UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended |
| September 30, 20212022 | or |
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☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______. |
Commission file number: 001-32991
WASHINGTON TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
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Rhode Island | | 05-0404671 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
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23 Broad Street | | |
Westerly, | Rhode Island | | 02891 |
(Address of principal executive offices) | | (Zip Code) |
(401) 348-1200
(Registrant’s telephone number, including area code)
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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.
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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, 20212022 was 17,327,584.17,180,903.
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FORM 10-Q |
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES |
For the Quarter Ended September 30, 20212022 |
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TABLE OF CONTENTS |
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Glossary of Acronyms and Terms
The following is a list of acronyms and terms that are used throughout this Quarterly Report on Form 10-Q:
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2013 Plan | Washington Trust Bancorp, Inc.'s 2013 Stock Option and Incentive Plan | | | |
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2021 Repurchase Program | Washington Trust Bancorp, Inc.'s Stock Repurchase Program adopted on November 10, 2021 | | | |
2022 Long Term Incentive Plan | Washington Trust Bancorp, Inc. 2022 Long Term Incentive Plan | | | |
ACL | Allowance for credit losses | | | |
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ALCO | Asset/Liability Committee | | | |
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AOCL | Accumulated other comprehensive loss | | | |
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ASC | Accounting Standards Codification | | | |
ASU | Accounting Standards Update | | | |
ATM | Automated teller machine | | | |
AUA | Assets under administration | | | |
Bancorp | Washington Trust Bancorp, Inc. | | | |
Bank | The Washington Trust Company, of Westerly | | | |
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BOLI | Bank-owned life insurance | | | |
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C&I | Commercial and industrial | | | |
CARES Act | Coronavirus Aid, Relief and Economic Security Act | | | |
CDARS | Certificate of Deposit Account Registry Service | | | |
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Corporation | The Bancorp and its subsidiaries | | | |
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CRE | Commercial real estate | | | |
CRRSA Act | Coronavirus Response and Relief Supplemental Appropriations Act | | | |
DCF | Discounted cash flow | | | |
DDM | Demand Deposit Marketplace | | | |
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EPS | Earnings per common share | | | |
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ERM | Enterprise risk management | | | |
Exchange Act | Securities Exchange Act of 1934, as amended | | | |
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FDIC | Federal Deposit Insurance Corporation | | | |
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FHLB | Federal Home Loan Bank of Boston | | | |
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FICO | Fair Isaac Corporation | | | |
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FRBB | Federal Reserve Bank of Boston | | | |
FTE | Fully taxable equivalent | | | |
GAAP | Accounting principles generally accepted in the United States of America | | | |
GDP | Gross domestic product | | | |
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HPI | National home price index | | | |
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ICS | Insured Cash Sweep | | | |
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LTV | Loan to value | | | |
NIM | Net interest margin | | | |
NUR | National unemployment rate | | | |
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OREO | Property acquired through foreclosure or repossession | | | |
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PPP | Paycheck Protection Program | | | |
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ROU | Right-of-use | | | |
S&P | Standard and Poors, Inc. | | | |
SBA | Small Business Administration | | | |
SEC | U.S. Securities and Exchange Commission | | | |
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TDR | Troubled debt restructuring | | | |
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Washington Trust | The Bancorp and its subsidiaries | | | |
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PART I. Financial Information
Item 1. Financial Statements
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Washington Trust Bancorp, Inc. and Subsidiaries | |
Consolidated Balance Sheets (unaudited) |
(Dollars in thousands, except par value) |
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| September 30, 2021 | December 31, 2020 |
Assets: | | |
Cash and due from banks | $297,039 | | $194,143 | |
Short-term investments | 3,349 | | 8,125 | |
Mortgage loans held for sale, at fair value | 48,705 | | 61,614 | |
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Available for sale debt securities, at fair value (amortized cost of $1,049,044, net of allowance for credit losses on securities of $0 at September 30, 2021; and amortized cost of $881,570; net of allowance for credit losses on securities of $0 at December 31, 2020) | 1,045,833 | | 894,571 | |
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Federal Home Loan Bank stock, at cost | 15,094 | | 30,285 | |
Loans: | | |
Total loans | 4,286,404 | | 4,195,990 | |
Less: allowance for credit losses on loans | 41,711 | | 44,106 | |
Net loans | 4,244,693 | | 4,151,884 | |
Premises and equipment, net | 28,488 | | 28,870 | |
Operating lease right-of-use assets | 27,518 | | 29,521 | |
Investment in bank-owned life insurance | 92,974 | | 84,193 | |
Goodwill | 63,909 | | 63,909 | |
Identifiable intangible assets, net | 5,631 | | 6,305 | |
Other assets | 129,410 | | 159,749 | |
Total assets | $6,002,643 | | $5,713,169 | |
Liabilities: | | |
Deposits: | | |
Noninterest-bearing deposits | $950,974 | | $832,287 | |
Interest-bearing deposits | 4,107,168 | | 3,546,066 | |
Total deposits | 5,058,142 | | 4,378,353 | |
Federal Home Loan Bank advances | 222,592 | | 593,859 | |
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Junior subordinated debentures | 22,681 | | 22,681 | |
Operating lease liabilities | 29,810 | | 31,717 | |
Other liabilities | 114,100 | | 152,364 | |
Total liabilities | 5,447,325 | | 5,178,974 | |
Commitments and contingencies (Note 18) | 0 | 0 |
Shareholders’ Equity: | | |
Common stock of $.0625 par value; authorized 60,000,000 shares; 17,363,457 shares issued and 17,320,449 shares outstanding at September 30, 2021 and 17,363,457 shares issued and 17,265,337 shares outstanding at December 31, 2020 | 1,085 | | 1,085 | |
Paid-in capital | 126,265 | | 125,610 | |
Retained earnings | 447,566 | | 418,246 | |
Accumulated other comprehensive loss | (18,128) | | (7,391) | |
Treasury stock, at cost; 43,008 shares at September 30, 2021 and 98,120 shares at December 31, 2020 | (1,470) | | (3,355) | |
Total shareholders’ equity | 555,318 | | 534,195 | |
Total liabilities and shareholders’ equity | $6,002,643 | | $5,713,169 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-3-
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Washington Trust Bancorp, Inc. and Subsidiaries | |
Consolidated Statements of Income (unaudited)
| (Dollars and shares in thousands, except per share amounts) |
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| | Three Months | | Nine Months |
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Periods ended September 30, | 2021 | | 2020 | | 2021 | | 2020 |
Interest income: | | | | | | | |
Interest and fees on loans | $35,691 | | | $34,925 | | | $104,670 | | | $110,938 | |
Interest on mortgage loans held for sale | 298 | | | 468 | | | 1,144 | | | 1,193 | |
Taxable interest on debt securities | 3,683 | | | 4,870 | | | 10,366 | | | 16,181 | |
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Dividends on Federal Home Loan Bank stock | 95 | | | 532 | | | 338 | | | 1,826 | |
Other interest income | 56 | | | 39 | | | 121 | | | 424 | |
Total interest and dividend income | 39,823 | | | 40,834 | | | 116,639 | | | 130,562 | |
Interest expense: | | | | | | | |
Deposits | 2,789 | | | 5,532 | | | 9,413 | | | 21,180 | |
Federal Home Loan Bank advances | 872 | | | 3,354 | | | 3,253 | | | 13,501 | |
Junior subordinated debentures | 92 | | | 135 | | | 278 | | | 519 | |
Other interest expense | — | | | 159 | | | — | | | 161 | |
Total interest expense | 3,753 | | | 9,180 | | | 12,944 | | | 35,361 | |
Net interest income | 36,070 | | | 31,654 | | | 103,695 | | | 95,201 | |
Provision for credit losses | — | | | 1,325 | | | (2,000) | | | 10,561 | |
Net interest income after provision for credit losses | 36,070 | | | 30,329 | | | 105,695 | | | 84,640 | |
Noninterest income: | | | | | | | |
Wealth management revenues | 10,455 | | | 8,954 | | | 30,778 | | | 26,248 | |
Mortgage banking revenues | 6,373 | | | 12,353 | | | 24,294 | | | 33,300 | |
Card interchange fees | 1,265 | | | 1,161 | | | 3,714 | | | 3,139 | |
Service charges on deposit accounts | 673 | | | 598 | | | 1,917 | | | 1,975 | |
Loan related derivative income | 728 | | | 1,264 | | | 2,370 | | | 3,818 | |
Income from bank-owned life insurance | 618 | | | 567 | | | 1,781 | | | 1,922 | |
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Other income | 408 | | | 571 | | | 2,233 | | | 1,313 | |
Total noninterest income | 20,520 | | | 25,468 | | | 67,087 | | | 71,715 | |
Noninterest expense: | | | | | | | |
Salaries and employee benefits | 22,162 | | | 21,892 | | | 65,771 | | | 60,824 | |
Outsourced services | 3,294 | | | 3,160 | | | 9,711 | | | 8,944 | |
Net occupancy | 2,134 | | | 2,012 | | | 6,304 | | | 5,940 | |
Equipment | 977 | | | 934 | | | 2,946 | | | 2,806 | |
Legal, audit and professional fees | 767 | | | 1,252 | | | 2,042 | | | 2,733 | |
FDIC deposit insurance costs | 482 | | | 392 | | | 1,201 | | | 1,488 | |
Advertising and promotion | 559 | | | 384 | | | 1,341 | | | 829 | |
Amortization of intangibles | 223 | | | 228 | | | 674 | | | 688 | |
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Debt prepayment penalties | — | | | — | | | 4,230 | | | — | |
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Other expenses | 1,922 | | | 2,090 | | | 6,025 | | | 7,023 | |
Total noninterest expense | 32,520 | | | 32,344 | | | 100,245 | | | 91,275 | |
Income before income taxes | 24,070 | | | 23,453 | | | 72,537 | | | 65,080 | |
Income tax expense | 5,319 | | | 5,131 | | | 15,855 | | | 13,817 | |
Net income | $18,751 | | | $18,322 | | | $56,682 | | | $51,263 | |
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Net income available to common shareholders | $18,697 | | | $18,285 | | | $56,520 | | | $51,154 | |
Weighted average common shares outstanding - basic | 17,320 | | | 17,260 | | | 17,303 | | | 17,287 | |
Weighted average common shares outstanding - diluted | 17,444 | | | 17,317 | | | 17,451 | | | 17,369 | |
Per share information: | Basic earnings per common share | $1.08 | | | $1.06 | | | $3.27 | | | $2.96 | |
| Diluted earnings per common share | $1.07 | | | $1.06 | | | $3.24 | | | $2.95 | |
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| September 30, 2022 | December 31, 2021 |
Assets: | | |
Cash and due from banks | $130,066 | | $175,259 | |
Short-term investments | 2,773 | | 3,234 | |
Mortgage loans held for sale, at fair value | 24,054 | | 40,196 | |
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Available for sale debt securities, at fair value (amortized cost of $1,165,816, net of allowance for credit losses on securities of $0 at September 30, 2022; and amortized cost of $1,051,800; net of allowance for credit losses on securities of $0 at December 31, 2021) | 982,573 | | 1,042,859 | |
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Federal Home Loan Bank stock, at cost | 32,940 | | 13,031 | |
Loans: | | |
Total loans | 4,848,873 | | 4,272,925 | |
Less: allowance for credit losses on loans | 36,863 | | 39,088 | |
Net loans | 4,812,010 | | 4,233,837 | |
Premises and equipment, net | 30,152 | | 28,908 | |
Operating lease right-of-use assets | 27,788 | | 26,692 | |
Investment in bank-owned life insurance | 101,491 | | 92,592 | |
Goodwill | 63,909 | | 63,909 | |
Identifiable intangible assets, net | 4,766 | | 5,414 | |
Other assets | 195,529 | | 125,196 | |
Total assets | $6,408,051 | | $5,851,127 | |
Liabilities: | | |
Deposits: | | |
Noninterest-bearing deposits | $938,572 | | $945,229 | |
Interest-bearing deposits | 4,131,285 | | 4,034,822 | |
Total deposits | 5,069,857 | | 4,980,051 | |
Federal Home Loan Bank advances | 700,000 | | 145,000 | |
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Junior subordinated debentures | 22,681 | | 22,681 | |
Operating lease liabilities | 30,189 | | 29,010 | |
Other liabilities | 153,050 | | 109,577 | |
Total liabilities | 5,975,777 | | 5,286,319 | |
Commitments and contingencies (Note 17) | | |
Shareholders’ Equity: | | |
Common stock of $.0625 par value; authorized 60,000,000 shares; 17,363,457 shares issued and 17,171,147 shares outstanding at September 30, 2022 and 17,363,457 shares issued and 17,330,818 shares outstanding at December 31, 2021 | 1,085 | | 1,085 | |
Paid-in capital | 127,055 | | 126,511 | |
Retained earnings | 485,163 | | 458,310 | |
Accumulated other comprehensive loss | (171,755) | | (19,981) | |
Treasury stock, at cost; 192,310 shares at September 30, 2022 and 32,639 shares at December 31, 2021 | (9,274) | | (1,117) | |
Total shareholders’ equity | 432,274 | | 564,808 | |
Total liabilities and shareholders’ equity | $6,408,051 | | $5,851,127 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-4-
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Washington Trust Bancorp, Inc. and Subsidiaries | |
Consolidated Statements of Comprehensive Income (unaudited) |
(Dollars and shares in thousands)thousands, except per share amounts) |
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| Three Months | | Nine Months |
Periods ended September 30, | 2021 | | 2020 | | 2021 | | 2020 |
Net income | $18,751 | | | $18,322 | | | $56,682 | | | $51,263 | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Net change in fair value of available for sale debt securities | (3,137) | | | (3,505) | | | (12,322) | | | 7,493 | |
Net change in fair value of cash flow hedges | (403) | | | 154 | | | (36) | | | (888) | |
Net change in defined benefit plan obligations | 540 | | | 410 | | | 1,621 | | | 1,229 | |
Total other comprehensive (loss) income, net of tax | (3,000) | | | (2,941) | | | (10,737) | | | 7,834 | |
Total comprehensive income | $15,751 | | | $15,381 | | | $45,945 | | | $59,097 | |
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| | Three Months | | Nine Months |
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Periods ended September 30, | 2022 | | 2021 | | 2022 | | 2021 |
Interest income: | | | | | | | |
Interest and fees on loans | $45,125 | | | $35,691 | | | $115,657 | | | $104,670 | |
Interest on mortgage loans held for sale | 361 | | | 298 | | | 851 | | | 1,144 | |
Taxable interest on debt securities | 6,061 | | | 3,683 | | | 15,209 | | | 10,366 | |
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Dividends on Federal Home Loan Bank stock | 88 | | | 95 | | | 218 | | | 338 | |
Other interest income | 503 | | | 56 | | | 769 | | | 121 | |
Total interest and dividend income | 52,138 | | | 39,823 | | | 132,704 | | | 116,639 | |
Interest expense: | | | | | | | |
Deposits | 6,656 | | | 2,789 | | | 13,722 | | | 9,413 | |
Federal Home Loan Bank advances | 3,234 | | | 872 | | | 3,891 | | | 3,253 | |
Junior subordinated debentures | 206 | | | 92 | | | 443 | | | 278 | |
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Total interest expense | 10,096 | | | 3,753 | | | 18,056 | | | 12,944 | |
Net interest income | 42,042 | | | 36,070 | | | 114,648 | | | 103,695 | |
Provision for credit losses | 800 | | | — | | | (2,100) | | | (2,000) | |
Net interest income after provision for credit losses | 41,242 | | | 36,070 | | | 116,748 | | | 105,695 | |
Noninterest income: | | | | | | | |
Wealth management revenues | 9,525 | | | 10,455 | | | 30,122 | | | 30,778 | |
Mortgage banking revenues | 2,047 | | | 6,373 | | | 7,630 | | | 24,294 | |
Card interchange fees | 1,287 | | | 1,265 | | | 3,754 | | | 3,714 | |
Service charges on deposit accounts | 819 | | | 673 | | | 2,250 | | | 1,917 | |
Loan related derivative income | 1,041 | | | 728 | | | 2,011 | | | 2,370 | |
Income from bank-owned life insurance | 684 | | | 618 | | | 1,900 | | | 1,781 | |
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Other income | 400 | | | 408 | | | 1,147 | | | 2,233 | |
Total noninterest income | 15,803 | | | 20,520 | | | 48,814 | | | 67,087 | |
Noninterest expense: | | | | | | | |
Salaries and employee benefits | 21,609 | | | 22,162 | | | 62,992 | | | 65,771 | |
Outsourced services | 3,552 | | | 3,294 | | | 10,169 | | | 9,711 | |
Net occupancy | 2,234 | | | 2,134 | | | 6,708 | | | 6,304 | |
Equipment | 939 | | | 977 | | | 2,795 | | | 2,946 | |
Legal, audit and professional fees | 693 | | | 767 | | | 2,140 | | | 2,042 | |
FDIC deposit insurance costs | 430 | | | 482 | | | 1,198 | | | 1,201 | |
Advertising and promotion | 799 | | | 559 | | | 1,874 | | | 1,341 | |
Amortization of intangibles | 215 | | | 223 | | | 648 | | | 674 | |
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Debt prepayment penalties | — | | | — | | | — | | | 4,230 | |
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Other expenses | 2,596 | | | 1,922 | | | 6,839 | | | 6,025 | |
Total noninterest expense | 33,067 | | | 32,520 | | | 95,363 | | | 100,245 | |
Income before income taxes | 23,978 | | | 24,070 | | | 70,199 | | | 72,537 | |
Income tax expense | 5,310 | | | 5,319 | | | 15,091 | | | 15,855 | |
Net income | $18,668 | | | $18,751 | | | $55,108 | | | $56,682 | |
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Net income available to common shareholders | $18,615 | | | $18,697 | | | $54,944 | | | $56,520 | |
Weighted average common shares outstanding - basic | 17,174 | | | 17,320 | | | 17,269 | | | 17,303 | |
Weighted average common shares outstanding - diluted | 17,298 | | | 17,444 | | | 17,389 | | | 17,451 | |
Per share information: | Basic earnings per common share | $1.08 | | | $1.08 | | | $3.18 | | | $3.27 | |
| Diluted earnings per common share | $1.08 | | | $1.07 | | | $3.16 | | | $3.24 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Washington Trust Bancorp, Inc. and Subsidiaries | |
Consolidated Statements of Changes in Shareholders' EquityComprehensive Income (Loss) (unaudited) |
(Dollars and shares in thousands) |
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For the three months ended September 30, 2021 | Common Shares Outstanding | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total |
Balance at June 30, 2021 | 17,320 | | $1,085 | | $125,442 | | $437,927 | | ($15,128) | | ($1,470) | | $547,856 | |
Net income | — | | — | | — | | 18,751 | | — | | — | | 18,751 | |
Total other comprehensive loss, net of tax | — | | — | | — | | — | | (3,000) | | — | | (3,000) | |
Cash dividends declared ($0.52 per share) | — | | — | | — | | (9,112) | | — | | — | | (9,112) | |
Share-based compensation | — | | — | | 823 | | — | | — | | — | | 823 | |
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Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered | — | | — | | — | | — | | — | | — | | — | |
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Balance at September 30, 2021 | 17,320 | | $1,085 | | $126,265 | | $447,566 | | ($18,128) | | ($1,470) | | $555,318 | |
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| Three Months | | Nine Months |
Periods ended September 30, | 2022 | | 2021 | | 2022 | | 2021 |
Net income | $18,668 | | | $18,751 | | | $55,108 | | | $56,682 | |
Other comprehensive (loss) income, net of tax: | | | | | | | |
Net change in fair value of available for sale debt securities | (47,067) | | | (3,137) | | | (132,469) | | | (12,322) | |
Net change in fair value of cash flow hedges | (6,973) | | | (403) | | | (20,281) | | | (36) | |
Net change in defined benefit plan obligations | 326 | | | 540 | | | 976 | | | 1,621 | |
Total other comprehensive loss, net of tax | (53,714) | | | (3,000) | | | (151,774) | | | (10,737) | |
Total comprehensive (loss) income | ($35,046) | | | $15,751 | | | ($96,666) | | | $45,945 | |
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For the nine months ended September 30, 2021 | Common Shares Outstanding | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total |
Balance at December 31, 2020 | 17,265 | | $1,085 | | $125,610 | | $418,246 | | ($7,391) | | ($3,355) | | $534,195 | |
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Net income | — | | — | | — | | 56,682 | | — | | — | | 56,682 | |
Total other comprehensive loss, net of tax | — | | — | | — | | — | | (10,737) | | — | | (10,737) | |
Cash dividends declared ($1.56 per share) | — | | — | | — | | (27,362) | | — | | — | | (27,362) | |
Share-based compensation | — | | — | | 2,705 | | — | | — | | — | | 2,705 | |
| | | | | | | |
| | | | | | | |
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered | 55 | | — | | (2,050) | | — | | — | | 1,885 | | (165) | |
| | | | | | | |
Balance at September 30, 2021 | 17,320 | | $1,085 | | $126,265 | | $447,566 | | ($18,128) | | ($1,470) | | $555,318 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-6-
| | | | | |
Washington Trust Bancorp, Inc. and Subsidiaries | |
Consolidated Statements of Changes in Shareholders' Equity (unaudited) |
(Dollars and shares in thousands)thousands, except per share amounts) |
| | | | | | | | | | | | | | | | | | | | | | | |
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, net of tax | — | | — | | — | | — | | (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 three months ended September 30, 2022 | Common Shares Outstanding | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total |
Balance at June 30, 2022 | 17,190 | | $1,085 | | $126,079 | | $475,889 | | ($118,041) | | ($8,378) | | $476,634 | |
Net income | — | | — | | — | | 18,668 | | — | | — | | 18,668 | |
Total other comprehensive loss, net of tax | — | | — | | — | | — | | (53,714) | | — | | (53,714) | |
Cash dividends declared ($0.54 per share) | — | | — | | — | | (9,394) | | — | | — | | (9,394) | |
Share-based compensation | — | | — | | 976 | | — | | — | | — | | 976 | |
| | | | | | | |
| | | | | | | |
Treasury stock purchased under 2021 Repurchase Program | (19) | | — | | — | | — | | — | | (896) | | (896) | |
Balance at September 30, 2022 | 17,171 | | $1,085 | | $127,055 | | $485,163 | | ($171,755) | | ($9,274) | | $432,274 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
For the nine months ended September 30, 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 - ASC 326 | — | | — | | — | | (6,108) | | — | | — | | (6,108) | |
Net income | — | | — | | — | | 51,263 | | — | | — | | 51,263 | |
Total other comprehensive income, net of tax | — | | — | | — | | — | | 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 the 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
For the nine months ended September 30, 2022 | Common Shares Outstanding | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total |
Balance at December 31, 2021 | 17,331 | | $1,085 | | $126,511 | | $458,310 | | ($19,981) | | ($1,117) | | $564,808 | |
| | | | | | | |
Net income | — | | — | | — | | 55,108 | | — | | — | | 55,108 | |
Total other comprehensive loss, net of tax | — | | — | | — | | — | | (151,774) | | — | | (151,774) | |
Cash dividends declared ($1.62 per share) | — | | — | | — | | (28,255) | | — | | — | | (28,255) | |
Share-based compensation | — | | — | | 2,589 | | — | | — | | — | | 2,589 | |
| | | | | | | |
| | | | | | | |
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered | 34 | | — | | (2,045) | | — | | — | | 1,322 | | (723) | |
Treasury stock purchased under 2021 Repurchase Program | (194) | | — | | — | | — | | — | | (9,479) | | (9,479) | |
Balance at September 30, 2022 | 17,171 | | $1,085 | | $127,055 | | $485,163 | | ($171,755) | | ($9,274) | | $432,274 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-7-
| | | | | |
Washington Trust Bancorp, Inc. and Subsidiaries | |
Consolidated StatementStatements of Cash FlowsChanges in Shareholders' Equity (unaudited) |
(Dollars and shares in thousands)thousands, except per share amounts) |
| | | | | | | | | | | | | | |
Nine months ended September 30, | 2021 | | 2020 |
Cash flows from operating activities: | | | |
Net income | $56,682 | | | $51,263 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Provision for credit losses | (2,000) | | | 10,561 | |
Depreciation of premises and equipment | 2,549 | | | 2,318 | |
| | | |
| | | |
Net amortization of premiums and discounts on debt securities and loans | 2,742 | | | 4,101 | |
Amortization of intangibles | 674 | | | 688 | |
| | | |
Share-based compensation | 2,705 | | | 2,696 | |
Tax benefit (expense) from stock option exercises and other equity awards | 135 | | | (70) | |
| | | |
Income from bank-owned life insurance | (1,781) | | | (1,922) | |
| | | |
Net gains on loan sales, including changes in fair value | (24,093) | | | (33,799) | |
| | | |
| | | |
| | | |
| | | |
| | | |
Proceeds from sales of loans, net | 706,253 | | | 586,677 | |
Loans originated for sale | (634,451) | | | (599,789) | |
| | | |
Decrease (increase) in operating lease right-of-use assets | 2,003 | | | (3,069) | |
(Decrease) increase in operating lease liabilities | (1,907) | | | 3,151 | |
Decrease (increase) in other assets | 34,107 | | | (67,262) | |
(Decrease) increase in other liabilities | (36,698) | | | 62,634 | |
Net cash provided by operating activities | 106,920 | | | 18,178 | |
Cash flows from investing activities: | | | |
Purchases of: | Available for sale debt securities: Mortgage-backed | (297,810) | | | (247,957) | |
| Available for sale debt securities: Other | (221,166) | | | (129,000) | |
| | | | |
| | | | |
| | | | |
Maturities, calls and principal payments of: | Available for sale debt securities: Mortgage-backed | 274,169 | | | 228,268 | |
| Available for sale debt securities: Other | 70,500 | | | 140,500 | |
| | | | |
Net redemption of Federal Home Loan Bank stock | 15,191 | | | 13,384 | |
| | | |
| | | |
Net increase in loans | (80,021) | | | (332,850) | |
| | | |
Purchases of loans | (41,546) | | | (51,081) | |
Proceeds from the sale of property acquired through foreclosure or repossession | — | | | 1,107 | |
Purchases of premises and equipment | (2,166) | | | (1,331) | |
Purchases of bank-owned life insurance | (7,000) | | | — | |
| | | |
Proceeds from surrender of bank-owned life insurance | — | | | 787 | |
| | | |
| | | |
Net cash used in investing activities | (289,849) | | | (378,173) | |
Cash flows from financing activities: | | | |
Net increase in deposits | 679,789 | | | 786,811 | |
| | | |
Proceeds from Federal Home Loan Bank advances | 1,173,000 | | | 1,592,500 | |
Repayment of Federal Home Loan Bank advances | (1,544,267) | | | (2,020,096) | |
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 | (165) | | | (417) | |
Cash dividends paid | (27,308) | | | (26,667) | |
| | | |
Net cash provided by financing activities | 281,049 | | | 433,555 | |
Net increase in cash and cash equivalents | 98,120 | | | 73,560 | |
Cash and cash equivalents at beginning of period | 202,268 | | | 138,455 | |
Cash and cash equivalents at end of period | $300,388 | | | $212,015 | |
| | | | |
Noncash Activities: | | | |
Loans charged off | $630 | | | $1,072 | |
Loans transferred to property acquired through foreclosure or repossession | — | | | 28 | |
Supplemental Disclosures: | | | |
Interest payments | $14,675 | | | $36,868 | |
Income tax payments | 15,551 | | | 15,039 | |
| | | | | | | | | | | | | | | | | | | | | | | |
For the three months ended September 30, 2021 | Common Shares Outstanding | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total |
Balance at June 30, 2021 | 17,320 | | $1,085 | | $125,442 | | $437,927 | | ($15,128) | | ($1,470) | | $547,856 | |
| | | | | | | |
Net income | — | | — | | — | | 18,751 | | — | | — | | 18,751 | |
Total other comprehensive loss, net of tax | — | | — | | — | | — | | (3,000) | | — | | (3,000) | |
Cash dividends declared ($0.52 per share) | — | | — | | — | | (9,112) | | — | | — | | (9,112) | |
Share-based compensation | — | | — | | 823 | | — | | — | | — | | 823 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Balance at September 30, 2021 | 17,320 | | $1,085 | | $126,265 | | $447,566 | | ($18,128) | | ($1,470) | | $555,318 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
For the nine months ended September 30, 2021 | Common Shares Outstanding | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total |
Balance at December 31, 2020 | 17,265 | | $1,085 | | $125,610 | | $418,246 | | ($7,391) | | ($3,355) | | $534,195 | |
| | | | | | | |
Net income | — | | — | | — | | 56,682 | | — | | — | | 56,682 | |
Total other comprehensive loss, net of tax | — | | — | | — | | — | | (10,737) | | — | | (10,737) | |
Cash dividends declared ($1.56 per share) | — | | — | | — | | (27,362) | | — | | — | | (27,362) | |
Share-based compensation | — | | — | | 2,705 | | — | | — | | — | | 2,705 | |
| | | | | | | |
| | | | | | | |
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered | 55 | | — | | (2,050) | | — | | — | | 1,885 | | (165) | |
| | | | | | | |
Balance at September 30, 2021 | 17,320 | | $1,085 | | $126,265 | | $447,566 | | ($18,128) | | ($1,470) | | $555,318 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-8-
| | | | | |
Washington Trust Bancorp, Inc. and Subsidiaries |
Consolidated Statement of Cash Flows (unaudited) |
(Dollars in thousands) |
| | | | | | | | | | | | | | |
Nine months ended September 30, | 2022 | | 2021 |
Cash flows from operating activities: | | | |
Net income | $55,108 | | | $56,682 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Provision for credit losses | (2,100) | | | (2,000) | |
Depreciation of premises and equipment | 2,554 | | | 2,549 | |
| | | |
| | | |
Net amortization of premiums and discounts on debt securities and loans | 2,485 | | | 2,742 | |
Amortization of intangibles | 648 | | | 674 | |
| | | |
Share-based compensation | 2,589 | | | 2,705 | |
Tax benefit from stock option exercises and other equity awards | 71 | | | 135 | |
| | | |
Income from bank-owned life insurance | (1,900) | | | (1,781) | |
| | | |
Net gains on loan sales, including changes in fair value | (6,164) | | | (24,093) | |
| | | |
| | | |
| | | |
| | | |
| | | |
Proceeds from sales of loans, net | 262,907 | | | 706,253 | |
Loans originated for sale | (242,153) | | | (634,451) | |
| | | |
(Increase) decrease in operating lease right-of-use assets | (1,096) | | | 2,003 | |
Increase (decrease) in operating lease liabilities | 1,179 | | | (1,907) | |
(Increase) decrease in other assets | (27,734) | | | 34,107 | |
Increase (decrease) in other liabilities | 25,451 | | | (36,698) | |
Net cash provided by operating activities | 71,845 | | | 106,920 | |
Cash flows from investing activities: | | | |
Purchases of: | Available for sale debt securities: Mortgage-backed | (203,826) | | | (297,810) | |
| Available for sale debt securities: Other | (10,747) | | | (221,166) | |
| | | | |
| | | | |
| | | | |
Maturities, calls and principal payments of: | Available for sale debt securities: Mortgage-backed | 97,495 | | | 274,169 | |
| Available for sale debt securities: Other | — | | | 70,500 | |
| | | | |
Net (purchases) redemption of Federal Home Loan Bank stock | (19,909) | | | 15,191 | |
Purchases of other equity investments | | (375) | | | — | |
| | | |
| | | |
Net increase in loans | (571,950) | | | (80,021) | |
| | | |
Purchases of loans | (1,764) | | | (41,546) | |
| | | |
Purchases of premises and equipment | (3,824) | | | (2,166) | |
Purchases of bank-owned life insurance | (7,000) | | | (7,000) | |
| | | |
| | | |
Equity investment in real estate limited partnership | (1,861) | | | — | |
| | | |
Net cash used in investing activities | (723,761) | | | (289,849) | |
Cash flows from financing activities: | | | |
Net increase in deposits | 89,806 | | | 679,789 | |
| | | |
Proceeds from Federal Home Loan Bank advances | 1,946,112 | | | 1,173,000 | |
Repayment of Federal Home Loan Bank advances | (1,391,112) | | | (1,544,267) | |
| | | |
| | | |
Treasury stock purchased | (9,479) | | | — | |
| | | |
| | | |
Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered | (723) | | | (165) | |
Cash dividends paid | (28,342) | | | (27,308) | |
| | | |
Net cash provided by financing activities | 606,262 | | | 281,049 | |
Net (decrease) increase in cash and cash equivalents | (45,654) | | | 98,120 | |
Cash and cash equivalents at beginning of period | 178,493 | | | 202,268 | |
Cash and cash equivalents at end of period | $132,839 | | | $300,388 | |
| | | | |
Noncash Activities: | | | |
Loans charged off | $122 | | | $630 | |
| | | |
Commitment for equity investment in real estate limited partnership | 8,360 | | | — | |
Supplemental Disclosures: | | | |
Interest payments | $15,677 | | | $14,675 | |
Income tax payments | 13,021 | | | 15,551 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-9-
Condensed Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation
Washington TrustThe 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”),the Bank, a Rhode Island chartered financial institution founded in 1800, and Weston Securities Corporation (“WSC”).Corporation. Through its subsidiaries, the Bancorp offers a complete product line of financial services, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut.
The Unaudited Consolidated Financial Statements include the accounts of the Bancorp and its subsidiaries (collectively the “Corporation” or “Washington Trust”).subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The Bancorp also owns Certain previously reported amounts have been reclassified to conform to 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 investment in the capital trusts, which is 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.current year’s presentation.
The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America (“GAAP”)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. Material estimatesManagement considers the ACL on loans to be a material estimate that areis particularly susceptible to change are the determination of the allowance for credit losses on loans, the valuation of goodwill and identifiable intangible assets and the accounting for defined benefit pension plans.change.
The Unaudited Consolidated Financial Statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”)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, 2020.2021.
