(1,235)
680
19,385
Balance at September 30, 2019
$3,178
($1,044)
($11,058)
($8,924)
-49-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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,
2020
2019
2020
2019
Earnings per common share - basic:
Net income
$18,322
$18,814
$51,263
$53,582
Less dividends and undistributed earnings allocated to participating securities
(37)
(36)
(109)
(105)
Net income available to common shareholders
$18,285
$18,778
$51,154
$53,477
Weighted average common shares
17,260
17,338
17,287
17,324
Earnings per common share - basic
$1.06
$1.08
$2.96
$3.09
Earnings per common share - diluted:
Net income
$18,322
$18,814
$51,263
$53,582
Less dividends and undistributed earnings allocated to participating securities
(37)
(36)
(109)
(105)
Net income available to common shareholders
$18,285
$18,778
$51,154
$53,477
Weighted average common shares
17,260
17,338
17,287
17,324
Dilutive effect of common stock equivalents
57
76
82
82
Weighted average diluted common shares
17,317
17,414
17,369
17,406
Earnings per common share - diluted
$1.06
$1.08
$2.95
$3.07
Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 223,210 and 221,047, respectively for the three and nine months ended September 30, 2020, compared to 93,075 and 87,775, respectively, for the same periods in 2019.
-50-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 17 - Leases
The Corporation has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception. As of September 30, 2020, there were no operating leases that had not yet commenced, compared to one operating lease that had not yet commenced as of December 31, 2019.
Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $1.0 million and $3.0 million respectively, for the three and nine months ended September 30, 2020, compared to $944 thousand and $2.8 million, respectively, for the same periods in 2019. Variable lease components, such as consumer price index adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.
The following table presents information regarding Corporation’s operating leases:
Sep 30, 2020
Dec 31, 2019
Weighted average discount rate
3.36
%
3.67
%
Range of lease expiration dates
10 months - 20 years
4 months - 21 years
Range of lease renewal options
1 year - 5 years
1 year - 5 years
Weighted average remaining lease term
13.6 years
14.0 years
The following table presents the undiscounted annual lease payments under the terms of the Corporation’s operating leases at September 30, 2020, including a reconciliation to the present value of operating lease liabilities recognized in the Unaudited Consolidated Balance Sheets:
(Dollars in thousands)
October 1, 2020 to December 31, 2020
$3,905
2021
3,801
2022
3,775
2023
3,625
2024
3,061
2025 and thereafter
22,566
Total operating lease payments (1)
40,733
Less interest
8,721
Present value of operating lease liabilities (2)
$32,012
(1) Includes $2.6 million related to options to extend lease terms that are reasonably certain of being exercised.
(2) Includes short-term operating lease liabilities of $2.9 million.
The following table presents the components of total lease expense and operating cash flows:
(Dollars in thousands)
Three Months
Nine Months
Periods ended September 30,
2020
2019
2020
2019
Lease Expense:
Operating lease expense
$1,005
$931
$2,915
$2,787
Variable lease expense
14
13
41
36
Total lease expense (1)
$1,019
$944
$2,956
$2,823
Cash Paid:
Cash paid reducing operating lease liabilities
$956
$926
$2,831
$2,677
(1) Included in net occupancy expenses in the Unaudited Consolidated Income Statement.
-51-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 18 - Commitments and Contingencies
Adoption of Topic 326
As disclosed in Note 2, Topic 326 requires the measurement of expected lifetime credit losses for unfunded commitments that are considered off-balance sheet credit exposures. The Corporation adopted the provisions of Topic 326 effective January 1, 2020 using the modified retrospective method. Therefore, the prior period comparative information has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 326. As a result of adopting Topic 326, the Corporation recognized an increase in the ACL on unfunded commitments of $1.5 million on January 1, 2020.
Accounting Policy Updates
Effective January 1, 2020, the Corporation has modified its accounting policy for the ACL on unfunded commitments. The updated policy is detailed below.
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.
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 $10.3 million and $13.7 million, respectively, as of September 30, 2020 and December 31, 2019. At September 30, 2020 and December 31, 2019, 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, 2020 and 2019.
-52-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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 swap agreements with commercial borrowers are similar to those used for loans. The interest rate swaps with other counterparties are generally subject to bilateral collateralization terms.
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
180,095
51,439
Forward sale commitments
312,074
94,829
Loan related derivative contracts:
Interest rate swaps with customers
995,661
813,458
Mirror swaps with counterparties
995,661
813,458
Risk participation-in agreements
92,937
72,866
Interest rate risk management contracts:
Interest rate swaps
60,000
60,000
See Note 9 for additional disclosure pertaining to derivative financial instruments.
The ACL on unfunded commitments amounted to $2.2 million at September 30, 2020, compared to $293 thousand at December 31, 2019.
The activity in the ACL on unfunded commitments for the three months ended September 30, 2020 is presented below:
(Dollars in thousands)
Commercial
Consumer
CRE
C&I
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance
$887
$1,207
$2,094
$42
$—
$19
$19
$2,155
Provision
(30)
60
30
(5)
—
—
—
25
Ending Balance
$857
$1,267
$2,124
$37
$—
$19
$19
$2,180
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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The activity in the ACL on unfunded commitments for the nine months ended September 30, 2020 is presented below:
(Dollars in thousands)
Commercial
Consumer
CRE
C&I
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance
$136
$144
$280
$6
$—
$7
$7
$293
Adoption of Topic 326 (1)
817
626
1,443
34
—
6
6
1,483
Provision
(96)
497
401
(3)
—
6
6
404
Ending Balance
$857
$1,267
$2,124
$37
$—
$19
$19
$2,180
(1) Adoption of the CECL accounting standard effective January 1, 2020.
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.
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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, 2019, 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, 2020 are not necessarily indicative of the results for the full-year ended December 31, 2020 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: the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; the length and extent of the economic contraction as a result of the COVID-19 pandemic; continued deterioration in local, regional, national or international economic conditions or conditions affecting the banking or financial services industries, financial capital markets and the customers and communities we serve; changes in consumer behavior due to changing political, business and economic conditions, including increased unemployment, or legislative or regulatory initiatives; the possibility that future credits losses are higher than currently expected due to changes in economic assumptions or adverse economic developments; volatility in national and international financial markets; reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits; reductions in the market value or outflows of wealth management assets under administration; decreases in the value of securities and other assets; reductions in loan demand; changes in loan collectibility, 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, cybersecurity incidents, fraud, natural disasters and future pandemics; reputational risk relating to our participation in the Paycheck Protection Program and other pandemic-related legislative and regulatory initiatives and programs; 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, 2019, 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.
Critical Accounting Policies and Estimates
Accounting policies involving significant judgments, estimates and assumptions by management, which have, or could have, a material impact on the Corporation’s consolidated financial statements are considered critical accounting policies. As of September 30, 2020, management considers the following to be its critical accounting policies: the determination of allowance for credit losses on loans, the valuation of goodwill and identifiable intangible assets, and accounting for defined benefit pension plans.
See our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 for a description of the Corporation’s critical accounting policies for the valuation of goodwill and identifiable intangible assets and accounting for defined benefit pension plans. Given the composition and nature of the Corporation’s investment security portfolio, management no longer considers the assessment of investment securities for impairment as a critical accounting policy.
As a result of the adoption of Topic 326 effective January 1, 2020, Washington Trust updated its critical accounting policy for the Allowance of Credit Losses on Loans. The updated policy is described in detail below.
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Management's Discussion and Analysis
Allowance for Credit Losses on Loans
The ACL on loans is management’s estimate of expected credit losses over the expected life of the loans at the reporting date.
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. Historical credit loss experience provides the basis for the calculation of loss given default and the estimation of expected credit losses. As discussed further below, adjustments to historical information are made for differences in specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, that may not be reflected in historical loss rates.
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. Pooled loan portfolio segments include commercial real estate (including commercial construction loans), commercial and industrial (including PPP loans), residential real estate (including homeowner construction), home equity and other consumer loans. The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments. 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 individually analyze such loans.
For loans that are individually analyzed, the ACL is measured using a discounted cash flow method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan is collateral dependent, at the fair value of the collateral. Factors management considers when measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due. For collateral dependent loans for which repayment is to be provided substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral dependent loans for which repayment is to be provided substantially through the operation of the collateral, such as accruing TDRs, estimated costs to sell are not incorporated into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the collateral.
For pooled loans, the Corporation utilizes a discounted cash flow (“DCF”) methodology to estimate credit losses over the expected life of the loan. The life of the loan excludes expected extensions, renewal and modifications, unless 1) the extension or renewal options are included in the original or modified contract terms and not unconditionally cancellable by the Corporation, or 2) management reasonably expects at the reporting date that a TDR will be executed with an individual borrower. The methodology incorporates the probability of default and loss given default, which are identified by default triggers such as past due by 90 or more days, whether a charge-off has occurred, the loan has been placed on nonaccrual status, the loan has been modified in a TDR or the loan is risk-rated as special mention or classified. The probability of default for the life of the loan is determined by the use of an econometric factor. Management utilizes the national unemployment rate as an econometric factor with a one-year forecast period and one-year straight-line reversion period to the historical mean of its macroeconomic assumption in order to estimate the probability of default for each loan portfolio segment. Utilizing a third party regression model, the forecasted national unemployment rate is correlated with the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, maturity date and prepayment speeds 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 are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. These qualitative risk factors include: 1) changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; 2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments; 3) changes in the nature and volume of the portfolio and in the terms of loans; 4) changes in the experience, ability, and depth of lending management and other relevant staff; 5) changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or rated loans; 6) changes in the quality of the institution’s loan review system; 7) changes in the value of underlying collateral for collateral dependent loans; 8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and 9) the effect of other
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Management's Discussion and Analysis
external factors such as legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. Qualitative loss factors are applied to each portfolio segment with the amounts determined by historical loan charge-offs of a peer group of similar-sized regional banks.
Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. While significant deterioration in the economic forecast due to the COVID-19 pandemic was estimated in the ACL on loans, continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the ACL. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans. In addition, various regulatory agencies periodically review the ACL on loans. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. The ACL on loans is an estimate, and ultimate losses may vary from management’s estimate.
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.
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 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.
The COVID-19 pandemic has caused an unprecedented disruption to the economy and the communities we serve. In the first quarter of 2020, we implemented our business continuity and pandemic plans, which included remote working arrangements for the majority of our workforce, closing our branches and offering drive-through banking or special banking services by appointment only, and promoting social distancing. In July 2020, we reopened our branch lobbies to customers while adhering to social distancing guidelines. Remote working arrangements continue for a significant portion of our workforce.