Note 2 - Recently Issued Accounting Pronouncements
Accounting Standards Adopted in 2021Pending Adoption
Income TaxesBusiness Combinations - ASC 745805
Accounting Standards UpdateASU No. 2019-12, “Income Taxes - Simplifying the Accounting2021-08, “Accounting for Income Taxes”Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2019-12”2021-08”), was issued in December 2019October 2021 to simplifyclarify the accounting for income taxes.contract cost assets and contract liabilities acquired in a business combination. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination at fair value on the acquisition date. The provisions of ASU 2019-122021-08 clarify that contract cost assets and contract liabilities acquired in a business combination should be accounted for in accordance with ASC 606 as if the acquirer had originated the contracts. ASU 2021-08 is effective for fiscal years beginning after December 15, 2020,2022, including interim periods within those fiscal years, with early adoption permitted. CertainThe provisions under ASU 2019-12 require prospective application, some require modified retrospective application through a cumulative-effect adjustment2021-08 are required to retained earnings as of the beginning of the year ofbe applied prospectively. The adoption while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The Corporation adopted the provisions of ASU 2019-12 effective January 1, 2021 and the adoption did2021-08 is not expected to have a material impact on the Corporation’s consolidated financial statements.
ReceivablesFinancial Instruments - Credit Losses - ASC 310326
Accounting Standards UpdateASU No. 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees2022-02, “Troubled Debt Restructurings and Other Costs”Vintage Disclosures” (“ASU 2020-08”2022-02”), was issued in October 2020March 2022 to provide further clarificationupdates on the accounting treatment for TDRs and related disclosures requirements, as well as modifying the disclosure requirement associated with the existing credit quality indicators “vintage” disclosure. With respect to TDRs, ASU 2022-02 eliminates the recognition and measurement guidance for TDRs under current GAAP and instead requires that the Corporation evaluate whether the modification represents a new loan or a continuation of existing loan, consistent with the current GAAP treatment for other loan modifications. In addition, ASU 2022-02 eliminates existing disclosure requirements on TDRs and replaces with enhanced disclosure requirements related to loan modifications made to borrowers, including those experiencing financial difficulty. ASU 2022-02 also provides an update to the 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 premiumexisting tabular vintage disclosure of credit quality indicators by requiring thatcurrent period gross write-offs to be disclosed by year of origination for each loan segment. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The provisions under ASU 2022-02 should be applied on a prospective basis. However, the premium be amortizedCorporation has the option to use a modified retrospective transition method related to the earliest callchange in accounting treatment for TDRs with a cumulative effect of the change in accounting principle recognized in the opening balance of retained earnings as of the adoption date. The Corporation early adoptedis currently evaluating this ASU and has not yet determined the provisionsimpact that the adoption 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 amount2022-02 will have on its consolidated financial statements.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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 Corporation adopted the provisions of ASU 2020-08 effective January 1, 2021 and the adoption did not have an impact on the Corporation’s consolidated financial statements.
Accounting Standards Pending Adoption
There were no recently issued accounting pronouncements, applicable to the Corporation, that are pending adoption as of September 30, 2021.
Note 3 - Cash and Due from Banks
The Bank maintains certain average reserve balances to meet the requirements of the Federal Reserve Bank of Boston (“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. As a result, there were no reserve balances included in cash and due from banks in the Unaudited Consolidated Balance Sheets at September 30, 2021 and December 31, 2020.
Cash and due from banks included interest-bearing deposits in other banks of $260.3 million and $138.4 million, respectively, at September 30, 2021 and December 31, 2020.
Cash and due from banks balances also include cash collateral pledged to derivative counterparties. See Note 10 for additional disclosure regarding cash collateral pledged to derivative counterparties.
Note 4 - Securities
Available for Sale Debt Securities
The following tables present the amortized cost, gross unrealized holding gains, gross unrealized holding losses, allowance for credit losses (“ACL”)ACL on securities and fair value of securities by major security type and class of security:
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
September 30, 2021 | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Allowance for Credit Losses | | Fair Value | |
September 30, 2022 | | September 30, 2022 | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | ACL | | Fair Value |
Available for Sale Debt Securities: | Available for Sale Debt Securities: | | Available for Sale Debt Securities: | |
Obligations of U.S. government-sponsored enterprises | Obligations of U.S. government-sponsored enterprises | $181,044 | | | $63 | | | ($2,502) | | | $— | | | $178,605 | | Obligations of U.S. government-sponsored enterprises | $231,204 | | | $5 | | | ($33,354) | | | $— | | | $197,855 | |
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 843,485 | | | 9,532 | | | (9,315) | | | — | | | 843,702 | | Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 912,063 | | | 120 | | | (147,919) | | | — | | | 764,264 | |
| Individual name issuer trust preferred debt securities | Individual name issuer trust preferred debt securities | 11,363 | | | 6 | | | (213) | | | — | | | 11,156 | | Individual name issuer trust preferred debt securities | 9,384 | | | — | | | (584) | | | — | | | 8,800 | |
| Corporate bonds | Corporate bonds | 13,152 | | | — | | | (782) | | | — | | | 12,370 | | Corporate bonds | 13,165 | | | — | | | (1,511) | | | — | | | 11,654 | |
Total available for sale debt securities | Total available for sale debt securities | $1,049,044 | | | $9,601 | | | ($12,812) | | | $— | | | $1,045,833 | | Total available for sale debt securities | $1,165,816 | | | $125 | | | ($183,368) | | | $— | | | $982,573 | |
|
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
December 31, 2020 | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Allowance for Credit Losses | | Fair Value | |
December 31, 2021 | | December 31, 2021 | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | ACL | | Fair Value |
Available for Sale Debt Securities: | Available for Sale Debt Securities: | | Available for Sale Debt Securities: | |
Obligations of U.S. government-sponsored enterprises | Obligations of U.S. government-sponsored enterprises | $131,186 | | | $628 | | | ($145) | | | $— | | | $131,669 | | Obligations of U.S. government-sponsored enterprises | $200,953 | | | $12 | | | ($4,511) | | | $— | | | $196,454 | |
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 725,890 | | | 14,942 | | | (527) | | | — | | | 740,305 | | Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 828,319 | | | 6,850 | | | (10,207) | | | — | | | 824,962 | |
| Individual name issuer trust preferred debt securities | Individual name issuer trust preferred debt securities | 13,341 | | | — | | | (672) | | | — | | | 12,669 | | Individual name issuer trust preferred debt securities | 9,373 | | | — | | | (235) | | | — | | | 9,138 | |
| Corporate bonds | Corporate bonds | 11,153 | | | — | | | (1,225) | | | — | | | 9,928 | | Corporate bonds | 13,155 | | | — | | | (850) | | | — | | | 12,305 | |
Total available for sale debt securities | Total available for sale debt securities | $881,570 | | | $15,570 | | | ($2,569) | | | $— | | | $894,571 | | Total available for sale debt securities | $1,051,800 | | | $6,862 | | | ($15,803) | | | $— | | | $1,042,859 | |
|
AmortizedThe Corporation excludes accrued interest from the amortized cost basis of debt securities and reports accrued interest in other assets in the Unaudited Consolidated Balance Sheets. Accrued interest receivable on available for sale debt securities excludes accrued interest receivable of $2.2totaled $2.7 million and $2.4$2.3 million, respectively, as of September 30, 20212022 and December 31, 2020. Accrued interest receivable is included in other assets in the
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Unaudited Consolidated Balance Sheets.2021.
As of September 30, 20212022 and December 31, 2020, debt2021, securities with a fair value of $344.3$302.7 million and $291.9$332.0 million, respectively, were pledged as collateral for Federal Home Loan Bank of Boston (“FHLB”)FHLB borrowings, potential borrowings with the FRB’s discount window,FRBB, certain public deposits and for other purposes. See Note 87 for additional disclosure on FHLB borrowings.
The schedule of maturities of available for sale debt securities is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments. All other debt securities are included based on contractual maturities. Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.
| (Dollars in thousands) | (Dollars in thousands) | | | (Dollars in thousands) | | |
September 30, 2021 | Amortized Cost | Fair Value | | |
September 30, 2022 | | September 30, 2022 | Amortized Cost | Fair Value | |
Due in one year or less | Due in one year or less | $177,689 | | $177,731 | | | Due in one year or less | $122,305 | | $102,490 | | |
Due after one year to five years | Due after one year to five years | 410,399 | | 410,341 | | | Due after one year to five years | 407,912 | | 343,570 | | |
Due after five years to ten years | Due after five years to ten years | 366,885 | | 364,137 | | | Due after five years to ten years | 418,836 | | 354,503 | | |
Due after ten years | Due after ten years | 94,071 | | 93,624 | | | Due after ten years | 216,763 | | 182,010 | | |
Total debt securities | Total debt securities | $1,049,044 | | $1,045,833 | | | Total debt securities | $1,165,816 | | $982,573 | | |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Included in the above table are debt securities with an amortized cost balance of $204.8$253.0 million and a fair value of $201.3$217.6 million at September 30, 20212022 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 32 years to 1514 years, with call features ranging from 1 month to 1 year.
Assessment of Available for Sale Debt Securities for Impairment
Management assesses the decline in fair value of investment securities on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatilityvolatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates both qualitative and quantitative factors to assess whether an impairment exists.
A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a debt security placed on nonaccrual is reversed against interest income. There were no debt securities on nonaccrual status at September 30, 20212022 and 20202021 and, therefore there was no accrued interest related to debt securities reversed against interest income for the three and nine months ended September 30, 20212022 and 2020.2021.
The following tables summarize available for sale debt securities in an unrealized loss position, for which an allowance for credit lossesACL on securities has not been recorded, segregated by length of time that the securities have been in a continuous unrealized loss position:
| (Dollars in thousands) | (Dollars in thousands) | Less than 12 Months | | 12 Months or Longer | | Total | (Dollars in thousands) | Less than 12 Months | | 12 Months or Longer | | Total |
September 30, 2021 | # | | Fair Value | Unrealized Losses | | # | | Fair Value | Unrealized Losses | | # | | Fair Value | Unrealized Losses | |
September 30, 2022 | | September 30, 2022 | # | | Fair Value | Unrealized Losses | | # | | Fair Value | Unrealized Losses | | # | | Fair Value | Unrealized Losses |
Obligations of U.S. government-sponsored enterprises | Obligations of U.S. government-sponsored enterprises | 14 | | | $167,238 | | ($2,499) | | | 1 | | | $497 | | ($3) | | | 15 | | | $167,735 | | ($2,502) | | Obligations of U.S. government-sponsored enterprises | 7 | | | $45,972 | | ($4,983) | | | 15 | | | $141,878 | | ($28,371) | | | 22 | | | $187,850 | | ($33,354) | |
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 36 | | | 506,511 | | (8,472) | | | 12 | | | 46,265 | | (843) | | | 48 | | | 552,776 | | (9,315) | | Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 122 | | | 395,493 | | (52,363) | | | 47 | | | 363,645 | | (95,556) | | | 169 | | | 759,138 | | (147,919) | |
Individual name issuer trust preferred debt securities | Individual name issuer trust preferred debt securities | — | | | — | | — | | | 3 | | | 9,157 | | (213) | | | 3 | | | 9,157 | | (213) | | Individual name issuer trust preferred debt securities | — | | | — | | — | | | 3 | | | 8,800 | | (584) | | | 3 | | | 8,800 | | (584) | |
Corporate bonds | Corporate bonds | — | | | — | | — | | | 4 | | | 12,370 | | (782) | | | 4 | | | 12,370 | | (782) | | Corporate bonds | — | | | — | | — | | | 4 | | | 11,654 | | (1,511) | | | 4 | | | 11,654 | | (1,511) | |
Total | Total | 50 | | | $673,749 | | ($10,971) | | | 20 | | | $68,289 | | ($1,841) | | | 70 | | | $742,038 | | ($12,812) | | Total | 129 | | | $441,465 | | ($57,346) | | | 69 | | | $525,977 | | ($126,022) | | | 198 | | | $967,442 | | ($183,368) | |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
| (Dollars in thousands) | (Dollars in thousands) | Less than 12 Months | | 12 Months or Longer | | Total | (Dollars in thousands) | Less than 12 Months | | 12 Months or Longer | | Total |
December 31, 2020 | # | | Fair Value | Unrealized Losses | | # | | Fair Value | Unrealized Losses | | # | | Fair Value | Unrealized Losses | |
December 31, 2021 | | December 31, 2021 | # | | Fair Value | Unrealized Losses | | # | | Fair Value | Unrealized Losses | | # | | Fair Value | Unrealized Losses |
Obligations of U.S. government-sponsored enterprises | Obligations of U.S. government-sponsored enterprises | 6 | | | $63,856 | | ($145) | | | — | | | $— | | $— | | | 6 | | | $63,856 | | ($145) | | Obligations of U.S. government-sponsored enterprises | 12 | | | $152,733 | | ($3,313) | | | 6 | | | $43,202 | | ($1,198) | | | 18 | | | $195,935 | | ($4,511) | |
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 16 | | | 107,283 | | (527) | | | — | | | — | | — | | | 16 | | | 107,283 | | (527) | | Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 41 | | | 514,419 | | (7,270) | | | 21 | | | 108,983 | | (2,937) | | | 62 | | | 623,402 | | (10,207) | |
Individual name issuer trust preferred debt securities | Individual name issuer trust preferred debt securities | — | | | — | | — | | | 5 | | | 12,669 | | (672) | | | 5 | | | 12,669 | | (672) | | Individual name issuer trust preferred debt securities | — | | | — | | — | | | 3 | | | 9,138 | | (235) | | | 3 | | | 9,138 | | (235) | |
Corporate bonds | Corporate bonds | — | | | — | | — | | | 3 | | | 9,928 | | (1,225) | | | 3 | | | 9,928 | | (1,225) | | Corporate bonds | — | | | — | | — | | | 4 | | | 12,305 | | (850) | | | 4 | | | 12,305 | | (850) | |
Total | Total | 22 | | | $171,139 | | ($672) | | | 8 | | | $22,597 | | ($1,897) | | | 30 | | | $193,736 | | ($2,569) | | Total | 53 | | | $667,152 | | ($10,583) | | | 34 | | | $173,628 | | ($5,220) | | | 87 | | | $840,780 | | ($15,803) | |
Deterioration in credit quality of the underlying issuers of the securities, deterioration in the condition of the financial services industry, worsening of the current economic environment, or declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as credit losses, and the Corporation may incur write-downs.losses.
Obligations of U.S. Government Agency and U.S. Government-Sponsored Enterprise Securities, including Mortgage-Backed Securities
The gross unrealized losses on U.S. government agency and U.S. government-sponsored debt securities, including mortgage-backedmortgage-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
backed securities, were primarily attributable to relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at September 30, 2021.2022. Management believes that the unrealized losses on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no allowance for credits losses on securities was recorded at September 30, 2021.2022.
Individual Name Issuer Trust Preferred Debt Securities
Included in debt securities in an unrealized loss position at September 30, 20212022 were 3three trust preferred securities issued by 3three 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 collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date, as well as credit rating changes between the reporting period date and the filing date of this report, and other information. As of September 30, 2021,2022, there were 2was one individual name issuer trust preferred debt securitiessecurity with an amortized cost of $4.0$2.0 million and unrealized losses of $140$132 thousand that werewas rated below investment grade by Standard & Poors, Inc. (“S&P”).&P. We noted no additional downgrades to below investment grade between September 30, 20212022 and the filing date of this report. Based on the information available through the filing date of this report, all individual name issuer trust preferred debt securities held in our portfolio continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates and not changes in the credit quality of the issuers of the debt securities. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no allowance for credit lossesACL on securities was recorded at September 30, 2021.2022.
Corporate Bonds
AtIncluded in debt securities in an unrealized loss position at September 30, 2021, the Corporation had 42022 were four corporate bond holdings with unrealized losses totaling $782 thousand. These investment grade corporate bonds were issued by large corporationsthree individual companies 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, 2021. Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date, as well as credit rating changes between the reporting period date and the filing date of this report, and other information. As of September 30, 2022, there was one corporate bond debt security with an amortized cost of $2.0 million and unrealized losses of $121 thousand that was rated below investment grade by S&P. We noted no downgrades to below investment grade between September 30, 2022 and the filing date of this report. Based on the information available through the filing date of this report, all corporate bond debt securities held in our portfolio continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. Management believes the unrealized losses on these debt securities are primarily attributable
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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 lossesACL was recorded at September 30, 2021.2022.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 54 - Loans
The following istable presents a summary of loans:
| (Dollars in thousands) | (Dollars in thousands) | September 30, 2021 | December 31, 2020 | (Dollars in thousands) | September 30, 2022 | December 31, 2021 |
Commercial: | Commercial: | | Commercial: | |
| Commercial real estate (1) | Commercial real estate (1) | $1,661,785 | | $1,633,024 | | Commercial real estate (1) | $1,762,687 | | $1,639,062 | |
Commercial & industrial (2) | Commercial & industrial (2) | 682,774 | | 817,408 | | Commercial & industrial (2) | 652,758 | | 641,555 | |
Total commercial | Total commercial | 2,344,559 | | 2,450,432 | | Total commercial | 2,415,445 | | 2,280,617 | |
Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
| Residential real estate (3) | Residential real estate (3) | 1,672,364 | | 1,467,312 | | Residential real estate (3) | 2,144,098 | | 1,726,975 | |
Consumer: | Consumer: | | Consumer: | |
| Home equity | Home equity | 249,874 | | 259,185 | | Home equity | 273,742 | | 247,697 | |
Other (4) | Other (4) | 19,607 | | 19,061 | | Other (4) | 15,588 | | 17,636 | |
Total consumer | Total consumer | 269,481 | | 278,246 | | Total consumer | 289,330 | | 265,333 | |
Total loans (5) | Total loans (5) | $4,286,404 | | $4,195,990 | | Total loans (5) | $4,848,873 | | $4,272,925 | |
(1)Commercial real estate (“CRE”)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”)&I consists of loans to businesses and individuals, a portion of which are fully or partially collateralized by real estate. C&I also includes $77.4$1.4 million and $199.8$38.0 million, respectively, of PPP loans as of September 30, 20212022 and December 31, 2020.2021.
(3)Residential real estate consists of mortgage and homeowner construction loans secured by one- to four-family residential properties.
(4)Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans.
(5)Includes net unamortized loan origination costs of $5.0$10.7 million and $1.5$6.7 million, respectively, at September 30, 20212022 and December 31, 20202021 and net unamortized premiums on purchased loans of $489$329 thousand and $787$414 thousand, respectively, at September 30, 20212022 and December 31, 2020.2021.
Loan balances exclude accrued interest receivable of $11.1$14.6 million and $11.3$10.3 million, respectively, as of September 30, 20212022 and December 31, 2020. Accrued interest receivable is included in other assets in the Unaudited Consolidated Balance Sheets.2021.
As of September 30, 20212022 and December 31, 2020,2021, loans amounting to $2.2$2.3 billion and $2.1$2.2 billion, respectively, were pledged as collateral to the FHLB under a blanket pledge agreement and to the FRB.FRBB for the discount window. See Note 87 for additional disclosure regarding borrowings.
Loan Modifications Under the CARES Act
The Corporation elected to account for eligible loan modifications under Section 4013 of the Coronavirus Aid, Relief and Economic SecurityCARES Act, (the “CARES Act”), as amended by the Coronavirus Response and Relief Supplemental AppropriationsCRRSA Act. To be eligible, aEligible loan modification must be (1) relatedmodifications from March 1, 2020 through January 1, 2022 made in response 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) January 1, 2022. Eligible loan modifications arepandemic were not required to be classified as troubled debt restructurings (“TDRs”) and are not reported as past due provided that they are performing in accordance withTDRs. The vast majority of the modified terms. Interest income will continue to be recognized unless the loan is placed on nonaccrual status in accordance with the nonaccrual loans accounting policy described below.
Washington Trust has processed loan payment deferral modifications, or "deferments", on 654 loans totaling $728 million since the beginning of the second quarter of 2020, in response to the COVID-19 pandemic. The majority of these deferments“deferments,” qualified as eligible loan modifications under Section 4013and were not classified as TDRs. All of the CARES Act, as amended. As of September 30, 2021, we had activethese loans with qualified deferments on 5 loans totaling $38.0 million, or 1% of total loans excluding Paycheck Protection Program (“PPP”) loans.
Condensed Notesexited their payment deferral period prior to Unaudited Consolidated Financial Statements – (continued)
March 31, 2022.
Concentrations of Credit Risk
A significant portion of our loan portfolio is concentrated among borrowers in southern New England and a substantial portion of the portfolio is collateralized by real estate in this area. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy, as well as the health of the real estate economic sector in the Corporation’s market area.
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 ageaging analysis of past due loans, segregated by class of loans:
| (Dollars in thousands) | (Dollars in thousands) | Days Past Due | | (Dollars in thousands) | Days Past Due | |
September 30, 2021 | 30-59 | | 60-89 | | Over 90 | | Total Past Due | | Current | | Total Loans | |
September 30, 2022 | | September 30, 2022 | 30-59 | | 60-89 | | Over 90 | | Total Past Due | | Current | | Total Loans |
Commercial: | Commercial: | | Commercial: | |
| Commercial real estate | Commercial real estate | $— | | | $— | | | $— | | | $— | | | $1,661,785 | | | $1,661,785 | | Commercial real estate | $— | | | $— | | | $— | | | $— | | | $1,762,687 | | | $1,762,687 | |
Commercial & industrial | Commercial & industrial | 1 | | | 1 | | | — | | | 2 | | | 682,772 | | | 682,774 | | Commercial & industrial | 4 | | | — | | | — | | | 4 | | | 652,754 | | | 652,758 | |
Total commercial | Total commercial | 1 | | | 1 | | | — | | | 2 | | | 2,344,557 | | | 2,344,559 | | Total commercial | 4 | | | — | | | — | | | 4 | | | 2,415,441 | | | 2,415,445 | |
Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
| Residential real estate | Residential real estate | 3,452 | | | 2,319 | | | 2,927 | | | 8,698 | | | 1,663,666 | | | 1,672,364 | | Residential real estate | 1,607 | | | 219 | | | 5,430 | | | 7,256 | | | 2,136,842 | | | 2,144,098 | |
Consumer: | Consumer: | | Consumer: | |
| Home equity | Home equity | 398 | | | 323 | | | 103 | | | 824 | | | 249,050 | | | 249,874 | | Home equity | 202 | | | — | | | 50 | | | 252 | | | 273,490 | | | 273,742 | |
Other | Other | 19 | | | 5 | | | — | | | 24 | | | 19,583 | | | 19,607 | | Other | 17 | | | — | | | — | | | 17 | | | 15,571 | | | 15,588 | |
Total consumer | Total consumer | 417 | | | 328 | | | 103 | | | 848 | | | 268,633 | | | 269,481 | | Total consumer | 219 | | | — | | | 50 | | | 269 | | | 289,061 | | | 289,330 | |
Total loans | Total loans | $3,870 | | | $2,648 | | | $3,030 | | | $9,548 | | | $4,276,856 | | | $4,286,404 | | Total loans | $1,830 | | | $219 | | | $5,480 | | | $7,529 | | | $4,841,344 | | | $4,848,873 | |
| (Dollars in thousands) | (Dollars in thousands) | Days Past Due | | (Dollars in thousands) | Days Past Due | |
December 31, 2020 | 30-59 | | 60-89 | | Over 90 | | Total Past Due | | Current | | Total Loans | |
December 31, 2021 | | December 31, 2021 | 30-59 | | 60-89 | | Over 90 | | Total Past Due | | Current | | Total Loans |
Commercial: | Commercial: | | Commercial: | |
| Commercial real estate | Commercial real estate | $265 | | | $— | | | $— | | | $265 | | | $1,632,759 | | | $1,633,024 | | Commercial real estate | $— | | | $— | | | $— | | | $— | | | $1,639,062 | | | $1,639,062 | |
Commercial & industrial | Commercial & industrial | 1 | | | 2 | | | — | | | 3 | | | 817,405 | | | 817,408 | | Commercial & industrial | 3 | | | — | | | — | | | 3 | | | 641,552 | | | 641,555 | |
Total commercial | Total commercial | 266 | | | 2 | | | — | | | 268 | | | 2,450,164 | | | 2,450,432 | | Total commercial | 3 | | | — | | | — | | | 3 | | | 2,280,614 | | | 2,280,617 | |
Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
| Residential real estate | Residential real estate | 4,466 | | | 701 | | | 5,172 | | | 10,339 | | | 1,456,973 | | | 1,467,312 | | Residential real estate | 1,784 | | | 3,176 | | | 4,662 | | | 9,622 | | | 1,717,353 | | | 1,726,975 | |
Consumer: | Consumer: | | Consumer: | |
| Home equity | Home equity | 894 | | | 129 | | | 644 | | | 1,667 | | | 257,518 | | | 259,185 | | Home equity | 580 | | | 77 | | | 108 | | | 765 | | | 246,932 | | | 247,697 | |
Other | Other | 23 | | | 7 | | | 88 | | | 118 | | | 18,943 | | | 19,061 | | Other | 21 | | | — | | | — | | | 21 | | | 17,615 | | | 17,636 | |
Total consumer | Total consumer | 917 | | | 136 | | | 732 | | | 1,785 | | | 276,461 | | | 278,246 | | Total consumer | 601 | | | 77 | | | 108 | | | 786 | | | 264,547 | | | 265,333 | |
Total loans | Total loans | $5,649 | | | $839 | | | $5,904 | | | $12,392 | | | $4,183,598 | | | $4,195,990 | | Total loans | $2,388 | | | $3,253 | | | $4,770 | | | $10,411 | | | $4,262,514 | | | $4,272,925 | |
Included in past due loans as of September 30, 20212022 and December 31, 2020,2021, were nonaccrual loans of $6.9$7.1 million and $8.5$9.4 million, respectively.
All In addition, all loans 90 days or more past due at September 30, 20212022 and December 31, 20202021 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
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. When loans are placed on nonaccrual status, interest previously accrued but not collected is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the carrying valueis a summary of nonaccrual loans, segregated by class of loans:
| (Dollars in thousands) | (Dollars in thousands) | Sep 30, 2021 | Dec 31, 2020 | (Dollars in thousands) | Sep 30, 2022 | Dec 31, 2021 |
Commercial: | Commercial: | | Commercial: | |
Commercial real estate | Commercial real estate | $— | | $— | | Commercial real estate | $— | | $— | |
Commercial & industrial | Commercial & industrial | — | | — | | Commercial & industrial | — | | — | |
Total commercial | Total commercial | — | | — | | Total commercial | — | | — | |
Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
Residential real estate | Residential real estate | 10,321 | | 11,981 | | Residential real estate | 11,700 | | 13,576 | |
Consumer: | Consumer: | | Consumer: | |
Home equity | Home equity | 655 | | 1,128 | | Home equity | 422 | | 627 | |
Other | Other | — | | 88 | | Other | — | | — | |
Total consumer | Total consumer | 655 | | 1,216 | | Total consumer | 422 | | 627 | |
Total nonaccrual loans | Total nonaccrual loans | $10,976 | | $13,197 | | Total nonaccrual loans | $12,122 | | $14,203 | |
Accruing loans 90 days or more past due | Accruing loans 90 days or more past due | $— | | $— | | Accruing loans 90 days or more past due | $— | | $— | |
No ACL was deemed necessary on nonaccrual loans with carrying values of $4.3 million and $4.2 million, respectively, as of September 30, 2022 and December 31, 2021.
Nonaccrual loans of $4.0$5.1 million and $4.7$4.8 million, respectively, at September 30, 20212022 and December 31, 20202021 were current as to the payment of principal and interest.
No ACL was deemed necessary on nonaccrual loans with a carrying value of $4.0 million and $3.0 million, respectively, as of September 30, 2021 and December 31, 2020.
As of September 30, 20212022 and December 31, 2020,2021, nonaccrual loans secured by one- to four-family residential property amounting to $1.5$4.4 million and $3.4$1.5 million, respectively, were in process of foreclosure.
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2021.2022.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents interest income recognized on nonaccrual loans:
| (Dollars in thousands) | (Dollars in thousands) | Three Months | | Nine Months | (Dollars in thousands) | Three Months | | Nine Months |
| Periods ended September 30, | Periods ended September 30, | 2021 | 2020 | | 2021 | 2020 | Periods ended September 30, | 2022 | 2021 | | 2022 | 2021 |
Commercial: | Commercial: | | Commercial: | |
Commercial real estate | Commercial real estate | $— | | $— | | | $— | | $— | | Commercial real estate | $— | | $— | | | $— | | $— | |
Commercial & industrial | Commercial & industrial | — | | — | | | — | | — | | Commercial & industrial | — | | — | | | — | | — | |
Total commercial | Total commercial | — | | — | | | — | | — | | Total commercial | — | | — | | | — | | — | |
Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
Residential real estate | Residential real estate | 131 | | 70 | | | 288 | | 341 | | Residential real estate | 77 | | 131 | | | 242 | | 288 | |
Consumer: | Consumer: | | Consumer: | |
Home equity | Home equity | 9 | | 11 | | | 44 | | 51 | | Home equity | 9 | | 9 | | | 21 | | 44 | |
Other | Other | — | | — | | | — | | — | | Other | — | | — | | | 3 | | — | |
Total consumer | Total consumer | 9 | | 11 | | | 44 | | 51 | | Total consumer | 9 | | 9 | | | 24 | | 44 | |
Total | Total | $140 | | $81 | | | $332 | | $392 | | Total | $86 | | $140 | | | $266 | | $332 | |
Troubled Debt Restructurings
A loan that has been modified or renewed is considered to be a TDR when two conditions are met: (1) the borrower is experiencing financial difficulty and (2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or a transaction with similar credit risk characteristics. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance,
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring of a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection.
The Corporation's ACL reflects the effects of a TDR when management reasonably expects at the reporting date that a TDR will be executed with an individual borrower. A TDR is considered reasonably expected no later than the point when management concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession to avoid a default. Reasonably expected TDRs and executed TDRs are evaluated individually to determine the required ACL. TDRs that did not involve a below-market rate concession and perform in accordance with their modified contractual terms for a reasonable period of time may be included in the Corporation’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.
TDRs are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term and full collection of principal and interest is in doubt.
TDRs are reported as such for at least one year from the date of the restructuring. In years after the restructuring, TDRs are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is performing in accordance with their modified contractual terms for a reasonable period of time.
The recorded investment in TDRs consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. For accruing TDRs, the recorded investment also includes accrued interest.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the recorded investment in TDRs and other pertinent information:
| (Dollars in thousands) | (Dollars in thousands) | Sep 30, 2021 | Dec 31, 2020 | (Dollars in thousands) | Sep 30, 2022 | Dec 31, 2021 |
Accruing TDRs | Accruing TDRs | $8,047 | | $13,418 | | Accruing TDRs | $7,275 | | $16,564 | |
Nonaccrual TDRs | Nonaccrual TDRs | 1,732 | | 2,345 | | Nonaccrual TDRs | 2,890 | | 2,819 | |
Total TDRs | Total TDRs | $9,779 | | $15,763 | | Total TDRs | $10,165 | | $19,383 | |
| Specific reserves on TDRs included in the ACL on loans | Specific reserves on TDRs included in the ACL on loans | $195 | | $159 | | Specific reserves on TDRs included in the ACL on loans | $132 | | $148 | |
Additional commitments to lend to borrowers with TDRs | Additional commitments to lend to borrowers with TDRs | $— | | $— | | Additional commitments to lend to borrowers with TDRs | $— | | $— | |
The following tables present TDRs occurring during the period indicated and the recorded investment pre- and post- modification:post-modification:
| | (Dollars in thousands) | (Dollars in thousands) | | Outstanding Recorded Investment | (Dollars in thousands) | | Outstanding Recorded Investment |
| | # of Loans | | Pre-Modifications | | Post-Modifications | | # of Loans | | Pre-Modifications | | Post-Modifications |
Three months ended September 30, | Three months ended September 30, | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | Three months ended September 30, | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Commercial: | Commercial: | | Commercial: | |
Commercial real estate | Commercial real estate | — | | | — | | | $— | | | $— | | | $— | | | $— | | Commercial real estate | — | | | — | | | $— | | | $— | | | $— | | | $— | |
Commercial & industrial | Commercial & industrial | — | | | — | | | — | | | — | | | — | | | — | | Commercial & industrial | 2 | | | — | | | 844 | | | — | | | 844 | | | — | |
Total commercial | Total commercial | — | | | — | | | — | | | — | | | — | | | — | | Total commercial | 2 | | | — | | | 844 | | | — | | | 844 | | | — | |
Residential Real Estate: | | |
Residential real estate | — | | | 4 | | | — | | | 2,092 | | | — | | | 2,092 | | |
Consumer: | | |
Home equity | — | | | 1 | | | — | | | 71 | | | — | | | 71 | | |
Other | — | | | — | | | — | | | — | | | — | | | — | | |
Total consumer | — | | | 1 | | | $— | | | $71 | | | $— | | | $71 | | |
| Total | Total | — | | | 5 | | | $— | | | $2,163 | | | $— | | | $2,163 | | Total | 2 | | | — | | | $844 | | | $— | | | $844 | | | $— | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
(Dollars in thousands) | | | | | Outstanding Recorded Investment |
| # of Loans | | Pre-Modifications | | Post-Modifications |
Nine months ended September 30, | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
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 | |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
(Dollars in thousands) | | | | | Outstanding Recorded Investment |
| # of Loans | | Pre-Modifications | | Post-Modifications |
Nine months ended September 30, | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Commercial: | | | | | | | | | | | |
Commercial real estate | — | | | — | | | $— | | | $— | | | $— | | | $— | |
Commercial & industrial | 2 | | | — | | | 844 | | | — | | | 844 | | | — | |
Total commercial | 2 | | | — | | | 844 | | | — | | | 844 | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total | 2 | | | — | | | $844 | | | $— | | | $844 | | | $— | |
The following table presents TDRs occurring during the period indicated by type of modification:
| | | (Dollars in thousands) | (Dollars in thousands) | Three Months | | Nine Months | (Dollars in thousands) | Three Months | | Nine Months |
Periods ended September 30, | Periods ended September 30, | 2021 | | 2020 | | 2021 | | 2020 | Periods ended September 30, | 2022 | | 2021 | | 2022 | | 2021 |
Below-market interest rate concession | Below-market interest rate concession | $— | | | $— | | | $— | | | $— | | Below-market interest rate concession | $— | | | $— | | | $— | | | $— | |
Payment deferral | Payment deferral | — | | | 2,163 | | | — | | | 7,365 | | Payment deferral | — | | | — | | | — | | | — | |
Maturity / amortization concession | Maturity / amortization concession | — | | | — | | | — | | | — | | Maturity / amortization concession | — | | | — | | | — | | | — | |
Interest only payments | Interest only payments | — | | | — | | | — | | | — | | Interest only payments | — | | | — | | | — | | | — | |
Combination (1) | Combination (1) | — | | | — | | | — | | | 413 | | Combination (1) | 844 | | | — | | | 844 | | | — | |
| Total | Total | $— | | | $2,163 | | | $— | | | $7,778 | | Total | $844 | | | $— | | | $844 | | | $— | |
(1)Loans included in this classification were modified with a combination of any two of the concessions listed in this table.
The following tables presenttable presents information on TDRs modified within the previous 12 months for which there was a payment default:
| | (Dollars in thousands) | (Dollars in thousands) | # of Loans | | Recorded Investment | (Dollars in thousands) | Three Months | | Nine Months |
Three months ended September 30, | 2021 | | 2020 | | 2021 | | 2020 | |
| | | # of Loans | | Recorded Investment | | # of Loans | | Recorded Investment |
Periods ended September 30, | | Periods ended September 30, | 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 |
TDRs with a Payment Default: | TDRs with a Payment Default: | | TDRs with a Payment Default: | |
| Residential real estate | Residential real estate | 1 | | | 1 | | | $330 | | | $903 | | Residential real estate | — | | 1 | | | $— | | $330 | | | — | | 1 | | | $— | | $330 | |
| Home equity | — | | | 1 | | | — | | | 47 | | |
| Totals | 1 | | | 2 | | | $330 | | | $950 | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
(Dollars in thousands) | # of Loans | | Recorded Investment |
Nine months ended September 30, | 2021 | | 2020 | | 2021 | | 2020 |
TDRs with a Payment Default: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Residential real estate | 1 | | | 1 | | | $330 | | | $903 | |
| | | | | | | |
Home equity | — | | | 1 | | | — | | | 47 | |
| | | | | | | |
Totals | 1 | | | 2 | | | $330 | | | $950 | |
Individually Analyzed Loans
Individually analyzed loans include nonaccrual commercial loans, reasonably expected TDRs and executed TDRs, as well as certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans.
As of September 30, 2022, the carrying value of individually analyzed loans amounted to $12.0 million, of which $8.3 million were considered collateral dependent. As of December 31, 2021, the carrying value of individually analyzed loans amounted to $15.5$21.1 million, of which $7.7$14.4 million were considered collateral dependent. As of December 31, 2020, the carrying value of individually analyzed loans amounted to $18.3 million, of which $8.4 million were considered collateral dependent.
For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. See Note 1110 for additional disclosure regarding fair value of individually analyzed collateral dependent loans.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the carrying value of collateral dependent individually analyzed loans:
| (Dollars in thousands) | (Dollars in thousands) | September 30, 2021 | | December 31, 2020 | (Dollars in thousands) | September 30, 2022 | | December 31, 2021 |
| | Carrying Value | Related Allowance | | Carrying Value | Related Allowance | | Carrying Value | Related Allowance | | Carrying Value | Related Allowance |
Commercial: | Commercial: | | Commercial: | |
Commercial real estate (1) | Commercial real estate (1) | $4,009 | | $321 | | | $1,792 | | $— | | Commercial real estate (1) | $3,609 | | $— | | | $10,603 | | $— | |
Commercial & industrial (2) | Commercial & industrial (2) | — | | — | | | 451 | | — | | Commercial & industrial (2) | — | | — | | | — | | — | |
Total commercial | Total commercial | 4,009 | | 321 | | | 2,243 | | — | | Total commercial | 3,609 | | — | | | 10,603 | | — | |
Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
Residential real estate (3)(2) | Residential real estate (3)(2) | 3,716 | | 538 | | | 5,947 | | 38 | | Residential real estate (3)(2) | 4,612 | | 520 | | | 3,803 | | 534 | |
Consumer: | Consumer: | | Consumer: | |
Home equity (3)(2) | Home equity (3)(2) | — | | — | | | 254 | | 183 | | Home equity (3)(2) | 71 | | — | | | — | | — | |
Other | Other | — | | — | | | — | | — | | Other | — | | — | | | — | | — | |
Total consumer | Total consumer | — | | — | | | 254 | | 183 | | Total consumer | 71 | | — | | | — | | — | |
Total | Total | $7,725 | | $859 | | | $8,444 | | $221 | | Total | $8,292 | | $520 | | | $14,406 | | $534 | |
(1) Secured by income-producing property.
(2) Secured by business assets.
(3) Secured by one- to four-family residential properties.
Credit Quality Indicators
Commercial
The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan risk rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. The Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for credit losses on loans.loan losses. See Note 65 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 Small Business Administration (“SBA”)SBA guarantees.
Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies.
Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectability. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
determined. “Loss” is not intended to imply that the loan has no recovery value, but rather, it is not practical or desirable to continue to carry the asset.
The Corporation’s procedures call for loan risk ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. On a quarterly basis, management reviews a watched asset list, which generally consists of commercial loans that are risk-rated 6 or worse, highly leveraged transaction loans, high-volatility commercial real estate loans with active deferrals resulting from the COVID-19 pandemic, and other selected loans. Management’s review focuses on the current status of the loans, the appropriateness of risk ratings and strategies to improve the credit.
An annual credit review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio.
Residential and Consumer
Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type.
In addition, other techniques are utilized to monitor indicators of credit deterioration in the residential real estate loans and home equity consumer loans. Among these techniques is the periodic tracking of loans with an updated Fair Isaac Corporation (“FICO”)FICO score and an updated estimated loan to value (“LTV”)LTV ratio. LTV is estimated based on such factors as geographic location, the original appraised value and changes in median home prices, and takes into consideration the age of the loan. The results of these analyses and other credit review procedures, including selected targeted internal reviews, are taken into account in the determination of qualitative loss factors for residential real estate and home equity consumer credits.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment as of September 30, 2021:2022:
| (Dollars in thousands) | (Dollars in thousands) | Term Loans Amortized Cost by Origination Year | | (Dollars in thousands) | Term Loans Amortized Cost by Origination Year | |
| | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans Amortized Cost | Revolving Loans Converted to Term Loans | Total | | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost | Revolving Loans Converted to Term Loans | Total |
Commercial: | Commercial: | | Commercial: | |
CRE: | CRE: | | CRE: | |
Pass | Pass | $260,038 | | $250,606 | | $305,492 | | $215,877 | | $179,618 | | $322,267 | | $8,466 | | $2,279 | | $1,544,643 | | Pass | $461,435 | | $354,011 | | $175,390 | | $193,425 | | $175,084 | | $316,290 | | $3,579 | | $1,466 | | $1,680,680 | |
Special Mention | Special Mention | 6,002 | | 786 | | 29,670 | | 37,010 | | 16,091 | | 23,209 | | 364 | | — | | 113,132 | | Special Mention | 14,142 | | 22,345 | | 406 | | 13,115 | | 17,567 | | 10,633 | | 190 | | — | | 78,398 | |
Classified | Classified | — | | 4,010 | | — | | — | | �� | | — | | — | | — | | 4,010 | | Classified | — | | — | | 510 | | — | | 2,685 | | 414 | | — | | — | | 3,609 | |
Total CRE | Total CRE | 266,040 | | 255,402 | | 335,162 | | 252,887 | | 195,709 | | 345,476 | | 8,830 | | 2,279 | | 1,661,785 | | Total CRE | 475,577 | | 376,356 | | 176,306 | | 206,540 | | 195,336 | | 327,337 | | 3,769 | | 1,466 | | 1,762,687 | |
C&I: | C&I: | | C&I: | |
Pass | Pass | 120,412 | | 96,441 | | 106,652 | | 90,595 | | 52,440 | | 99,439 | | 87,001 | | 1,096 | | 654,076 | | Pass | 86,981 | | 63,805 | | 76,341 | | 88,235 | | 94,240 | | 121,837 | | 103,130 | | 798 | | 635,367 | |
Special Mention | Special Mention | — | | — | | 642 | | 4,641 | | 6,419 | | 13,019 | | 1,186 | | — | | 25,907 | | Special Mention | 1,605 | | — | | — | | — | | 1,444 | | 12,123 | | 1,497 | | — | | 16,669 | |
Classified | Classified | — | | — | | — | | — | | — | | 2,791 | | — | | — | | 2,791 | | Classified | — | | — | | — | | 26 | | — | | — | | 696 | | — | | 722 | |
Total C&I | Total C&I | 120,412 | | 96,441 | | 107,294 | | 95,236 | | 58,859 | | 115,249 | | 88,187 | | 1,096 | | 682,774 | | Total C&I | 88,586 | | 63,805 | | 76,341 | | 88,261 | | 95,684 | | 133,960 | | 105,323 | | 798 | | 652,758 | |
| Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
Residential real estate: | Residential real estate: | | Residential real estate: | |
Current | Current | 573,380 | | 387,179 | | 174,478 | | 99,480 | | 95,794 | | 333,355 | | — | | — | | 1,663,666 | | Current | 622,899 | | 718,371 | | 283,621 | | 127,157 | | 74,789 | | 310,005 | | — | | — | | 2,136,842 | |
Past Due | Past Due | — | | 1,407 | | 272 | | 1,299 | | 763 | | 4,957 | | — | | — | | 8,698 | | Past Due | — | | — | | 1,397 | | 1,156 | | 2,107 | | 2,596 | | — | | — | | 7,256 | |
Total residential real estate | Total residential real estate | 573,380 | | 388,586 | | 174,750 | | 100,779 | | 96,557 | | 338,312 | | — | | — | | 1,672,364 | | Total residential real estate | 622,899 | | 718,371 | | 285,018 | | 128,313 | | 76,896 | | 312,601 | | — | | — | | 2,144,098 | |
Consumer: | Consumer: | | Consumer: | |
Home equity: | Home equity: | | Home equity: | |
Current | Current | 8,170 | | 7,294 | | 4,315 | | 2,682 | | 1,125 | | 3,939 | | 213,010 | | 8,515 | | 249,050 | | Current | 15,354 | | 8,709 | | 3,842 | | 2,643 | | 2,106 | | 3,428 | | 229,083 | | 8,326 | | 273,491 | |
Past Due | Past Due | — | | — | | — | | — | | — | | 185 | | 241 | | 398 | | 824 | | Past Due | — | | — | | — | | — | | — | | 81 | | 95 | | 75 | | 251 | |
Total home equity | Total home equity | 8,170 | | 7,294 | | 4,315 | | 2,682 | | 1,125 | | 4,124 | | 213,251 | | 8,913 | | 249,874 | | Total home equity | 15,354 | | 8,709 | | 3,842 | | 2,643 | | 2,106 | | 3,509 | | 229,178 | | 8,401 | | 273,742 | |
Other: | Other: | | Other: | |
Current | Current | 6,128 | | 3,936 | | 1,381 | | 708 | | 784 | | 6,360 | | 286 | | — | | 19,583 | | Current | 3,182 | | 4,400 | | 1,742 | | 736 | | 258 | | 4,987 | | 266 | | — | | 15,571 | |
Past Due | Past Due | 14 | | 10 | | — | | — | | — | | — | | — | | — | | 24 | | Past Due | 17 | | — | | — | | — | | — | | — | | — | | — | | 17 | |
Total other | Total other | 6,142 | | 3,946 | | 1,381 | | 708 | | 784 | | 6,360 | | 286 | | — | | 19,607 | | Total other | 3,199 | | 4,400 | | 1,742 | | 736 | | 258 | | 4,987 | | 266 | | — | | 15,588 | |
| Total Loans | Total Loans | $974,144 | | $751,669 | | $622,902 | | $452,292 | | $353,034 | | $809,521 | | $310,554 | | $12,288 | | $4,286,404 | | Total Loans | $1,205,615 | | $1,171,641 | | $543,249 | | $426,493 | | $370,280 | | $782,394 | | $338,536 | | $10,665 | | $4,848,873 | |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment as of December 31, 2020:2021:
| (Dollars in thousands) | (Dollars in thousands) | Term Loans Amortized Cost by Origination Year | | (Dollars in thousands) | Term Loans Amortized Cost by Origination Year | |
| | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving Loans Amortized Cost | Revolving Loans Converted to Term Loans | Total | | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans Amortized Cost | Revolving Loans Converted to Term Loans | Total |
Commercial: | Commercial: | | Commercial: | |
CRE: | CRE: | | CRE: | |
Pass | Pass | $283,341 | | $353,875 | | $260,917 | | $236,310 | | $136,490 | | $249,359 | | $10,333 | | $2,386 | | $1,533,011 | | Pass | $417,705 | | $212,649 | | $260,940 | | $206,164 | | $163,132 | | $266,067 | | $7,015 | | $2,202 | | $1,535,874 | |
Special Mention | Special Mention | 756 | | 20,235 | | 39,387 | | 16,222 | | 11,318 | | 10,367 | | 771 | | — | | 99,056 | | Special Mention | 9,089 | | 489 | | 33,982 | | 28,432 | | — | | 20,273 | | 320 | | — | | 92,585 | |
Classified | Classified | 957 | | — | | — | | — | | — | | — | | — | | — | | 957 | | Classified | — | | 958 | | — | | 2,685 | | 6,959 | | 1 | | — | | — | | 10,603 | |
Total CRE | Total CRE | 285,054 | | 374,110 | | 300,304 | | 252,532 | | 147,808 | | 259,726 | | 11,104 | | 2,386 | | 1,633,024 | | Total CRE | 426,794 | | 214,096 | | 294,922 | | 237,281 | | 170,091 | | 286,341 | | 7,335 | | 2,202 | | 1,639,062 | |
C&I: | C&I: | | C&I: | |
Pass | Pass | 293,493 | | 95,775 | | 98,146 | | 56,792 | | 44,445 | | 91,128 | | 95,817 | | 1,296 | | 776,892 | | Pass | 116,959 | | 78,601 | | 104,827 | | 87,619 | | 51,579 | | 83,182 | | 89,686 | | 911 | | 613,364 | |
Special Mention | Special Mention | 1,123 | | 722 | | 3,210 | | 6,839 | | 3,141 | | 14,853 | | 3,806 | | 56 | | 33,750 | | Special Mention | — | | — | | 606 | | 4,599 | | 6,195 | | 15,605 | | 1,186 | | — | | 28,191 | |
Classified | Classified | 403 | | — | | — | | — | | — | | 6,363 | | — | | — | | 6,766 | | Classified | — | | — | | — | | — | | — | | — | | — | | — | | — | |
Total C&I | Total C&I | 295,019 | | 96,497 | | 101,356 | | 63,631 | | 47,586 | | 112,344 | | 99,623 | | 1,352 | | 817,408 | | Total C&I | 116,959 | | 78,601 | | 105,433 | | 92,218 | | 57,774 | | 98,787 | | 90,872 | | 911 | | 641,555 | |
| Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
Residential real estate: | Residential real estate: | | Residential real estate: | |
Current | Current | 463,477 | | 253,228 | | 146,839 | | 155,976 | | 128,139 | | 309,314 | | — | | — | | 1,456,973 | | Current | 733,658 | | 353,742 | | 158,140 | | 85,656 | | 88,365 | | 297,792 | | — | | — | | 1,717,353 | |
Past Due | Past Due | 238 | | 1,698 | | 1,310 | | 886 | | 110 | | 6,097 | | — | | — | | 10,339 | | Past Due | — | | 1,402 | | 1,167 | | 2,379 | | 763 | | 3,911 | | — | | — | | 9,622 | |
Total residential real estate | Total residential real estate | 463,715 | | 254,926 | | 148,149 | | 156,862 | | 128,249 | | 315,411 | | — | | — | | 1,467,312 | | Total residential real estate | 733,658 | | 355,144 | | 159,307 | | 88,035 | | 89,128 | | 301,703 | | — | | — | | 1,726,975 | |
Consumer: | Consumer: | | Consumer: | |
Home equity: | Home equity: | | Home equity: | |
Current | Current | 9,838 | | 6,771 | | 3,898 | | 1,474 | | 1,217 | | 3,955 | | 219,085 | | 11,280 | | 257,518 | | Current | 10,434 | | 5,850 | | 3,703 | | 2,380 | | 1,064 | | 3,592 | | 211,488 | | 8,421 | | 246,932 | |
Past Due | Past Due | — | | 35 | | 24 | | — | | — | | 186 | | 310 | | 1,112 | | 1,667 | | Past Due | — | | — | | 185 | | — | | — | | 245 | | 115 | | 220 | | 765 | |
Total home equity | Total home equity | 9,838 | | 6,806 | | 3,922 | | 1,474 | | 1,217 | | 4,141 | | 219,395 | | 12,392 | | 259,185 | | Total home equity | 10,434 | | 5,850 | | 3,888 | | 2,380 | | 1,064 | | 3,837 | | 211,603 | | 8,641 | | 247,697 | |
Other: | Other: | | Other: | |
Current | Current | 5,214 | | 2,241 | | 1,237 | | 1,544 | | 548 | | 7,850 | | 308 | | 1 | | 18,943 | | Current | 5,536 | | 3,264 | | 1,313 | | 407 | | 747 | | 6,090 | | 258 | | — | | 17,615 | |
Past Due | Past Due | 19 | | 1 | | — | | — | | 88 | | 7 | | 3 | | — | | 118 | | Past Due | 21 | | — | | — | | — | | — | | — | | — | | — | | 21 | |
Total other | Total other | 5,233 | | 2,242 | | 1,237 | | 1,544 | | 636 | | 7,857 | | 311 | | 1 | | 19,061 | | Total other | 5,557 | | 3,264 | | 1,313 | | 407 | | 747 | | 6,090 | | 258 | | — | | 17,636 | |
| Total Loans | Total Loans | $1,058,859 | | $734,581 | | $554,968 | | $476,043 | | $325,496 | | $699,479 | | $330,433 | | $16,131 | | $4,195,990 | | Total Loans | $1,293,402 | | $656,955 | | $564,863 | | $420,321 | | $318,804 | | $696,758 | | $310,068 | | $11,754 | | $4,272,925 | |
Consistent with industry practice, Washington Trust may renew commercial loans at or immediately prior to their maturity. In the tables above, renewals subject to full credit evaluation before being granted are reported as originations in the period renewed.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 65 - Allowance for Credit Losses on Loans
The ACL on loans is management’s current estimate, at the reporting date, of expected credit losses over the expected life of the loans. The level of the ACL on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the calculation of loss given default and the estimation of expected credit losses. Qualitative adjustments 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.
In accordance with the Corporation’s ACL policy, the methodology is reviewed no less than annually. In the first quarter of 2021, management updated its ACLThe methodology for pooled loans to incorporate additional econometric factors in the determination of theincorporates a probability of default for each loan portfolio segment.and loss given default framework. Loss given default is estimated based on historical credit loss experience. Probability of default is estimated using a regression model that incorporates econometric factors. Econometric factors are selected based on the correlation of the factor to historical credit losses for each loan portfolio segment. Effective January 1, 2021,
The following table summarizes the following econometric factors are utilized in the determination of the probability of default for each loan portfolio segment:segment as of the national unemployment rate (“NUR”) and gross domestic product (“GDP”) econometric factors are utilizeddates indicated:
| | | | | | | | |
| Econometric Factors |
Loan portfolio segment | At September 30, 2022 | At December 31, 2021 |
CRE | NUR & GDP | NUR & GDP |
C&I | NUR & GDP | NUR |
Residential real estate | NUR & HPI | NUR & HPI |
Home equity | NUR & HPI | NUR & HPI |
Other consumer | GDP | NUR & GDP |
The following table presents the activity in the ACL on loans for the commercial real estate and other consumer loan portfolio segments;three months ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Commercial | | | Consumer | | |
| CRE | C&I | Total Commercial | Residential Real Estate | Home Equity | Other | Total Consumer | Total |
Beginning Balance | $17,197 | | $10,332 | | $27,529 | | $7,308 | | $1,040 | | $440 | | $1,480 | | $36,317 | |
| | | | | | | | |
Charge-offs | — | | (10) | | (10) | | — | | — | | (53) | | (53) | | (63) | |
Recoveries | — | | 1 | | 1 | | — | | — | | 8 | | 8 | | 9 | |
Provision | 414 | | 24 | | 438 | | 139 | | 31 | | (8) | | 23 | | 600 | |
Ending Balance | $17,611 | | $10,347 | | $27,958 | | $7,447 | | $1,071 | | $387 | | $1,458 | | $36,863 | |
The following table presents the NUR and national home price index (“HPI”) econometric factors are utilizedactivity in the ACL on loans for the residential real estate and home equity portfolio segments; and the NUR econometric factor is utilized for the commercial & industrial loan portfolio segment. Prior to January 1, 2021, solely the NUR was used in the determination of the probability of default for each loan portfolio segment.nine months ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
(Dollars in thousands) | Commercial | | | Consumer | | |
| CRE | C&I | Total Commercial | Residential Real Estate | Home Equity | Other | Total Consumer | Total |
Beginning Balance | $18,933 | | $10,832 | | $29,765 | | $7,860 | | $1,069 | | $394 | | $1,463 | | $39,088 | |
| | | | | | | | |
Charge-offs | — | | (19) | | (19) | | — | | — | | (103) | | (103) | | (122) | |
Recoveries | 145 | | 22 | | 167 | | 21 | | 4 | | 34 | | 38 | | 226 | |
Provision | (1,467) | | (488) | | (1,955) | | (434) | | (2) | | 62 | | 60 | | (2,329) | |
Ending Balance | $17,611 | | $10,347 | | $27,958 | | $7,447 | | $1,071 | | $387 | | $1,458 | | $36,863 | |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the activity in the ACL on loans for the three months ended September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Commercial | | | Consumer | | |
| CRE | C&I | Total Commercial | Residential Real Estate | Home Equity | Other | Total Consumer | Total |
Beginning Balance | $21,450 | | $11,717 | | $33,167 | | $6,877 | | $1,340 | | $495 | | $1,835 | | $41,879 | |
| | | | | | | | |
Charge-offs | — | | 2 | | 2 | | (57) | | (183) | | (11) | | (194) | | (249) | |
Recoveries | — | | — | | — | | 5 | | 73 | | 3 | | 76 | | 81 | |
Provision | (613) | | (392) | | (1,005) | | 1,131 | | (112) | | (14) | | (126) | | — | |
Ending Balance | $20,837 | | $11,327 | | $32,164 | | $7,956 | | $1,118 | | $473 | | $1,591 | | $41,711 | |
The following table presents the activity in the ACL on loans for the nine months ended September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
(Dollars in thousands) | Commercial | | | Consumer | | |
| CRE | C&I | Total Commercial | Residential Real Estate | Home Equity | Other | Total Consumer | Total |
Beginning Balance | $22,065 | | $12,228 | | $34,293 | | $8,042 | | $1,300 | | $471 | | $1,771 | | $44,106 | |
| | | | | | | | |
Charge-offs | — | | (304) | | (304) | | (107) | | (183) | | (36) | | (219) | | (630) | |
Recoveries | — | | 3 | | 3 | | 85 | | 79 | | 19 | | 98 | | 186 | |
Provision | (1,228) | | (600) | | (1,828) | | (64) | | (78) | | 19 | | (59) | | (1,951) | |
Ending Balance | $20,837 | | $11,327 | | $32,164 | | $7,956 | | $1,118 | | $473 | | $1,591 | | $41,711 | |
Note 6 - Deposits
The following table presents the activity in the allowance for loan losses for the three months endeda summary of deposits:
| | | | | | | | | | | |
(Dollars in thousands) | Sep 30, 2022 | | Dec 31, 2021 |
Noninterest-bearing demand deposits | $938,572 | | | $945,229 | |
Interest-bearing demand deposits (1) | 304,275 | | | 251,032 | |
NOW accounts | 869,984 | | | 867,138 | |
Money market accounts | 1,146,826 | | | 1,072,864 | |
Savings accounts | 600,568 | | | 555,177 | |
Time deposits (2) | 1,209,632 | | | 1,288,611 | |
Total deposits | $5,069,857 | | | $4,980,051 | |
(1)Includes wholesale brokered demand deposit balances of $31,044 and $0, respectively, as of September 30, 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 | |
2022 and December 31, 2021.
(2)
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the activity in the allowance for loan losses for the nine months endedIncludes wholesale brokered time deposit balances of $412,127 and $515,228, respectively, as of 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 ASC 326 | 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 | |
2022 and December 31, 2021.
Note 7 - LeasesBorrowings
The Corporation has committedAdvances payable 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. Operating lease right-of-use (“ROU”) assetsFHLB amounted to $27.5$700.0 million and $29.5$145.0 million, respectively, as ofat September 30, 20212022 and December 31, 2020. Operating lease liabilities totaled $29.8 million and $31.7 million, respectively, as of September 30, 2021 and December 31, 2020.2021.
As of September 30, 2021, there were 3 operating leases that had not yet commenced. As of2022 and December 31, 2020, there were no operating leases that2021, the Bank had not yet commenced.
Rental expense for operating leases is recognized onaccess to a straight-line basis over$40.0 million unused line of credit with the lease term and amounted to $1.0FHLB. Additionally, the Bank had a $102.0 million and $3.1 million respectively, forstandby letter of credit with the three and nine months ended September 30, 2021, compared to $1.0 million and $3.0 million, respectively, for the same periods in 2020. 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 the Corporation’s operating leases:
| | | | | | | | | | | |
| Sep 30, 2021 | | Dec 31, 2020 |
Weighted average discount rate | 3.35 | % | | 3.34 | % |
Range of lease expiration dates | 10 months - 19 years | | 7 months - 20 years |
Range of lease renewal options | 1 year - 5 years | | 1 year - 5 years |
Weighted average remaining lease term | 13.0 years | | 13.4 years |
The following table presents the undiscounted annual lease payments under the terms of the Corporation’s operating leasesFHLB at September 30, 2021, including a reconciliation2022. The Bank had remaining available borrowing capacity of $967.1 million and $1.6 billion, respectively, with the FHLB at September 30, 2022 and December 31, 2021. The Bank pledges certain qualified investment securities and loans as collateral to the present value of operating lease liabilities recognized in the Unaudited Consolidated Balance Sheets:
| | | | | |
(Dollars in thousands) | |
October 1, 2021 to December 31, 2021 | $978 | |
2022 | 3,981 | |
2023 | 3,881 | |
2024 | 3,670 | |
2025 | 2,932 | |
2026 and thereafter | 22,099 | |
Total operating lease payments (1) | 37,541 | |
Less: interest | 7,731 | |
Present value of operating lease liabilities (2) | $29,810 | |
(1) Includes $1.4 million related to options to extend lease terms that are reasonably certain of being exercised.
(2) Includes short-term operating lease liabilities of $3.1 million.FHLB.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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, | 2021 | 2020 | | 2021 | 2020 |
Lease Expense: | | | | | |
Operating lease expense | $1,004 | | $1,005 | | | $3,011 | | $2,915 | |
Variable lease expense | 10 | | 14 | | | 44 | | 41 | |
Total lease expense (1) | $1,014 | | $1,019 | | | $3,055 | | $2,956 | |
Cash Paid: | | | | | |
Cash paid reducing operating lease liabilities | $932 | | $956 | | | $2,910 | | $2,831 | |
(1) Included in net occupancy expenses in the Unaudited Consolidated Income Statement.
Note 8 - Federal Home Loan Bank Advances
Advances payable to the FHLB amounted to $222.6 million and $593.9 million, respectively, at September 30, 2021 and December 31, 2020.
As of September 30, 2021 and December 31, 2020, the Bank had access to a $40.0 million unused line of credit and also had remaining available borrowing capacity of $1.5 billion and $969.7 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, 2021:2022:
| (Dollars in thousands) | (Dollars in thousands) | Scheduled Maturity | | Weighted Average Rate | (Dollars in thousands) | Scheduled Maturity | | Weighted Average Rate |
October 1, 2021 to December 31, 2021 | $142,450 | | | 0.39 | % | |
2022 | — | | | — | | |
October 1, 2022 to December 31, 2022 | | October 1, 2022 to December 31, 2022 | $625,000 | | | 2.96 | % |
2023 | 2023 | 35,000 | | | 0.45 | | 2023 | 55,000 | | | 1.92 | |
2024 | 2024 | 35,000 | | | 2.45 | | 2024 | 20,000 | | | 4.48 | |
2025 | 2025 | — | | | — | | 2025 | — | | | — | |
2026 and thereafter | 10,142 | | | 3.06 | | |
Balance at September 30, 2021 | $222,592 | | | 0.84 | % | |
2026 | | 2026 | — | | | — | |
2027 and thereafter | | 2027 and thereafter | — | | | — | |
Balance at September 30, 2022 | | Balance at September 30, 2022 | $700,000 | | | 2.92 | % |
Note 98 - Shareholders' Equity
Stock Repurchase Program
The Corporation’s Stock2021 Repurchase Program adopted on December 1, 2020 (the “2020 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 20202021 Repurchase Program expiredexpires on OctoberDecember 31, 2022, and may be modified, suspended, or discontinued at any time. In the nine months ended September 30, 2022, the Corporation has repurchased 194,162 shares, at an average price of $48.82 and a total cost of $9.5 million, under its 2021 and no shares were repurchased under this program.Repurchase Program.
Regulatory Capital Requirements
Capital levels at September 30, 2022 exceeded the regulatory minimum levels to be considered “well capitalized.”
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Regulatory Capital Requirements
Capital levels at September 30, 2021 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) | (Dollars in thousands) | Actual | | For Capital Adequacy Purposes | | To Be “Well Capitalized” Under Prompt Corrective Action Provisions | (Dollars in thousands) | Actual | | For Capital Adequacy Purposes | | To Be “Well Capitalized” Under Prompt Corrective Action Provisions |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
September 30, 2021 | | |
September 30, 2022 | | September 30, 2022 | |
Total Capital (to Risk-Weighted Assets): | Total Capital (to Risk-Weighted Assets): | | Total Capital (to Risk-Weighted Assets): | |
Corporation | Corporation | $569,424 | | | 13.83 | % | | $329,407 | | | 8.00 | % | | N/A | | N/A | Corporation | $596,341 | | | 12.65 | % | | $377,111 | | | 8.00 | % | | N/A | | N/A |
Bank | Bank | 559,605 | | | 13.59 | | | 329,378 | | | 8.00 | | | $411,723 | | | 10.00 | % | Bank | 579,854 | | | 12.30 | | | 376,991 | | | 8.00 | | | $471,238 | | | 10.00 | % |
Tier 1 Capital (to Risk-Weighted Assets): | Tier 1 Capital (to Risk-Weighted Assets): | | Tier 1 Capital (to Risk-Weighted Assets): | |
Corporation | Corporation | 535,552 | | | 13.01 | | | 247,055 | | | 6.00 | | | N/A | | N/A | Corporation | 564,194 | | | 11.97 | | | 282,833 | | | 6.00 | | | N/A | | N/A |
Bank | Bank | 525,733 | | | 12.77 | | | 247,034 | | | 6.00 | | | 329,378 | | | 8.00 | | Bank | 547,707 | | | 11.62 | | | 282,743 | | | 6.00 | | | 376,991 | | | 8.00 | |
Common Equity Tier 1 Capital (to Risk-Weighted Assets): | Common Equity Tier 1 Capital (to Risk-Weighted Assets): | | Common Equity Tier 1 Capital (to Risk-Weighted Assets): | |
Corporation | Corporation | 513,553 | | | 12.47 | | | 185,291 | | | 4.50 | | | N/A | | N/A | Corporation | 542,197 | | | 11.50 | | | 212,125 | | | 4.50 | | | N/A | | N/A |
Bank | Bank | 525,733 | | | 12.77 | | | 185,275 | | | 4.50 | | | 267,620 | | | 6.50 | | Bank | 547,707 | | | 11.62 | | | 212,057 | | | 4.50 | | | 306,305 | | | 6.50 | |
Tier 1 Capital (to Average Assets): (1) | Tier 1 Capital (to Average Assets): (1) | | Tier 1 Capital (to Average Assets): (1) | |
Corporation | Corporation | 535,552 | | | 9.12 | | | 234,803 | | | 4.00 | | | N/A | | N/A | Corporation | 564,194 | | | 8.99 | | | 251,121 | | | 4.00 | | | N/A | | N/A |
Bank | Bank | 525,733 | | | 8.96 | | | 234,722 | | | 4.00 | | | 293,403 | | | 5.00 | | Bank | 547,707 | | | 8.73 | | | 250,995 | | | 4.00 | | | 313,743 | | | 5.00 | |
| December 31, 2020 | | |
December 31, 2021 | | December 31, 2021 | |
Total Capital (to Risk-Weighted Assets): | Total Capital (to Risk-Weighted Assets): | | Total Capital (to Risk-Weighted Assets): | |
Corporation | Corporation | 539,496 | | | 13.51 | | | 319,532 | | | 8.00 | | | N/A | | N/A | Corporation | 578,137 | | | 14.01 | | | 330,105 | | | 8.00 | | | N/A | | N/A |
Bank | Bank | 534,288 | | | 13.38 | | | 319,503 | | | 8.00 | | | 399,379 | | | 10.00 | | Bank | 565,087 | | | 13.70 | | | 330,025 | | | 8.00 | | | 412,532 | | | 10.00 | |
Tier 1 Capital (to Risk-Weighted Assets): | Tier 1 Capital (to Risk-Weighted Assets): | | Tier 1 Capital (to Risk-Weighted Assets): | |
Corporation | Corporation | 503,791 | | | 12.61 | | | 239,649 | | | 6.00 | | | N/A | | N/A | Corporation | 546,362 | | | 13.24 | | | 247,578 | | | 6.00 | | | N/A | | N/A |
Bank | Bank | 498,583 | | | 12.48 | | | 239,627 | | | 6.00 | | | 319,503 | | | 8.00 | | Bank | 533,312 | | | 12.93 | | | 247,519 | | | 6.00 | | | 330,025 | | | 8.00 | |
Common Equity Tier 1 Capital (to Risk-Weighted Assets): | Common Equity Tier 1 Capital (to Risk-Weighted Assets): | | Common Equity Tier 1 Capital (to Risk-Weighted Assets): | |
Corporation | Corporation | 481,792 | | | 12.06 | | | 179,737 | | | 4.50 | | | N/A | | N/A | Corporation | 524,363 | | | 12.71 | | | 185,684 | | | 4.50 | | | N/A | | N/A |
Bank | Bank | 498,583 | | | 12.48 | | | 179,721 | | | 4.50 | | | 259,596 | | | 6.50 | | Bank | 533,312 | | | 12.93 | | | 185,639 | | | 4.50 | | | 268,146 | | | 6.50 | |
Tier 1 Capital (to Average Assets): (1) | Tier 1 Capital (to Average Assets): (1) | | Tier 1 Capital (to Average Assets): (1) | |
Corporation | Corporation | 503,791 | | | 8.95 | | | 225,209 | | | 4.00 | | | N/A | | N/A | Corporation | 546,362 | | | 9.36 | | | 233,534 | | | 4.00 | | | N/A | | N/A |
Bank | Bank | 498,583 | | | 8.86 | | | 225,126 | | | 4.00 | | | 281,407 | | | 5.00 | | Bank | 533,312 | | | 9.14 | | | 233,434 | | | 4.00 | | | 291,793 | | | 5.00 | |
(1) Leverage ratio.