On March 27, 2020, the CARES Act was enacted to address the economic effects of the COVID-19 pandemic. The CARES Act initially appropriated $349 billion for “paycheck protection loans” through the PPP. The amount appropriated was subsequently increased to $659 billion. Loans under the PPP that meet SBA requirements may be forgiven in certain circumstances, and are 100% guaranteed by SBA. As of September 30, 2020, there were 1,770 PPP loans totaling $216.8 million included in our commercial and industrial loan portfolio. PPP loans are fully guaranteed by the U.S. government, have either a two-year or five-year term and earn interest at a rate of 1%. We currently expect a significant portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. In conjunction with the PPP, the FRB has created the PPPLF, a lending facility for qualified financial institutions. Only loans issued under the PPP can be pledged as collateral to access the facility. The PPPLF extends credit to depository institutions at a fixed interest rate of 0.35% with maturity terms matching the maturity date of the pledged PPP loans. In the second quarter of 2020, Washington Trust began participating in PPPLF and as of September 30, 2020, PPPLF borrowings amounted to $105.7 million.
The CARES Act also provided TDR accounting relief. From March 1, 2020 through the earlier of December 31, 2020 or 60 days after the termination date of the National Emergency, a financial institution may elect to suspend the requirements under GAAP for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR, including impairment accounting. This TDR relief applies for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. Financial institutions are required to maintain
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Management's Discussion and Analysis
records of the volume of loans involved in modifications to which TDR relief is applicable. Washington Trust has made this election. Through September 30, 2020, we have executed loan payment deferment modifications on 617 loans totaling $685.4 million. Eligible deferment modifications are not classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. As of September 30, 2020, we have active deferrals on 253 loans totaling $418.2 million, or 10% of total loans excluding PPP loans. As of November 2, 2020, we have active deferrals on 146 loans totaling $252.9 million, or 6% of total loans excluding PPP loans.
Risk Management
The Corporation has a comprehensive enterprise risk management (“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 collectibility 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 5 and Note 6 to the Unaudited Consolidated Financial Statements. For further discussion regarding credit risk associated with unfunded commitments, see Note 18 to the Unaudited Consolidated Financial Statements. For further discussion regarding the Corporation’s securities portfolio, see Note 4 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. 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, asset/liability management and interest rate risk, see “Liquidity and Capital Resources” and “Asset/Liability Management and Interest Rate Risk” sections 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.
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” concept that is an industry best practice for
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Management's Discussion and Analysis
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 must report on and escalate their concerns. Corporate functions such as Credit Risk Management, Financial Administration, Information Assurance and Compliance, comprise 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 is 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, 2019, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC.
Results of Operations
The following table presents a summarized consolidated statement of operations:
(Dollars in thousands)
Three Months
Nine Months
Change
Change
For the periods ended September 30,
2020
2019
$
%
2020
2019
$
%
Net interest income
$31,654
$32,978
($1,324)
(4
%)
$95,201
$101,420
($6,219)
(6
%)
Noninterest income
25,468
18,342
7,126
39
71,715
50,462
21,253
42
Total revenues
57,122
51,320
5,802
11
166,916
151,882
15,034
10
Provision for credit losses
1,325
400
925
231
10,561
1,575
8,986
571
Noninterest expense
32,344
26,870
5,474
20
91,275
81,985
9,290
11
Income before income taxes
23,453
24,050
(597)
(2)
65,080
68,322
(3,242)
(5)
Income tax expense
5,131
5,236
(105)
(2)
13,817
14,740
(923)
(6)
Net income
$18,322
$18,814
($492)
(3
%)
$51,263
$53,582
($2,319)
(4
%)
The following table presents a summary of performance metrics and ratios:
Three Months
Nine Months
For the periods ended September 30,
2020
2019
2020
2019
Diluted earnings per common share
$1.06
$1.08
$2.95
$3.07
Return on average assets (net income divided by average assets)
1.24
%
1.44
%
1.20
%
1.39
%
Return on average equity (net income available for common shareholders divided by average equity)
13.99
%
15.20
%
13.36
%
15.09
%
Net interest income as a percentage of total revenues
55
%
64
%
57
%
67
%
Noninterest income as a percentage of total revenues
45
%
36
%
43
%
33
%
Net income totaled $18.3 million and $51.3 million, respectively, for the three and nine months ended September 30, 2020, compared to $18.8 million and $53.6 million, respectively, for the same periods in 2019.
Net interest income in 2020 was negatively impacted by the decline in market interest rates, as interest-earning asset yields declined faster than the downward repricing of interest-bearing liabilities. However, the decline in market interest rates also spurred mortgage origination, refinancing and sales activity, resulting in strong mortgage banking results in 2020. Our 2020 results also reflected an increase in provision for credit losses due to the anticipated impact of the COVID-19 pandemic under the CECL accounting methodology. Noninterest expenses increased in 2020, largely due to increases in salaries and employee benefits expense, which included volume-related increases in mortgage banking commissions expense.
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Management's Discussion and Analysis
Average Balances / Net Interest Margin - Fully Taxable Equivalent (FTE) Basis
The following table presents average balance and interest rate information. Tax-exempt income is converted to a fully taxable equivalent 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 fair value adjustments 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,
2020
2019
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
$168,106
$39
0.09
$96,231
$493
2.03
$71,875
($454)
(1.94)
Mortgage loans held for sale
61,043
468
3.05
39,771
410
4.09
21,272
58
(1.04)
Taxable debt securities
906,977
4,870
2.14
920,910
6,318
2.72
(13,933)
(1,448)
(0.58)
Nontaxable debt securities
—
—
—
75
3
15.87
(75)
(3)
(15.87)
Total securities
906,977
4,870
2.14
920,985
6,321
2.72
(14,008)
(1,451)
(0.58)
FHLB stock
43,839
532
4.83
47,982
747
6.18
(4,143)
(215)
(1.35)
Commercial real estate
1,652,136
11,649
2.81
1,490,878
17,314
4.61
161,258
(5,665)
(1.80)
Commercial & industrial
849,452
6,920
3.24
584,601
6,946
4.71
264,851
(26)
(1.47)
Total commercial
2,501,588
18,569
2.95
2,075,479
24,260
4.64
426,109
(5,691)
(1.69)
Residential real estate
1,510,621
14,047
3.70
1,367,017
13,728
3.98
143,604
319
(0.28)
Home equity
276,221
2,320
3.34
291,058
3,615
4.93
(14,837)
(1,295)
(1.59)
Other
18,706
237
5.04
22,270
278
4.95
(3,564)
(41)
0.09
Total consumer
294,927
2,557
3.45
313,328
3,893
4.93
(18,401)
(1,336)
(1.48)
Total loans
4,307,136
35,173
3.25
3,755,824
41,881
4.42
551,312
(6,708)
(1.17)
Total interest-earning assets
5,487,101
41,082
2.98
4,860,793
49,852
4.07
626,308
(8,770)
(1.09)
Noninterest-earning assets
377,348
320,223
57,125
Total assets
$5,864,449
$5,181,016
$683,433
Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits
$157,986
$83
0.21
$137,980
$649
1.87
$20,006
($566)
(1.66)
NOW accounts
631,148
99
0.06
471,302
69
0.06
159,846
30
—
Money market accounts
839,032
977
0.46
699,138
2,094
1.19
139,894
(1,117)
(0.73)
Savings accounts
428,781
67
0.06
362,142
72
0.08
66,639
(5)
(0.02)
Time deposits (in-market)
730,464
3,015
1.64
800,571
4,181
2.07
(70,107)
(1,166)
(0.43)
Total interest-bearing in-market deposits
2,787,411
4,241
0.61
2,471,133
7,065
1.13
316,278
(2,824)
(0.52)
Wholesale brokered time deposits
463,756
1,291
1.11
475,026
2,727
2.28
(11,270)
(1,436)
(1.17)
Total interest-bearing deposits
3,251,167
5,532
0.68
2,946,159
9,792
1.32
305,008
(4,260)
(0.64)
FHLB advances
860,758
3,354
1.55
980,091
6,512
2.64
(119,333)
(3,158)
(1.09)
Junior subordinated debentures
22,681
135
2.37
22,681
245
4.29
—
(110)
(1.92)
PPPLF borrowings
180,128
159
0.35
—
—
—
180,128
159
0.35
Total interest-bearing liabilities
4,314,734
9,180
0.85
3,948,931
16,549
1.66
365,803
(7,369)
(0.81)
Noninterest-bearing demand deposits
842,949
626,408
216,541
Other liabilities
186,981
115,480
71,501
Shareholders’ equity
519,785
490,197
29,588
Total liabilities and shareholders’ equity
$5,864,449
$5,181,016
$683,433
Net interest income (FTE)
$31,902
$33,303
($1,401)
Interest rate spread
2.13
2.41
(0.28)
Net interest margin
2.31
2.72
(0.41)
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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,
2020
2019
Change
Commercial loans
$248
$323
($75)
Nontaxable debt securities
—
2
(2)
Total
$248
$325
($77)
Nine months ended September 30,
2020
2019
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
$156,296
$424
0.36
$75,333
$1,232
2.19
$80,963
($808)
(1.83)
Mortgage loans held for sale
48,570
1,193
3.28
28,379
878
4.14
20,191
315
(0.86)
Taxable debt securities
905,692
16,181
2.39
972,511
20,550
2.83
(66,819)
(4,369)
(0.44)
Nontaxable debt securities
—
—
—
602
24
5.33
(602)
(24)
(5.33)
Total debt securities
905,692
16,181
2.39
973,113
20,574
2.83
(67,421)
(4,393)
(0.44)
FHLB stock
49,236
1,826
4.95
48,185
2,162
6.00
1,051
(336)
(1.05)
Commercial real estate
1,623,612
40,326
3.32
1,461,736
51,702
4.73
161,876
(11,376)
(1.41)
Commercial & industrial
749,905
20,214
3.60
603,143
21,972
4.87
146,762
(1,758)
(1.27)
Total commercial
2,373,517
60,540
3.41
2,064,879
73,674
4.77
308,638
(13,134)
(1.36)
Residential real estate
1,492,589
42,660
3.82
1,358,606
41,099
4.04
133,983
1,561
(0.22)
Home equity
281,488
7,802
3.70
284,657
10,757
5.05
(3,169)
(2,955)
(1.35)
Other
19,171
716
4.99
24,017
887
4.94
(4,846)
(171)
0.05
Total consumer
300,659
8,518
3.78
308,674
11,644
5.04
(8,015)
(3,126)
(1.26)
Total loans
4,166,765
111,718
3.58
3,732,159
126,417
4.53
434,606
(14,699)
(0.95)
Total interest-earning assets
5,326,559
131,342
3.29
4,857,169
151,263
4.16
469,390
(19,921)
(0.87)
Noninterest-earning assets
357,133
292,702
64,431
Total assets
$5,683,692
$5,149,871
$533,821
Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits
$158,594
$725
0.61
$144,306
$1,959
1.82
$14,288
($1,234)
(1.21)
NOW accounts
569,283
253
0.06
462,856
228
0.07
106,427
25
(0.01)
Money market accounts
818,530
4,439
0.72
668,330
5,534
1.11
150,200
(1,095)
(0.39)
Savings accounts
402,243
195
0.06
365,911
204
0.07
36,332
(9)
(0.01)
Time deposits (in-market)
752,443
10,571
1.88
795,559
11,900
2.00
(43,116)
(1,329)
(0.12)
Total interest-bearing in-market deposits
2,701,093
16,183
0.80
2,436,962
19,825
1.09
264,131
(3,642)
(0.29)
Wholesale brokered time deposits
471,771
4,997
1.41
485,405
8,132
2.24
(13,634)
(3,135)
(0.83)
Total interest-bearing deposits
3,172,864
21,180
0.89
2,922,367
27,957
1.28
250,497
(6,777)
(0.39)
FHLB advances
1,016,943
13,501
1.77
1,019,172
20,153
2.64
(2,229)
(6,652)
(0.87)
Junior subordinated debentures
22,681
519
3.06
22,681
750
4.42
—
(231)
(1.36)
PPPLF borrowings
61,333
161
0.35
—
—
—
61,333
161
0.35
Total interest-bearing liabilities
4,273,821
35,361
1.11
3,964,220
48,860
1.65
309,601
(13,499)
(0.54)
Noninterest-bearing demand deposits
733,359
613,917
119,442
Other liabilities
164,928
98,012
66,916
Shareholders’ equity
511,584
473,722
37,862
Total liabilities and shareholders’ equity
$5,683,692
$5,149,871
$533,821
Net interest income (FTE)
$95,981
$102,403
($6,422)
Interest rate spread
2.18
2.51
(0.33)
Net interest margin
2.41
2.82
(0.41)
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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,
2020
2019
Change
Commercial loans
$780
$977
($197)
Nontaxable debt securities
—
6
(6)
Total
$780
$983
($203)
Net Interest Income
Net interest income continues to be the primary source of our operating income. Net interest income for the three and nine months ended September 30, 2020 totaled $31.7 million, and $95.2 million, respectively, compared to $33.0 million and $101.4 million, respectively, for the same periods in 2019. 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 a fully taxable equivalent (“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, net interest margin and the yield on loans may be impacted by the periodic recognition of prepayment penalty income associated with loan payoffs. Prepayment penalty income associated with loan payoffs for both the three and nine months ended September 30, 2020 and 2019 was immaterial. The analysis of net interest income, net interest margin 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. As market interest rates decline, loan prepayments and the receipt of payments on mortgage-backed securities generally increase. This results in accelerated levels of amortization reducing net interest income and may also result in the proceeds having to be reinvested at a lower rate than the loan or mortgage-backed security being prepaid. As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans amounted to $4.1 million for the nine months ended September 30, 2020, up by $988 thousand from the same period in 2019.