In addition to the minimum regulatory capital required for capital adequacy purposes outlined in the table above, the Corporation is required to maintain a minimum capital conservation buffer, in the form of common equity, of 2.50% in order to avoid restrictions on capital distributions and discretionary bonuses. The Corporation’s capital levels exceeded the minimum regulatory capital requirements plus the capital conservation buffer at September 30, 20212022 and December 31, 2020.2021.
The Bancorp owns the common stock of two capital trusts, which have issued trust preferred securities. In accordance with GAAP, the capital trusts are treated as unconsolidated subsidiaries. At both September 30, 20212022 and December 31, 2020,2021, $22.0 million in trust preferred securities were included in the Tier 1 capital of the Corporation for regulatory capital reporting purposes pursuant to the FRB’s capital adequacy guidelines.guidelines of the Federal Reserve.
In accordance with regulatory capital rules, the Corporation elected the option to delay the estimated impact of Accounting Standards Codification (“ASC”)ASC 326 on its regulatory capital over a two-year deferral and subsequent three-year transition period ending December 31, 2024. As a result, capital ratios and amounts as of September 30, 2021 and December 31, 2020 exclude the full impact of the increased ACL on loans and unfunded loan commitments attributed to the adoption of ASC 326, which was effective January 1, 2020, adjusted for an approximation of the after-tax provision for credit losses attributable to ASC 326 relative to the incurred loss methodology during the two-year deferral period. The cumulative difference at the end of the deferral period is being phased-in to regulatory capital over the three-year transition period, which began January 1, 2022.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
ASC 326 relative to the incurred loss methodology during the deferral period. The cumulative difference at the end of the deferral period will be phased-in to regulatory capital over a three-year transition period beginning in 2022.
Note 109 - 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, 20212022 and December 31, 2020,2021, the Corporation had an interest rate swap contractscontract with a total notional amount of $60.0$20.0 million that werewas designated as a cash flow hedgeshedge to hedge the interest rate risk associated with short-term variable rate FHLB advances. The interest rate swapsswap on borrowings maturematures in December of 2021 and December of 2023.
As of September 30, 2022 and December 31, 2021, the Corporation had an interest rate swap contract with a total notional amount of $300.0 million that was designated as a cash flow hedge to hedge the interest rate risk associated with a pool of variable rate commercial loans. The interest rate swap on loans was executed in the second quarter of 2021 and matures in May of 2026.
The changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) and subsequently reclassified to earnings when gains or losses are realized.
Loan Related Derivative Contracts
Interest Rate SwapDerivative Contracts with Customers
The Corporation enters into interest rate swap and interest rate cap contracts to help commercial loan borrowers manage their interest rate risk. TheThese interest rate swap contracts with commercial loanallow borrowers allow them to convert variable-rate loan payments to fixed-rate loan payments.payments, while interest rate cap contracts allow borrowers to limit their interest rate exposure in a rising rate environment. When the Corporation enters into an interest rate swapderivative contract with a commercial loan borrower, it simultaneously enters into a “mirror” swapinterest rate contract with a third party. TheFor interest rate swaps, the third party exchanges the client’s fixed-rate loan payments for variable-rate loan payments. The Corporation retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans.
As of September 30, 20212022 and December 31, 2020,2021, Washington Trust had interest rate swapderivative contracts with commercial loan borrowers (predominantly interest rate swap contracts) with notional amounts of $998.5$962.4 million and $991.0 million,$1.0 billion, 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.
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.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
As of September 30, 2021,2022, the notional amounts of risk participation-out agreements and risk participation-in agreements were $74.6$66.9 million and $147.4$177.0 million, respectively, compared to $61.6$74.2 million and $92.7$163.2 million, respectively, as of December 31, 2020.2021.
Mortgage Loan Commitments
Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Forward sale commitments are contracts for delayed delivery or net settlement of the underlying instrument, such as a residential real estate mortgage loan, where the seller agrees to deliver on a specified future date, either a specified instrument at a specified price or yield or the net cash equivalent of an underlying instrument. Both interest rate lock commitments and forward sale commitments are derivative financial instruments, but do not meet criteria for hedge accounting and therefore, the changes in fair value of these commitments are reflected in earnings.
As of September 30, 2021,2022, the notional amounts of interest rate lock commitments and forward sale commitments were $97.9$27.4 million and $195.1$64.1 million, respectively, compared to $167.7$49.8 million and $279.7$103.6 million, respectively, as of December 31, 2020.2021.
The following table presents the fair values of derivative instruments in the Unaudited Consolidated Balance Sheets:
| (Dollars in thousands) | (Dollars in thousands) | Derivative Assets | | Derivative Liabilities | (Dollars in thousands) | Derivative Assets | | Derivative Liabilities |
| | | Fair Value | | | Fair Value | | | Fair Value | | | Fair Value |
| | Balance Sheet Location | Sep 30, 2021 | | Dec 31, 2020 | | Balance Sheet Location | Sep 30, 2021 | | Dec 31, 2020 | | Balance Sheet Location | Sep 30, 2022 | | Dec 31, 2021 | | Balance Sheet Location | Sep 30, 2022 | | Dec 31, 2021 |
Derivatives Designated as Cash Flow Hedging Instruments: | Derivatives Designated as Cash Flow Hedging Instruments: | | Derivatives Designated as Cash Flow Hedging Instruments: | |
Interest rate risk management contracts: | Interest rate risk management contracts: | | Interest rate risk management contracts: | |
| Interest rate swaps | Interest rate swaps | Other assets | $180 | | | $— | | | Other liabilities | $2,006 | | | $1,958 | | Interest rate swaps | Other assets | $540 | | | $182 | | | Other liabilities | $32,936 | | | $5,301 | |
| Derivatives not Designated as Hedging Instruments: | Derivatives not Designated as Hedging Instruments: | | Derivatives not Designated as Hedging Instruments: | |
Loan related derivative contracts: | Loan related derivative contracts: | | Loan related derivative contracts: | |
Interest rate swaps with customers | Other assets | 42,873 | | | 75,804 | | | Other liabilities | 1,667 | | | 68 | | |
Mirror swaps with counterparties | Other assets | 1,649 | | | 67 | | | Other liabilities | 42,996 | | | 76,248 | | |
Interest rate contracts with customers | | Interest rate contracts with customers | Other assets | 122 | | | 32,361 | | | Other liabilities | 71,028 | | | 2,015 | |
Mirror contracts with counterparties | | Mirror contracts with counterparties | Other assets | 70,679 | | | 2,001 | | | Other liabilities | 122 | | | 32,480 | |
Risk participation agreements | Risk participation agreements | Other assets | 1 | | | 22 | | | Other liabilities | 2 | | | 2 | | Risk participation agreements | Other assets | — | | | 1 | | | Other liabilities | — | | | 2 | |
| Mortgage loan commitments: | Mortgage loan commitments: | | Mortgage loan commitments: | |
Interest rate lock commitments | Interest rate lock commitments | Other assets | 2,344 | | | 7,202 | | | Other liabilities | — | | | — | | Interest rate lock commitments | Other assets | 204 | | | 1,256 | | | Other liabilities | 186 | | | — | |
Forward sale commitments | Forward sale commitments | Other assets | 703 | | | — | | | Other liabilities | 1,024 | | | 2,914 | | Forward sale commitments | Other assets | 1,069 | | | 54 | | | Other liabilities | 211 | | | 905 | |
Gross amounts | Gross amounts | | 47,750 | | | 83,095 | | | 47,695 | | | 81,190 | | Gross amounts | | 72,614 | | | 35,855 | | | 104,483 | | | 40,703 | |
Less: amounts offset (1) | Less: amounts offset (1) | | 1,828 | | | 67 | | | 1,828 | | | 67 | | Less: amounts offset (1) | | 24,516 | | | 2,167 | | | 24,516 | | | 2,167 | |
Derivative balances, net of offset | Derivative balances, net of offset | | 45,922 | | | 83,028 | | | 45,867 | | | 81,123 | | Derivative balances, net of offset | | 48,098 | | | 33,688 | | | 79,967 | | | 38,536 | |
Less: collateral pledged (2) | Less: collateral pledged (2) | | — | | | — | | | 39,109 | | | 74,698 | | Less: collateral pledged (2) | | — | | | — | | | 8,542 | | | 34,539 | |
Net amounts | Net amounts | | $45,922 | | | $83,028 | | | $6,758 | | | $6,425 | | Net amounts | | $48,098 | | | $33,688 | | | $71,425 | | | $3,997 | |
(1)Interest rate risk management contracts and loan related derivative contracts with counterparties are subject to master netting arrangements.
(2)Collateral pledged to derivative counterparties is in the form of cash. Washington Trust may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the effect of derivative instruments in the Unaudited Consolidated Statements of Changes in Shareholders’ Equity: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, | 2021 | | 2020 | | 2021 | | 2020 |
Derivatives Designated as Cash Flow Hedging Instruments: | | | | | | | |
Interest rate risk management contracts: | | | | | | | |
Interest rate swaps | ($403) | | | $214 | | | ($36) | | | ($1,109) | |
Interest rate caps | — | | | 25 | | | — | | | 71 | |
Interest rate floors | — | | | (85) | | | — | | | 150 | |
Total | ($403) | | | $154 | | | ($36) | | | ($888) | |
Interest rate cap and interest rate floor contracts designated as cash flow hedges matured in 2020. | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Gain (Loss) Recognized in Other Comprehensive Income (Loss), Net of Tax |
| Three Months | | Nine Months |
Periods ended September 30, | 2022 | | 2021 | | 2022 | | 2021 |
Derivatives Designated as Cash Flow Hedging Instruments: | | | | | | | |
Interest rate risk management contracts: | | | | | | | |
Interest rate swaps | ($6,973) | | | ($403) | | | ($20,281) | | | ($36) | |
| | | | | | | |
| | | | | | | |
Total | ($6,973) | | | ($403) | | | ($20,281) | | | ($36) | |
For derivatives designated as cash flow hedging instruments, see Note 1615 for additional disclosure pertaining to the amounts and location of reclassifications from accumulated other comprehensive incomeAOCL into earnings.
The following table presents the effect of derivative instruments in the Corporation’s Unaudited Consolidated Statements of Income: | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Amount of Gain (Loss) Recognized in Income on Derivatives |
| | Three Months | | Nine Months |
Periods ended September 30, | Statement of Income Location | 2022 | | 2021 | | 2022 | | 2021 |
Derivatives not Designated as Hedging Instruments: | | | | | | | |
Loan related derivative contracts: | | | | | | | | |
Interest rate contracts with customers | Loan related derivative income | ($33,605) | | | ($2,715) | | | ($93,227) | | | ($21,281) | |
Mirror contracts with counterparties | Loan related derivative income | 34,646 | | | 3,558 | | | 95,189 | | | 23,173 | |
Risk participation agreements | Loan related derivative income | — | | | (115) | | | 49 | | | 478 | |
| | | | | | | | |
Mortgage loan commitments: | | | | | | | | |
Interest rate lock commitments | Mortgage banking revenues | (516) | | | (17) | | | (1,238) | | | (4,859) | |
Forward sale commitments | Mortgage banking revenues | 998 | | | (361) | | | 4,729 | | | 4,994 | |
Total | | $1,523 | | | $350 | | | $5,502 | | | $2,505 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Amount of Gain (Loss) Recognized in Income on Derivatives |
| | Three Months | | Nine Months |
Periods ended September 30, | Statement of Income Location | 2021 | | 2020 | | 2021 | | 2020 |
Derivatives not Designated as Hedging Instruments: | | | | | | | |
Loan related derivative contracts: | | | | | | | | |
Interest rate swaps with customers | Loan related derivative income | ($2,715) | | | $767 | | | ($21,281) | | | $67,258 | |
Mirror swaps with counterparties | Loan related derivative income | 3,558 | | | 499 | | | 23,173 | | | (63,655) | |
Risk participation agreements | Loan related derivative income | (115) | | | (2) | | | 478 | | | 215 | |
| | | | | | | | |
Mortgage loan commitments: | | | | | | | | |
Interest rate lock commitments | Mortgage banking revenues | (17) | | | (1,499) | | | (4,859) | | | 5,785 | |
Forward sale commitments | Mortgage banking revenues | (361) | | | (4,743) | | | 4,994 | | | (10,733) | |
Total | | $350 | | | ($4,978) | | | $2,505 | | | ($1,130) | |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 1110 - Fair Value Measurements
The Corporation uses fair value measurements to record fair value adjustments on certain assets and liabilities and to determine fair value disclosures. Items recorded at fair value on a recurring basis include securities available for sale, mortgage loans held for sale and derivatives. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent individually analyzed loans, property acquired through foreclosure or repossessionOREO 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”)or “inputs”, are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Corporation’s market assumptions. These two types of inputs have created the following fair value hierarchy:
•Level 1 – Quoted prices for identical assets or liabilities in active markets.
•Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
•Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in the markets and which reflect the Corporation’s market assumptions.
Fair Value Option Election
GAAP allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
financial assets and liabilities on a contract-by-contract basis. The Corporation has elected the fair value option for mortgage loans held for sale to better match changes in fair value of the loans with changes in the fair value of the forward sale commitment contracts used to economically hedge them.
The following table presents a summary of mortgage loans held for sale accounted for under the fair value option:
| (Dollars in thousands) | (Dollars in thousands) | September 30, 2021 | December 31, 2020 | (Dollars in thousands) | September 30, 2022 | December 31, 2021 |
Aggregate fair value | Aggregate fair value | $48,705 | | $61,614 | | Aggregate fair value | $24,054 | | $40,196 | |
Aggregate principal balance | Aggregate principal balance | 47,464 | | 59,313 | | Aggregate principal balance | 24,328 | | 39,201 | |
Difference between fair value and principal balance | Difference between fair value and principal balance | $1,241 | | $2,301 | | Difference between fair value and principal balance | ($274) | | $995 | |
Changes in fair value of mortgage loans held for sale accounted for under the fair value option election are included in mortgage banking revenues in the Unaudited Consolidated Statements of Income. Changes in fair value amounted to decreases to mortgage banking revenues of $521 thousand for the three months ended September 30, 2022 and $1.3 million for the nine months ended September 30, 2022. This compared to an increase to mortgage banking revenues of $372 thousand for the three months ended September 30, 2021 and a decrease to mortgage banking revenues of $1.1 million for the nine months ended September 30, 2021. This compared to increases to mortgage banking revenues of $1.1 million and $2.2 million, respectively, in the three and nine months ended September 30, 2020.
There were no mortgage loans held for sale 90 days or more past due as of September 30, 20212022 and December 31, 2020.2021.
Valuation Techniques
Debt Securities
Available for sale debt securities are recorded at fair value on a recurring basis. When available, the Corporation uses quoted market prices to determine the fair value of debt securities; such items are classified as Level 1. There were no Level 1 debt securities held at September 30, 20212022 and December 31, 2020.2021.
Level 2 debt securities are traded less frequently than exchange-traded instruments. The fair value of these securities is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category includes obligations of U.S. government-sponsored enterprises, including mortgage-backed securities, individual name issuer trust preferred debt securities and corporate bonds.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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, 20212022 and December 31, 2020.2021.
Mortgage Loans Held for Sale
The fair value of mortgage loans held for sale is estimated based on current market prices for similar loans in the secondary market and therefore are classified as Level 2 assets.
Collateral Dependent Individually Analyzed Loans
The fair value of collateral dependent individually analyzed loans is determined based upon the appraised fair value of the underlying collateral. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For collateral dependent loans that are expected to be repaid substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the collateral. Internal valuations may be utilized to determine the fair value of other business assets. Collateral dependent individually analyzed loans are categorized as Level 3.
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 Unaudited 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.
Derivatives
Interest rate swaps, caps and floorsderivative contracts are traded in over-the-counter markets where quoted market prices are not readily available. Fair value measurements are determined using independent valuation software, which utilizes the present value of future cash flows discounted using market observable inputs such as forward rate assumptions. The Corporation evaluates the credit risk of its counterparties, as well as that of the Corporation. Accordingly, factors such as the likelihood of default by the Corporation and its counterparties, its net exposures and remaining contractual life are considered in determining if
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
any fair value adjustments related to credit risk are required. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position, if any. The Corporation has determined that the majority of the inputs used to value its derivative positions fall within Level 2 of the fair value hierarchy. However, the credit valuation adjustments utilize Level 3 inputs. As of September 30, 20212022 and December 31, 2020,2021, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.valuation. As a result, the Corporation has classified its derivative valuations in their entirety as Level 2.
Fair value measurements of forward loan commitments (interest rate lock commitments and forward sale commitments) are primarily based on current market prices for similar assets in the secondary market for mortgage loans and therefore are classified as Level 2 assets. The fair value of interest rate lock commitments is also dependent on the ultimate closing of the loans. Pull-through rates are based on the Corporation’s historical data and reflect the Corporation’s best estimate of the likelihood that a commitment will result in a closed loan. Although the pull-through rates are Level 3 inputs, the Corporation has assessed the significance of the impact of pull-through rates on the overall valuation of its interest rate lock commitments and has determined that they are not significant to the overall valuation. As a result, the Corporation has classified its interest rate lock commitments as Level 2.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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) | (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) | (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, 2021 | |
September 30, 2022 | | September 30, 2022 | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
Assets: | Assets: | | Assets: |
Available for sale debt securities: | Available for sale debt securities: | | Available for sale debt securities: | |
Obligations of U.S. government-sponsored enterprises | Obligations of U.S. government-sponsored enterprises | $178,605 | | $— | | $178,605 | | $— | | Obligations of U.S. government-sponsored enterprises | $197,855 | | $— | | $197,855 | | $— | |
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 843,702 | | — | | 843,702 | | — | | Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 764,264 | | — | | 764,264 | | — | |
| Individual name issuer trust preferred debt securities | Individual name issuer trust preferred debt securities | 11,156 | | — | | 11,156 | | — | | Individual name issuer trust preferred debt securities | 8,800 | | — | | 8,800 | | — | |
| Corporate bonds | Corporate bonds | 12,370 | | — | | 12,370 | | — | | Corporate bonds | 11,654 | | — | | 11,654 | | — | |
Mortgage loans held for sale | Mortgage loans held for sale | 48,705 | | — | | 48,705 | | — | | Mortgage loans held for sale | 24,054 | | — | | 24,054 | | — | |
Derivative assets | Derivative assets | 45,922 | | — | | 45,922 | | — | | Derivative assets | 48,098 | | — | | 48,098 | | — | |
| Total assets at fair value on a recurring basis | Total assets at fair value on a recurring basis | $1,140,460 | | $— | | $1,140,460 | | $— | | Total assets at fair value on a recurring basis | $1,054,725 | | $— | | $1,054,725 | | $— | |
Liabilities: | Liabilities: | | Liabilities: | |
Derivative liabilities | Derivative liabilities | $45,867 | | $— | | $45,867 | | $— | | Derivative liabilities | $79,967 | | $— | | $79,967 | | $— | |
| Total liabilities at fair value on a recurring basis | Total liabilities at fair value on a recurring basis | $45,867 | | $— | | $45,867 | | $— | | Total liabilities at fair value on a recurring basis | $79,967 | | $— | | $79,967 | | $— | |
| | | | | | | | | | | | | | |
(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, 2020 |
Assets: | | | | |
Available for sale debt securities: | | | | |
Obligations of U.S. government-sponsored enterprises | $131,669 | | $— | | $131,669 | | $— | |
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 740,305 | | — | | 740,305 | | — | |
| | | | |
Individual name issuer trust preferred debt securities | 12,669 | | — | | 12,669 | | — | |
| | | | |
Corporate bonds | 9,928 | | — | | 9,928 | | — | |
| | | | |
Mortgage loans held for sale | 61,614 | | — | | 61,614 | | — | |
Derivative assets | 83,028 | | — | | 83,028 | | — | |
| | | | |
| | | | |
| | | | |
| | | | |
Total assets at fair value on a recurring basis | $1,039,213 | | $— | | $1,039,213 | | $— | |
Liabilities: | | | | |
Derivative liabilities | $81,123 | | $— | | $81,123 | | $— | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Total liabilities at fair value on a recurring basis | $81,123 | | $— | | $81,123 | | $— | |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
| | | | | | | | | | | | | | |
(Dollars in thousands) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
December 31, 2021 |
Assets: | | | | |
Available for sale debt securities: | | | | |
Obligations of U.S. government-sponsored enterprises | $196,454 | | $— | | $196,454 | | $— | |
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 824,962 | | — | | 824,962 | | — | |
| | | | |
Individual name issuer trust preferred debt securities | 9,138 | | — | | 9,138 | | — | |
| | | | |
Corporate bonds | 12,305 | | — | | 12,305 | | — | |
| | | | |
Mortgage loans held for sale | 40,196 | | — | | 40,196 | | — | |
Derivative assets | 33,688 | | — | | 33,688 | | — | |
| | | | |
| | | | |
| | | | |
| | | | |
Total assets at fair value on a recurring basis | $1,116,743 | | $— | | $1,116,743 | | $— | |
Liabilities: | | | | |
Derivative liabilities | $38,536 | | $— | | $38,536 | | $— | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Total liabilities at fair value on a recurring basis | $38,536 | | $— | | $38,536 | | $— | |
Items Recorded at Fair Value on a Nonrecurring Basis
The following table presents the carrying value ofThere were no assets held at September 30, 2021, which were written down to fair value during the nine months ended September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
(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 individually analyzed loans | $3,563 | | | $— | | | $— | | | $3,563 | |
| | | | | | | |
| | | | | | | |
Total assets at fair value on a nonrecurring basis | $3,563 | | | $— | | | $— | | | $3,563 | |
2022.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the carrying value of assets held at December 31, 2020, whichDuring 2021, two collateral dependent individually analyzed loans were written down to fair value. One loan with a carrying value duringof $3.1 million was paid in full in the year endedfourth quarter of 2021. The second loan with a carrying value of $533 thousand was fully reserved for as of December 31, 2020:2021.
| | | | | | | | | | | | | | | | | | | | | | | |
(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 individually analyzed loans | $1,720 | | | $— | | | $— | | | $1,720 | |
Loan servicing rights | 7,434 | | | — | | | — | | | 7,434 | |
| | | | | | | |
Total assets at fair value on a nonrecurring basis | $9,154 | | | $— | | | $— | | | $9,154 | |
The following tables presenttable presents valuation techniques and unobservable inputs for assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value:
| | | | | | | | | | | | | | |
(Dollars in thousands) | Fair Value | Valuation Technique | Unobservable Input | Range of Inputs Utilized (Weighted Average) |
September 30,December 31, 2021 |
Collateral dependent individually analyzed loans | $3,563— | | Appraisals of collateral | Discount for costs to sell | 0% - 14% (11%) |
| | | Appraisal adjustments | 0% - 100% (15%) |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | | | | | | | | | | | |
(Dollars in thousands)
| Fair Value | Valuation Technique | Unobservable Input | Range of Inputs Utilized (Weighted Average) |
December 31, 2020 |
Collateral dependent individually analyzed loans | $1,720 | | Appraisals of collateral | Discount for costs to sell | 0% - 25% (11%) |
| | | Appraisal adjustments | 0% - 100% (15%) |
| | | | |
Loan servicing rights | 7,434 | | Discounted cash flow | Discount rates | 10% - 14% (10%) |
| | | Prepayment rates | 18% - 42% (21%) |
| | | | |
| | | | |
| | | | |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Valuation of Financial Instruments
The estimated fair values and related carrying amounts for financial instruments for which fair value is only disclosed are presented below as of the periods indicated. The tables exclude financial instruments for which the carrying value approximates fair value such as cash and cash equivalents, FHLB stock, accrued interest receivable, bank-owned life insurance,BOLI, non-maturity deposits and accrued interest payable. The Corporation considers cash and cash equivalents, accrued interest receivable and accrued interest payable as level 1 measurements within the fair value hierarchy. The Corporation considers FHLB stock, BOLI and non-maturity deposits as level 2 measurements.
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
September 30, 2021 | Carrying Amount | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |
September 30, 2022 | | September 30, 2022 | Carrying Amount | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
Financial Assets: | Financial Assets: | | Financial Assets: | |
| Loans, net of allowance for credit losses on loans | Loans, net of allowance for credit losses on loans | $4,244,693 | | $4,174,632 | | $— | | $— | | $4,174,632 | | Loans, net of allowance for credit losses on loans | $4,812,010 | | $4,778,506 | | $— | | $— | | $4,778,506 | |
| Financial Liabilities: | Financial Liabilities: | | Financial Liabilities: | |
Time deposits | Time deposits | $1,464,284 | | $1,468,196 | | $— | | $1,468,196 | | $— | | Time deposits | $1,209,632 | | $1,212,810 | | $— | | $1,212,810 | | $— | |
FHLB advances | FHLB advances | 222,592 | | 225,069 | | — | | 225,069 | | — | | FHLB advances | 700,000 | | 699,221 | | — | | 699,221 | | — | |
Junior subordinated debentures | Junior subordinated debentures | 22,681 | | 20,136 | | — | | 20,136 | | — | | Junior subordinated debentures | 22,681 | | 18,763 | | — | | 18,763 | | — | |
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | |
December 31, 2021 | Carrying Amount | Total Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) |
Financial Assets: | | | | | |
| | | | | |
Loans, net of allowance for credit losses on loans | $4,233,837 | | $4,145,516 | | $— | | $— | | $4,145,516 | |
| | | | | |
Financial Liabilities: | | | | | |
Time deposits | $1,288,611 | | $1,294,053 | | $— | | $1,294,053 | | $— | |
FHLB advances | 145,000 | | 144,862 | | — | | 144,862 | | — | |
Junior subordinated debentures | 22,681 | | 20,181 | | — | | 20,181 | | — | |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | | |
December 31, 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 | $4,151,884 | | $4,114,628 | | $— | | $— | | $4,114,628 | |
| | | | | |
Financial Liabilities: | | | | | |
Time deposits | $1,296,396 | | $1,302,128 | | $— | | $1,302,128 | | $— | |
FHLB advances | 593,859 | | 602,000 | | — | | 602,000 | | — | |
Junior subordinated debentures | 22,681 | | 19,422 | | — | | 19,422 | | — | |
Note 1211 - Revenue from Contracts with Customers
The following tables summarize total revenues as presented in the Unaudited Consolidated Statements of Income and the related amounts that are from contracts with customers within the scope of ASC 606. As shown below, a substantial portion of our revenues are specifically excluded from the scope of ASC 606.
| For the three months ended September 30, | For the three months ended September 30, | 2021 | | 2020 | For the three months ended September 30, | 2022 | | 2021 |
(Dollars in thousands) | (Dollars in thousands) | Revenue (1) | ASC 606 Revenue (2) | | Revenue (1) | ASC 606 Revenue (2) | (Dollars in thousands) | Revenue (1) | ASC 606 Revenue (2) | | Revenue (1) | ASC 606 Revenue (2) |
Net interest income | Net interest income | $36,070 | | $— | | | $31,654 | | $— | | Net interest income | $42,042 | | $— | | | $36,070 | | $— | |
Noninterest income: | Noninterest income: | | Noninterest income: | |
Asset-based wealth management revenues | Asset-based wealth management revenues | 10,224 | | 10,224 | | | 8,786 | | 8,786 | | Asset-based wealth management revenues | 9,302 | | 9,302 | | | 10,224 | | 10,224 | |
Transaction-based wealth management revenues | Transaction-based wealth management revenues | 231 | | 231 | | | 168 | | 168 | | Transaction-based wealth management revenues | 223 | | 223 | | | 231 | | 231 | |
Total wealth management revenues | Total wealth management revenues | 10,455 | | 10,455 | | | 8,954 | | 8,954 | | Total wealth management revenues | 9,525 | | 9,525 | | | 10,455 | | 10,455 | |
Mortgage banking revenues | Mortgage banking revenues | 6,373 | | — | | | 12,353 | | — | | Mortgage banking revenues | 2,047 | | — | | | 6,373 | | — | |
Card interchange fees | Card interchange fees | 1,265 | | 1,265 | | | 1,161 | | 1,161 | | Card interchange fees | 1,287 | | 1,287 | | | 1,265 | | 1,265 | |
Service charges on deposit accounts | Service charges on deposit accounts | 673 | | 673 | | | 598 | | 598 | | Service charges on deposit accounts | 819 | | 819 | | | 673 | | 673 | |
Loan related derivative income | Loan related derivative income | 728 | | — | | | 1,264 | | — | | Loan related derivative income | 1,041 | | — | | | 728 | | — | |
Income from bank-owned life insurance | Income from bank-owned life insurance | 618 | | — | | | 567 | | — | | Income from bank-owned life insurance | 684 | | — | | | 618 | | — | |
| | Other income | Other income | 408 | | 310 | | | 571 | | 491 | | Other income | 400 | | 316 | | | 408 | | 310 | |
Total noninterest income | Total noninterest income | 20,520 | | 12,703 | | | 25,468 | | 11,204 | | Total noninterest income | 15,803 | | 11,947 | | | 20,520 | | 12,703 | |
Total revenues | Total revenues | $56,590 | | $12,703 | | | $57,122 | | $11,204 | | Total revenues | $57,845 | | $11,947 | | | $56,590 | | $12,703 | |
(1)As reported in the Unaudited Consolidated Statements of Income.
(2)Revenue from contracts with customers in scope of ASC 606.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
| | For the nine months ended September 30, | For the nine months ended September 30, | 2021 | | 2020 | For the nine months ended September 30, | 2022 | | 2021 |
(Dollars in thousands) | (Dollars in thousands) | Revenue (1) | ASC 606 Revenue (2) | | Revenue (1) | ASC 606 Revenue (2) | (Dollars in thousands) | Revenue (1) | ASC 606 Revenue (2) | | Revenue (1) | ASC 606 Revenue (2) |
Net interest income | Net interest income | $103,695 | | $— | | | $95,201 | | $— | | Net interest income | $114,648 | | $— | | | $103,695 | | $— | |
Noninterest income: | Noninterest income: | | Noninterest income: | |
Asset-based wealth management revenues | Asset-based wealth management revenues | 29,798 | | 29,798 | | | 25,297 | | 25,297 | | Asset-based wealth management revenues | 29,154 | | 29,154 | | | 29,798 | | 29,798 | |
Transaction-based wealth management revenues | Transaction-based wealth management revenues | 980 | | 980 | | | 951 | | 951 | | Transaction-based wealth management revenues | 968 | | 968 | | | 980 | | 980 | |
Total wealth management revenues | Total wealth management revenues | 30,778 | | 30,778 | | | 26,248 | | 26,248 | | Total wealth management revenues | 30,122 | | 30,122 | | | 30,778 | | 30,778 | |
Mortgage banking revenues | Mortgage banking revenues | 24,294 | | — | | | 33,300 | | — | | Mortgage banking revenues | 7,630 | | — | | | 24,294 | | — | |
Card interchange fees | Card interchange fees | 3,714 | | 3,714 | | | 3,139 | | 3,139 | | Card interchange fees | 3,754 | | 3,754 | | | 3,714 | | 3,714 | |
Service charges on deposit accounts | Service charges on deposit accounts | 1,917 | | 1,917 | | | 1,975 | | 1,975 | | Service charges on deposit accounts | 2,250 | | 2,250 | | | 1,917 | | 1,917 | |
Loan related derivative income | Loan related derivative income | 2,370 | | — | | | 3,818 | | — | | Loan related derivative income | 2,011 | | — | | | 2,370 | | — | |
Income from bank-owned life insurance | Income from bank-owned life insurance | 1,781 | | — | | | 1,922 | | — | | Income from bank-owned life insurance | 1,900 | | — | | | 1,781 | | — | |
| | Other income | Other income | 2,233 | | 1,834 | | | 1,313 | | 1,026 | | Other income | 1,147 | | 880 | | | 2,233 | | 1,834 | |
Total noninterest income | Total noninterest income | 67,087 | | 38,243 | | | 71,715 | | 32,388 | | Total noninterest income | 48,814 | | 37,006 | | | 67,087 | | 38,243 | |
Total revenues | Total revenues | $170,782 | | $38,243 | | | $166,916 | | $32,388 | | Total revenues | $163,462 | | $37,006 | | | $170,782 | | $38,243 | |
(1)As reported in the Unaudited Consolidated Statements of Income.
(2)Revenue from contracts with customers in scope of ASC 606.
The Corporation recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), automated teller machine (“ATM”)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.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The Corporation recognizes revenue over a period of time, generally monthly, as services are performed and performance obligations are satisfied. Such revenue includes wealth management revenues and service charges on deposit accounts. Wealth management revenues are categorized as either asset-based revenues or transaction-based revenues. Asset-based revenues include trust and investment management fees that are earned based upon a percentage of asset values under administration. Transaction-based revenues include tax preparation fees, commissions and other service fees. Fee revenue from service charges on deposit accounts represent service charges assessed to customers who hold deposit accounts at the Bank.