FTE net interest income for the three and nine months ended September 30, 2020 amounted to $31.9 million and $96.0 million, respectively, down by $1.4 million and $6.4 million, respectively, from the same periods in 2019. Growth in average interest-earning assets, net of increased average interest-bearing liability balances, contributed approximately $6.1 million and $12.8 million, respectively, of additional net interest income for the three and nine months ended September 30, 2020, however, this was offset by declines in asset yields out-pacing declines in funding costs, which reduced net interest income by $7.5 million and $19.2 million, respectively.
The net interest margin was 2.31% and 2.41%, respectively, for the three and nine months ended September 30, 2020, compared to 2.72% and 2.82%, respectively, for the same periods a year ago. Compression in net interest margin resulted from the downward repricing of assets, which occurred at a faster pace than the downward repricing of liabilities.
Total average securities for the three and nine months ended September 30, 2020 decreased by $14.0 million and $67.4 million, respectively, from the average balances for the same periods a year earlier. The decline in the average balance of securities was due to timing of reinvestment of security portfolio cash flows. The FTE rate of return on the securities portfolio for the three and nine months ended September 30, 2020 was 2.14% and 2.39%, respectively, compared to 2.72% and 2.83%, respectively, for the same periods in 2019, reflecting purchases of relatively lower yielding debt securities and lower market interest rates.
Total average loan balances for the three and nine months ended September 30, 2020 increased by $551.3 million and $434.6 million, respectively, from the average loan balances for the comparable 2019 period. This reflected growth in average commercial loan balances, which included the origination of PPP loans in 2020, as well as growth in average residential real estate loan balances, which included purchases of residential mortgage loans in the latter portion of 2019 and first quarter of 2020. The yield on total loans for the three and nine months ended September 30, 2020 was 3.25% and 3.58%, respectively, compared to 4.42% and 4.53%, respectively, for the same periods in 2019. Yields on LIBOR-based and prime-based loans reflected lower market interest rates.
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Management's Discussion and Analysis
The average balance of FHLB advances for the three and nine months ended September 30, 2020 decreased by $119.3 million and $2.2 million, respectively, compared to the average balances for the same periods in 2019. The average rate paid on such advances for the three and nine months ended September 30, 2020 was 1.55% and 1.77%, respectively, compared to 2.64% and 2.64%, respectively, for the same periods in 2019, due to lower rates on short-term advances.
Included in total average interest-bearing deposits were of out-of-market wholesale brokered time deposits, which decreased by $11.3 million and $13.6 million, respectively, from the same periods in 2019. The average rate paid on wholesale brokered time deposits for the three and nine months ended September 30, 2020 was 1.11% and 1.41%, respectively, compared to 2.28% and 2.24%, respectively, for the same periods in 2019. The decline in the yield on average wholesale brokered time deposits reflected lower market interest rates.
Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, for the three and nine months ended September 30, 2020 increased by $316.3 million and $264.1 million, respectively, from the average balances for the same periods in 2019. The increases largely reflected growth in average lower-cost deposit categories, partially offset by maturities of higher-cost promotional time deposits. The average rate paid on in-market interest-bearing deposits for the three and nine months ended September 30, 2020 decreased by 52 basis points and 29 basis points, respectively, compared to the same periods in 2019, largely due to downward repricing of interest-bearing in-market deposits reflecting lower market interest rates.
The average balance of noninterest-bearing demand deposits for the three and nine months ended September 30, 2020 increased by $216.5 million and $119.4 million, respectively, from the average balances for the same periods in 2019. See additional disclosure regarding PPP loan funding deposits under the caption “Sources of Funds.”
-63-
Management's Discussion and Analysis
Volume / Rate Analysis - Interest Income and Expense (FTE Basis)
The following table presents certain information on a 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, 2020 vs. 2019
Nine Months Ended September 30, 2020 vs. 2019
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
$214
($668)
($454)
$705
($1,513)
($808)
Mortgage loans held for sale
181
(123)
58
526
(211)
315
Taxable debt securities
(95)
(1,353)
(1,448)
(1,344)
(3,025)
(4,369)
Nontaxable debt securities
(2)
(1)
(3)
(12)
(12)
(24)
Total securities
(97)
(1,354)
(1,451)
(1,356)
(3,037)
(4,393)
FHLB stock
(60)
(155)
(215)
46
(382)
(336)
Commercial real estate
1,713
(7,378)
(5,665)
5,260
(16,636)
(11,376)
Commercial & industrial
2,559
(2,585)
(26)
4,674
(6,432)
(1,758)
Total commercial
4,272
(9,963)
(5,691)
9,934
(23,068)
(13,134)
Residential real estate
1,369
(1,050)
319
3,862
(2,301)
1,561
Home equity
(176)
(1,119)
(1,295)
(118)
(2,837)
(2,955)
Other
(45)
4
(41)
(181)
10
(171)
Total consumer
(221)
(1,115)
(1,336)
(299)
(2,827)
(3,126)
Total loans
5,420
(12,128)
(6,708)
13,497
(28,196)
(14,699)
Total interest income
5,658
(14,428)
(8,770)
13,418
(33,339)
(19,921)
Interest on Interest-Bearing Liabilities:
Interest-bearing demand deposits
83
(649)
(566)
179
(1,413)
(1,234)
NOW accounts
30
—
30
58
(33)
25
Money market accounts
359
(1,476)
(1,117)
1,092
(2,187)
(1,095)
Savings accounts
13
(18)
(5)
19
(28)
(9)
Time deposits (in-market)
(343)
(823)
(1,166)
(636)
(693)
(1,329)
Total interest-bearing in-market deposits
142
(2,966)
(2,824)
712
(4,354)
(3,642)
Wholesale brokered time deposits
(63)
(1,373)
(1,436)
(221)
(2,914)
(3,135)
Total interest-bearing deposits
79
(4,339)
(4,260)
491
(7,268)
(6,777)
FHLB advances
(717)
(2,441)
(3,158)
(44)
(6,608)
(6,652)
Junior subordinated debentures
—
(110)
(110)
—
(231)
(231)
Other borrowings
159
—
159
161
—
161
Total interest expense
(479)
(6,890)
(7,369)
608
(14,107)
(13,499)
Net interest income (FTE)
$6,137
($7,538)
($1,401)
$12,810
($19,232)
($6,422)
Provision for Credit Losses
Effective January 1, 2020, Washington Trust adopted Topic 326, often referred to as CECL, which requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures. CECL requires that the allowance for credit losses, or ACL, be calculated based on current expected credit losses over the full remaining expected life of the financial assets and also consider expected future changes in macroeconomic conditions. See Note 2 to the Unaudited Consolidated Financial Statements for additional disclosure on the impact of adopting Topic 326.
Prior to January 1, 2020, the provision for loan losses was based on an incurred loss model. The incurred loss model was based on management’s periodic assessment of the adequacy of the allowance for credit losses on loans which, in turn, was
-64-
Management's Discussion and Analysis
based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics; the levels of nonperforming loans, past due loans and net charge-offs, both current and historic; local economic and credit conditions; the direction of real estate values; and regulatory guidelines. The provision for loan losses was charged against earnings in order to maintain an allowance that reflected management’s best estimate of probable losses inherent in the loan portfolio at the balance sheet date.
Provisions for credit losses of $1.3 million and $10.6 million, respectively, were charged to earnings for the three and nine months ended September 30, 2020, compared to $400 thousand and $1.6 million, respectively, for the same periods in 2019. In addition to the change in accounting methodology described above, the year-over-year increase in the year-to-date provision was attributable to anticipated losses related the COVID-19 pandemic and also reflected loan growth and changes in the underlying portfolio. Estimating an appropriate level of ACL in loans necessarily involves a high degree of judgment and continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the ACL.
Net charge-offs totaled $96 thousand and $1.0 million, respectively, for the three and nine months ended September 30, 2020, compared to $801 thousand and $1.7 million, respectively, for the same periods in 2019.
The allowance for credit losses on loans was $42.6 million, or 1.00% of total loans, at September 30, 2020, compared to an allowance for loan losses of $27.0 million, or 0.69% of total loans, at December 31, 2019. See additional discussion under the caption “Asset Quality” for further information on the allowance for credit losses 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,
2020
2019
$
%
2020
2019
$
%
Noninterest income:
Wealth management revenues
$8,954
$9,153
($199)
(2
%)
$26,248
$27,954
($1,706)
(6
%)
Mortgage banking revenues
12,353
4,840
7,513
155
33,300
11,126
22,174
199
Card interchange fees
1,161
1,099
62
6
3,139
3,114
25
1
Service charges on deposit accounts
598
939
(341)
(36)
1,975
2,743
(768)
(28)
Loan related derivative income
1,264
1,407
(143)
(10)
3,818
2,877
941
33
Income from bank-owned life insurance
567
569
(2)
—
1,922
1,784
138
8
Net realized gains on securities
—
—
—
—
—
(80)
80
100
Other income
571
335
236
70
1,313
944
369
39
Total noninterest income
$25,468
$18,342
$7,126
39
%
$71,715
$50,462
$21,253
42
%
Noninterest Income Analysis
Revenue from wealth management services represented 37% of total noninterest income for the nine months ended September 30, 2020, compared to 55% for the same period in 2019. A substantial portion of wealth management revenues is dependent on the value of wealth management assets under administration and is closely tied to the performance of the financial markets. 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 financial planning, commissions and other service fees that are not primarily derived from the value of assets.
-65-
Management's Discussion and Analysis
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,
2020
2019
$
%
2020
2019
$
%
Wealth management revenues:
Asset-based revenues
$8,786
$9,013
($227)
(3
%)
$25,297
$27,075
($1,778)
(7
%)
Transaction-based revenues
168
140
28
20
951
879
72
8
Total wealth management revenues
$8,954
$9,153
($199)
(2
%)
$26,248
$27,954
($1,706)
(6
%)
Wealth management revenues for the three and nine months ended September 30, 2020 decreased by $199 thousand and $1.7 million, respectively, from the comparable periods in 2019, due to a decline in asset-based revenues. The decrease in asset-based revenues correlated to declines in the average balances of assets under administration (“AUA”) for the comparable periods in 2019.
The following table presents the changes in wealth management AUA:
(Dollars in thousands)
Three Months
Nine Months
Periods ended September 30,
2020
2019
2020
2019
Wealth management assets under administration:
Balance at the beginning of period
$6,138,845
$6,478,890
$6,235,801
$5,910,814
Net investment appreciation & income
335,209
66,514
234,076
809,060
Net client asset outflows
(78,402)
(419,077)
(74,225)
(593,547)
Balance at the end of period
$6,395,652
$6,126,327
$6,395,652
$6,126,327
Wealth management AUA amounted to $6.4 billion at September 30, 2020, up by $269.3 million, or 4%, from the balance at September 30, 2019, reflecting net investment appreciation offset, in part, by net client asset outflows. AUA and related asset-based revenues were adversely impacted by client outflows in the second half of 2019, which was largely associated with the departures of two senior counselors in June 2019. The average balance of AUA for the three and nine months ended September 30, 2020 decreased by approximately 0.2% and 4%, respectively, from the average balances for the same periods in 2019.
Mortgage banking revenues represented 46% of total noninterest income for the nine months ended September 30, 2020, compared to 22% for the same period in 2019. These revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets.
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Management's Discussion and Analysis
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,
2020
2019
$
%
2020
2019
$
%
Mortgage banking revenues:
Realized gains on loan sales, net (1)
$14,280
$4,509
$9,771
217
%
$28,614
$9,370
$19,244
205
%
Unrealized (losses) gains, net (2)
(1,555)
243
(1,798)
(740)
5,185
1,379
3,806
276
Loan servicing fee income, net (3)
(372)
88
(460)
(523)
(499)
377
(876)
(232)
Total mortgage banking revenues
$12,353
$4,840
$7,513
155
%
$33,300
$11,126
$22,174
199
%
Loans sold to the secondary market (4)
$354,170
$184,976
$169,194
91
%
$821,585
$414,469
$407,116
98
%
(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 adjustments 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, 2020, mortgage banking revenues were up by $7.5 million and $22.2 million, respectively, compared to the same periods in 2019, primarily due to an increase in net realized gains associated with mortgage banking activities. Net realized gains rose due to increases in both sales volume and sales yield on loans sold to the secondary market. For the three and nine months ended September 30, 2020, mortgage loans sold to the secondary market totaled $354.2 million and $821.6 million, respectively, compared to $185.0 million and $414.5 million, respectively, for the same periods in 2019. As noted in the above table, mortgage banking revenues also include net unrealized gains and losses and net loan servicing fee income. Net unrealized gains and losses correlate to changes in the mortgage pipeline and corresponding changes in the fair value of mortgage loan commitments. Net loan servicing fee income associated with loans sold with servicing retained, declined in 2020, largely due to increased amortization of servicing rights resulting from higher prepayment speeds on the serviced mortgage portfolio. Mortgage origination, refinancing and sales activity increased year-over-year in response to declines in market interest rates.
For the three and nine months ended September 30, 2020, service charges on deposit accounts decreased by $341 thousand and $768 thousand, respectively, compared to the same periods in 2019, primarily due to lower overdraft activity and related fee income.
Loan related derivative income for the three months ended September 30, 2020 decreased by $143 thousand from the same period in 2019. Loan-related derivative income for the nine months ended September 30, 2020 increased by $941 thousand from the comparable period in 2019, reflecting higher gains on commercial borrower interest rate swap transactions.
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Management's Discussion and Analysis
Noninterest Expense
The following table presents noninterest expense comparisons:
(Dollars in thousands)
Three Months
Nine Months
Change
Change
Periods ended September 30,
2020
2019
$
%
2020
2019
$
%
Noninterest expense:
Salaries and employee benefits
$21,892
$18,332
$3,560
19
%
$60,824
$54,387
$6,437
12
%
Outsourced services
3,160
2,722
438
16
8,944
7,846
1,098
14
Net occupancy
2,012
1,933
79
4
5,940
5,835
105
2
Equipment
934
1,046
(112)
(11)
2,806
3,085
(279)
(9)
Legal, audit and professional fees
1,252
645
607
94
2,733
1,843
890
48
FDIC deposit insurance costs
392
(460)
852
185
1,488
509
979
192
Advertising and promotion
384
368
16
4
829
1,132
(303)
(27)
Amortization of intangibles
228
236
(8)
(3)
688
714
(26)
(4)
Other
2,090
2,048
42
2
7,023
6,634
389
6
Total noninterest expense
$32,344
$26,870
$5,474
20
%
$91,275
$81,985
$9,290
11
%
Noninterest Expense Analysis
Salaries and employee benefits expense for the three and nine months ended September 30, 2020 increased by $3.6 million and $6.4 million, respectively, compared to the same periods in 2019, largely reflecting volume-related increases in mortgage banking commissions expense, higher staffing levels, annual merit increases, and increases in performance-based compensation expense. These were partially offset by increases in deferred labor costs (a contra expense) associated with loan originations in 2020.
Outsourced services expense for the three and nine months ended September 30, 2020 increased by $438 thousand and $1.1 million, respectively, compared to the same periods in 2019, reflecting volume-related increases in third party processing costs and the expansion of services provided by third party vendors.
Legal, audit and professional fees for the three and nine months ended September 30, 2020 increased by $607 thousand and $890 thousand, respectively, compared to the same periods in 2019, reflecting increased costs associated with various legal and consulting matters.
FDIC deposit insurance costs for the three and nine months ended September 30, 2020 increased by $852 thousand and $979 thousand, respectively, compared to the same periods in 2019, largely due to approximately $900 thousand of FDIC assessment credits recognized in the third quarter of 2019.
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,
2020
2019
2020
2019
Income tax expense
$5,131
$5,236
$13,817
$14,740
Effective income tax rate
21.9
%
21.8
%
21.2
%
21.6
%
The effective income tax rates for the three and nine months endedSeptember 30, 2020 and 2019 differed from the federal rate of 21%, primarily due to state income tax expense, offset by the benefits of tax-exempt income, income from BOLI, federal tax credits and the recognition of excess tax benefits (expense) associated with the settlement of share-based awards.
The modest decrease in the effective tax rate for the nine months endedSeptember 30, 2020 compared to the same period in 2019 largely reflected lower state tax exposure.
-68-
Management's Discussion and Analysis
Segment Reporting
The Corporation manages its operations through two business segments, Commercial Banking and Wealth Management Services. Activity not related to the segments, including activity related to the investment securities portfolio, wholesale funding matters and administrative units are considered Corporate. The Corporate unit also includes income from BOLI and the residual impact of methodology allocations such as funds transfer pricing offsets. Methodologies used to allocate income and expenses to business lines are periodically reviewed and revised. 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,
2020
2019
$
%
2020
2019
$
%
Net interest income
$33,103
$28,515
$4,588
16
%
$94,692
$83,684
$11,008
13
%
Provision for credit losses
1,325
400
925
231
10,561
1,575
8,986
571
Net interest income after provision for credit losses
31,778
28,115
3,663
13
84,131
82,109
2,022
2
Noninterest income
15,940
8,607
7,333
85
43,515
20,753
22,762
110
Noninterest expense
20,874
16,897
3,977
24
58,403
50,661
7,742
15
Income before income taxes
26,844
19,825
7,019
35
69,243
52,201
17,042
33
Income tax expense
5,828
4,347
1,481
34
14,769
11,371
3,398
30
Net income
$21,016
$15,478
$5,538
36
%
$54,474
$40,830
$13,644
33
%
Net interest income for the Commercial Banking segment for the three and nine months ended September 30, 2020, increased by $4.6 million and $11.0 million, respectively, from the same periods in 2019, reflecting growth in loans partially offset by lower yields on loans due to declines in market interest rates.
Provisions for credit losses of $1.3 million and $10.6 million, respectively, were charged to earnings for the three and nine months ended September 30, 2020, compared to $400 thousand and $1.6 million, respectively, for the same periods in 2019. In addition to the change in accounting methodology described above under the caption “Provision for Credit Losses,” anticipated losses related the COVID-19 pandemic and also reflected loan growth and changes in the underlying portfolio.
Noninterest income derived from the Commercial Banking segment for the three and nine months ended September 30, 2020 was up by $7.3 million and $22.8 million, respectively, from the comparable periods in 2019 largely due to higher mortgage banking revenues. See additional discussion regarding mortgage banking revenues, loan related derivative income and service charges on deposits under the caption “Noninterest Income” above.
Commercial Banking noninterest expenses for the three and nine months ended September 30, 2020 were up by $4.0 million and $7.7 million, respectively, from the same periods in 2019, reflecting increases in salaries and employee benefits, FDIC deposit insurance costs, outsourced services and legal expenses. 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,
2020
2019
$
%
2020
2019
$
%
Net interest expense
($24)
($114)
$90
79
%
($117)
($361)
$244
68
%
Noninterest income
8,954
9,153
(199)
(2)
26,248
27,961
(1,713)
(6)
Noninterest expense
7,528
6,577
951
14
21,466
20,720
746
4
Income before income taxes
1,402
2,462
(1,060)
(43)
4,665
6,880
(2,215)
(32)
Income tax expense
403
646
(243)
(38)
1,216
1,845
(629)
(34)
Net income
$999
$1,816
($817)
(45
%)
$3,449
$5,035
($1,586)
(31
%)
For the three and nine months ended September 30, 2020, noninterest income derived from the Wealth Management Services segment decreased by $199 thousand and $1.7 million, respectively, compared to the same periods in 2019, due to a decline in asset-based revenues. See further discussion of wealth management revenues under the caption “Noninterest Income” above.