The following table presents revenue from contracts with customers based on the timing of revenue recognition:
| | (Dollars in thousands) | (Dollars in thousands) | Three Months | | Nine Months | (Dollars in thousands) | Three Months | | Nine Months |
Periods ended September 30, | Periods ended September 30, | 2021 | 2020 | | 2021 | 2020 | Periods ended September 30, | 2022 | 2021 | | 2022 | 2021 |
Revenue recognized at a point in time: | Revenue recognized at a point in time: | | Revenue recognized at a point in time: | |
Card interchange fees | Card interchange fees | $1,265 | | $1,161 | | | $3,714 | | $3,139 | | Card interchange fees | $1,287 | | $1,265 | | | $3,754 | | $3,714 | |
Service charges on deposit accounts | Service charges on deposit accounts | 531 | | 447 | | | 1,516 | | 1,488 | | Service charges on deposit accounts | 628 | | 531 | | | 1,782 | | 1,516 | |
Other income | Other income | 247 | | 441 | | | 1,678 | | 895 | | Other income | 249 | | 247 | | | 692 | | 1,678 | |
Revenue recognized over time: | Revenue recognized over time: | | Revenue recognized over time: | |
Wealth management revenues | Wealth management revenues | 10,455 | | 8,954 | | | 30,778 | | 26,248 | | Wealth management revenues | 9,525 | | 10,455 | | | 30,122 | | 30,778 | |
Service charges on deposit accounts | Service charges on deposit accounts | 142 | | 151 | | | 401 | | 487 | | Service charges on deposit accounts | 191 | | 142 | | | 468 | | 401 | |
Other income | Other income | 63 | | 50 | | | 156 | | 131 | | Other income | 67 | | 63 | | | 188 | | 156 | |
Total revenues from contracts in scope of Topic 606 | Total revenues from contracts in scope of Topic 606 | $12,703 | | $11,204 | | | $38,243 | | $32,388 | | Total revenues from contracts in scope of Topic 606 | $11,947 | | $12,703 | | | $37,006 | | $38,243 | |
Receivables for revenue from contracts with customers primarily consist of amounts due for wealth management services performed for which the Corporation’s performance obligations have been fully satisfied. Receivables amounted to
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
$4.8 $5.6 million and $6.6 million, respectively, at both September 30, 20212022 and December 31, 20202021 and were included in other assets in the Unaudited Consolidated Balance Sheets.
Deferred revenues, which are considered contract liabilities under ASC 606, represent advance consideration received from customers for which the Corporation has a remaining performance obligation to fulfill. Contract liabilities are recognized as revenue over the life of the contract as the performance obligations are satisfied. The balances of contract liabilities were insignificant at both September 30, 20212022 and December 31, 20202021 and were included in other liabilities in the Unaudited Consolidated Balance Sheets.
For commissions and incentives that are in scope of ASC 606, such as those paid to employees in our wealth management services and commercial banking segments in order to obtain customer contracts, contract cost assets are established. The contract cost assets are capitalized and amortized over the estimated useful life that the asset is expected to generate benefits. The carrying value of contract cost assets amounted to $1.6$2.0 million and $1.9 million, respectively, at September 30, 2021, compared to $1.5 million at2022 and December 31, 20202021 and were included in other assets in the Unaudited Consolidated Balance Sheets. The amortization of contract cost assets is recorded within salaries and employee benefits expense in the Unaudited Consolidated Statements of Income.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 1312 - Defined Benefit Pension Plans
Washington Trust maintains a qualified pension plan for the benefit of certain eligible employees who were hired prior to October 1, 2007. Washington Trust also has non-qualified retirement plans to provide supplemental retirement benefits to certain employees, as defined in the plans. The defined benefit pension plans were previously amended to freeze benefit accruals after a 10-year transition period ending in December 2023.
The following table presents components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss), on a pre-tax basis:
| (Dollars in thousands) | (Dollars in thousands) | Qualified Pension Plan | | Non-Qualified Retirement Plans | (Dollars in thousands) | Qualified Pension Plan | | Non-Qualified Retirement Plans |
| | Three Months | | Nine Months | | Three Months | | Nine Months | | Three Months | | Nine Months | | Three Months | | Nine Months |
Periods ended September 30, | Periods ended September 30, | 2021 | 2020 | | 2021 | 2020 | | 2021 | 2020 | | 2021 | 2020 | Periods ended September 30, | 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 |
Net Periodic Benefit Cost: | Net Periodic Benefit Cost: | | Net Periodic Benefit Cost: | |
Service cost (1) | Service cost (1) | $592 | | $541 | | | $1,777 | | $1,623 | | | $52 | | $43 | | | $156 | | $128 | | Service cost (1) | $516 | | $592 | | | $1,547 | | $1,777 | | | $54 | | $52 | | | $163 | | $156 | |
Interest cost (2) | Interest cost (2) | 500 | | 626 | | | 1,502 | | 1,879 | | | 84 | | 116 | | | 253 | | 349 | | Interest cost (2) | 592 | | 500 | | | 1,776 | | 1,502 | | | 105 | | 84 | | | 317 | | 253 | |
Expected return on plan assets (2) | Expected return on plan assets (2) | (1,203) | | (1,135) | | | (3,611) | | (3,404) | | | — | | — | | | — | | — | | Expected return on plan assets (2) | (1,159) | | (1,203) | | | (3,476) | | (3,611) | | | — | | — | | | — | | — | |
| Recognized net actuarial loss (2) | Recognized net actuarial loss (2) | 531 | | 396 | | | 1,591 | | 1,187 | | | 180 | | 139 | | | 542 | | 419 | | Recognized net actuarial loss (2) | 255 | | 531 | | | 765 | | 1,591 | | | 173 | | 180 | | | 519 | | 542 | |
| Net periodic benefit cost | Net periodic benefit cost | $420 | | $428 | | | $1,259 | | $1,285 | | | $316 | | $298 | | | $951 | | $896 | | Net periodic benefit cost | $204 | | $420 | | | $612 | | $1,259 | | | $332 | | $316 | | | $999 | | $951 | |
(1)Included in salaries and employee benefits expense in the Unaudited Consolidated Statements of Income.
(2)Included in other expenses in the Unaudited Consolidated Statements of Income.
The following table presents the measurement date and weighted-average assumptions used to determine net periodic benefit cost:
| | | Qualified Pension Plan | | Non-Qualified Retirement Plans | | Qualified Pension Plan | | Non-Qualified Retirement Plans |
For the nine months ended September 30, | For the nine months ended September 30, | 2021 | | 2020 | | 2021 | | 2020 | For the nine months ended September 30, | 2022 | | 2021 | | 2022 | | 2021 |
Measurement date | Measurement date | Dec 31, 2020 | | Dec 31, 2019 | | Dec 31, 2020 | | Dec 31, 2019 | Measurement date | Dec 31, 2021 | | Dec 31, 2020 | | Dec 31, 2021 | | Dec 31, 2020 |
Equivalent single discount rate for benefit obligations | Equivalent single discount rate for benefit obligations | 2.71% | | 3.42% | | 2.51% | | 3.30% | Equivalent single discount rate for benefit obligations | 3.00% | | 2.71% | | 2.89% | | 2.51% |
Equivalent single discount rate for service cost | Equivalent single discount rate for service cost | 2.86 | | 3.54 | | 2.94 | | 3.62 | Equivalent single discount rate for service cost | 3.11 | | 2.86 | | 3.16 | | 2.94 |
Equivalent single discount rate for interest cost | Equivalent single discount rate for interest cost | 2.16 | | 3.07 | | 1.97 | | 2.93 | Equivalent single discount rate for interest cost | 2.67 | | 2.16 | | 2.48 | | 1.97 |
Expected long-term return on plan assets | Expected long-term return on plan assets | 5.75 | | 5.75 | | N/A | | N/A | Expected long-term return on plan assets | 5.25 | | 5.75 | | N/A | | N/A |
Rate of compensation increase | Rate of compensation increase | 3.75 | | 3.75 | | 3.75 | | 3.75 | Rate of compensation increase | 3.75 | | 3.75 | | 3.75 | | 3.75 |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 1413 - Share-Based Compensation Arrangements
The 2022 Long Term Incentive Plan was approved by the shareholders on April 26, 2022. The maximum number of shares of common stock that may be issued under the 2022 Long Term Incentive Plan is 600,000 and is subject to adjustment. The type of permitted equity awards under the 2022 Long Term Incentive Plan include stock options (both incentive and non-qualified options), stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, cash-based awards, and dividend equivalent rights. On February 18, 2022, the Corporation’s Board of Directors voted that no further awards would be granted under the 2013 Plan following shareholder approval of the 2022 Long Term Incentive Plan.
During the nine months ended September 30, 2021,2022, the Corporation granted performance share unit awards and nonvested sharerestricted stock unit awards.
Performance share unit awardsunits were granted to certain key employees providing them the opportunity to earn shares of common stock over a 3-year performance period. The weighted average fair value of the performance share unit awardsunits was $46.15.$59.31. The number of shares to be vested will be contingent upon the Corporation’s attainment of certain performance measures as detailed in the performance share unit award agreements. Based on the most recent performance assumption available, it is estimated that 51,15642,728 shares will be earned.
In addition, the Corporation granted to certain key employees and non-executive directors 8,360 nonvested share10,717 restricted stock units with 3-year cliff vesting. The weighted average grant date fair value of the nonvested sharerestricted stock units was $50.81.$51.57.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 1514 - Business Segments
Washington Trust segregates financial information in assessingThe Corporation manages its results among itsoperations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services operating segments. The Corporate unit includes activity not allocated to the operating segments.Services.
Management uses certain methodologiesan allocation methodology 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. LoansDirect activities are assigned a FTP rate for funds usedto the appropriate business segment to which the activity relates. Indirect activities, such as corporate, technology and deposits are assigned a FTP rate for funds provided. Certain indirect expensesother support functions, are allocated to segments. These include indirect expenses such as technology, operations and other support functions.business segments primarily based upon full-time equivalent employee computations.
Commercial Banking
The Commercial Banking operating segment includes commercial, residential and consumer lending activities; mortgage banking activities; deposit generation; cash management activities; and direct banking activities, which includeincluding customer support and the operation of ATMs, telephone banking, internet banking and mobile banking servicesservices; as well as investment portfolio and customer support and sales.wholesale funding activities.
Wealth Management Services
The Wealth Management Services operating segment includes investment management; holistic financial planning services; personal trust and estate services, including services as trustee, personal representative, custodian and guardian; settlement of decedents’ estates; and institutional trust services, including custody and fiduciary services.
CorporateThe following table presents the statement of operations and total assets for Washington Trust’s reportable segments:
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.
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(Dollars in thousands) | Commercial Banking | | Wealth Management Services | | Consolidated Total |
Three months ended September 30, | 2022 | 2021 | | 2022 | 2021 | | 2022 | 2021 |
Net interest income (expense) | $42,038 | | $36,085 | | | $4 | | ($15) | | | $42,042 | | $36,070 | |
Provision for credit losses | 800 | | — | | | — | | — | | | 800 | | — | |
Net interest income (expense) after provision for credit losses | 41,238 | | 36,085 | | | 4 | | (15) | | | 41,242 | | 36,070 | |
Noninterest income | 6,043 | | 9,962 | | | 9,760 | | 10,558 | | | 15,803 | | 20,520 | |
Noninterest expenses: | | | | | | | | |
Depreciation and amortization expense | 751 | | 740 | | | 348 | | 365 | | | 1,099 | | 1,105 | |
Other noninterest expenses | 23,995 | | 23,538 | | | 7,973 | | 7,877 | | | 31,968 | | 31,415 | |
Total noninterest expenses | 24,746 | | 24,278 | | | 8,321 | | 8,242 | | | 33,067 | | 32,520 | |
Income before income taxes | 22,535 | | 21,769 | | | 1,443 | | 2,301 | | | 23,978 | | 24,070 | |
Income tax expense | 4,878 | | 4,725 | | | 432 | | 594 | | | 5,310 | | 5,319 | |
Net income | $17,657 | | $17,044 | | | $1,011 | | $1,707 | | | $18,668 | | $18,751 | |
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Total assets at period end | $6,332,986 | | $5,929,230 | | | $75,065 | | $73,413 | | | $6,408,051 | | $6,002,643 | |
Expenditures for long-lived assets | 1,206 | | 310 | | | 137 | | 28 | | | 1,343 | | 338 | |
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) | (Dollars in thousands) | Commercial Banking | | Wealth Management Services | | Corporate | | Consolidated Total | (Dollars in thousands) | Commercial Banking | | Wealth Management Services | | | Consolidated Total |
Three months ended September 30, | 2021 | 2020 | | 2021 | 2020 | | 2021 | 2020 | | 2021 | 2020 | |
Nine months ended September 30, | | Nine months ended September 30, | 2022 | 2021 | | 2022 | 2021 | | | 2022 | 2021 |
Net interest income (expense) | Net interest income (expense) | $35,732 | | $33,103 | | | ($25) | | ($24) | | | $363 | | ($1,425) | | | $36,070 | | $31,654 | | Net interest income (expense) | $114,709 | | $103,737 | | | ($61) | | ($42) | | | | $114,648 | | $103,695 | |
Provision for credit losses | Provision for credit losses | — | | 1,325 | | | — | | — | | | — | | — | | | — | | 1,325 | | Provision for credit losses | (2,100) | | (2,000) | | | — | | — | | | | (2,100) | | (2,000) | |
Net interest income (expense) after provision for credit losses | Net interest income (expense) after provision for credit losses | 35,732 | | 31,778 | | | (25) | | (24) | | | 363 | | (1,425) | | | 36,070 | | 30,329 | | Net interest income (expense) after provision for credit losses | 116,809 | | 105,737 | | | (61) | | (42) | | | | 116,748 | | 105,695 | |
Noninterest income | Noninterest income | 9,440 | | 15,940 | | | 10,455 | | 8,954 | | | 625 | | 574 | | | 20,520 | | 25,468 | | Noninterest income | 18,174 | | 35,032 | | | 30,640 | | 32,055 | | | | 48,814 | | 67,087 | |
Noninterest expenses: | Noninterest expenses: | | Noninterest expenses: | | | |
Depreciation and amortization expense | Depreciation and amortization expense | 718 | | 601 | | | 341 | | 350 | | | 46 | | 38 | | | 1,105 | | 989 | | Depreciation and amortization expense | 2,168 | | 2,105 | | | 1,034 | | 1,118 | | | | 3,202 | | 3,223 | |
Other noninterest expenses | Other noninterest expenses | 20,108 | | 20,273 | | | 7,190 | | 7,178 | | | 4,117 | | 3,904 | | | 31,415 | | 31,355 | | Other noninterest expenses | 69,110 | | 74,425 | | | 23,051 | | 22,597 | | | | 92,161 | | 97,022 | |
Total noninterest expenses | Total noninterest expenses | 20,826 | | 20,874 | | | 7,531 | | 7,528 | | | 4,163 | | 3,942 | | | 32,520 | | 32,344 | | Total noninterest expenses | 71,278 | | 76,530 | | | 24,085 | | 23,715 | | | | 95,363 | | 100,245 | |
Income (loss) before income taxes | 24,346 | | 26,844 | | | 2,899 | | 1,402 | | | (3,175) | | (4,793) | | | 24,070 | | 23,453 | | |
Income tax expense (benefit) | 5,394 | | 5,828 | | | 710 | | 403 | | | (785) | | (1,100) | | | 5,319 | | 5,131 | | |
Net income (loss) | $18,952 | | $21,016 | | | $2,189 | | $999 | | | ($2,390) | | ($3,693) | | | $18,751 | | $18,322 | | |
Income before income taxes | | Income before income taxes | 63,705 | | 64,239 | | | 6,494 | | 8,298 | | | | 70,199 | | 72,537 | |
Income tax expense | | Income tax expense | 13,423 | | 13,810 | | | 1,668 | | 2,045 | | | | 15,091 | | 15,855 | |
Net income | | Net income | $50,282 | | $50,429 | | | $4,826 | | $6,253 | | | | $55,108 | | $56,682 | |
| Total assets at period end | Total assets at period end | $4,520,169 | | $4,588,419 | | | $75,438 | | $74,942 | | | $1,407,036 | | $1,186,431 | | | $6,002,643 | | $5,849,792 | | Total assets at period end | $6,332,986 | | $5,929,230 | | | $75,065 | | $73,413 | | | | $6,408,051 | | $6,002,643 | |
Expenditures for long-lived assets | Expenditures for long-lived assets | 309 | | 360 | | | 13 | | 20 | | | 16 | | 26 | | | 338 | | 406 | | Expenditures for long-lived assets | 3,494 | | 2,027 | | | 330 | | 139 | | | | 3,824 | | 2,166 | |
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(Dollars in thousands) | Commercial Banking | | Wealth Management Services | | Corporate | | Consolidated Total |
Nine months ended September 30, | 2021 | 2020 | | 2021 | 2020 | | 2021 | 2020 | | 2021 | 2020 |
Net interest income (expense) | $105,579 | | $94,692 | | | ($72) | | ($117) | | | ($1,812) | | $626 | | | $103,695 | | $95,201 | |
Provision for credit losses | (2,000) | | 10,561 | | | — | | — | | | — | | — | | | (2,000) | | 10,561 | |
Net interest income (expense) after provision for loan losses | 107,579 | | 84,131 | | | (72) | | (117) | | | (1,812) | | 626 | | | 105,695 | | 84,640 | |
Noninterest income | 33,510 | | 43,515 | | | 31,778 | | 26,248 | | | 1,799 | | 1,952 | | | 67,087 | | 71,715 | |
Noninterest expenses: | | | | | | | | | | | |
Depreciation and amortization expense | 2,040 | | 1,832 | | | 1,044 | | 1,058 | | | 139 | | 116 | | | 3,223 | | 3,006 | |
Other noninterest expenses | 60,093 | | 56,571 | | | 20,594 | | 20,408 | | | 16,335 | | 11,290 | | | 97,022 | | 88,269 | |
Total noninterest expenses | 62,133 | | 58,403 | | | 21,638 | | 21,466 | | | 16,474 | | 11,406 | | | 100,245 | | 91,275 | |
Income (loss) before income taxes | 78,956 | | 69,243 | | | 10,068 | | 4,665 | | | (16,487) | | (8,828) | | | 72,537 | | 65,080 | |
Income tax expense (benefit) | 17,275 | | 14,769 | | | 2,412 | | 1,216 | | | (3,832) | | (2,168) | | | 15,855 | | 13,817 | |
Net income (loss) | $61,681 | | $54,474 | | | $7,656 | | $3,449 | | | ($12,655) | | ($6,660) | | | $56,682 | | $51,263 | |
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Total assets at period end | $4,520,169 | | $4,588,419 | | | $75,438 | | $74,942 | | | $1,407,036 | | $1,186,431 | | | $6,002,643 | | $5,849,792 | |
Expenditures for long-lived assets | 2,026 | | 1,147 | | | 87 | | 86 | | | 53 | | 98 | | | 2,166 | | 1,331 | |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 1615 - Other Comprehensive Income (Loss)
The following tables present the activity in other comprehensive income (loss):
| Three months ended September 30, | Three months ended September 30, | 2021 | | 2020 | Three months ended September 30, | 2022 | | 2021 |
(Dollars in thousands) | (Dollars in thousands) | Pre-tax Amounts | Income Taxes | Net of Tax | | Pre-tax Amounts | Income Taxes | Net of Tax | (Dollars in thousands) | Pre-tax Amounts | Income Taxes | Net of Tax | | Pre-tax Amounts | Income Taxes | Net of Tax |
Securities available for sale: | Securities available for sale: | | Securities available for sale: | |
Changes in fair value of available for sale debt securities | ($4,127) | | ($990) | | ($3,137) | | | ($4,582) | | ($1,077) | | ($3,505) | | |
Change in fair value of available for sale debt securities | | Change in fair value of available for sale debt securities | ($61,931) | | ($14,864) | | ($47,067) | | | ($4,127) | | ($990) | | ($3,137) | |
| Cash flow hedges: | Cash flow hedges: | | Cash flow hedges: | |
Change in fair value of cash flow hedges | Change in fair value of cash flow hedges | (288) | | (69) | | (219) | | | (146) | | (39) | | (107) | | Change in fair value of cash flow hedges | (10,250) | | (2,460) | | (7,790) | | | (288) | | (69) | | (219) | |
Net cash flow hedge (losses) gains reclassified into earnings (1) (2) | (243) | | (59) | | (184) | | | 344 | | 83 | | 261 | | |
Net cash flow hedge losses (gains) reclassified into earnings (1) | | Net cash flow hedge losses (gains) reclassified into earnings (1) | 1,075 | | 258 | | 817 | | | (243) | | (59) | | (184) | |
Net change in fair value of cash flow hedges | Net change in fair value of cash flow hedges | (531) | | (128) | | (403) | | | 198 | | 44 | | 154 | | Net change in fair value of cash flow hedges | (9,175) | | (2,202) | | (6,973) | | | (531) | | (128) | | (403) | |
Defined benefit plan obligations: | Defined benefit plan obligations: | | Defined benefit plan obligations: | |
| Amortization of net actuarial losses (3)(2) | Amortization of net actuarial losses (3)(2) | 711 | | 171 | | 540 | | | 535 | | 125 | | 410 | | Amortization of net actuarial losses (3)(2) | 428 | | 102 | | 326 | | | 711 | | 171 | | 540 | |
| Total other comprehensive loss | Total other comprehensive loss | ($3,947) | | ($947) | | ($3,000) | | | ($3,849) | | ($908) | | ($2,941) | | Total other comprehensive loss | ($70,678) | | ($16,964) | | ($53,714) | | | ($3,947) | | ($947) | | ($3,000) | |
(1)The pre-tax amounts for the three months ended September 30, 2021 are included in interest expense on FHLB advances and interest and fees on loans and FHLB interest expense in the Unaudited Consolidated Statements of Income.
(2)The pre-tax amounts for the three months ended September 30, 2020 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.
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Nine months ended September 30, | 2021 | | 2020 |
(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 | ($16,212) | | ($3,890) | | ($12,322) | | | $9,794 | | $2,301 | | $7,493 | |
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Cash flow hedges: | | | | | | | |
Change in fair value of cash flow hedges | (21) | | (5) | | (16) | | | (1,994) | | (473) | | (1,521) | |
Net cash flow hedge (losses) gains reclassified into earnings (1) (2) | (27) | | (7) | | (20) | | | 829 | | 196 | | 633 | |
Net change in fair value of cash flow hedges | (48) | | (12) | | (36) | | | (1,165) | | (277) | | (888) | |
Defined benefit plan obligations: | | | | | | | |
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Amortization of net actuarial losses (3) | 2,133 | | 512 | | 1,621 | | | 1,606 | | 377 | | 1,229 | |
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Total other comprehensive (loss) income | ($14,127) | | ($3,390) | | ($10,737) | | | $10,235 | | $2,401 | | $7,834 | |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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Nine months ended September 30, | 2022 | | 2021 |
(Dollars in thousands) | Pre-tax Amounts | Income Taxes | Net of Tax | | Pre-tax Amounts | Income Taxes | Net of Tax |
Securities available for sale: | | | | | | | |
Change in fair value of available for sale debt securities | ($174,302) | | ($41,833) | | ($132,469) | | | ($16,212) | | ($3,890) | | ($12,322) | |
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Cash flow hedges: | | | | | | | |
Change in fair value of cash flow hedges | (27,394) | | (6,574) | | (20,820) | | | (21) | | (5) | | (16) | |
Net cash flow hedge losses (gains) reclassified into earnings (1) | 709 | | 170 | | 539 | | | (27) | | (7) | | (20) | |
Net change in fair value of cash flow hedges | (26,685) | | (6,404) | | (20,281) | | | (48) | | (12) | | (36) | |
Defined benefit plan obligations: | | | | | | | |
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Amortization of net actuarial losses (2) | 1,284 | | 308 | | 976 | | | 2,133 | | 512 | | 1,621 | |
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Total other comprehensive loss | ($199,703) | | ($47,929) | | ($151,774) | | | ($14,127) | | ($3,390) | | ($10,737) | |
(1)The pre-tax amounts for the nine months ended September 30, 2021 are included in interest expense on FHLB advances and interest and fees on loans and FHLB interest expense in the Unaudited Consolidated Statements of Income.
(2)The pre-tax amounts for the nine months ended September 30, 2020 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.
The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax:
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(Dollars in thousands) | Net Unrealized Gains (Losses) on Available For Sale Debt Securities | | | | Net Unrealized Losses on Cash Flow Hedges | | Defined Benefit Pension Plan Adjustment | | Total |
For the three months ended September 30, 2021 | | | | | |
Balance at June 30, 2021 | $696 | | | | | ($1,080) | | | ($14,744) | | | ($15,128) | |
Other comprehensive loss before reclassifications | (3,137) | | | | | (219) | | | — | | | (3,356) | |
Amounts reclassified from accumulated other comprehensive income | — | | | | | (184) | | | 540 | | | 356 | |
Net other comprehensive (loss) income | (3,137) | | | | | (403) | | | 540 | | | (3,000) | |
Balance at September 30, 2021 | ($2,441) | | | | | ($1,483) | | | ($14,204) | | | ($18,128) | |
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(Dollars in thousands) | Net Unrealized Losses on Available For Sale Debt Securities | | | | Net Unrealized Losses on Cash Flow Hedges | | Net Unrealized Losses on Defined Benefit Plan Obligations | | Total |
For the three months ended September 30, 2022 | | | | | |
Balance at June 30, 2022 | ($92,197) | | | | | ($17,321) | | | ($8,523) | | | ($118,041) | |
Other comprehensive loss before reclassifications | (47,067) | | | | | (7,790) | | | — | | | (54,857) | |
Amounts reclassified from accumulated other comprehensive loss | — | | | | | 817 | | | 326 | | | 1,143 | |
Net other comprehensive (loss) income | (47,067) | | | | | (6,973) | | | 326 | | | (53,714) | |
Balance at September 30, 2022 | ($139,264) | | | | | ($24,294) | | | ($8,197) | | | ($171,755) | |
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(Dollars in thousands) | Net Unrealized Losses on Available For Sale Debt Securities | | | | Net Unrealized Losses on Cash Flow Hedges | | Net Unrealized Losses on Defined Benefit Plan Obligations | | Total |
For the nine months ended September 30, 2022 | | | | | |
Balance at December 31, 2021 | ($6,795) | | | | | ($4,013) | | | ($9,173) | | | ($19,981) | |
Other comprehensive loss before reclassifications | (132,469) | | | | | (20,820) | | | — | | | (153,289) | |
Amounts reclassified from accumulated other comprehensive loss | — | | | | | 539 | | | 976 | | | 1,515 | |
Net other comprehensive (loss) income | (132,469) | | | | | (20,281) | | | 976 | | | (151,774) | |
Balance at September 30, 2022 | ($139,264) | | | | | ($24,294) | | | ($8,197) | | | ($171,755) | |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
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(Dollars in thousands) | Net Unrealized Gains (Losses) on Available For Sale Debt Securities | | | | Net Unrealized Losses on Cash Flow Hedges | | Defined Benefit Pension Plan Adjustment | | Total |
For the nine months ended September 30, 2021 | | | | | |
Balance at December 31, 2020 | $9,881 | | | | | ($1,447) | | | ($15,825) | | | ($7,391) | |
Other comprehensive loss before reclassifications | (12,322) | | | | | (16) | | | — | | | (12,338) | |
Amounts reclassified from accumulated other comprehensive income | — | | | | | (20) | | | 1,621 | | | 1,601 | |
Net other comprehensive (loss) income | (12,322) | | | | | (36) | | | 1,621 | | | (10,737) | |
Balance at September 30, 2021 | ($2,441) | | | | | ($1,483) | | | ($14,204) | | | ($18,128) | |
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(Dollars in thousands) | Net Unrealized Gains (Losses) on Available For Sale Debt Securities | | | | Net Unrealized Losses on Cash Flow Hedges | | Net Unrealized Losses on Defined Benefit Plan Obligations | | Total |
For the three months ended September 30, 2021 | | | | | |
Balance at June 30, 2021 | $696 | | | | | ($1,080) | | | ($14,744) | | | ($15,128) | |
Other comprehensive income before reclassifications | (3,137) | | | | | (219) | | | — | | | (3,356) | |
Amounts reclassified from accumulated other comprehensive income (loss) | — | | | | | (184) | | | 540 | | | 356 | |
Net other comprehensive income | (3,137) | | | | | (403) | | | 540 | | | (3,000) | |
Balance at September 30, 2021 | ($2,441) | | | | | ($1,483) | | | ($14,204) | | | ($18,128) | |
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(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) | |
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(Dollars in thousands) | Net Unrealized Gains (Losses) on Available For Sale Debt Securities | | | | Net Unrealized Losses on Cash Flow Hedges | | Net Unrealized Losses on Defined Benefit Plan Obligations | | Total |
For the nine months ended September 30, 2021 | | | | | |
Balance at December 31, 2020 | $9,881 | | | | | ($1,447) | | | ($15,825) | | | ($7,391) | |
Other comprehensive income (loss) before reclassifications | (12,322) | | | | | (16) | | | — | | | (12,338) | |
Amounts reclassified from accumulated other comprehensive income (loss) | — | | | | | (20) | | | 1,621 | | | 1,601 | |
Net other comprehensive (loss) income | (12,322) | | | | | (36) | | | 1,621 | | | (10,737) | |
Balance at September 30, 2021 | ($2,441) | | | | | ($1,483) | | | ($14,204) | | | ($18,128) | |
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(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) | |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 1716 - Earnings per Common Share
The following table presents the calculation of earnings per common share:
| (Dollars and shares in thousands, except per share amounts) | (Dollars and shares in thousands, except per share amounts) | | (Dollars and shares in thousands, except per share amounts) | |
| | Three Months | | Nine Months | | Three Months | | Nine Months |
Periods ended September 30, | Periods ended September 30, | 2021 | | 2020 | | 2021 | | 2020 | Periods ended September 30, | 2022 | | 2021 | | 2022 | | 2021 |
Earnings per common share - basic: | | |
Earnings for basic and diluted earnings per common share: | | Earnings for basic and diluted earnings per common share: | |
Net income | Net income | $18,751 | | | $18,322 | | | $56,682 | | | $51,263 | | Net income | $18,668 | | | $18,751 | | | $55,108 | | | $56,682 | |
Less: dividends and undistributed earnings allocated to participating securities | Less: dividends and undistributed earnings allocated to participating securities | (55) | | | (37) | | | (163) | | | (109) | | Less: dividends and undistributed earnings allocated to participating securities | (53) | | | (55) | | | (164) | | | (163) | |
Net income available to common shareholders | Net income available to common shareholders | $18,696 | | | $18,285 | | | $56,519 | | | $51,154 | | Net income available to common shareholders | $18,615 | | | $18,696 | | | $54,944 | | | $56,519 | |
Weighted average common shares | 17,320 | | | 17,260 | | | 17,303 | | | 17,287 | | |
Earnings per common share - basic | $1.08 | | | $1.06 | | | $3.27 | | | $2.96 | | |
Earnings per common share - diluted: | | |
Net income | $18,751 | | | $18,322 | | | $56,682 | | | $51,263 | | |
Less: dividends and undistributed earnings allocated to participating securities | (54) | | | (37) | | | (162) | | | (109) | | |
Net income available to common shareholders | $18,697 | | | $18,285 | | | $56,520 | | | $51,154 | | |
| Shares: | | Shares: | |
| Weighted average common shares | Weighted average common shares | 17,320 | | | 17,260 | | | 17,303 | | | 17,287 | | Weighted average common shares | 17,174 | | | 17,320 | | | 17,269 | | | 17,303 | |
Dilutive effect of common stock equivalents | Dilutive effect of common stock equivalents | 124 | | | 57 | | | 148 | | | 82 | | Dilutive effect of common stock equivalents | 124 | | | 124 | | | 120 | | | 148 | |
Weighted average diluted common shares | Weighted average diluted common shares | 17,444 | | | 17,317 | | | 17,451 | | | 17,369 | | Weighted average diluted common shares | 17,298 | | | 17,444 | | | 17,389 | | | 17,451 | |
Earnings per common share - diluted | $1.07 | | | $1.06 | | | $3.24 | | | $2.95 | | |
| Earnings per common share: | | Earnings per common share: | |
Basic earnings per common share | | Basic earnings per common share | $1.08 | | | $1.08 | | | $3.18 | | | $3.27 | |
Diluted earnings per common share | | Diluted earnings per common share | $1.08 | | | $1.07 | | | $3.16 | | | $3.24 | |
Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 148,542137,886 and 149,675,140,777, respectively, for the three and nine months ended September 30, 2021,2022, compared to 223,210148,542 and 221,047,149,675, respectively, for the same periods in 2020.2021.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 1817 - Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Unaudited Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.
Financial Instruments Whose Contract Amounts Represent Credit Risk (Unfunded Commitments)
Commitments to Extend Credit
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 $12.1$9.9 million and $11.7$11.8 million, respectively, as of September 30, 20212022 and December 31, 2020.2021. At September 30, 20212022 and December 31, 2020,2021, there were no liabilities to beneficiaries resulting from
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
standby letters of credit. Fee income on standby letters of credit was insignificant for the three and nine months ended September 30, 20212022 and 2020.2021.
A substantial portion of the standby letters of credit were supported by pledged collateral. The collateral obtained is determined based on management’s credit evaluation of the customer. Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required.
Financial Instruments Whose Notional Amounts Exceed the Amount of Credit Risk
Mortgage Loan Commitments
Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with these rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Both interest rate lock commitments and forward sale commitments are derivative financial instruments.