For the three and nine months ended September 30, 2020, noninterest expenses for the Wealth Management Services segment increased by $951 thousand and $746 thousand, respectively, from the same periods in 2019, including increases salaries and employee benefits, legal and outsourced services expenses. See further discussion under the caption “Noninterest Expense” above.
Corporate
The following table presents a summarized statement of operations for the Corporate unit:
(Dollars in thousands)
Three Months
Nine Months
Change
Change
Periods ended September 30,
2020
2019
$
%
2020
2019
$
%
Net interest (expense) income
($1,425)
$4,577
($6,002)
(131
%)
$626
$18,097
($17,471)
(97
%)
Noninterest income
574
582
(8)
(1)
1,952
1,748
204
12
Noninterest expense
3,942
3,396
546
16
11,406
10,604
802
8
(Loss) income before income taxes
(4,793)
1,763
(6,556)
(372)
(8,828)
9,241
(18,069)
(196)
Income tax (benefit) expense
(1,100)
243
(1,343)
(553)
(2,168)
1,524
(3,692)
(242)
Net (loss) income
($3,693)
$1,520
($5,213)
(343
%)
($6,660)
$7,717
($14,377)
(186
%)
Net interest income for the Corporate unit for the three and nine months ended September 30, 2020 was down by $6.0 million and $17.5 million, respectively, compared to the same periods in 2019. Lower interest income on securities, resulting from a decline in average balances of securities and lower yields on securities, was partially offset by lower wholesale funding costs. The decline in net interest income for the Corporate unit also reflected unfavorable net funds transfer pricing allocations with the Commercial Banking segment as the downward repricing of assets occurred at a faster pace than the repricing of liabilities.
For the three and nine months ended September 30, 2020, noninterest expenses for the Corporate unit increased by $546 thousand and $802 thousand, respectively from the same periods in 2019, including increases in salaries and benefits, legal and other professional fees and outsourced services.
-70-
Management's Discussion and Analysis
Financial Condition
Summary
The following table presents selected financial condition data:
(Dollars in thousands)
Change
September 30, 2020
December 31, 2019
$
%
Cash and due from banks
$204,113
$132,193
$71,920
54
%
Total securities
913,850
899,490
14,360
2
Total loans
4,282,047
3,892,999
389,048
10
Allowance for credit losses on loans
42,645
27,014
15,631
58
Total assets
5,849,792
5,292,659
557,133
11
Total deposits
4,285,693
3,498,882
786,811
22
FHLB advances
713,868
1,141,464
(427,596)
(37)
Total shareholders’ equity
527,693
503,492
24,201
5
Total assets amounted to $5.8 billion at September 30, 2020, up by $557.1 million, or 11%, from the end of 2019. This reflected growth in total loans and an increase in the balance of cash and due from banks. The cash and due from banks balance rose largely due to increased levels of cash collateral pledged to derivative counterparties. See Note 9 to the Unaudited Consolidated Financial Statements for additional disclosure regarding derivative financial instruments.
The allowance for credit losses on loans increased by $15.6 million, or 58%, from the end of 2019. This reflected the adoption of the CECL accounting methodology effective January 1, 2020, as well as the estimated impact of the COVID-19 pandemic. See additional disclosure in the Asset Quality section under the caption “Allowance for credit losses on loans.”
Total deposits increased by $786.8 million, or 22%, reflecting increases in both in-market deposits and wholesale brokered time deposits. FHLB advances decreased by $427.6 million, or 37%, from December 31, 2019. Shareholders’ equity amounted to $527.7 million at September 30, 2020, up by $24.2 million, or 5%, from the balance at December 31, 2019. As of September 30, 2020, the Bancorp and the Bank were “well capitalized.” See Note 8 to the Unaudited Consolidated Financial Statements for additional discussion on regulatory capital requirements.
Securities
Investment security activity is monitored by the Investment Committee, the members of which also sit on the Asset/Liability Committee (“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 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 maintain a portfolio of trading securities. As of September 30, 2020 and December 31, 2019, the Corporation did not have securities designated as held to maturity. 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
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Management's Discussion and Analysis
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, 2020 and December 31, 2019, 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 4 and 10 to the Unaudited Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities.
Securities Portfolio
The carrying amounts of securities held are as follows:
(Dollars in thousands)
September 30, 2020
December 31, 2019
Amount
%
Amount
%
Available for Sale Debt Securities:
Obligations of U.S. government-sponsored enterprises
$146,540
16
%
$157,648
18
%
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
745,071
82
719,080
80
Individual name issuer trust preferred debt securities
12,363
1
12,579
1
Corporate bonds
9,876
1
10,183
1
Total available for sale debt securities
$913,850
100
%
$899,490
100
%
The securities portfolio stood at $913.9 million as of September 30, 2020, or 16% of total assets, compared to $899.5 million as of December 31, 2019, or 17% of total assets. 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 increased by $14.4 million, or 2%, from the end of 2019, reflecting purchases of debt securities totaling $377.0 million, with a weighted average yield of 1.96%, as well as an increase in the fair value of available for sale securities. These were partially offset by routine paydowns on mortgage-backed securities, calls and maturities of debt securities.
As of September 30, 2020, the net unrealized gain position on available for sale debt securities amounted to $14.0 million, compared to $4.2 million as of December 31, 2019. These net positions included gross unrealized losses of $3.3 million and $4.9 million, respectively, of as September 30, 2020 and December 31, 2019.
See Note 4 to the Unaudited Consolidated Financial Statements for additional information.
Loans
Total loans amounted to $4.3 billion at September 30, 2020, up by $389.0 million, or 10%, from the end of 2019, largely due to commercial loan growth and first quarter 2020 purchases of residential real estate mortgage loans. Growth in commercial loans was largely due to second quarter 2020 originations of PPP loans within the commercial and industrial portfolio.
-72-
Management's Discussion and Analysis
The following is a summary of loans:
(Dollars in thousands)
September 30, 2020
December 31, 2019
Amount
%
Amount
%
Commercial:
Commercial real estate (1)
$1,665,745
39
%
$1,547,572
40
%
Commercial & industrial (2)
822,269
19
585,289
15
Total commercial
2,488,014
58
2,132,861
55
Residential Real Estate:
Residential real estate (3)
1,506,726
35
1,449,090
37
Consumer:
Home equity
268,551
6
290,874
7
Other (4)
18,756
1
20,174
1
Total consumer
287,307
7
311,048
8
Total loans
$4,282,047
100
%
$3,892,999
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.
Washington Trust continues to work with and support our customers experiencing financial difficulty due to the COVID-19 pandemic. Through September 30, 2020, we have executed loan payment deferral modifications on 617 loans totaling $685.4 million. The majority of these deferments qualified as eligible loan modifications under Section 4013 of the CARES Act and therefore, were not required to be classified as TDRs and were not reported as past due. Seventeen of these deferments executed on loan balances of $7.8 million were past due before the COVID-19 pandemic and therefore, were classified as TDRs and were included in past due loans as of September 30, 2020.
As of September 30, 2020, we had active deferrals on 253 loans totaling $418.2 million, or 10% of total loans excluding PPP loans. As of November 2, 2020, we have active deferrals on 146 loans totaling $252.9 million, or 6% of total loans excluding PPP loans.
Management continues to actively monitor the deferments and loan portfolios in certain industry segments that it considers “at risk” of significant impact. Deferment extensions are prudently underwritten and have resulted in loan risk rating downgrades when warranted. Management considers deferments when estimating the allowance for credit losses. Loss exposure within these industries is mitigated by a number of factors such as collateral values, LTV ratios, and other key indicators, however, some degree of credit loss is expected and has been incorporated into the allowance for credit loss recognition under the CECL methodology.
Commercial Loans
The commercial loan portfolio represented 58% of total loans at September 30, 2020.
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 $430.6 million and $399.7 million, respectively, at September 30, 2020 and December 31, 2019. Our participation in commercial loans originated by other banks also includes shared national credits. Shared national credits are defined as participations in loans or loan commitments of at least $100.0 million that are shared by three or more banks.
Commercial loans fall into two major categories, commercial real estate and commercial and industrial loans. Commercial real estate 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. Commercial real estate loans also include construction loans made to businesses for land development or the on-
-73-
Management's Discussion and Analysis
site construction of industrial, commercial, or residential buildings. Commercial and industrial loans primarily provide working capital, equipment financing and financing for other business-related purposes. Commercial and industrial loans are frequently collateralized by equipment, inventory, accounts receivable, and/or general business assets. A portion of the Bank’s commercial and industrial loans is also collateralized by real estate. Commercial and industrial loans also include 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”)
CRE loans totaled $1.7 billion at September 30, 2020, up by $118.2 million, or 8%, from the balance at December 31, 2019. Included in CRE loans were construction and development loans of $101.4 million and $211.5 million, respectively, as of September 30, 2020 and December 31, 2019. For the nine months ended September 30, 2020, CRE loan originations and advances totaled approximately $211 million, which were partially offset by payoffs and paydowns.
The following table presents a geographic summary of CRE loans by property location:
(Dollars in thousands)
September 30, 2020
December 31, 2019
Outstanding Balance
% of Total
Outstanding Balance
% of Total
Connecticut
$653,853
39
%
$616,484
40
%
Massachusetts
501,243
30
458,029
30
Rhode Island
432,252
26
394,929
25
Subtotal
1,587,348
95
1,469,442
95
All other states
78,397
5
78,130
5
Total
$1,665,745
100
%
$1,547,572
100
%
The following table presents a summary of CRE loans by property type segmentation:
(Dollars in thousands)
September 30, 2020
December 31, 2019
Count
Outstanding Balance
% of Total
Count
Outstanding Balance
% of Total
CRE Portfolio Segmentation:
Multi-family dwelling
137
$542,971
33
%
123
$430,502
28
%
Retail
134
336,071
20
110
314,661
20
Office
75
292,154
18
78
294,910
19
Hospitality
39
148,164
9
32
128,867
8
Healthcare
16
120,429
7
16
110,409
7
Industrial and warehouse
26
96,819
6
25
82,432
5
Commercial mixed use
21
42,908
3
48
73,895
5
Other
42
86,229
4
70
111,896
8
Total CRE loans
490
$1,665,745
100
%
502
$1,547,572
100
%
Average CRE loan size
$3,399
$3,083
Largest individual CRE loan outstanding
$32,200
$25,962
-74-
Management's Discussion and Analysis
The following table presents a summary of CRE loan deferments by industry segmentation:
(Dollars in thousands)
November 2, 2020
September 30, 2020
June 30, 2020
Count
Balance
% of Outstanding Balance (1)
Count
Balance
% of Outstanding Balance (1)
Count
Balance
% of Outstanding Balance (2)
CRE Deferments by Segment:
Hospitality
18
$78,602
53
%
21
$89,049
60
%
31
$117,665
81
%
Retail
12
68,763
20
32
122,596
36
43
124,071
38
Healthcare
2
22,161
18
4
46,084
38
5
64,326
54
Office
3
9,248
3
4
17,679
6
15
74,099
26
Commercial mixed use
1
637
1
—
—
—
6
3,089
7
Multi-family dwelling
3
633
—
9
10,732
2
20
34,318
7
Other
7
27,785
32
11
28,635
33
12
29,838
35
Total CRE deferments
46
$207,829
12
%
81
$314,775
19
%
132
$447,406
27
%
(1)Percent of respective outstanding portfolio segment balance as of September 30, 2020.