Loan Related Derivative Contracts
The Corporation’s credit policies with respect to interest rate swap agreementscontracts with commercial borrowers are similar to those used for loans. The interest rate swapscontracts with other counterparties are generally subject to bilateral collateralization terms.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the contractual and notional amounts of financial instruments with off-balance sheet risk:
| (Dollars in thousands) | (Dollars in thousands) | Sep 30, 2021 | | Dec 31, 2020 | (Dollars in thousands) | Sep 30, 2022 | | Dec 31, 2021 |
Financial instruments whose contract amounts represent credit risk (unfunded commitments): | Financial instruments whose contract amounts represent credit risk (unfunded commitments): | | Financial instruments whose contract amounts represent credit risk (unfunded commitments): | |
Commitments to extend credit: | Commitments to extend credit: | | Commitments to extend credit: | |
Commercial loans | Commercial loans | $483,296 | | | $453,493 | | Commercial loans | $678,907 | | | $516,344 | |
Home equity lines | Home equity lines | 352,999 | | | 319,744 | | Home equity lines | 418,413 | | | 367,784 | |
Other loans | Other loans | 125,949 | | | 89,078 | | Other loans | 144,584 | | | 122,492 | |
Standby letters of credit | Standby letters of credit | 12,146 | | | 11,709 | | Standby letters of credit | 9,898 | | | 11,844 | |
Financial instruments whose notional amounts exceed the amounts of credit risk: | Financial instruments whose notional amounts exceed the amounts of credit risk: | | Financial instruments whose notional amounts exceed the amounts of credit risk: | |
Mortgage loan commitments: | Mortgage loan commitments: | | Mortgage loan commitments: | |
Interest rate lock commitments | Interest rate lock commitments | 97,856 | | | 167,671 | | Interest rate lock commitments | 27,370 | | | 49,800 | |
Forward sale commitments | Forward sale commitments | 195,105 | | | 279,653 | | Forward sale commitments | 64,148 | | | 103,626 | |
Loan related derivative contracts: | Loan related derivative contracts: | | Loan related derivative contracts: | |
Interest rate swaps with customers | 998,530 | | | 991,002 | | |
Mirror swaps with counterparties | 998,530 | | | 991,002 | | |
Interest rate contracts with customers | | Interest rate contracts with customers | 962,381 | | | 1,022,388 | |
Mirror contracts with counterparties | | Mirror contracts with counterparties | 962,381 | | | 1,022,388 | |
Risk participation-in agreements | Risk participation-in agreements | 147,404 | | | 92,717 | | Risk participation-in agreements | 176,992 | | | 163,207 | |
| Interest rate risk management contracts: | Interest rate risk management contracts: | | Interest rate risk management contracts: | |
Interest rate swaps | Interest rate swaps | 360,000 | | | 60,000 | | Interest rate swaps | 320,000 | | | 320,000 | |
See Note 109 for additional disclosure pertaining to derivative financial instruments.
ACL on Unfunded Commitments
The ACL on unfunded commitments is management’s estimate of expected credit losses over the expected contractual term (or life) in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. Unfunded commitments for home equity lines of credit and commercial demand loans are considered unconditionally cancellable for regulatory capital purposes and, therefore, are excluded from the calculation to estimate the ACL on unfunded commitments. For each portfolio, estimated loss rates and funding factors are applied to the corresponding balance of unfunded commitments. For each portfolio, the estimated loss rates applied to unfunded commitments are the same quantitative and qualitative loss rates applied to the corresponding on-balance sheet amounts in determining the ACL on loans. The estimated funding factor applied to unfunded commitments represents the likelihood that the funding will occur and is based upon the Corporation’s average historical utilization rate for each portfolio.
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The ACL on unfunded commitments is included in other liabilities in the Unaudited Consolidated Balance Sheets. The ACL on unfunded commitments is adjusted through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income.
The activity in the ACL on unfunded commitments for the three months ended September 30, 2022 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Commercial | | | Consumer | | |
| CRE | C&I | Total Commercial | Residential Real Estate | Home Equity | Other | Total Consumer | Total |
Beginning Balance | $1,279 | | $834 | | $2,113 | | $58 | | $— | | $19 | | $19 | | $2,190 | |
| | | | | | | | |
Provision | 185 | | 25 | | 210 | | (8) | | — | | (2) | | (2) | | 200 | |
Ending Balance | $1,464 | | $859 | | $2,323 | | $50 | | $— | | $17 | | $17 | | $2,390 | |
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The activity in the ACL on unfunded commitments for the nine months ended September 30, 2022 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
(Dollars in thousands) | Commercial | | | Consumer | | |
| CRE | C&I | Total Commercial | Residential Real Estate | Home Equity | Other | Total Consumer | Total |
Beginning Balance | $1,267 | | $816 | | $2,083 | | $62 | | $— | | $16 | | $16 | | $2,161 | |
| | | | | | | | |
Provision | 197 | | 43 | | 240 | | (12) | | — | | 1 | | 1 | | 229 | |
Ending Balance | $1,464 | | $859 | | $2,323 | | $50 | | $— | | $17 | | $17 | | $2,390 | |
The activity in the ACL on unfunded commitments for the three months ended September 30, 2021 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Commercial | | | Consumer | | |
| CRE | C&I | Total Commercial | Residential Real Estate | Home Equity | Other | Total Consumer | Total |
Beginning Balance | $1,214 | | $1,045 | | $2,259 | | $56 | | $— | | $18 | | $18 | | $2,333 | |
| | | | | | | | |
Provision | 4 | | (8) | | (4) | | 4 | | — | | — | | — | | — | |
Ending Balance | $1,218 | | $1,037 | | $2,255 | | $60 | | $— | | $18 | | $18 | | $2,333 | |
The activity in the ACL on unfunded commitments for the nine months ended September 30, 2021 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
(Dollars in thousands) | Commercial | | | Consumer | | |
| CRE | C&I | Total Commercial | Residential Real Estate | Home Equity | Other | Total Consumer | Total |
Beginning Balance | $907 | | $1,402 | | $2,309 | | $54 | | $— | | $19 | | $19 | | $2,382 | |
| | | | | | | | |
Provision | 311 | | (365) | | (54) | | 6 | | — | | (1) | | (1) | | (49) | |
Ending Balance | $1,218 | | $1,037 | | $2,255 | | $60 | | $— | | $18 | | $18 | | $2,333 | |
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 | |
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 | 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 | |
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.
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, 2020,2021, and in conjunction with the condensed Unaudited Consolidated Financial Statements and notes thereto included in Item 1 of this report. Operating results for the three and nine months ended September 30, 20212022 are not necessarily indicative of the results for the full-year ended December 31, 20212022 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;
•changes in consumer behavior due to changing political, business and economic conditions, including concerns about inflation,inflation;
•interest rate changes or legislative or regulatory initiatives; volatility, as well as changes in the balance and mix of loans and deposits;
•changes in loan demand and collectability;
•the possibility that future credits losses are higher than currently expected due to changes in economic assumptions or adverse economic developments;
•ongoing volatility in national and international financial markets; reductions in net interest income resulting from interest rate changes or 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; AUA;
•decreases in the value of securities and other assets; reductions in loan demand; changes in loan collectability,
•increases in defaults and charge-off rates; changes related to the discontinuation and replacement of LIBOR;
•changes in the size and nature of our competition;
•changes in legislation or regulation and accounting principles, policies and guidelines;
•operational risks including, but not limited to, changes in information technology, cybersecurity incidents, fraud, natural disasters, war, terrorism, civil unrest, the ongoing COVID-19 pandemic, and future pandemics;
•reputational risk relating to our participation in the Paycheck Protection Programrisks; 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, 2020,2021, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC, may result in these differences. You should carefully review all of these factors and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
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. Management considers the following to be its critical accounting policies: the determination of the 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, 2020 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. Management updated its critical accounting policy for the allowance for credit losses on loans in the first quarter of 2021 as the result of incorporating additional econometric factors in the determination of the probability of default for each loan portfolio segment. The updated policy is presented below.
Allowance for Credit Losses on Loans
The allowance for credit losses (“ACL") on loans is management’s current estimate of expected credit losses over the expected life of the loans. In accordance with the ACL policy, the methodology is reviewed no less than annually. The ACL on loans is established 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-
Management's Discussion and Analysis
offs are recognized when management believes the collectability 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 Paycheck Protection Program (“PPP”) loans), residential real estate (including homeowner construction), home equity and other consumer loans. The second component involves identifying 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 troubled debt restructurings (“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 (“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. 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 DCF methodology to estimate credit losses over the expected life of the loan. The life of the loan excludes expected extensions, renewals and modifications, unless the extension or renewal options are included in the original or modified contract terms and not unconditionally cancellable by the Corporation. The methodology incorporates a probability of default and loss given default framework. Default triggers include the loan has become past due by 90 or more days, 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. Loss given default is estimated based on historical credit loss experience. Probability of default is estimated utilizing a regression model that incorporates econometric factors. These factors are selected based on the correlation of the factor to historical credit losses for each portfolio segment. The national unemployment rate (“NUR”) and gross domestic product (“GDP”) econometric factors are utilized for the commercial real estate and other consumer loan portfolio segments; the NUR and national home price index (“HPI”) econometric factors are utilized for the residential real estate and home equity portfolio segments; and the NUR econometric factor is utilized for the commercial & industrial loan portfolio segment. To estimate the probability of default, the model utilizes forecasted econometric factors over a one-year reasonable and supportable forecast period. After the forecast period, the model reverts to the historical mean of the respective econometric factor and the associated probability of default on a straight-line basis over a one-year reversion period. The DCF methodology combines the probability of default, the loss given default, prepayment speeds and the remaining life of the loan to estimate a reserve for each loan. The sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived.
Quantitative loss factors 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 collectability 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,
Management's Discussion and Analysis
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 credit 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. Deteriorating conditions or assumptions could lead to future 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
Management's Discussion and Analysis
expenses include salaries and employee benefit costs, outsourced services provided by third party vendors, occupancy and facility-related costs and other administrative expenses.
We continue to leverage our strong regional brand to build market share and remain steadfast in our commitment to provide superior service. We believe the key to future growth is providing customers with convenient in-person service and digital banking solutions. In July 2022, we plan to openopened a new commercial lending office in New Haven, Connecticut. In August 2022, we opened a new full-service branch in Cumberland, Rhode Island.
COVID-19 Pandemic Related
On March 11, 2021, the American Rescue Plan Act (“ARP”) was signed into law providing an additional $1.9 trillion in COVID-19 economic relief. The ARP included provisions on aid to state and local governments, hard-hit industries and communities, additional direct stimulus payments to qualifying individuals, additional funding for the Small Business Administration’s (“SBA’s”) PPP and other provisions. PPP loans are 100% guaranteed by the SBA. On May 4, 2021, the SBA In addition, we recently announced that PPP funding was exhaustedwe submitted applications to establish a branch office in three northern Rhode Island locations in 2023 to further expand our branch footprint and that it stopped accepting new loan applications from most lenders.
Inserve the nine months ended September 30, 2021, we originated 1,157 PPP loans with principal balances totaling $101 million and we processed SBA forgiveness on 2,228 PPP loans with principal balances totaling $224 million.
As of September 30, 2021, the carrying value of PPP loans amounted to $77.4 million and included net unamortized loan origination fee balances of $2.6 million. As of October 31, 2021, the carrying value of PPP loans declined to $59.7 million and included net unamortized loan origination fee balances of $2.0 million. Management expects that a significant portion of remaining PPP loansbroader Rhode Island community. The three branch offices will be ultimately forgiven by the SBAlocated in accordance with the terms of the program. See additional disclosure regarding PPP loans under the heading “Commercial & Industrial Loans” in the Financial Condition section.Barrington, Providence and Smithfield, Rhode Island and are subject to federal, state, local, and regulatory approvals.
Risk Management
The Corporation has a comprehensive enterprise risk management (“ERM”)ERM program through which the Corporation identifies, measures, monitors and controls current and emerging material risks.
Management's Discussion and Analysis
The Board of Directors is responsible for oversight of the ERM program. The ERM program enables the aggregation of risk across the Corporation and ensures the Corporation has the tools, programs and processes in place to support informed decision making, to anticipate risks before they materialize and to maintain the Corporation’s risk profile consistent with its risk strategy.
The Board of Directors has approved an enterprise risk management policy that addresses each category of risk. The risk categories include: credit risk, interest rate risk, liquidity risk, price and market risk, compliance risk, strategic and reputation risk, and operational risk. A description of each risk category is provided below.
Credit risk represents the possibility that borrowers or other counterparties may not repay loans or other contractual obligations according to their terms due to changes in the financial capacity, ability and willingness of such borrowers or counterparties to meet their obligations. In some cases, the collateral securing payment of the loans may be sufficient to assure repayment, but in other cases the Corporation may experience significant credit losses which could have an adverse effect on its operating results. The Corporation makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of the real estate and other assets serving as collateral for the repayment of loans. Credit risk also exists with respect to investment securities. For further discussion regarding the credit risk and the credit quality of the Corporation’s loan portfolio, see Note 54 and Note 65 to the Unaudited Consolidated Financial Statements. For further discussion regarding credit risk associated with unfunded commitments, see Note 1817 to the Unaudited Consolidated Financial Statements. For further discussion regarding the Corporation’s securities portfolio, see Note 43 to the Unaudited Consolidated Financial Statements.
Interest rate risk is the risk of loss to future earnings due to changes in interest rates. It exists because the repricing frequency and magnitude of interest-earning assets and interest-bearing liabilities are not identical. See the “Asset/Liability Management and Interest Rate Risk” section below for additional disclosure.
Liquidity risk is the risk that the Corporation will not have the ability to generate adequate amounts of cash for it to meet its maturing liability obligations and customer loan demand. For detailed disclosure regarding liquidity management, asset/liability management and interest rate risk, see the “Liquidity and Capital Resources” and “Asset/Liability Management and Interest Rate Risk” sectionssection 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.
Management's Discussion and Analysis
Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, natural disasters and security risks.
ERM is an overarching program that includes all areas of the Corporation. A framework approach is utilized to assign responsibility and to ensure that the various business units and activities involved in the risk management life-cycle are effectively integrated. The Corporation has adopted the “three lines of defense” strategy that is an industry best practice for ERM. Business units are the first line of defense in managing risk. They are responsible for identifying, measuring, monitoring, and controlling current and emerging risks. They must report on and escalate their concerns. Corporate functions such as Credit Risk Management, Financial Administration, Information Assurance and Compliance, compriserepresent 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 isand third party credit review represent the third line of defense. They provide independent assurance to the Board of Directors of the effectiveness of the first and second lines in fulfilling their risk management responsibilities.
For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020,2021, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC.
Management's Discussion and Analysis
Results of Operations
The following table presents a summarized consolidated statement of operations:
| (Dollars in thousands) | (Dollars in thousands) | Three Months | | Nine Months | (Dollars in thousands) | Three Months | | Nine Months |
| | | Change | | | Change | | | Change | | | Change |
Periods ended September 30, | Periods ended September 30, | 2021 | 2020 | | $ | % | | 2021 | 2020 | | $ | % | Periods ended September 30, | 2022 | 2021 | | $ | % | | 2022 | 2021 | | $ | % |
Net interest income | Net interest income | $36,070 | | $31,654 | | | $4,416 | | 14 | % | | $103,695 | | $95,201 | | | $8,494 | | 9 | % | Net interest income | $42,042 | | $36,070 | | | $5,972 | | 17 | % | | $114,648 | | $103,695 | | | $10,953 | | 11 | % |
Noninterest income | Noninterest income | 20,520 | | 25,468 | | | (4,948) | | (19) | | | 67,087 | | 71,715 | | | (4,628) | | (6) | | Noninterest income | 15,803 | | 20,520 | | | (4,717) | | (23) | | | 48,814 | | 67,087 | | | (18,273) | | (27) | |
Total revenues | Total revenues | 56,590 | | 57,122 | | | (532) | | (1) | | | 170,782 | | 166,916 | | | 3,866 | | 2 | | Total revenues | 57,845 | | 56,590 | | | 1,255 | | 2 | | | 163,462 | | 170,782 | | | (7,320) | | (4) | |
Provision for credit losses | Provision for credit losses | — | | 1,325 | | | (1,325) | | (100) | | | (2,000) | | 10,561 | | | (12,561) | | (119) | | Provision for credit losses | 800 | | — | | | 800 | | 100 | | | (2,100) | | (2,000) | | | (100) | | (5) | |
Noninterest expense | Noninterest expense | 32,520 | | 32,344 | | | 176 | | 1 | | | 100,245 | | 91,275 | | | 8,970 | | 10 | | Noninterest expense | 33,067 | | 32,520 | | | 547 | | 2 | | | 95,363 | | 100,245 | | | (4,882) | | (5) | |
Income before income taxes | Income before income taxes | 24,070 | | 23,453 | | | 617 | | 3 | | | 72,537 | | 65,080 | | | 7,457 | | 11 | | Income before income taxes | 23,978 | | 24,070 | | | (92) | | — | | | 70,199 | | 72,537 | | | (2,338) | | (3) | |
Income tax expense | Income tax expense | 5,319 | | 5,131 | | | 188 | | 4 | | | 15,855 | | 13,817 | | | 2,038 | | 15 | | Income tax expense | 5,310 | | 5,319 | | | (9) | | — | | | 15,091 | | 15,855 | | | (764) | | (5) | |
Net income | Net income | $18,751 | | $18,322 | | | $429 | | 2 | % | | $56,682 | | $51,263 | | | $5,419 | | 11 | % | Net income | $18,668 | | $18,751 | | | ($83) | | — | % | | $55,108 | | $56,682 | | | ($1,574) | | (3 | %) |
The following table presents a summary of performance metrics and ratios:
| | | Three Months | | Nine Months | | Three Months | | Nine Months |
Periods ended September 30, | Periods ended September 30, | 2021 | 2020 | | 2021 | 2020 | Periods ended September 30, | 2022 | 2021 | | 2022 | 2021 |
Diluted earnings per common share | Diluted earnings per common share | $1.07 | | $1.06 | | | $3.24 | | $2.95 | | Diluted earnings per common share | $1.08 | | $1.07 | | | $3.16 | | $3.24 | |
Return on average assets (net income divided by average assets) | Return on average assets (net income divided by average assets) | 1.26 | % | 1.24 | % | | 1.30 | % | 1.20 | % | Return on average assets (net income divided by average assets) | 1.19 | % | 1.26 | % | | 1.23 | % | 1.30 | % |
Return on average equity (net income available for common shareholders divided by average equity) | Return on average equity (net income available for common shareholders divided by average equity) | 13.37 | % | 13.99 | % | | 13.93 | % | 13.36 | % | Return on average equity (net income available for common shareholders divided by average equity) | 15.16 | % | 13.37 | % | | 14.35 | % | 13.93 | % |
Net interest income as a percentage of total revenues | Net interest income as a percentage of total revenues | 64 | % | 55 | % | | 61 | % | 57 | % | Net interest income as a percentage of total revenues | 73 | % | 64 | % | | 70 | % | 61 | % |
Noninterest income as a percentage of total revenues | Noninterest income as a percentage of total revenues | 36 | % | 45 | % | | 39 | % | 43 | % | Noninterest income as a percentage of total revenues | 27 | % | 36 | % | | 30 | % | 39 | % |
Net income totaled $18.8$18.7 million and $56.7$55.1 million, respectively, for the three and nine months ended September 30, 2021,2022, compared to $18.3$18.8 million and $51.3$56.7 million, respectively, for the same periods in 2020.2021.
In 2021,2022, growth in net interest income largely benefited from lower funding costswas driven by higher yields on, and growth in, average interest-earning assets, partially offset by a reductionhigher cost of funds. The decline in wholesale funding balances, as well as accelerated amortization of net deferred fee balances on PPP loans that were forgiven by the SBA. Noninterestnoninterest income changes reflected lower mortgage banking revenues resulting from an overall reduction in mortgage origination and highersales activity, and lower wealth management revenues.asset-based revenues attributable to recent declines in the financial markets. The reductionprovision for credit losses recognized in 2022 provided for loan growth and was also reflective of low loss rates, strong asset and credit loss provisioning reflected improvement inquality metrics and our current estimate of forecasted economic conditionsconditions. We experienced modest increases across a variety of noninterest expense categories, however declines in debt prepayment penalties and continued stable asset quality metrics. Noninterestvolume-related mortgage originator compensation expense resulted in an overall decline in year-to-date noninterest expenses in 2021 included debt prepayment penalty expense associated with paying off higher yielding FHLB advances, as well as an increase in salaries and benefits expense.2022.
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 (“FTE”)FTE basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. Unrealized gains (losses) on available for sale securities and changes in fair value on mortgage loans held for sale are excluded from the average balance and yield calculations. Nonaccrual loans, as well as interest recognized on these loans, are included in amounts presented for loans.
| Three months ended September 30, | Three months ended September 30, | 2021 | | 2020 | | Change | Three months ended September 30, | 2022 | | 2021 | | Change |
(Dollars in thousands) | (Dollars in thousands) | Average Balance | Interest | Yield/ Rate | | Average Balance | Interest | Yield/ Rate | | Average Balance | Interest | Yield/ Rate | (Dollars in thousands) | Average Balance | Interest | Yield/ Rate | | Average Balance | Interest | Yield/ Rate | | Average Balance | Interest | Yield/ Rate |
Assets: | Assets: | | Assets: | |
Cash, federal funds sold and short-term investments | Cash, federal funds sold and short-term investments | $179,574 | | $56 | | 0.12 | | | $168,106 | | $39 | | 0.09 | | | $11,468 | | $17 | | 0.03 | | Cash, federal funds sold and short-term investments | $92,708 | | $503 | | 2.15 | | | $179,574 | | $56 | | 0.12 | | | ($86,866) | | $447 | | 2.03 | |
Mortgage loans held for sale | Mortgage loans held for sale | 41,261 | | 298 | | 2.87 | | | 61,043 | | 468 | | 3.05 | | | (19,782) | | (170) | | (0.18) | | Mortgage loans held for sale | 34,503 | | 361 | | 4.15 | | | 41,261 | | 298 | | 2.87 | | | (6,758) | | 63 | | 1.28 | |
Taxable debt securities | Taxable debt securities | 1,045,997 | | 3,683 | | 1.40 | | | 906,977 | | 4,870 | | 2.14 | | | 139,020 | | (1,187) | | (0.74) | | Taxable debt securities | 1,150,674 | | 6,061 | | 2.09 | | | 1,045,997 | | 3,683 | | 1.40 | | | 104,677 | | 2,378 | | 0.69 | |
| FHLB stock | FHLB stock | 18,909 | | 95 | | 1.99 | | | 43,839 | | 532 | | 4.83 | | | (24,930) | | (437) | | (2.84) | | FHLB stock | 25,377 | | 88 | | 1.38 | | | 18,909 | | 95 | | 1.99 | | | 6,468 | | (7) | | (0.61) | |
| Commercial real estate | Commercial real estate | 1,648,972 | | 12,209 | | 2.94 | | | 1,652,136 | | 11,649 | | 2.81 | | | (3,164) | | 560 | | 0.13 | | Commercial real estate | 1,692,374 | | 17,974 | | 4.21 | | | 1,648,972 | | 12,209 | | 2.94 | | | 43,402 | | 5,765 | | 1.27 | |
Commercial & industrial | Commercial & industrial | 736,073 | | 7,886 | | 4.25 | | | 849,452 | | 6,920 | | 3.24 | | | (113,379) | | 966 | | 1.01 | | Commercial & industrial | 630,360 | | 7,114 | | 4.48 | | | 736,073 | | 7,886 | | 4.25 | | | (105,713) | | (772) | | 0.23 | |
Total commercial | Total commercial | 2,385,045 | | 20,095 | | 3.34 | | | 2,501,588 | | 18,569 | | 2.95 | | | (116,543) | | 1,526 | | 0.39 | | Total commercial | 2,322,734 | | 25,088 | | 4.29 | | | 2,385,045 | | 20,095 | | 3.34 | | | (62,311) | | 4,993 | | 0.95 | |
Residential real estate | Residential real estate | 1,623,913 | | 13,511 | | 3.30 | | | 1,510,621 | | 14,047 | | 3.70 | | | 113,292 | | (536) | | (0.40) | | Residential real estate | 2,045,833 | | 17,379 | | 3.37 | | | 1,623,913 | | 13,511 | | 3.30 | | | 421,920 | | 3,868 | | 0.07 | |
Home equity | Home equity | 252,938 | | 2,043 | | 3.20 | | | 276,221 | | 2,320 | | 3.34 | | | (23,283) | | (277) | | (0.14) | | Home equity | 269,654 | | 2,804 | | 4.13 | | | 252,938 | | 2,043 | | 3.20 | | | 16,716 | | 761 | | 0.93 | |
Other | Other | 19,822 | | 247 | | 4.94 | | | 18,706 | | 237 | | 5.04 | | | 1,116 | | 10 | | (0.10) | | Other | 15,299 | | 171 | | 4.43 | | | 19,822 | | 247 | | 4.94 | | | (4,523) | | (76) | | (0.51) | |
Total consumer | Total consumer | 272,760 | | 2,290 | | 3.33 | | | 294,927 | | 2,557 | | 3.45 | | | (22,167) | | (267) | | (0.12) | | Total consumer | 284,953 | | 2,975 | | 4.14 | | | 272,760 | | 2,290 | | 3.33 | | | 12,193 | | 685 | | 0.81 | |
Total loans | Total loans | 4,281,718 | | 35,896 | | 3.33 | | | 4,307,136 | | 35,173 | | 3.25 | | | (25,418) | | 723 | | 0.08 | | Total loans | 4,653,520 | | 45,442 | | 3.87 | | | 4,281,718 | | 35,896 | | 3.33 | | | 371,802 | | 9,546 | | 0.54 | |
Total interest-earning assets | Total interest-earning assets | 5,567,459 | | 40,028 | | 2.85 | | | 5,487,101 | | 41,082 | | 2.98 | | | 80,358 | | (1,054) | | (0.13) | | Total interest-earning assets | 5,956,782 | | 52,455 | | 3.49 | | | 5,567,459 | | 40,028 | | 2.85 | | | 389,323 | | 12,427 | | 0.64 | |
Noninterest-earning assets | Noninterest-earning assets | 351,678 | | | 377,348 | | | (25,670) | | | Noninterest-earning assets | 259,347 | | | 351,678 | | | (92,331) | | |
Total assets | Total assets | $5,919,137 | | | $5,864,449 | | | $54,688 | | | Total assets | $6,216,129 | | | $5,919,137 | | | $296,992 | | |
Liabilities and Shareholders’ Equity: | Liabilities and Shareholders’ Equity: | | Liabilities and Shareholders’ Equity: | |
Interest-bearing demand deposits | $206,237 | | $51 | | 0.10 | | | $157,986 | | $83 | | 0.21 | | | $48,251 | | ($32) | | (0.11) | | |
Interest-bearing demand deposits (in-market) | | Interest-bearing demand deposits (in-market) | $267,670 | | $822 | | 1.22 | | | $206,237 | | $51 | | 0.10 | | | $61,433 | | $771 | | 1.12 | |
NOW accounts | NOW accounts | 782,963 | | 129 | | 0.07 | | | 631,148 | | 99 | | 0.06 | | | 151,815 | | 30 | | 0.01 | | NOW accounts | 871,038 | | 212 | | 0.10 | | | 782,963 | | 129 | | 0.07 | | | 88,075 | | 83 | | 0.03 | |
Money market accounts | Money market accounts | 1,014,204 | | 586 | | 0.23 | | | 839,032 | | 977 | | 0.46 | | | 175,172 | | (391) | | (0.23) | | Money market accounts | 1,137,875 | | 2,231 | | 0.78 | | | 1,014,204 | | 586 | | 0.23 | | | 123,671 | | 1,645 | | 0.55 | |
Savings accounts | Savings accounts | 530,956 | | 70 | | 0.05 | | | 428,781 | | 67 | | 0.06 | | | 102,175 | | 3 | | (0.01) | | Savings accounts | 582,513 | | 100 | | 0.07 | | | 530,956 | | 70 | | 0.05 | | | 51,557 | | 30 | | 0.02 | |
Time deposits (in-market) | Time deposits (in-market) | 672,012 | | 1,695 | | 1.00 | | | 730,464 | | 3,015 | | 1.64 | | | (58,452) | | (1,320) | | (0.64) | | Time deposits (in-market) | 797,199 | | 1,983 | | 0.99 | | | 672,012 | | 1,695 | | 1.00 | | | 125,187 | | 288 | | (0.01) | |
Total interest-bearing in-market deposits | 3,206,372 | | 2,531 | | 0.31 | | | 2,787,411 | | 4,241 | | 0.61 | | | 418,961 | | (1,710) | | (0.30) | | |
Interest-bearing in-market deposits | | Interest-bearing in-market deposits | 3,656,295 | | 5,348 | | 0.58 | | | 3,206,372 | | 2,531 | | 0.31 | | | 449,923 | | 2,817 | | 0.27 | |
Wholesale brokered demand deposits | | Wholesale brokered demand deposits | 31,014 | | 166 | | 2.12 | | | — | | — | | — | | | 31,014 | | 166 | | 2.12 | |
Wholesale brokered time deposits | Wholesale brokered time deposits | 722,233 | | 258 | | 0.14 | | | 463,756 | | 1,291 | | 1.11 | | | 258,477 | | (1,033) | | (0.97) | | Wholesale brokered time deposits | 381,984 | | 1,142 | | 1.19 | | | 722,233 | | 258 | | 0.14 | | | (340,249) | | 884 | | 1.05 | |
Wholesale brokered deposits | | Wholesale brokered deposits | 412,998 | | 1,308 | | 1.26 | | | 722,233 | | 258 | | 0.14 | | | (309,235) | | 1,050 | | 1.12 | |
Total interest-bearing deposits | Total interest-bearing deposits | 3,928,605 | | 2,789 | | 0.28 | | | 3,251,167 | | 5,532 | | 0.68 | | | 677,438 | | (2,743) | | (0.40) | | Total interest-bearing deposits | 4,069,293 | | 6,656 | | 0.65 | | | 3,928,605 | | 2,789 | | 0.28 | | | 140,688 | | 3,867 | | 0.37 | |
FHLB advances | FHLB advances | 317,766 | | 872 | | 1.09 | | | 860,758 | | 3,354 | | 1.55 | | | (542,992) | | (2,482) | | (0.46) | | FHLB advances | 549,729 | | 3,234 | | 2.33 | | | 317,766 | | 872 | | 1.09 | | | 231,963 | | 2,362 | | 1.24 | |
Junior subordinated debentures | Junior subordinated debentures | 22,681 | | 92 | | 1.61 | | | 22,681 | | 135 | | 2.37 | | | — | | (43) | | (0.76) | | Junior subordinated debentures | 22,681 | | 206 | | 3.60 | | | 22,681 | | 92 | | 1.61 | | | — | | 114 | | 1.99 | |
PPPLF borrowings | — | | — | | — | | | 180,128 | | 159 | | 0.35 | | | (180,128) | | (159) | | (0.35) | | |
| Total interest-bearing liabilities | Total interest-bearing liabilities | 4,269,052 | | 3,753 | | 0.35 | | | 4,314,734 | | 9,180 | | 0.85 | | | (45,682) | | (5,427) | | (0.50) | | Total interest-bearing liabilities | 4,641,703 | | 10,096 | | 0.86 | | | 4,269,052 | | 3,753 | | 0.35 | | | 372,651 | | 6,343 | | 0.51 | |
Noninterest-bearing demand deposits | Noninterest-bearing demand deposits | 952,676 | | | 842,949 | | | 109,727 | | | Noninterest-bearing demand deposits | 944,153 | | | 952,676 | | | (8,523) | | |
Other liabilities | Other liabilities | 142,562 | | | 186,981 | | | (44,419) | | | Other liabilities | 143,043 | | | 142,562 | | | 481 | | |
Shareholders’ equity | Shareholders’ equity | 554,847 | | | 519,785 | | | 35,062 | | | Shareholders’ equity | 487,230 | | | 554,847 | | | (67,617) | | |
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | $5,919,137 | | | $5,864,449 | | | $54,688 | | | Total liabilities and shareholders’ equity | $6,216,129 | | | $5,919,137 | | | $296,992 | | |
Net interest income (FTE) | Net interest income (FTE) | | $36,275 | | | $31,902 | | | $4,373 | | | Net interest income (FTE) | | $42,359 | | | $36,275 | | | $6,084 | | |
Interest rate spread | Interest rate spread | | 2.50 | | | 2.13 | | | 0.37 | | Interest rate spread | | 2.63 | | | 2.50 | | | 0.13 | |
Net interest margin | Net interest margin | | 2.58 | | | 2.31 | | | 0.27 | | Net interest margin | | 2.82 | | | 2.58 | | | 0.24 | |
Management's Discussion and Analysis
Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:
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(Dollars in thousands) | | | |
Three months ended September 30, | 2022 | 2021 | Change |
Commercial loans | $317 | | $205 | | $112 | |
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Nine months ended September 30, | 2022 | | 2021 | | Change |
(Dollars in thousands) | Average Balance | Interest | Yield/ Rate | | Average Balance | Interest | Yield/ Rate | | Average Balance | Interest | Yield/ Rate |
Assets: | | | | | | | | | | | |
Cash, federal funds sold and short-term investments | $128,606 | | $769 | | 0.80 | | | $160,350 | | $121 | | 0.10 | | | ($31,744) | | $648 | | 0.70 | |
Mortgage loans held for sale | 29,985 | | 851 | | 3.79 | | | 53,307 | | 1,144 | | 2.87 | | | (23,322) | | (293) | | 0.92 | |
Taxable debt securities | 1,106,632 | | 15,209 | | 1.84 | | | 997,741 | | 10,366 | | 1.39 | | | 108,891 | | 4,843 | | 0.45 | |
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FHLB stock | 15,745 | | 218 | | 1.85 | | | 24,265 | | 338 | | 1.86 | | | (8,520) | | (120) | | (0.01) | |
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Commercial real estate | 1,648,061 | | 43,360 | | 3.52 | | | 1,638,200 | | 35,269 | | 2.88 | | | 9,861 | | 8,091 | | 0.64 | |
Commercial & industrial | 628,574 | | 19,456 | | 4.14 | | | 794,091 | | 23,865 | | 4.02 | | | (165,517) | | (4,409) | | 0.12 | |
Total commercial | 2,276,635 | | 62,816 | | 3.69 | | | 2,432,291 | | 59,134 | | 3.25 | | | (155,656) | | 3,682 | | 0.44 | |
Residential real estate | 1,875,175 | | 46,376 | | 3.31 | | | 1,531,529 | | 39,248 | | 3.43 | | | 343,646 | | 7,128 | | (0.12) | |
Home equity | 257,814 | | 6,753 | | 3.50 | | | 255,959 | | 6,220 | | 3.25 | | | 1,855 | | 533 | | 0.25 | |
Other | 15,995 | | 550 | | 4.60 | | | 20,301 | | 742 | | 4.89 | | | (4,306) | | (192) | | (0.29) | |
Total consumer | 273,809 | | 7,303 | | 3.57 | | | 276,260 | | 6,962 | | 3.37 | | | (2,451) | | 341 | | 0.20 | |
Total loans | 4,425,619 | | 116,495 | | 3.52 | | | 4,240,080 | | 105,344 | | 3.32 | | | 185,539 | | 11,151 | | 0.20 | |
Total interest-earning assets | 5,706,587 | | 133,542 | | 3.13 | | | 5,475,743 | | 117,313 | | 2.86 | | | 230,844 | | 16,229 | | 0.27 | |
Noninterest-earning assets | 268,744 | | | | | 346,514 | | | | | (77,770) | | | |
Total assets | $5,975,331 | | | | | $5,822,257 | | | | | $153,074 | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | | |
Interest-bearing demand deposits (in-market) | $255,014 | | $1,114 | | 0.58 | | | $190,979 | | $196 | | 0.14 | | | $64,035 | | $918 | | 0.44 | |
NOW accounts | 867,464 | | 492 | | 0.08 | | | 747,385 | | 350 | | 0.06 | | | 120,079 | | 142 | | 0.02 | |
Money market accounts | 1,193,599 | | 3,984 | | 0.45 | | | 958,812 | | 1,852 | | 0.26 | | | 234,787 | | 2,132 | | 0.19 | |
Savings accounts | 570,129 | | 246 | | 0.06 | | | 513,110 | | 211 | | 0.05 | | | 57,019 | | 35 | | 0.01 | |
Time deposits (in-market) | 800,037 | | 5,997 | | 1.00 | | | 687,278 | | 5,822 | | 1.13 | | | 112,759 | | 175 | | (0.13) | |
Interest-bearing in-market deposits | 3,686,243 | | 11,833 | | 0.43 | | | 3,097,564 | | 8,431 | | 0.36 | | | 588,679 | | 3,402 | | 0.07 | |
Wholesale brokered demand deposits | 17,197 | | 212 | | 1.65 | | | — | | — | | — | | | 17,197 | | 212 | | 1.65 | |
Wholesale brokered time deposits | 396,465 | | 1,677 | | 0.57 | | | 655,165 | | 982 | | 0.20 | | | (258,700) | | 695 | | 0.37 | |
Wholesale brokered deposits | 413,662 | | 1,889 | | 0.61 | | | 655,165 | | 982 | | 0.20 | | | (241,503) | | 907 | | 0.41 | |
Total interest-bearing deposits | 4,099,905 | | 13,722 | | 0.45 | | | 3,752,729 | | 9,413 | | 0.34 | | | 347,176 | | 4,309 | | 0.11 | |
FHLB advances | 285,590 | | 3,891 | | 1.82 | | | 438,213 | | 3,253 | | 0.99 | | | (152,623) | | 638 | | 0.83 | |
Junior subordinated debentures | 22,681 | | 443 | | 2.61 | | | 22,681 | | 278 | | 1.64 | | | — | | 165 | | 0.97 | |
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Total interest-bearing liabilities | 4,408,176 | | 18,056 | | 0.55 | | | 4,213,623 | | 12,944 | | 0.41 | | | 194,553 | | 5,112 | | 0.14 | |
Noninterest-bearing demand deposits | 925,433 | | | | | 918,760 | | | | | 6,673 | | | |
Other liabilities | 129,967 | | | | | 147,244 | | | | | (17,277) | | | |
Shareholders’ equity | 511,755 | | | | | 542,630 | | | | | (30,875) | | | |
Total liabilities and shareholders’ equity | $5,975,331 | | | | | $5,822,257 | | | | | $153,074 | | | |
Net interest income (FTE) | | $115,486 | | | | $104,369 | | | | | $11,117 | | |
Interest rate spread | | | 2.58 | | | | | 2.45 | | | | | 0.13 | |
Net interest margin | | | 2.71 | | | | | 2.55 | | | | | 0.16 | |
Management's Discussion and Analysis
Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:
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(Dollars in thousands) | | | |
Three months ended September 30, | 2021 | 2020 | Change |
Commercial loans | $205 | | $248 | | ($43) | |
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Nine months ended September 30, | 2021 | | 2020 | | 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 | $160,350 | | $121 | | 0.10 | | | $156,296 | | $424 | | 0.36 | | | $4,054 | | ($303) | | (0.26) | |
Mortgage loans held for sale | 53,307 | | 1,144 | | 2.87 | | | 48,570 | | 1,193 | | 3.28 | | | 4,737 | | (49) | | (0.41) | |
Taxable debt securities | 997,741 | | 10,366 | | 1.39 | | | 905,692 | | 16,181 | | 2.39 | | | 92,049 | | (5,815) | | (1.00) | |
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| | | | | | | | | | | |
| | | | | | | | | | | |
FHLB stock | 24,265 | | 338 | | 1.86 | | | 49,236 | | 1,826 | | 4.95 | | | (24,971) | | (1,488) | | (3.09) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Commercial real estate | 1,638,200 | | 35,269 | | 2.88 | | | 1,623,612 | | 40,326 | | 3.32 | | | 14,588 | | (5,057) | | (0.44) | |
Commercial & industrial | 794,091 | | 23,865 | | 4.02 | | | 749,905 | | 20,214 | | 3.60 | | | 44,186 | | 3,651 | | 0.42 | |
Total commercial | 2,432,291 | | 59,134 | | 3.25 | | | 2,373,517 | | 60,540 | | 3.41 | | | 58,774 | | (1,406) | | (0.16) | |
Residential real estate | 1,531,529 | | 39,248 | | 3.43 | | | 1,492,589 | | 42,660 | | 3.82 | | | 38,940 | | (3,412) | | (0.39) | |
Home equity | 255,959 | | 6,220 | | 3.25 | | | 281,488 | | 7,802 | | 3.70 | | | (25,529) | | (1,582) | | (0.45) | |
Other | 20,301 | | 742 | | 4.89 | | | 19,171 | | 716 | | 4.99 | | | 1,130 | | 26 | | (0.10) | |
Total consumer | 276,260 | | 6,962 | | 3.37 | | | 300,659 | | 8,518 | | 3.78 | | | (24,399) | | (1,556) | | (0.41) | |
Total loans | 4,240,080 | | 105,344 | | 3.32 | | | 4,166,765 | | 111,718 | | 3.58 | | | 73,315 | | (6,374) | | (0.26) | |
Total interest-earning assets | 5,475,743 | | 117,313 | | 2.86 | | | 5,326,559 | | 131,342 | | 3.29 | | | 149,184 | | (14,029) | | (0.43) | |
Noninterest-earning assets | 346,514 | | | | | 357,133 | | | | | (10,619) | | | |
Total assets | $5,822,257 | | | | | $5,683,692 | | | | | $138,565 | | | |
Liabilities and Shareholders’ Equity: | | | | | | | | | | | |
Interest-bearing demand deposits | $190,979 | | $196 | | 0.14 | | | $158,594 | | $725 | | 0.61 | | | $32,385 | | ($529) | | (0.47) | |
NOW accounts | 747,385 | | 350 | | 0.06 | | | 569,283 | | 253 | | 0.06 | | | 178,102 | | 97 | | — | |
Money market accounts | 958,812 | | 1,852 | | 0.26 | | | 818,530 | | 4,439 | | 0.72 | | | 140,282 | | (2,587) | | (0.46) | |
Savings accounts | 513,110 | | 211 | | 0.05 | | | 402,243 | | 195 | | 0.06 | | | 110,867 | | 16 | | (0.01) | |
Time deposits (in-market) | 687,278 | | 5,822 | | 1.13 | | | 752,443 | | 10,571 | | 1.88 | | | (65,165) | | (4,749) | | (0.75) | |
Total interest-bearing in-market deposits | 3,097,564 | | 8,431 | | 0.36 | | | 2,701,093 | | 16,183 | | 0.80 | | | 396,471 | | (7,752) | | (0.44) | |
Wholesale brokered time deposits | 655,165 | | 982 | | 0.20 | | | 471,771 | | 4,997 | | 1.41 | | | 183,394 | | (4,015) | | (1.21) | |
Total interest-bearing deposits | 3,752,729 | | 9,413 | | 0.34 | | | 3,172,864 | | 21,180 | | 0.89 | | | 579,865 | | (11,767) | | (0.55) | |
FHLB advances | 438,213 | | 3,253 | | 0.99 | | | 1,016,943 | | 13,501 | | 1.77 | | | (578,730) | | (10,248) | | (0.78) | |
Junior subordinated debentures | 22,681 | | 278 | | 1.64 | | | 22,681 | | 519 | | 3.06 | | | — | | (241) | | (1.42) | |
PPPLF borrowings | — | | — | | — | | | 61,333 | | 161 | | 0.35 | | | (61,333) | | (161) | | (0.35) | |
Total interest-bearing liabilities | 4,213,623 | | 12,944 | | 0.41 | | | 4,273,821 | | 35,361 | | 1.11 | | | (60,198) | | (22,417) | | (0.70) | |
Noninterest-bearing demand deposits | 918,760 | | | | | 733,359 | | | | | 185,401 | | | |
Other liabilities | 147,244 | | | | | 164,928 | | | | | (17,684) | | | |
Shareholders’ equity | 542,630 | | | | | 511,584 | | | | | 31,046 | | | |
Total liabilities and shareholders’ equity | $5,822,257 | | | | | $5,683,692 | | | | | $138,565 | | | |
Net interest income (FTE) | | $104,369 | | | | $95,981 | | | | | $8,388 | | |
Interest rate spread | | | 2.45 | | | | | 2.18 | | | | | 0.27 | |
Net interest margin | | | 2.55 | | | | | 2.41 | | | | | 0.14 | |
Management's Discussion and Analysis
Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:
| | (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
Nine months ended September 30, | Nine months ended September 30, | 2021 | 2020 | Change | Nine months ended September 30, | 2022 | 2021 | Change |
Commercial loans | Commercial loans | $674 | | $780 | | ($106) | | Commercial loans | $838 | | $674 | | $164 | |
|
Net Interest Income
Net interest income, continues to be the primary source of our operating income. Net interest income, totaled $42.0 million and $114.6 million, respectively, for the three and nine months ended September 30, 2021 totaled2022, compared to $36.1 million and $103.7 million, respectively, compared to $31.7 million and $95.2 million, respectively, for the same periods in 2020.2021. Net interest income is affected by the level of and changes in interest rates, and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Prepayment penalty income associated with loan payoffs is included in net interest income.