(2)Percent of respective outstanding portfolio segment balance as of June 30, 2020.
As of November 2, 2020, we have active deferrals on 46 CRE loans totaling $207.8 million, which represented 12% of the total CRE portfolio at September 30, 2020.
While various industries have and will continue to experience adverse effects as a result of the COVID-19 pandemic, management currently considers the following CRE industry segments to be “at-risk” of significant impact:
•The retail segment consisted of 134 loans with balances totaling $336.1 million at September 30, 2020, representing 20% of the total CRE portfolio. Our retail properties generally have single tenant drugstores or strong anchor tenants, often national grocery store chains. At November 2, 2020, we have active deferrals on 12 retail loans totaling $68.8 million, which represented 20% of this segment’s balance at September 30, 2020.
•The hospitality segment consisted of 39 loans with balances totaling $148.2 million at September 30, 2020, representing 9% of the total CRE portfolio. We generally underwrite this segment at an LTV of 65% or less. Our hospitality properties are largely limited service properties with no restaurants and limited meeting space. This segment also includes leisure travel properties that are located on the New England coastline. At November 2, 2020, we have active deferrals on 18 hospitality loans totaling $78.6 million, which represented 53% of this segment’s balance at September 30, 2020.
•The healthcare segment consisted of 16 loans with balances totaling $120.4 million at September 30, 2020, representing 7% of the total CRE portfolio. This segment is composed of assisted living, nursing homes and continuing care retirement communities. At November 2, 2020, we have active deferrals on 2 healthcare loans totaling $22.2 million, which represented 18% of this segment’s balance at September 30, 2020.
Commercial and Industrial Loans (“C&I”)
C&I loans amounted to $822.3 million at September 30, 2020, up by $237.0 million, or 40%, from the balance at December 31, 2019. For the nine months ended September 30, 2020, C&I loan originations amounted to $284 million and were partially offset by paydowns, payoffs and a modest decline in line utilization. C&I originations were concentrated in PPP loans. As of September 30, 2020, there were 1,770 PPP loans with a carrying value of $216.8 million included in the C&I portfolio. The average PPP loan size was $122 thousand. Net unamortized loan origination fees on PPP loans amounted to $5.1 million at September 30, 2020.
Shared national credit balances outstanding included in the C&I loan portfolio totaled $49.4 million at September 30, 2020. 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, 2020.
-75-
Management's Discussion and Analysis
The following table presents a summary of C&I loan by industry segmentation:
(Dollars in thousands)
September 30, 2020
December 31, 2019
Count
Outstanding Balance
% of Total
Count
Outstanding Balance
% of Total
C&I Portfolio Segmentation:
Healthcare and social assistance
263
$185,628
23
%
86
$138,857
24
%
Manufacturing
150
90,981
11
65
53,561
9
Retail
201
67,851
8
75
43,386
7
Educational services
60
67,357
8
22
56,556
10
Owner occupied and other real estate
279
65,949
8
157
46,033
8
Professional, scientific and technical
268
44,703
5
66
37,599
6
Accommodation and food services
276
43,525
5
64
16,562
3
Entertainment and recreation
93
34,537
4
35
30,807
5
Information
36
30,071
4
11
22,162
4
Transportation and warehousing
44
27,459
3
23
20,960
4
Finance and insurance
107
26,213
3
57
28,501
5
Public administration
26
23,845
3
23
25,107
4
Other
799
114,150
15
225
65,198
11
Total C&I loans
2,602
$822,269
100
%
909
$585,289
100
%
Average C&I loan size
$316
$644
Largest individual C&I loan outstanding
$18,551
$19,001
PPP loans were included in the C&I portfolio. The following table presents a summary of PPP loans by industry segmentation:
September 30, 2020
Count
Outstanding Balance
% of Total
PPP Loans by Segment:
Healthcare and social assistance
183
$49,331
23
%
Accommodation and food services
217
25,410
12
Manufacturing
94
25,395
12
Professional, scientific and technical
223
20,848
10
Retail
138
12,731
6
Educational services
36
11,490
5
Owner occupied and other real estate
117
9,268
4
Entertainment and recreation
65
4,293
2
Information
24
3,914
2
Finance and insurance
56
2,423
1
Transportation and warehousing
21
2,050
1
Public administration
4
482
—
Other
592
49,149
22
Total PPP loans (included in the C&I loan portfolio)
1,770
$216,784
100
%
-76-
Management's Discussion and Analysis
The following table presents a summary of C&I loan deferments by industry segmentation:
(Dollars in thousands)
November 2, 2020
September 30, 2020
June 30, 2020
Count
Balance
% of Outstanding Balance, excl PPP loans (1)
Count
Balance
% of Outstanding Balance, excl PPP loans (1)
Count
Balance
% of Outstanding Balance, excl PPP loans (2)
C&I Deferments by Segment:
Accommodation and food services
3
$3,201
18
%
4
$3,480
19
%
18
$12,252
61
%
Healthcare and social assistance
2
1,613
1
4
14,947
11
6
15,384
11
Owner occupied and other real estate
4
1,382
2
5
2,243
4
21
5,128
8
Transportation and warehousing
4
1,120
4
5
1,408
6
5
1,414
5
Manufacturing
2
940
1
1
1,538
2
4
2,505
4
Entertainment and recreation
2
418
1
5
2,970
10
11
13,045
42
Educational services
—
—
—
4
7,400
13
4
7,329
12
Retail
—
—
—
1
1,068
2
5
2,693
5
Professional, scientific and technical
—
—
—
—
—
—
1
41
—
Public administration
—
—
—
—
—
—
1
98
—
Other
2
170
—
7
10,221
16
24
14,533
23
Total C&I deferments
19
$8,844
1
%
36
$45,275
8
%
100
$74,422
12
%
(1)Percent of respective outstanding portfolio segment balance, excluding PPP loans, as of September 30, 2020.
(2)Percent of respective outstanding portfolio segment balance, excluding PPP loans, as of June 30, 2020.
As of November 2, 2020, we have active deferrals on 19 C&I loans totaling $8.8 million, which represented 1% of the total C&I portfolio (excluding PPP loans) at September 30, 2020.
Healthcare and social assistance totaled $185.6 million as of September 30, 2020 and is our largest single C&I industry segment, representing 23% of the total C&I portfolio. This segment includes specialty medical practices, elder services and community and mental health centers. At November 2, 2020, we have active deferrals on 2 healthcare and social assistance loans of $1.6 million, which represented 1% of this industry segment’s balances (excluding PPP loans) as of September 30, 2020. It is possible that there will be further disruption in this industry segment.
While various industries have and will continue to experience adverse effects as a result of the COVID-19 pandemic, management currently considers the following C&I industry segments to be “at-risk” of significant impact:
•The accommodation and food services industry segment consisted of 276 loans with balances totaling $43.5 million as of September 30, 2020, representing 5% of the total C&I portfolio. At November 2, 2020, we have active deferrals on 3 accommodation and food services loans totaling $3.2 million, which represented 18% of this industry segment’s balance (excluding PPP loans) at September 30, 2020. The deferrals were executed for restaurant and food establishments.
•The entertainment and recreation industry segment consisted of 93 loans with balances totaling $34.5 million as of September 30, 2020, representing 4% of the total C&I portfolio. This industry segment consists largely of golf courses and marinas. At November 2, 2020, we have active deferrals on 2 entertainment and recreation industry loans totaling $418 thousand, which represented 1% of this industry segment’s balance (excluding PPP loans) at September 30, 2020. The deferments were executed for a gym.
Residential Real Estate Loans
The residential real estate loan portfolio represented 35% of total loans at September 30, 2020.
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,
2020
2019
2020
2019
Amount
% of Total
Amount
% of Total
Amount
% of Total
Amount
% of Total
Originations for retention in portfolio (1)
$132,726
26
%
$105,075
36
%
$368,118
30
%
$226,508
34
%
Originations for sale to the secondary market (2)
377,137
74
189,979
64
859,680
70
437,928
66
Total
$509,863
100
%
$295,054
100
%
$1,227,798
100
%
$664,436
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,
2020
2019
2020
2019
Amount
% of Total
Amount
% of Total
Amount
% of Total
Amount
% of Total
Loans sold with servicing rights retained
$317,920
90
%
$25,766
14
%
$609,363
74
%
$53,548
13
%
Loans sold with servicing rights released (1)
36,250
10
159,210
86
212,222
26
360,921
87
Total
$354,170
100
%
$184,976
100
%
$821,585
100
%
$414,469
100
%
(1)Includes brokered loans (loans originated for others).
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 $6.6 million and $3.5 million, respectively, as of September 30, 2020 and December 31, 2019. The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $1.1 billion and $587.0 million, respectively, as of September 30, 2020 and December 31, 2019.
Residential real estate loans held in portfolio amounted to $1.5 billion at September 30, 2020, up by $57.6 million, or 4%, from the balance at December 31, 2019. During the nine months ended September 30, 2020, Washington Trust purchased $51.2 million of residential real estate mortgage loans with a weighted average yield of 3.38% from another financial institution. These loans were individually evaluated to Washington Trust’s underwriting standards and predominantly secured by properties in Massachusetts.
The following is a geographic summary of residential real estate mortgages by property location:
(Dollars in thousands)
September 30, 2020
December 31, 2019
Amount
% of Total
Amount
% of Total
Massachusetts
$1,017,659
68
%
$932,726
64
%
Rhode Island
342,344
23
356,392
25
Connecticut
125,568
8
140,574
10
Subtotal
1,485,571
99
1,429,692
99
All other states
21,155
1
19,398
1
Total (1)
$1,506,726
100
%
$1,449,090
100
%
(1)Includes residential real estate loans purchased from other financial institutions totaling $149.4 million and $151.8 million, respectively, as of September 30, 2020 and December 31, 2019.
As of November 2, 2020, we have active deferrals on 69 residential real estate loans totaling $35.1 million, which represented 2% of the total residential real estate portfolio balance as of September 30, 2020. The average size of residential real estate
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Management's Discussion and Analysis
loans with active deferrals as of November 2, 2020 was approximately $509 thousand and these loans have an estimated LTV ratio of 57%.
Consumer Loans
Consumer loans include home equity loans and lines of credit and personal installment loans.
The consumer loan portfolio totaled $287.3 million at September 30, 2020, down by $23.7 million, or 8%, from December 31, 2019. Home equity lines of credit and home equity loans represented 93% of the total consumer portfolio at September 30, 2020. The Bank estimates that approximately 60% of the combined home equity lines of credit and home equity loan balances are first lien positions or subordinate to other Washington Trust mortgages. Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $10.6 million and $12.8 million, respectively, at September 30, 2020 and December 31, 2019.
As of November 2, 2020, we have active deferrals on 12 consumer loans totaling $1.1 million, which represented 0.4% of the total consumer portfolio balance as of September 30, 2020.