The following discussion presents net interest income on an FTE basis by adjusting income and yields on tax-exempt loans and securities to be comparable to taxable loans and securities.
The analysis of net interest income, net interest margin (“NIM”)NIM and the yield on loans may be impacted by the periodic recognition of prepayment penalty fee income associated with commercial loan payoffs. There was no prepayment penalty fee income associated with loan payoffs for the three months ended September 30, 2021, while there was $934 thousand of such income (or 2 basis points of benefit to NIM) for the nine months ended September 30, 2021. Prepayment penalty fee income associated with loan payoffs amounted to $33$30 thousand (or 0 basis pointspoint benefit to NIM) and $180$168 thousand (or 1 basis point benefit to the NIM), respectively, for the three and nine months ended September 30, 2020.2022. There was no prepayment penalty fee income recognized in the third quarter of 2021 and $934 thousand (or 2 basis points benefit to NIM) recognized in the nine months ended September 30, 2021.
The analysis of net interest income, NIM and the yield on loans is also impacted by changes in the level of net amortization of premiums and discounts on securities and loans, which is included in interest income. AsChanges in market interest rates affect the level of loan prepayments and the receipt of payments on mortgage-backed securities. Prepayment speeds generally increase as market interest rates decline and decrease as market interest rates rise. Changes in prepayment speeds could increase or decrease the level of net amortization of premiums and discounts, thereby affecting interest income. Additionally, as PPP loans arewere forgiven by the SBA, related unamortized net fee balances arewere accelerated and amortized, intoincreasing net interest income. As market interest rates decline, payments on mortgage-backed securities and loan prepayments 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 mortgage-backed security or loan being prepaid. As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to interest income) amounted to $2.7$2.5 million for the nine months ended September 30, 2021. This compares to net amortization, or a net reduction to interest income, of $4.12022, compared $2.7 million for the same period in 2020. The decline in net amortization reflected accelerated amortization of net deferred fee balances on PPP loans, partially offset by an increase in amortization of net premiums on securities.2021.
Accelerated amortization of net deferred fee balances on PPP loans forgiven by the SBA amounted to $2.0$21 thousand (or 0 basis point benefit to NIM) and $1.2 million and $4.3 million,(or 3 basis points benefit to NIM), respectively, for the three and nine months ended September 30, 2021.2022. This addedcompared to $2.0 million (or 13 basis points benefit to NIM) and $4.3 million (or 11 basis points respectively,benefit to NIMNIM), respectively, for the three and nine months ended September 30, 2021. There were no PPP loans forgiven in the correspondingsame periods in 2020.2021.
FTE net interest income for the three and nine months ended September 30, 20212022 amounted to $36.3$42.4 million and $104.4$115.5 million, respectively, up by $4.4$6.1 million and $8.4$11.1 million, respectively, from the same periods in 2020. Declines2021. Increases in average interest-bearing liability balances and growthasset yields outpaced increases in average interest-earnings assets contributed approximately $1.4funding costs, contributing $4.3 million and $7.4$6.9 million, respectively, of net interest income for the three and nine months ended September 30, 2021. Declines2022. In the three months ended September 30, 2022, growth in funding costs out-paced lower asset yields andaverage interest-earning assets, net of increased average interest-bearing liability balances, contributed $3.0approximately $1.8 million and $1.0 million, respectively, of net interest income forincome. In the three and nine months ended September 30, 2021.2022, growth in average interest-earning assets and declines in average interest-bearing liability balances contributed approximately $4.2 million of net interest income.
The NIM was 2.58%2.82% and 2.55%2.71%, respectively, for the three and nine months ended September 30, 2021,2022, compared to 2.31%2.58% and 2.41%, respectively, for the same periods a year ago. NIM benefited from lower funding costs and a reduction in average wholesale funding balances. It also benefited from accelerated amortization of net deferred fee balances on PPP loans that were forgiven by the SBA and loan prepayment fees. Excluding the impact of both accelerated net deferred fee amortization on PPP loans and commercial loan prepayment fee income, the NIM amounted to 2.45% and 2.42%, respectively, for the three and nine months ended September 30, 2021, compared to 2.31% and 2.40%2.55%, respectively, for the same periods in 2020.2021 as NIM benefited from higher market interest rates.
Total average securities for the three and nine months ended September 30, 20212022 increased by $139.0$104.7 million and $92.0$108.9 million, respectively, from the average balances for the same periods a year earlier. The FTE rate of return on the securities portfolio for the three and nine months ended September 30, 2022 was 2.09% and 1.84%, respectively, compared to 1.40% and 1.39%, respectively, for the same periods in 2021, reflecting the impact of higher market interest rates in 2022.
Total average loan balances for the three and nine months ended September 30, 2022 increased by $371.8 million and $185.5 million, respectively, from the average loan balances for the comparable 2021 periods. The increase reflected growth
Management's Discussion and Analysis
securities portfolio for the three and nine months ended September 30, 2021 was 1.40% and 1.39%, respectively, compared to 2.14% and 2.39%, respectively, for the same periods in 2020, reflecting purchases of relatively lower yielding debt securities and the impact of lower market interest rates.
Total average loan balances for the three months ended September 30, 2021 decreased by $25.4 million from the average loan balances for the comparable 2020 period. Total average loan balances for the nine months ended September 30, 2021 increased by $73.3 million from the average loan balances for the same period in 2020. The year-to-date increase reflected growth in average commercial loan balances concentrated in PPP loans, as well as growth in average residential real estate loan balances.balances, partially offset by a decline in commercial & industrial loans due to PPP loans that were forgiven by the SBA. The yield on total loans for the three and nine months ended September 30, 20212022 was 3.87% and 3.52%, respectively, compared to 3.33% and 3.32%, respectively, compared to 3.25% and 3.58%, respectively, forin the samecorresponding periods in 2020.2021. The yield on total loans benefited frommay be impacted by the periodic recognition of commercial loan prepayment fee income, as well as the accelerated amortization of net deferred fee balances on PPP loans thatwhen such loans were forgiven by the SBA and loan prepayment fees.SBA. Excluding the impact of accelerated net deferred fee amortization on PPP loans and commercial loan prepayment fee income,these items for both periods, the yield on total loans for the three and nine months ended September 30, 20212022 was 3.87% and 3.48%, respectively, up from 3.14% and 3.16%, respectively, compared to 3.25% and 3.58%, respectively, for the same periods in 2020. Yields on LIBOR-based and prime-based loans reflected lower2021, reflecting higher market interest rates.
The average balance of FHLB advances for the three and nine months ended September 30, 20212022 increased by $232.0 million and decreased by $543.0 million and $578.7$152.6 million, respectively, compared to the average balances for the same periods in 2020.2021. The average rate paid on such advances for the three and nine months ended September 30, 20212022 was 2.33% and 1.82%, respectively, up from 1.09% and 0.99%, respectively, down from 1.55% and 1.77%, respectively, for the same periods in 2020,2021, reflecting maturities and payoffs of higher-yielding FHLB advances and lowerrecent increases in market interest rates.
Included in total average interest-bearing deposits were of out-of-market wholesale brokered time deposits, which increaseddecreased by $258.5$309.2 million and $183.4$241.5 million, respectively, from the same periods in 2020.2021. The average rate paid on wholesale brokered time deposits for the three and nine months ended September 30, 20212022 was 0.14%1.26% and 0.20%0.61%, respectively, compared to 1.11%0.14% and 1.41%0.20%, respectively, for the same periods in 2020,2021, reflecting lowerrecent increases in market interest rates.
Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, for the three and nine months ended September 30, 20212022 increased by $419.0$449.9 million and $396.5$588.7 million, respectively, from the average balances for the same periods in 2020.2021. The increases largely reflected growth in lower-costacross all deposit categories, partially offset by maturities of higher-cost promotional time deposits.categories. The average rate paid on in-market interest-bearing deposits for the three and nine months ended September 30, 2021 decreased2022 increased by 3027 basis points and 447 basis points, respectively, from the same periods in 2020,2021, reflecting downward repricing of interest-bearing in-market deposits due to lowerrecent increases in market interest rates.
The average balance of noninterest-bearing demand deposits for the three and nine months ended September 30, 20212022 decreased by $8.5 million and increased by $109.7 million and $185.4$6.7 million, respectively, from the average balance for the same periods in 2020. See additional disclosure under the caption “Sources of Funds.”2021.
Management's Discussion and Analysis
Volume / Rate Analysis - Interest Income and Expense (FTE Basis)
The following table presents certain information on aan 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) | (Dollars in thousands) | Three Months Ended September 30, 2021 vs. 2020 | | Nine Months Ended September 30, 2021 vs. 2020 | (Dollars in thousands) | Three Months Ended September 30, 2022 vs. 2021 | | Nine Months Ended September 30, 2022 vs. 2021 |
| | Change Due to | | Change Due to | | Change Due to | | Change Due to |
| | Volume | Rate | Net Change | | Volume | Rate | Net Change | | Volume | Rate | Net Change | | Volume | Rate | Net Change |
Interest on Interest-Earning Assets: | Interest on Interest-Earning Assets: | | Interest on Interest-Earning Assets: | |
Cash, federal funds sold and other short-term investments | Cash, federal funds sold and other short-term investments | $3 | | $14 | | $17 | | | $11 | | ($314) | | ($303) | | Cash, federal funds sold and other short-term investments | ($39) | | $486 | | $447 | | | ($28) | | $676 | | $648 | |
Mortgage loans held for sale | Mortgage loans held for sale | (145) | | (25) | | (170) | | | 110 | | (159) | | (49) | | Mortgage loans held for sale | (55) | | 118 | | 63 | | | (592) | | 299 | | (293) | |
Taxable debt securities | Taxable debt securities | 669 | | (1,856) | | (1,187) | | | 1,516 | | (7,331) | | (5,815) | | Taxable debt securities | 401 | | 1,977 | | 2,378 | | | 1,221 | | 3,622 | | 4,843 | |
| FHLB stock | FHLB stock | (215) | | (222) | | (437) | | | (667) | | (821) | | (1,488) | | FHLB stock | 27 | | (34) | | (7) | | | (118) | | (2) | | (120) | |
| Commercial real estate | Commercial real estate | (22) | | 582 | | 560 | | | 360 | | (5,417) | | (5,057) | | Commercial real estate | 331 | | 5,434 | | 5,765 | | | 213 | | 7,878 | | 8,091 | |
Commercial & industrial | Commercial & industrial | (1,010) | | 1,976 | | 966 | | | 1,232 | | 2,419 | | 3,651 | | Commercial & industrial | (1,181) | | 409 | | (772) | | | (5,104) | | 695 | | (4,409) | |
Total commercial | Total commercial | (1,032) | | 2,558 | | 1,526 | | | 1,592 | | (2,998) | | (1,406) | | Total commercial | (850) | | 5,843 | | 4,993 | | | (4,891) | | 8,573 | | 3,682 | |
Residential real estate | Residential real estate | 1,010 | | (1,546) | | (536) | | | 1,087 | | (4,499) | | (3,412) | | Residential real estate | 3,576 | | 292 | | 3,868 | | | 8,545 | | (1,417) | | 7,128 | |
Home equity | Home equity | (189) | | (88) | | (277) | | | (673) | | (909) | | (1,582) | | Home equity | 141 | | 620 | | 761 | | | 46 | | 487 | | 533 | |
Other | Other | 14 | | (4) | | 10 | | | 41 | | (15) | | 26 | | Other | (52) | | (24) | | (76) | | | (150) | | (42) | | (192) | |
Total consumer | Total consumer | (175) | | (92) | | (267) | | | (632) | | (924) | | (1,556) | | Total consumer | 89 | | 596 | | 685 | | | (104) | | 445 | | 341 | |
Total loans | Total loans | (197) | | 920 | | 723 | | | 2,047 | | (8,421) | | (6,374) | | Total loans | 2,815 | | 6,731 | | 9,546 | | | 3,550 | | 7,601 | | 11,151 | |
Total interest income | Total interest income | 115 | | (1,169) | | (1,054) | | | 3,017 | | (17,046) | | (14,029) | | Total interest income | 3,149 | | 9,278 | | 12,427 | | | 4,033 | | 12,196 | | 16,229 | |
Interest on Interest-Bearing Liabilities: | Interest on Interest-Bearing Liabilities: | | Interest on Interest-Bearing Liabilities: | |
Interest-bearing demand deposits | 20 | | (52) | | (32) | | | 123 | | (652) | | (529) | | |
Interest-bearing demand deposits (in-market) | | Interest-bearing demand deposits (in-market) | 23 | | 748 | | 771 | | | 88 | | 830 | | 918 | |
NOW accounts | NOW accounts | 18 | | 12 | | 30 | | | 97 | | — | | 97 | | NOW accounts | 17 | | 66 | | 83 | | | 46 | | 96 | | 142 | |
Money market accounts | Money market accounts | 170 | | (561) | | (391) | | | 646 | | (3,233) | | (2,587) | | Money market accounts | 80 | | 1,565 | | 1,645 | | | 535 | | 1,597 | | 2,132 | |
Savings accounts | Savings accounts | 14 | | (11) | | 3 | | | 48 | | (32) | | 16 | | Savings accounts | 6 | | 24 | | 30 | | | 13 | | 22 | | 35 | |
Time deposits (in-market) | Time deposits (in-market) | (225) | | (1,095) | | (1,320) | | | (846) | | (3,903) | | (4,749) | | Time deposits (in-market) | 305 | | (17) | | 288 | | | 888 | | (713) | | 175 | |
Total interest-bearing in-market deposits | (3) | | (1,707) | | (1,710) | | | 68 | | (7,820) | | (7,752) | | |
Interest-bearing in-market deposits | | Interest-bearing in-market deposits | 431 | | 2,386 | | 2,817 | | | 1,570 | | 1,832 | | 3,402 | |
Wholesale brokered demand deposits | | Wholesale brokered demand deposits | 166 | | — | | 166 | | | 212 | | — | | 212 | |
Wholesale brokered time deposits | Wholesale brokered time deposits | 478 | | (1,511) | | (1,033) | | | 1,413 | | (5,428) | | (4,015) | | Wholesale brokered time deposits | (174) | | 1,058 | | 884 | | | (516) | | 1,211 | | 695 | |
Wholesale brokered deposits | | Wholesale brokered deposits | (8) | | 1,058 | | 1,050 | | | (304) | | 1,211 | | 907 | |
Total interest-bearing deposits | Total interest-bearing deposits | 475 | | (3,218) | | (2,743) | | | 1,481 | | (13,248) | | (11,767) | | Total interest-bearing deposits | 423 | | 3,444 | | 3,867 | | | 1,266 | | 3,043 | | 4,309 | |
FHLB advances | FHLB advances | (1,691) | | (791) | | (2,482) | | | (5,773) | | (4,475) | | (10,248) | | FHLB advances | 923 | | 1,439 | | 2,362 | | | (1,410) | | 2,048 | | 638 | |
Junior subordinated debentures | Junior subordinated debentures | — | | (43) | | (43) | | | — | | (241) | | (241) | | Junior subordinated debentures | — | | 114 | | 114 | | | — | | 165 | | 165 | |
PPPLF borrowings | (80) | | (79) | | (159) | | | (81) | | (80) | | (161) | | |
| Total interest expense | Total interest expense | (1,296) | | (4,131) | | (5,427) | | | (4,373) | | (18,044) | | (22,417) | | Total interest expense | 1,346 | | 4,997 | | 6,343 | | | (144) | | 5,256 | | 5,112 | |
Net interest income (FTE) | Net interest income (FTE) | $1,411 | | $2,962 | | $4,373 | | | $7,390 | | $998 | | $8,388 | | Net interest income (FTE) | $1,803 | | $4,281 | | $6,084 | | | $4,177 | | $6,940 | | $11,117 | |
Provision for Credit Losses
The provision for credit losses results from management’s review of the adequacy of the ACL. The ACL is management’s estimate of expected lifetime credit losses as of the reporting date and includes consideration of current forecasted economic conditions. Estimating an appropriate level of ACL necessarily involves a high degree of judgment.
For the three months ended September 30, 2021 there was no provision for credit losses recognized in earnings, compared toThe Corporation recorded a positive provision for credit losses (or a charge) of $1.3 million$800 thousand for the same period in 2020. For the ninethree months ended September 30, 2021,2022, compared to no provision for credit losses recognized in the third quarter of 2021. On a year-to-date basis, the Corporation recognized a negative provision for credit losses (or a benefit) of $2.0$2.1 million was recognized in earnings,2022, compared to a positivenegative provision for credit losses (or a charge)benefit) of $10.6$2.0 million for the same period in 2020.2021. The reductionyear-to-date negative provision recognized in 2022 was reflective of low loss rates, strong asset and credit loss provisioning in 2021 reflected relative improvement inquality metrics, our current estimate of forecasted economic conditions, and continued stable asset quality metrics.
also provided for loan growth. The year-to-date negative provision recorded in 2021 largely reflected an improvement in
Management's Discussion and Analysis
Total netforecasted economic conditions following higher credit provisioning in 2020, which was attributable to the emergence of the COVID-19 pandemic.
Net charge-offs were $168totaled $54 thousand and $444 thousand, respectively, for the three andmonths ended September 30, 2022, compared to $168 thousand for the same period in 2021. Net recoveries totaled $104 thousand for the nine months ended September 30, 2021,2022, compared to $96net charge-offs of $444 thousand and $1.0 million, respectively, for the same periodsperiod in 2020.2021.
The ACL on loans was $41.7$36.9 million, or 0.97%0.76% of total loans, at September 30, 2021,2022, compared to an ACL on loans of $44.1$39.1 million, or 1.05%0.91% of total loans, at December 31, 2020.2021.
See additional discussion under the caption “Asset Quality” for further information on the ACL on loans.
Noninterest Income
Noninterest income is an important source of revenue for Washington Trust. The principal categories of noninterest income are shown in the following table:
| (Dollars in thousands) | (Dollars in thousands) | Three Months | | Nine Months | (Dollars in thousands) | Three Months | | Nine Months |
| | | Change | | | Change | | | Change | | | Change |
Periods ended September 30, | Periods ended September 30, | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % | Periods ended September 30, | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Noninterest income: | Noninterest income: | | Noninterest income: | |
Wealth management revenues | Wealth management revenues | $10,455 | | | $8,954 | | | $1,501 | | | 17 | % | | $30,778 | | | $26,248 | | | $4,530 | | | 17 | % | Wealth management revenues | $9,525 | | | $10,455 | | | ($930) | | | (9 | %) | | $30,122 | | | $30,778 | | | ($656) | | | (2 | %) |
| Mortgage banking revenues | Mortgage banking revenues | 6,373 | | | 12,353 | | | (5,980) | | | (48) | | | 24,294 | | | 33,300 | | | (9,006) | | | (27) | | Mortgage banking revenues | 2,047 | | | 6,373 | | | (4,326) | | | (68) | | | 7,630 | | | 24,294 | | | (16,664) | | | (69) | |
Card interchange fees | Card interchange fees | 1,265 | | | 1,161 | | | 104 | | | 9 | | | 3,714 | | | 3,139 | | | 575 | | | 18 | | Card interchange fees | 1,287 | | | 1,265 | | | 22 | | | 2 | | | 3,754 | | | 3,714 | | | 40 | | | 1 | |
Service charges on deposit accounts | Service charges on deposit accounts | 673 | | | 598 | | | 75 | | | 13 | | | 1,917 | | | 1,975 | | | (58) | | | (3) | | Service charges on deposit accounts | 819 | | | 673 | | | 146 | | | 22 | | | 2,250 | | | 1,917 | | | 333 | | | 17 | |
Loan related derivative income | Loan related derivative income | 728 | | | 1,264 | | | (536) | | | (42) | | | 2,370 | | | 3,818 | | | (1,448) | | | (38) | | Loan related derivative income | 1,041 | | | 728 | | | 313 | | | 43 | | | 2,011 | | | 2,370 | | | (359) | | | (15) | |
Income from bank-owned life insurance | Income from bank-owned life insurance | 618 | | | 567 | | | 51 | | | 9 | | | 1,781 | | | 1,922 | | | (141) | | | (7) | | Income from bank-owned life insurance | 684 | | | 618 | | | 66 | | | 11 | | | 1,900 | | | 1,781 | | | 119 | | | 7 | |
| Other income | Other income | 408 | | | 571 | | | (163) | | | (29) | | | 2,233 | | | 1,313 | | | 920 | | | 70 | | Other income | 400 | | | 408 | | | (8) | | | (2) | | | 1,147 | | | 2,233 | | | (1,086) | | | (49) | |
| Total noninterest income | Total noninterest income | $20,520 | | | $25,468 | | | ($4,948) | | | (19 | %) | | $67,087 | | | $71,715 | | | ($4,628) | | | (6 | %) | Total noninterest income | $15,803 | | | $20,520 | | | ($4,717) | | | (23 | %) | | $48,814 | | | $67,087 | | | ($18,273) | | | (27 | %) |
Noninterest Income Analysis
Revenue from wealth management services represented 46%62% of total noninterest income for the nine months ended September 30, 2021,2022, compared to 37%46% for the same period in 2020.2021. A substantial portion of wealth management revenues is dependent on the value of wealth management assets under administration (“AUA”)AUA and is closely tied to the performance of the financial markets. This portion of wealth management revenues is referred to as “asset-based” and includes trust and investment management fees. Wealth management revenues also include “transaction-based” revenues, such as commissions and other service fees that are not primarily derived from the value of assets.
The categories of wealth management revenues are shown in the following table:
| (Dollars in thousands) | (Dollars in thousands) | Three Months | | Nine Months | (Dollars in thousands) | Three Months | | Nine Months |
| | | Change | | | Change | | | Change | | | Change |
Periods ended September 30, | Periods ended September 30, | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % | Periods ended September 30, | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Wealth management revenues: | Wealth management revenues: | | Wealth management revenues: | |
| Asset-based revenues | Asset-based revenues | $10,224 | | | $8,786 | | | $1,438 | | | 16 | % | | $29,798 | | | $25,297 | | | $4,501 | | | 18 | % | Asset-based revenues | $9,302 | | | $10,224 | | | ($922) | | | (9 | %) | | $29,154 | | | $29,798 | | | ($644) | | | (2 | %) |
Transaction-based revenues | Transaction-based revenues | 231 | | | 168 | | | 63 | | | 38 | | | 980 | | | 951 | | | 29 | | | 3 | | Transaction-based revenues | 223 | | | 231 | | | (8) | | | (3) | | | 968 | | | 980 | | | (12) | | | (1) | |
Total wealth management revenues | Total wealth management revenues | $10,455 | | | $8,954 | | | $1,501 | | | 17 | % | | $30,778 | | | $26,248 | | | $4,530 | | | 17 | % | Total wealth management revenues | $9,525 | | | $10,455 | | | ($930) | | | (9 | %) | | $30,122 | | | $30,778 | | | ($656) | | | (2 | %) |
Wealth management revenues for the three and nine months ended September 30, 2021 increased2022 decreased by $1.5 million$930 thousand and $4.5 million,$656 thousand, respectively, from the comparablesame periods in 2020,2021, reflecting growthdecreases in asset-based revenues. The increasechange in asset-based revenues correlated with the increasechange in average AUA balances. The average balance of AUA for the three and nine months ended September 30, 2022 decreased by approximately 11% and 2%, respectively, from the average AUA balances.
balance for the same periods in 2021.
Management's Discussion and Analysis
The following table presents the changes in wealth management AUA:AUA balances:
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
| | Three Months | | Nine Months | | Three Months | | Nine Months |
Periods ended September 30, | Periods ended September 30, | 2021 | | 2020 | | 2021 | | 2020 | Periods ended September 30, | 2022 | | 2021 | | 2022 | | 2021 |
Wealth management assets under administration: | Wealth management assets under administration: | | Wealth management assets under administration: | |
Balance at the beginning of period | Balance at the beginning of period | $7,441,519 | | | $6,138,845 | | | $6,866,737 | | | $6,235,801 | | Balance at the beginning of period | $6,650,097 | | | $7,441,519 | | | $7,784,211 | | | $6,866,737 | |
Net investment appreciation (depreciation) & income | (4,830) | | | 335,209 | | | 572,506 | | | 234,076 | | |
Net client asset inflows (outflows) | 6,707 | | | (78,402) | | | 4,153 | | | (74,225) | | |
Net investment (depreciation) appreciation & income | | Net investment (depreciation) appreciation & income | (239,762) | | | (4,830) | | | (1,444,785) | | | 572,506 | |
Net client asset (outflows) inflows | | Net client asset (outflows) inflows | (87,578) | | | 6,707 | | | (16,669) | | | 4,153 | |
Balance at the end of period | Balance at the end of period | $7,443,396 | | | $6,395,652 | | | $7,443,396 | | | $6,395,652 | | Balance at the end of period | $6,322,757 | | | $7,443,396 | | | $6,322,757 | | | $7,443,396 | |
Wealth management AUA amounted to $7.4$6.3 billion at September 30, 2021, up by $1.0 billion from the balance at September 30, 2020,2022. Wealth management AUA balances declined in 2022, primarily due to net investment appreciation. The average balancedepreciation as a result of recent declines in the financial markets.