Asset Quality
Nonperforming Assets
Nonperforming assets include nonaccrual loans and property acquired through foreclosure or repossession.
The following table presents nonperforming assets and additional asset quality data:
(Dollars in thousands)
Sep 30, 2020
Dec 31, 2019
Commercial:
Commercial real estate
$431
$603
Commercial & industrial
—
657
Total commercial
431
1,260
Residential Real Estate:
Residential real estate
12,792
14,297
Consumer:
Home equity
1,429
1,763
Other
88
88
Total consumer
1,517
1,851
Total nonaccrual loans
14,740
17,408
Property acquired through foreclosure or repossession, net
—
1,109
Total nonperforming assets
$14,740
$18,517
Nonperforming assets to total assets
0.25
%
0.35
%
Nonperforming loans to total loans
0.34
%
0.45
%
Total past due loans to total loans
0.24
%
0.40
%
Accruing loans 90 days or more past due
$—
$—
Total nonperforming assets decreased by $3.8 million from December 31, 2019. This included a $2.7 million decrease in nonaccrual loans and a $1.1 million decrease in property acquired through foreclosure (“OREO”). The decrease in OREO reflected sales of two properties essentially at their carrying value during the nine months ended September 30, 2020. At September 30, 2020, there were no properties held in OREO.
Nonaccrual Loans
During the nine months ended September 30, 2020, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.
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Management's Discussion and Analysis
The following table presents the activity in nonaccrual loans:
(Dollars in thousands)
Three Months
Nine Months
For the periods ended September 30,
2020
2019
2020
2019
Balance at beginning of period
$16,017
$12,867
$17,408
$11,707
Additions to nonaccrual status
971
5,672
2,937
9,216
Loans returned to accruing status
(1,623)
(597)
(2,170)
(1,570)
Loans charged-off
(111)
(966)
(1,071)
(1,888)
Loans transferred to other real estate owned
—
(2,000)
(28)
(2,000)
Payments, payoffs and other changes
(514)
(74)
(2,336)
(563)
Balance at end of period
$14,740
$14,902
$14,740
$14,902
The following table presents additional detail on nonaccrual loans:
(Dollars in thousands)
September 30, 2020
December 31, 2019
Days Past Due
Days Past Due
Over 90
Under 90
Total
% (1)
Over 90
Under 90
Total
% (1)
Commercial:
Commercial real estate
$431
$—
$431
0.03
%
$603
$—
$603
0.04
%
Commercial & industrial
—
—
—
—
—
657
657
0.11
Total commercial
431
—
431
0.02
603
657
1,260
0.06
Residential Real Estate:
Residential real estate
4,502
8,290
12,792
0.85
4,700
9,597
14,297
0.99
Consumer:
Home equity
618
811
1,429
0.53
996
767
1,763
0.61
Other
88
—
88
0.47
88
—
88
0.44
Total consumer
706
811
1,517
0.53
1,084
767
1,851
0.60
Total nonaccrual loans
$5,639
$9,101
$14,740
0.34
%
$6,387
$11,021
$17,408
0.45
%
(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, 2020.
As of September 30, 2020, the composition of nonaccrual loans was 97% residential and consumer and 3% commercial, compared to 93% and 7%, respectively, at December 31, 2019.
Nonaccrual residential real estate mortgage loans amounted to $12.8 million at September 30, 2020, down by $1.5 million from the end of 2019. As of September 30, 2020, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Rhode Island and Connecticut. Included in total nonaccrual residential real estate loans at September 30, 2020 were five loans purchased for portfolio and serviced by others amounting to $1.6 million. Management monitors the collection efforts of its third party servicers as part of its assessment of the collectibility of nonperforming loans.
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 include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. 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.
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Management's Discussion and Analysis
TDRs are classified as accruing or non-accruing based on management’s assessment of the collectibility of the loan. Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately 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.
As of September 30, 2020, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured in a TDR.
See Note 5 for disclosure regarding the Corporation’s election to account for eligible loan modifications under Section 4013 of the CARES Act.
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, 2020
Dec 31, 2019
Accruing TDRs
Commercial:
Commercial real estate
$844
$—
Commercial & industrial
457
—
Total commercial
1,301
—
Residential Real Estate:
Residential real estate
3,589
358
Consumer:
Home equity
804
—
Other
15
18
Total consumer
819
18
Accruing TDRs
5,709
376
Nonaccrual TDRs
Residential Real Estate:
Residential real estate
2,823
492
Consumer:
Home equity
71
—
Other
—
—
Total consumer
71
—
Nonaccrual TDRs
2,894
492
Total TDRs
$8,603
$868
TDRs amounted to $8.6 million at September 30, 2020, up by $7.7 million from the end of 2019, due to loan payment deferrals executed on 17 loans that were not eligible for TDR accounting relief provided under the CARES Act.
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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, 2020
December 31, 2019
Amount
% (1)
Amount
% (1)
Commercial:
Commercial real estate
$431
0.03
%
$1,433
0.09
%
Commercial & industrial
21
—
1
—
Total commercial
452
0.02
1,434
0.07
Residential Real Estate:
Residential real estate
8,081
0.54
11,429
0.79
Consumer:
Home equity
1,753
0.65
2,696
0.93
Other
108
0.58
130
0.64
Total consumer
1,861
0.65
2,826
0.91
Total past due loans
$10,394
0.24
%
$15,689
0.40
%
(1)Percentage of past due loans to the total loans outstanding within the respective category.
As of September 30, 2020, the composition of past due loans (loans past due 30 days or more) was 96% residential and consumer and 4% commercial, compared to 91% and 9%, respectively, at December 31, 2019. Total past due loans decreased by $5.3 million from the end of 2019.
Total past due loans included $8.8 million of nonaccrual loans as of September 30, 2020, compared to $11.5 million as of December 31, 2019. All loans 90 days or more past due at September 30, 2020 and December 31, 2019 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 consist of classified accruing commercial loans that were less than 90 days past due at September 30, 2020 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. These loans are not included in the amounts of nonaccrual or restructured loans presented above. 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 increased allowance coverage and provision for loan losses.
Management has identified approximately $6.4 million in potential problem loans at September 30, 2020, compared to $10.3 million at December 31, 2019. As of September 30, 2020, the balance of potential problem loans consisted of two commercial relationships, which were both current with respect to payment terms. Potential problem loans are assessed for loss exposure using the methods described in Note 5 to the Unaudited Consolidated Financial Statements under the caption “Credit Quality Indicators.”
In addition, see discussion regarding certain commercial industry segments that management considers to be "at-risk" of significant impact from the COVID-19 pandemic under the caption "Commercial Loans" within the Financial Condition section.
Allowance for Credit Losses on Loans
The ACL on loans is management’s estimated valuation allowance at each reporting date in accordance with GAAP. The ACL on loans is increased through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income and by recoveries of amounts previously charged-off. The ACL on loans is reduced by charge-offs on loans. Loan charge-offs are recognized when management believes the collectibility of the principal balance outstanding is unlikely. Full or partial charge-offs on collateral dependent individually analyzed loans are generally recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.
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Management's Discussion and Analysis
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 following table presents additional detail on the Corporation’s loan portfolio and associated allowance:
(Dollars in thousands)
September 30, 2020
December 31, 2019
Loans
Related Allowance
Allowance / Loans
Loans
Related Allowance
Allowance / Loans
Individually analyzed loans
$15,654
$523
3.34
%
$17,783
$968
5.44
%
Pooled (collectively evaluated) loans
4,266,393
42,122
0.99
3,875,216
26,046
0.67
Total
$4,282,047
$42,645
1.00
%
$3,892,999
$27,014
0.69
%
In 2020, for loans that are individually analyzed, the ACL 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 is collateral dependent, at the fair value of the collateral.
In 2020, Washington Trust utilizes a DCF methodology to estimate credit losses for each pooled portfolio segment. The methodology incorporates the probability of default and loss given default. Management utilizes the national unemployment rate as an econometric factor with a one-year forecast period and one-year straight-line reversion period to its historical mean in order to estimate the probability of default for each loan portfolio segment. Utilizing a third party regression model, the forecasted national unemployment rate is correlated with the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, maturity date and prepayment speeds 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.
See Note 6 to the Unaudited Consolidated Financial Statements for additional disclosure regarding the process and methodology to estimate 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, 2020
December 31, 2019
Allocated ACL
ACL to Loans
Loans to Total Portfolio (1)
Allocated ACL
ACL to Loans
Loans to Total Portfolio (1)
Commercial:
Commercial real estate
$21,757
1.31
%
39
%
$14,741
0.95
%
40
%
Commercial & industrial
11,185
1.36
%
19
3,921
0.67
%
15
Total commercial
32,942
1.32
%
58
18,662
0.87
%
55
Residential Real Estate:
Residential real estate
7,919
0.53
%
35
6,615
0.46
%
37
Consumer:
Home equity
1,347
0.50
%
6
1,390
0.48
%
7
Other
437
2.33
%
1
347
1.72
%
1
Total consumer
1,784
0.62
%
7
1,737
0.56
%
8
Total allowance for credit losses on loans at end of period
$42,645
1.00
%
100
%
$27,014
0.69
%
100
%
(1)Percentage of loans outstanding in respective category to total loans outstanding.
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Management's Discussion and Analysis
The ACL on loans amounted to $42.6 million at September 30, 2020, up by $15.6 million from the balance at December 31, 2019. Upon adoption of CECL on January 1, 2020, Washington Trust's ACL on loans increased by $6.5 million, or 24%. See Note 2 to the Unaudited Consolidated Financial Statements for additional disclosure on the impact of adopting Topic 326.
Provisions for credit losses of $1.3 million and $10.6 million, respectively, were charged to earnings for the three and nine months ended September 30, 2020, compared to $400 thousand and $1.6 million, respectively, for the same periods in 2019. In addition to the change in accounting methodology described above, the year-over-year increase in the year-to-date provision was attributable to anticipated losses related the COVID-19 pandemic and also reflected loan growth and changes in the underlying portfolio.
Net charge-offs totaled $96 thousand and $1.0 million, respectively, for the three and nine months ended September 30, 2020, compared to $801 thousand and $1.7 million, respectively, for the same periods in 2019.
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 value of the loan. The Corporation does not recognize a recovery when an updated appraisal indicates 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. Updates to appraisals are generally obtained for troubled 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.
Estimating an appropriate level of ACL in loans necessarily involves a high degree of judgment. While significant deterioration in the economic forecast due to the COVID-19 pandemic was estimated in the ACL on loans, continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the ACL. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans. In addition, various regulatory agencies periodically review the ACL on loans. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. The ACL on loans is an estimate, and ultimate losses may vary from management’s estimate.
Sources of Funds
Our sources of funds include deposits, brokered time 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 Demand Deposit Marketplace program, Insured Cash Sweep program and the Certificate of Deposit Account Registry Service 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 out-of-market wholesale brokered deposits.
-84-
Management's Discussion and Analysis
The following table presents a summary of deposits:
(Dollars in thousands)
Change
September 30, 2020
December 31, 2019
$
%
Noninterest-bearing demand deposits
$840,444
$609,924
$230,520
38
%
Interest-bearing demand deposits
170,198
159,938
10,260
6
NOW accounts
644,909
520,295
124,614
24
Money market accounts
877,536
765,899
111,637
15
Savings accounts
439,383
373,503
65,880
18
Time deposits (in-market)
729,058
784,481
(55,423)
(7)
Total in-market deposits
3,701,528
3,214,040
487,488
15
Wholesale brokered time deposits
584,165
284,842
299,323
105
Total deposits
$4,285,693
$3,498,882
$786,811
22
%
Total deposits amounted to $4.3 billion at September 30, 2020, up by $786.8 million, or 22%, from December 31, 2019. This included an increase of $299.3 million, or 105%, in out-of-market brokered time deposits. Excluding out-of-market brokered time deposits, in-market deposits were up by $487.5 million, or 15%, from the balance at December 31, 2019. In-market deposit growth included temporary PPP loan fundings deposited into customer accounts at Washington Trust.
Borrowings
FHLB advances are used to meet short-term liquidity needs and also to fund loan growth and additions to the securities portfolio. FHLB advances totaled $713.9 million at September 30, 2020, down by $427.6 million, or 37%, from the balance at the end of 2019.
In June 2020, Washington Trust began participating in the FRB’s PPPLF, which extends credit to depository institutions at a fixed interest rate of 0.35%. Only PPP loans can be pledged as collateral to access the facility. The maturity date of the PPPLF borrowings matches the maturity date of the pledged PPP loans. As of September 30, 2020, PPPLF borrowings amounted to $105.7 million, with a corresponding amount of PPP loans pledged as collateral.
See Note 7 to the Unaudited Consolidated Financial Statements for additional information regarding Borrowings.
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 60% of total average assets in the nine months ended September 30, 2020. 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 time deposits), cash flows from the Corporation’s 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 FRB 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.
-85-
Management's Discussion and Analysis
See additional disclosure regarding Washington Trust’s participation in the FRB’s PPPLF under the caption “Borrowings” in the section “Sources of Funds.”
The table below presents unused funding capacity by source as of the dates indicated:
(Dollars in thousands)
September 30, 2020
December 31, 2019
Additional Funding Capacity:
Federal Home Loan Bank of Boston (1)
$828,386
$534,990
Federal Reserve Bank of Boston (2)
20,718
24,686
Unencumbered investment securities
593,439
461,850
Total
$1,442,543
$1,021,526
(1)As of September 30, 2020 and December 31, 2019, loans with a carrying value of $2.1 billion and $2.1 billion, respectively, and securities available for sale with carrying values of $164.7 million and $271.4 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.
(2)As of September 30, 2020 and December 31, 2019, loans with a carrying value of $13.5 million and $16.6 million, respectively, and securities available for sale with a carrying value of $14.7 million and $17.0 million, respectively, were pledged to the FRB 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.
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, 2020. 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 $18.2 million for the nine months ended September 30, 2020. Net income of $51.3 million was offset by mortgage banking related adjustments to reconcile net income to net cash used in operating activities. Net cash used in investing activities totaled $378.2 million for the nine months ended September 30, 2020, reflecting outflows to fund the increase in and purchases of loans, as well as purchases of debt securities. These outflows were partially offset by net inflows from maturities, calls and principal payments of securities. For the nine months ended September 30, 2020, net cash provided by financing activities amounted to $433.6 million, with net increases in deposits, FHLB advances and PPPLF borrowings, partially offset by the payment of dividends to shareholders and treasury stock purchases. See the Unaudited Consolidated Statements of Cash Flows for further information about sources and uses of cash.
Capital Resources
Total shareholders’ equity amounted to $527.7 million at September 30, 2020, up by $24.2 million from December 31, 2019. This included net income of $51.3 million and an increase of $7.8 million in the accumulated comprehensive income component of shareholders’ equity, largely reflecting an increase in the fair value of available for sale debt securities. These increases were partially offset by $26.7 million in dividend declarations, a $6.1 million decrease to retained earnings due to the adoption of CECL, and a net increase in treasury stock of $3.5 million.
The Corporation declared a quarterly dividend of 51 cents per share for the three months ended September 30, 2020, unchanged from the 51 cents per share declared for the same period in 2019. On a year-to-date basis, dividend declarations totaled $1.53 per share in 2020, compared to $1.49 per share in 2019.
The ratio of total equity to total assets amounted to 9.02% at September 30, 2020 compared to a ratio of 9.51% at December 31, 2019. Book value per share at September 30, 2020 and December 31, 2019 amounted to $30.57 and $29.00, 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 13.09% at September 30, 2020, compared to 12.94% at December 31, 2019. See Note 8 to the Unaudited Consolidated Financial Statements for additional discussion of regulatory capital requirements and the election of the CECL phase-in option provided by regulatory guidance, which delays the estimated impact of CECL on regulatory capital and phases it in over a three-year period beginning in 2022.
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Management's Discussion and Analysis
Off-Balance Sheet Arrangements
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 swap agreements 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 18 to the Unaudited Consolidated Financial Statements.
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 18 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, 2020 and December 31, 2019, 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 net interest margin 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.
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Management's Discussion and Analysis
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, 2020 and December 31, 2019. 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 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, 2020
December 31, 2019
Months 1 - 12
Months 13 - 24
Months 1 - 12
Months 13 - 24
100 basis point rate decrease
(1.69)%
(2.78)%
(3.71)%
(5.57)%
100 basis point rate increase
5.00
6.24
2.88
1.02
200 basis point rate increase
10.28
11.96
6.60
3.37
300 basis point rate increase
15.26
16.86
10.35
5.53
The ALCO estimates that the 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.
The overall positive exposure of net interest income to rising rates 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.
The relative change in interest rate sensitivity for declining rates from December 31, 2019 as shown in the above table was attributable to a lower absolute level of market interest rates with certain rates and yields reaching floors or zero in declining rate scenarios. The relative increase in interest rate sensitivity for rising rates from December 31, 2019 was attributable to a relative increase in the proportion of low-cost core deposits to total sources of funds. Interest rate risk modeling assumes that core deposits reprice more slowly and by a lesser amount than the repricing of wholesale funding 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 net interest margin. 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 have declined, the banking industry has 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 if 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.
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.
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Management's Discussion and Analysis
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, 2020 and December 31, 2019 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)
$1,259
($9,359)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
9,418
(54,363)
Trust preferred debt and other corporate debt securities
(175)
242
Total change in market value as of September 30, 2020
$10,502
($63,480)
Total change in market value as of December 31, 2019
$17,741
($81,705)
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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, 2019, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, as amended (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, 2020. 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, 2020 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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
This section supplements and updates certain of the information found under Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 25, 2020 (“Annual Report”) and Part II. Item 1A. “Risk Factors” of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, as filed with the SEC on May 7, 2020, and June 30, 2020, as filed with the SEC on August 6, 2020 (collectively, the “10-Qs”), based on information currently known to us and recent developments since the date of the 10-Qs. The matters discussed below should be read in conjunction with the risks described in Part I. Item 1A. “Risk Factors” of our Annual Report and Part II. Item 1A. “Risk Factors” of our 10-Qs. However, the risks and uncertainties that we face are not limited to those described below and those set forth in the Annual Report and 10-Qs. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our common stock, particularly in light of the fast-changing nature of the COVID-19 pandemic, containment measures and the related impacts to economic and operating conditions.
The COVID-19 pandemic, and the measures taken to control its spread, will continue to adversely impact our employees, customers, business operations and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted.
The COVID-19 pandemic has impacted and is likely to continue to impact the national economy and the regional and local markets in which we operate, lower equity market valuations, create significant volatility and disruption in capital and debt markets, and increase unemployment levels. Our business operations may be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. We are subject to heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements that we and our third party service providers have put in place for employees. Federal Reserve actions to combat the economic contraction caused by the COVID-19 pandemic, including the reduction of the target federal funds rate and quantitative easing programs, could, if prolonged, adversely affect our net interest income and margins, and our profitability. The continued closures of many businesses and the institution of pandemic-related orders and directives in the states and communities we serve have reduced business activity and financial transactions. Government policies and directives relating to the pandemic response are subject to change as the effects and spread of the COVID-19 pandemic continue to evolve. It is unclear whether any COVID-19 pandemic-related businesses losses that we or our customers may suffer will be recovered by existing insurance policies. Changes in customer behavior due to worsening business and economic conditions or legislative or regulatory initiatives may impact the demand for our products and services, which could adversely affect our revenue. Pandemic-related delays in our ability to execute appraisals of collateral securing loans may cause disruption in the loan origination process and add uncertainty about the adequacy of our allowance for credit losses. The measures we have taken to aid our customers, including loan payment deferments, may be insufficient to help our customers who have been negatively impacted by the economic fallout from the COVID-19 pandemic. Loans that are currently in deferral status may become nonperforming loans. Mortgage banking revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets. Further deterioration in economic and financial market conditions may require us to increase our provision for credit losses or recognize impairments on investment securities we hold, goodwill, intangible assets and right-of-use-assets. A substantial portion of wealth management revenues is dependent on the value of wealth management assets under administration and is closely tied to the performance of the financial markets. The increase in financial market volatility and a corresponding increase in trading frequency also means that our Wealth Management Services business is subject to an increased risk of trading errors, and the risk that any trading errors are of an increased magnitude.
While the COVID-19 pandemic negatively impacted our results of operations for the first three calendar quarters of 2020, the extent to which the COVID-19 pandemic will continue to impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic, as well as further actions we may take as may be required by government authorities or that we determine is in the best interests of our
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employees and customers. There is no certainty that such measures will be sufficient to mitigate the risks posed by the pandemic.
Our participation in the SBA’s PPP may expose us to reputational harm, increased litigation risk, as well as the risk that the SBA may not fund some or all of the guarantees associated with PPP loans.
As of September 30, 2020, there were 1,770 PPP loans with a carrying value of $216.8 million included in our commercial and industrial loan portfolio. Lenders participating in the PPP have faced increased public scrutiny about their loan application process and procedures, and the nature and type of the borrowers receiving PPP loans. We depend on our reputation as a trusted and responsible financial services company to compete effectively in the communities that we serve, and any negative public or customer response to, or any litigation or claims that might arise out of, our participation in the PPP and any other legislative or regulatory initiatives and programs that may be enacted in response to the COVID-19 pandemic, could adversely impact our business. Other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP, and we may be subject to the same or similar litigation, in addition to litigation in connection with our processing of PPP loan forgiveness applications. In addition, if the SBA determines that there is a deficiency in the manner in which a PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency or the processing fee from us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
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, 2020 formatted in Inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (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, 2020 has been formatted in Inline XBRL and contained in Exhibit 101.
____________________
(1) 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 4, 2020
By:
/s/ Edward O. Handy III
Edward O. Handy III
Chairman and Chief Executive Officer
(principal executive officer)
Date:
November 4, 2020
By:
/s/ Ronald S. Ohsberg
Ronald S. Ohsberg
Senior Executive Vice President, Chief Financial Officer and Treasurer