Recently, four client-facing wealth management advisors in our registered investment adviser subsidiary resigned. These four employees were associated with approximately $1.0 billion of AUA for both the three and nine months endedas of September 30, 2021 increased by2022. From October 1, 2022 through November 4, 2022, we have been notified of client AUA withdrawals of approximately 19%, respectively, from$546 million. We estimate a decline in annual revenues of approximately $3.2 million associated with these withdrawals. Washington Trust could experience additional AUA outflows in upcoming months associated with the average balance fordeparture of the same periods in 2020.former advisors.
Mortgage banking revenues represented 36%16% of total noninterest income for the nine months ended September 30, 2021,2022, compared to 46%36% for the same period in 2020.2021. These revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets. The composition of mortgage banking revenues and the volume of loans sold to the secondary market are shown in the following table:
| (Dollars in thousands) | (Dollars in thousands) | Three Months | | Nine Months | (Dollars in thousands) | Three Months | | Nine Months |
| | | Change | | | Change | | | Change | | | Change |
Periods ended September 30, | Periods ended September 30, | 2021 | 2020 | | $ | % | | 2021 | 2020 | | $ | % | Periods ended September 30, | 2022 | 2021 | | $ | % | | 2022 | 2021 | | $ | % |
Mortgage banking revenues: | Mortgage banking revenues: | | Mortgage banking revenues: | |
Realized gains on loan sales, net (1) | Realized gains on loan sales, net (1) | $5,750 | | $14,280 | | | ($8,530) | | (60 | %) | | $28,057 | | $28,614 | | | ($557) | | (2 | %) | Realized gains on loan sales, net (1) | $1,718 | | $5,750 | | | ($4,032) | | (70 | %) | | $6,962 | | $28,057 | | | ($21,095) | | (75 | %) |
Changes in fair value, net (2) | Changes in fair value, net (2) | 467 | | (1,555) | | | 2,022 | | 130 | | | (3,964) | | 5,185 | | | (9,149) | | (176) | | Changes in fair value, net (2) | (226) | | 467 | | | (693) | | (148) | | | (798) | | (3,964) | | | 3,166 | | 80 | |
Loan servicing fee income, net (3) | Loan servicing fee income, net (3) | 156 | | (372) | | | 528 | | 142 | | | 201 | | (499) | | | 700 | | 140 | | Loan servicing fee income, net (3) | 555 | | 156 | | | 399 | | 256 | | | 1,466 | | 201 | | | 1,265 | | 629 | |
Total mortgage banking revenues | Total mortgage banking revenues | $6,373 | | $12,353 | | | ($5,980) | | (48 | %) | | $24,294 | | $33,300 | | | ($9,006) | | (27 | %) | Total mortgage banking revenues | $2,047 | | $6,373 | | | ($4,326) | | (68 | %) | | $7,630 | | $24,294 | | | ($16,664) | | (69 | %) |
| Loans sold to the secondary market (4) | Loans sold to the secondary market (4) | $173,861 | | $354,170 | | | ($180,309) | | (51 | %) | | $756,438 | | $821,585 | | | ($65,147) | | (8 | %) | Loans sold to the secondary market (4) | $75,324 | | $173,861 | | | ($98,537) | | (57 | %) | | $285,193 | | $756,438 | | | ($471,245) | | (62 | %) |
(1)Includes gains on loan sales, commission income on loans originated for others, servicing right gains, and gains (losses) on forward loan commitments.
(2)Represents fair value changes on mortgage loans held for sale and forward loan commitments.
(3)Represents loan servicing fee income, net of servicing right amortization and valuation adjustments.
(4)Includes brokered loans (loans originated for others).
For the three and nine months ended September 30, 2021,2022, mortgage banking revenues were down by $6.0$4.3 million and $9.0$16.7 million, respectively, compared to the same periods in 2020. These revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets. Included2021. The decline in mortgage banking revenues arewas mainly attributable to a decline in sales volume and a reduction in the sales yield. Mortgage loans sold to the secondary market totaled $75.3 million and $285.2 million, respectively, for the three and nine months ended September 30, 2022, compared to $173.9 million and $756.4 million, respectively, for the same periods in 2021, reflecting an overall reduction in mortgage origination and sales activity, as well as a shift to a higher proportion of loans originated for retention in portfolio in 2022. Mortgage banking revenues were also impacted by changes in the fair value of mortgage loans held for sale and forward loan commitments, which are primarily based on current market prices in the secondary market and correlate to changes in the size of the mortgage pipeline. The year-over-year decrease in third quarter mortgage banking revenues largely reflected both a decline inIn addition, the quarterly volume of loans sold, as well as a relative decline from the previously elevated sales yield levels in the secondary market. The year-to-date decline in mortgage banking revenues was mainly attributable to a decline in current market pricing and lower sales volume. As noted in the above table, mortgage banking revenues also includespartially offset by higher net loan servicing fee income associated with loans sold with servicing retained. ThereThe increase in net loan servicing fee income was a higher levellargely due to lower amortization of servicing right amortization in 2020 driven by higherrights, reflecting lower prepayment speeds on ourthe serviced mortgage portfolio.
For the three and nine months ended September 30, 2021, loan related derivative income decreased by $536 thousand and $1.4 million, respectively, from the comparable periods in 2020, reflecting a lower volume of commercial borrower interest rate swaps transactions.
Income from BOLI for the three and nine months ended September 30, 2021 was up by $51 thousand and down by $141 thousand, respectively, from the same periods in 2020. Included in income from BOLI for the nine months ended September 30, 2020 was a $229 thousand non-taxable gain due to the receipt of life insurance proceeds. Excluding this non-
Management's Discussion and Analysis
taxable gain, income from BOLI was up year-over-year, resulting from a $7.0 million purchase of BOLI in the second quarter of 2021.
Other income for the nine months ended September 30, 2021 increased2022 decreased by $920 thousand$1.1 million from the same period in 20202021, due to $1.0 million of income associated with a litigation settlement that was recognized in the first quarter of 2021.
Noninterest Expense
The following table presents noninterest expense comparisons:
| (Dollars in thousands) | (Dollars in thousands) | Three Months | | Nine Months | (Dollars in thousands) | Three Months | | Nine Months |
| | | Change | | | Change | | | Change | | | Change |
Periods ended September 30, | Periods ended September 30, | 2021 | | 2020 | | $ | | % | | 2021 | | 2020 | | $ | | % | Periods ended September 30, | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Noninterest expense: | Noninterest expense: | | Noninterest expense: | |
Salaries and employee benefits | Salaries and employee benefits | $22,162 | | | $21,892 | | | $270 | | | 1 | % | | $65,771 | | | $60,824 | | | $4,947 | | | 8 | % | Salaries and employee benefits | $21,609 | | | $22,162 | | | ($553) | | | (2 | %) | | $62,992 | | | $65,771 | | | ($2,779) | | | (4 | %) |
Outsourced services | Outsourced services | 3,294 | | | 3,160 | | | 134 | | | 4 | | | 9,711 | | | 8,944 | | | 767 | | | 9 | | Outsourced services | 3,552 | | | 3,294 | | | 258 | | | 8 | | | 10,169 | | | 9,711 | | | 458 | | | 5 | |
Net occupancy | Net occupancy | 2,134 | | | 2,012 | | | 122 | | | 6 | | | 6,304 | | | 5,940 | | | 364 | | | 6 | | Net occupancy | 2,234 | | | 2,134 | | | 100 | | | 5 | | | 6,708 | | | 6,304 | | | 404 | | | 6 | |
Equipment | Equipment | 977 | | | 934 | | | 43 | | | 5 | | | 2,946 | | | 2,806 | | | 140 | | | 5 | | Equipment | 939 | | | 977 | | | (38) | | | (4) | | | 2,795 | | | 2,946 | | | (151) | | | (5) | |
| Legal, audit and professional fees | Legal, audit and professional fees | 767 | | | 1,252 | | | (485) | | | (39) | | | 2,042 | | | 2,733 | | | (691) | | | (25) | | Legal, audit and professional fees | 693 | | | 767 | | | (74) | | | (10) | | | 2,140 | | | 2,042 | | | 98 | | | 5 | |
FDIC deposit insurance costs | FDIC deposit insurance costs | 482 | | | 392 | | | 90 | | | 23 | | | 1,201 | | | 1,488 | | | (287) | | | (19) | | FDIC deposit insurance costs | 430 | | | 482 | | | (52) | | | (11) | | | 1,198 | | | 1,201 | | | (3) | | | — | |
Advertising and promotion | Advertising and promotion | 559 | | | 384 | | | 175 | | | 46 | | | 1,341 | | | 829 | | | 512 | | | 62 | | Advertising and promotion | 799 | | | 559 | | | 240 | | | 43 | | | 1,874 | | | 1,341 | | | 533 | | | 40 | |
Amortization of intangibles | Amortization of intangibles | 223 | | | 228 | | | (5) | | | (2) | | | 674 | | | 688 | | | (14) | | | (2) | | Amortization of intangibles | 215 | | | 223 | | | (8) | | | (4) | | | 648 | | | 674 | | | (26) | | | (4) | |
| Debt prepayment penalties | Debt prepayment penalties | — | | | — | | | — | | | — | | | 4,230 | | | — | | | 4,230 | | | 100 | | Debt prepayment penalties | — | | | — | | | — | | | — | | | — | | | 4,230 | | | (4,230) | | | (100) | |
| Other | Other | 1,922 | | | 2,090 | | | (168) | | | (8) | | | 6,025 | | | 7,023 | | | (998) | | | (14) | | Other | 2,596 | | | 1,922 | | | 674 | | | 35 | | | 6,839 | | | 6,025 | | | 814 | | | 14 | |
Total noninterest expense | Total noninterest expense | $32,520 | | | $32,344 | | | $176 | | | 1 | % | | $100,245 | | | $91,275 | | | $8,970 | | | 10 | % | Total noninterest expense | $33,067 | | | $32,520 | | | $547 | | | 2 | % | | $95,363 | | | $100,245 | | | ($4,882) | | | (5 | %) |
Noninterest Expense Analysis
Salaries and employee benefits expense, for the three and nine months ended September 30, 2021 increased by $270 thousand and $4.9 million, respectively, compared to the same periods in 2020. This largely reflected annual merit increases, increased staffing levels and increases in performance-based compensation accruals. These increases were partially offset by net declines in variable mortgage banking compensation expense, which included higher deferred labor costs (a contra expense) associated with residential real estate loan originations for portfolio.
Outsourced serviceslargest component of noninterest expense, for the three and nine months ended September 30, 2021 increased2022 decreased by $134$553 thousand and $767 thousand,$2.8 million, respectively, compared to the same periods in 2020, reflecting2021. This included volume-related decreases in mortgage originator compensation expense, annual merit increases in third party services and processing costs.
Legal, audit and professional fees for the three and nine months ended September 30, 2021 decreased by $485 thousand and $691 thousand, respectively, compared to the same periods in 2020, reflecting a decline in legal expenses.higher staffing levels.
Debt prepayment penalty expense for the nine months ended September 30, 2021 totaled $4.2 million, and resulted fromdue to the prepayment of $32.1 million of higher-yielding FHLB advances in the first half of 2021.advances. There were no such debt prepayments in the comparable period in 2020.2022.
Other expensesexpense for the three and nine months ended September 30, 2021 decreased2022 increased by $168$674 thousand and $998$814 thousand, respectively, fromcompared to the same periods in 2020. Included in2021, reflecting modest increases across a variety of other expenses in the first quarter of 2020 was a charge for $800 thousand representing the establishment of contingency loss reserve associated with counterfeit checks drawn on a commercial customer’s account. This contingency matter was resolved in the second quarter of 2020 and resulted in a partial reversal, or a benefit, of $170 thousand being recognized as a reduction to other expenses in the second quarter of 2020.noninterest expense categories.
Management's Discussion and Analysis
Income Taxes
The following table presents the Corporation’s income tax provision and applicable tax rates for the periods indicated:
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
| | Three Months | | Nine Months | | Three Months | | Nine Months |
Periods ended September 30, | Periods ended September 30, | 2021 | 2020 | | 2021 | 2020 | Periods ended September 30, | 2022 | 2021 | | 2022 | 2021 |
Income tax expense | Income tax expense | $5,319 | | $5,131 | | | $15,855 | | $13,817 | | Income tax expense | $5,310 | | $5,319 | | | $15,091 | | $15,855 | |
Effective income tax rate | Effective income tax rate | 22.1 | % | 21.9 | % | | 21.9 | % | 21.2 | % | Effective income tax rate | 22.1 | % | 22.1 | % | | 21.5 | % | 21.9 | % |
The effective income tax rates for the three and nine months ended September 30, 20212022 and 20202021 differed from the federal rate of 21%, primarily due to state income tax expense, partially offset by the benefits of tax-exempt income, income from BOLI, federal tax credits and the recognition of excess tax expense or benefits associated with the settlement of share-based awards.
Management's Discussion and Analysis
The increasedecrease in the effective tax rate for the three and nine months ended September 30, 20212022 compared to the same periodsperiod in 20202021 largely reflected higher state incomean increase in benefits from federal tax expensecredits and a decrease in state tax expense, partially offset by a decrease in benefits from tax-exempt income.
The Corporation’s net deferred tax assets amounted to $62.1 million at September 30, 2022, compared to $14.0 million at December 31, 2021. The Corporation has determined that a valuation allowance is not required for any of the proportiondeferred tax assets since it is more-likely-than-not that these assets will be realized primarily through future reversals of tax-exempt incomeexisting taxable temporary differences or by offsetting projected future taxable income. Net deferred tax assets increased in 2022, largely reflecting increases in deferred tax assets associated with the declines in fair value of securities available for sale and cash flow hedges that were primarily attributable to pre-tax income.relative changes in market interest rates.
Segment Reporting
The Corporation manages its operations through two operatingreportable business segments, consisting of Commercial Banking and Wealth Management Services. The Corporate unit includes activity not allocated to the operating segments, such as activity related to the wholesale investment securities portfolio and wholesale funding matters. The Corporate unit also includes income from 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. Methodologies used to allocate income and expenses to business lines are periodically reviewed and revised. See Note 1514 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) | (Dollars in thousands) | Three Months | | Nine Months | (Dollars in thousands) | Three Months | | Nine Months |
| | | Change | | | Change | | | Change | | | Change |
Periods ended September 30, | Periods ended September 30, | 2021 | 2020 | | $ | % | | 2021 | 2020 | | $ | % | Periods ended September 30, | 2022 | 2021 | | $ | % | | 2022 | 2021 | | $ | % |
Net interest income | Net interest income | $35,732 | | $33,103 | | | $2,629 | | 8 | % | | $105,579 | | $94,692 | | | $10,887 | | 11 | % | Net interest income | $42,038 | | $36,085 | | | $5,953 | | 16 | % | | $114,709 | | $103,737 | | | $10,972 | | 11 | % |
Provision for credit losses | Provision for credit losses | — | | 1,325 | | | (1,325) | | (100) | | | (2,000) | | 10,561 | | | (12,561) | | (119) | | Provision for credit losses | 800 | | — | | | 800 | | 100 | | | (2,100) | | (2,000) | | | (100) | | 5 | |
Net interest income after provision for credit losses | Net interest income after provision for credit losses | 35,732 | | 31,778 | | | 3,954 | | 12 | | | 107,579 | | 84,131 | | | 23,448 | | 28 | | Net interest income after provision for credit losses | 41,238 | | 36,085 | | | 5,153 | | 14 | | | 116,809 | | 105,737 | | | 11,072 | | 10 | |
Noninterest income | Noninterest income | 9,440 | | 15,940 | | | (6,500) | | (41) | | | 33,510 | | 43,515 | | | (10,005) | | (23) | | Noninterest income | 6,043 | | 9,962 | | | (3,919) | | (39) | | | 18,174 | | 35,032 | | | (16,858) | | (48) | |
Noninterest expense | Noninterest expense | 20,826 | | 20,874 | | | (48) | | — | | | 62,133 | | 58,403 | | | 3,730 | | 6 | | Noninterest expense | 24,746 | | 24,278 | | | 468 | | 2 | | | 71,278 | | 76,530 | | | (5,252) | | (7) | |
Income before income taxes | Income before income taxes | 24,346 | | 26,844 | | | (2,498) | | (9) | | | 78,956 | | 69,243 | | | 9,713 | | 14 | | Income before income taxes | 22,535 | | 21,769 | | | 766 | | 4 | | | 63,705 | | 64,239 | | | (534) | | (1) | |
Income tax expense | Income tax expense | 5,394 | | 5,828 | | | (434) | | (7) | | | 17,275 | | 14,769 | | | 2,506 | | 17 | | Income tax expense | 4,878 | | 4,725 | | | 153 | | 3 | | | 13,423 | | 13,810 | | | (387) | | (3) | |
Net income | Net income | $18,952 | | $21,016 | | | ($2,064) | | (10 | %) | | $61,681 | | $54,474 | | | $7,207 | | 13 | % | Net income | $17,657 | | $17,044 | | | $613 | | 4 | % | | $50,282 | | $50,429 | | | ($147) | | — | % |
Net interest income for the Commercial Banking segment for the three and nine months ended September 30, 2021,2022, increased by $2.6$6.0 million and $10.9$11.0 million, respectively, from the same periods in 2020.2021. Net interest income largely benefited from accelerated amortization of net deferred fee balances on PPP loans that were forgiven by the SBA and lower cost of funds, and was also negatively impacted by lowerhigher yields on loans. For the nine months ended September 30, 2021, the increase was also attributable toand growth in average loan balances.interest-earning assets, partially offset by a higher cost of funds.
For the three months ended September 30, 2021 there was no provision for credit losses, compared toThe Corporation recorded a positive provision for credit losses (or a charge) of $1.3 million$800 thousand for the three months ended September 30, 2022, compared to no provision for the same period in 2020.2021. For the nine months ended September 30, 2021,2022, the Corporation recorded a negative provision for credit losses (or a benefit) of $2.0$2.1 million, was recognized in earnings, compared to a positivenegative provision for credit losses (or a charge)benefit) of $10.6$2.0 million for the same period in 2020. The year-over-year reduction in credit loss provisioning reflected relative improvement in forecasted economic conditions and continued stable asset quality metrics.
Management's Discussion and Analysis
2021. See additional discussion under the caption “Provision for Credit Losses.”
Noninterest income derived from the Commercial Banking segment for the three and nine months ended September 30, 20212022 was down by $6.5$3.9 million and $10.0$16.9 million, respectively, from the comparable periods in 2020, largely2021, primarily due to lower mortgage banking revenues and loan related derivative income.revenues. See additional discussion regarding mortgage banking revenues and loan related derivative income under the caption “Noninterest Income” above.
Commercial Banking noninterest expenses for the three andmonths ended September 30, 2022 were up by $468 thousand from the same period in 2021. For the nine months ended September 30, 20212022, noninterest expenses for the commercial banking segment were down by $48 thousand and up by $3.7$5.3 million respectively, from the same periodsperiod in 2020. The year-to-date increase2021, largely reflected increasesreflecting decreases in debt prepayment penalties and salaries and employee benefits expense and outsourced services.expense. See additional discussion under the caption “Noninterest Expense” above.
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) | (Dollars in thousands) | Three Months | | Nine Months | (Dollars in thousands) | Three Months | | Nine Months |
| | | Change | | | Change | | | Change | | | Change |
Periods ended September 30, | Periods ended September 30, | 2021 | 2020 | | $ | % | | 2021 | 2020 | | $ | % | Periods ended September 30, | 2022 | 2021 | | $ | % | | 2022 | 2021 | | $ | % |
Net interest expense | Net interest expense | ($25) | | ($24) | | | ($1) | | 4 | % | | ($72) | | ($117) | | | $45 | | 38 | % | Net interest expense | $4 | | ($15) | | | $19 | | 127 | % | | ($61) | | ($42) | | | ($19) | | 45 | % |
| Noninterest income | Noninterest income | 10,455 | | 8,954 | | | 1,501 | | 17 | | | 31,778 | | 26,248 | | | 5,530 | | 21 | | Noninterest income | 9,760 | | 10,558 | | | (798) | | (8) | | | 30,640 | | 32,055 | | | (1,415) | | (4) | |
Noninterest expense | Noninterest expense | 7,531 | | 7,528 | | | 3 | | — | | | 21,638 | | 21,466 | | | 172 | | 1 | | Noninterest expense | 8,321 | | 8,242 | | | 79 | | 1 | | | 24,085 | | 23,715 | | | 370 | | 2 | |
Income before income taxes | Income before income taxes | 2,899 | | 1,402 | | | 1,497 | | 107 | | | 10,068 | | 4,665 | | | 5,403 | | 116 | | Income before income taxes | 1,443 | | 2,301 | | | (858) | | (37) | | | 6,494 | | 8,298 | | | (1,804) | | (22) | |
Income tax expense | Income tax expense | 710 | | 403 | | | 307 | | 76 | | | 2,412 | | 1,216 | | | 1,196 | | 98 | | Income tax expense | 432 | | 594 | | | (162) | | (27) | | | 1,668 | | 2,045 | | | (377) | | (18) | |
Net income | Net income | $2,189 | | $999 | | | $1,190 | | 119 | % | | $7,656 | | $3,449 | | | $4,207 | | 122 | % | Net income | $1,011 | | $1,707 | | | ($696) | | (41 | %) | | $4,826 | | $6,253 | | | ($1,427) | | (23 | %) |
For the three and nine months ended September 30, 2021,2022, noninterest income derived from the Wealth Management Services segment increaseddecreased by $1.5 million$798 thousand and $5.5$1.4 million, respectively, compared tofrom the same periods in 2020,2021, reflecting growtha decrease in asset-based revenues. The decline in year-to-date revenues andalso included income of $1.0 million associated with a litigation settlement that was recognized in the first quarter of 2021. See further discussion under the caption “Noninterest Income” above.
For the three and nine months ended September 30, 2021,2022, noninterest expenses for the Wealth Management Services segment increased by $3$79 thousand and $172$370 thousand, respectively, from the samecomparable periods in 2020, largely reflecting an increase in salaries and employee benefits2021. These included modest changes across a variety of noninterest expense and declines in legal and other 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, | 2021 | 2020 | | $ | % | | 2021 | 2020 | | $ | % |
Net interest (expense) income | $363 | | ($1,425) | | | $1,788 | | (125 | %) | | ($1,812) | | $626 | | | ($2,438) | | (389 | %) |
| | | | | | | | | | | |
| | | | | | | | | | | |
Noninterest income | 625 | | 574 | | | 51 | | 9 | | | 1,799 | | 1,952 | | | (153) | | (8) | |
Noninterest expense | 4,163 | | 3,942 | | | 221 | | 6 | | | 16,474 | | 11,406 | | | 5,068 | | 44 | |
(Loss) income before income taxes | (3,175) | | (4,793) | | | 1,618 | | (34) | | | (16,487) | | (8,828) | | | (7,659) | | 87 | |
Income tax (benefit) expense | (785) | | (1,100) | | | 315 | | (29) | | | (3,832) | | (2,168) | | | (1,664) | | 77 | |
Net (loss) income | ($2,390) | | ($3,693) | | | $1,303 | | (35 | %) | | ($12,655) | | ($6,660) | | | ($5,995) | | 90 | % |
Net interest income for the Corporate unit for the three and nine months ended September 30, 2021 was up by $1.8 million and down by $2.4 million, respectively, compared to the same periods in 2020. The year-over-year increase in third quarter net interest income reflected lower funding costs and lower wholesale funding balances, partially offset by lower interest income on securities resulting from lower yields. On a year-to-date basis, the decline in net interest income reflected lower interest income on securities resulting from lower yields, partially offset by lower funding costs and lower wholesale funding balances.
Management's Discussion and Analysis
For the three and nine months ended September 30, 2021, noninterest expenses for the Corporate unit increased by $221 thousand and $5.1 million, respectively, from the same periods in 2020. The year-to-date increase was primarily due to debt prepayment penalty expense recognized in 2021 of $4.2 million. See further discussion under the caption “Noninterest Expense” above.categories.
Financial Condition
Summary
The following table presents selected financial condition data:
| (Dollars in thousands) | (Dollars in thousands) | | Change | (Dollars in thousands) | | Change |
| | September 30, 2021 | | December 31, 2020 | | $ | % | | September 30, 2022 | | December 31, 2021 | | $ | % |
Cash and due from banks | Cash and due from banks | $297,039 | | | $194,143 | | | $102,896 | | 53 | % | Cash and due from banks | $130,066 | | | $175,259 | | | ($45,193) | | (26 | %) |
Total securities | Total securities | 1,045,833 | | | 894,571 | | | 151,262 | | 17 | | Total securities | 982,573 | | | 1,042,859 | | | (60,286) | | (6) | |
Total loans | Total loans | 4,286,404 | | | 4,195,990 | | | 90,414 | | 2 | | Total loans | 4,848,873 | | | 4,272,925 | | | 575,948 | | 13 | |
Allowance for credit losses on loans | Allowance for credit losses on loans | 41,711 | | | 44,106 | | | (2,395) | | (5) | | Allowance for credit losses on loans | 36,863 | | | 39,088 | | | (2,225) | | (6) | |
Total assets | Total assets | 6,002,643 | | | 5,713,169 | | | 289,474 | | 5 | | Total assets | 6,408,051 | | | 5,851,127 | | | 556,924 | | 10 | |
Total deposits | Total deposits | 5,058,142 | | | 4,378,353 | | | 679,789 | | 16 | | Total deposits | 5,069,857 | | | 4,980,051 | | | 89,806 | | 2 | |
FHLB advances | FHLB advances | 222,592 | | | 593,859 | | | (371,267) | | (63) | | FHLB advances | 700,000 | | | 145,000 | | | 555,000 | | 383 | |
Total shareholders’ equity | Total shareholders’ equity | 555,318 | | | 534,195 | | | 21,123 | | 4 | | Total shareholders’ equity | 432,274 | | | 564,808 | | | (132,534) | | (23) | |
Total assets amounted to $6.0$6.4 billion at September 30, 2021,2022, up by $289.5$556.9 million, or 5%10%, from the end of 2020. This included an increase of $102.9 million, or 53%, in the balance of cash2021, due to loan growth.
Cash and due from banks balances declined by $45.2 million, or 26%, from the end of 2021, including a reduction in cash collateral pledged to derivative counterparties and lower cash balances with correspondent banks. See Note 9 to the Unaudited Consolidated Financial Statements for additional disclosure regarding derivative financial instruments.
The securities portfolio increaseddecreased by $151.3$60.3 million, or 17%6%, from the end of 2021, reflecting purchases, partially offset by pay-downs, called securities and a temporary decline in fair value.value and routine pay-downs on mortgage-backed securities, partially offset by purchases of debt securities.
Total loans increased by $90.4$575.9 million, or 2%, as loan originations and purchases were partially offset by payoffs, pay-downs and PPP loans that were forgiven by the SBA. The ACL on loans decreased by $2.4 million, or 5%13%, from the end of 2020, reflecting relative improvement2021, led by growth in forecasted economic conditions and continued stable asset quality metrics.the residential real estate portfolio.
Management's Discussion and Analysis
Total deposits increased by $679.8$89.8 million, or 16%2%, from the end of 2021, with increasesan increase of $161.9 million, or 4%, in both in-market deposits andpartially offset by a decrease of $72.1 million, or 14%, in wholesale brokered time deposits.
FHLB advances decreasedincreased by $371.3$555.0 million, or 63%383%, from December 31, 2020.2021. Higher levels of wholesale funding were utilized to fund loan growth and purchases of debt securities.
Shareholders’ equity increaseddecreased by $21.1$132.5 million, or 4%23%, largely reflecting earnings net of dividend declarations and a decline in the accumulated other comprehensive incomeAOCL component of shareholders' equity largely due to a temporary declinedecreases in the fair value of available for sale debt securities.securities and cash flow hedges that were primarily attributable to relative changes in market interest rates.
Securities
Investment security activity is monitored by the Investment Committee, the members of which also sit on the Asset/Liability Committee (“ALCO”).ALCO. Asset and liability management objectives are the primary influence on the Corporation’s investment activities. However, the Corporation also recognizes that there are certain specific risks inherent in investment activities. The securities portfolio is managed in accordance with regulatory guidelines and established internal corporate investment policies that provide limitations on specific risk factors such as market risk, credit risk and concentration, liquidity risk and operational risk to help monitor risks associated with investing in securities. Reports on the activities conducted by the Investment Committee and the ALCO are presented to the Board of Directors on a regular basis.
The Corporation’s securities portfolio is managed to generate interest income, to implement interest rate risk management strategies, and to provide a readily available source of liquidity for balance sheet management. Securities are designated as either available for sale, held to maturity or trading at the time of purchase. The Corporation does not have securities designated as held to maturity and does not maintain a portfolio of trading securities. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Debt
Management's Discussion and Analysis
securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized.
Determination of Fair Value
The Corporation uses an independent pricing service to obtain quoted prices. The prices provided by the independent pricing service are generally based on observable market data in active markets. The determination of whether markets are active or inactive is based upon the level of trading activity for a particular security class. Management reviews the independent pricing service’s documentation to gain an understanding of the appropriateness of the pricing methodologies. Management also reviews the prices provided by the independent pricing service for reasonableness based upon current trading levels for similar securities. If the prices appear unusual, they are re-examined and the value is either confirmed or revised. In addition, management periodically performs independent price tests of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of September 30, 20212022 and December 31, 2020,2021, management did not make any adjustments to the prices provided by the pricing service.
Our fair value measurements generally utilize Level 2 inputs, representing quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and model-derived valuations in which all significant input assumptions are observable in active markets.
See Notes 43 and 1110 to the Unaudited Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities.
Management's Discussion and Analysis
Securities Portfolio
The carrying amounts of securities held are as follows:
| (Dollars in thousands) | (Dollars in thousands) | September 30, 2021 | | December 31, 2020 | (Dollars in thousands) | September 30, 2022 | | December 31, 2021 |
| | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
Available for Sale Debt Securities: | Available for Sale Debt Securities: | | Available for Sale Debt Securities: | |
Obligations of U.S. government-sponsored enterprises | Obligations of U.S. government-sponsored enterprises | $178,605 | | | 17 | % | | $131,669 | | | 15 | % | Obligations of U.S. government-sponsored enterprises | $197,855 | | | 20 | % | | $196,454 | | | 19 | % |
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 843,702 | | | 81 | | | 740,305 | | | 83 | | Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 764,264 | | | 78 | | | 824,962 | | | 79 | |
| Individual name issuer trust preferred debt securities | Individual name issuer trust preferred debt securities | 11,156 | | | 1 | | | 12,669 | | | 1 | | Individual name issuer trust preferred debt securities | 8,800 | | | 1 | | | 9,138 | | | 1 | |
| Corporate bonds | Corporate bonds | 12,370 | | | 1 | | | 9,928 | | | 1 | | Corporate bonds | 11,654 | | | 1 | | | 12,305 | | | 1 | |
| Total available for sale debt securities | Total available for sale debt securities | $1,045,833 | | | 100 | % | | $894,571 | | | 100 | % | Total available for sale debt securities | $982,573 | | | 100 | % | | $1,042,859 | | | 100 | % |
The securities portfolio amounted to $1.0 billion, or 17%15% of total assets, as of September 30, 20212022 compared to $894.6 million,$1.0 billion, or 16%18% of total assets, as of December 31, 2020.2021. The largest component of the securities portfolio is mortgage-backed securities, all of which are issued by U.S. government agencies or U.S. government-sponsored enterprises.
The securities portfolio increaseddecreased by $151.3$60.3 million, or 17%6%, from the end of 2020,2021, reflecting a temporary decline in the fair value of available for sale securities and routine pay-downs on mortgage-backed securities. These decreases were partially offset by purchases of U.S. government agency and U.S. government-sponsored debt securities, including mortgage-backed securities, totaling $519.0$214.6 million, with a weighted average yield of 1.65%3.45%. These purchases were partially offset by routine pay-downs on mortgage-backed securities and called securities, as well as a temporary decline in the fair value of available for sale securities.
As of September 30, 2021, theThe carrying amount of available for sale debt securities included net unrealized losses of $3.2$183.2 million compared to net unrealized gains of $13.0and $8.9 million, respectively, as of September 30, 2022 and December 31, 2020.2021. The decline in fair value of available for sale debt securities from the end of 20202021 was primarily concentrated in obligations of U.S. government agencies and U.S. government-sponsored enterprises, including mortgage-backed securities, and primarily attributable to relative changes in interest rates since the time of purchase. See Note 43 to the Unaudited Consolidated Financial Statements for additional information.
Federal Home Loan Bank Stock
The Bank is a member of the FHLB, which is a cooperative that provides services to its member banking institutions. The primary reason for the Bank’s membership is to gain access to a reliable source of wholesale funding in order to manage interest rate risk. The purchase of FHLB stock is a requirement for a member to gain access to funding. The Bank purchases
Management's Discussion and Analysis
FHLB stock in proportion to the volume of funding received and views the purchases as a necessary long-term investment for the purposes of balance sheet liquidity and not for investment return.
The Bank’s investment in FHLB stock totaled $15.1 million at September 30, 2021, compared to $30.3 million at December 31, 2020.
Loans
Total loans amounted to $4.3$4.8 billion at September 30, 2021,2022, up by $90.4$575.9 million, or 13.5%, from the end of 2020, reflecting2021, led by growth in the residential real estate portfolio partially offset by a decline in the commercial loan portfolio.
The following is a summary of loans:
| (Dollars in thousands) | (Dollars in thousands) | September 30, 2021 | | December 31, 2020 | (Dollars in thousands) | September 30, 2022 | | December 31, 2021 |
| | Amount | | % | | Amount | | % | | Amount | | % | | Amount | | % |
Commercial: | Commercial: | | Commercial: | |
Commercial real estate (1) | Commercial real estate (1) | $1,661,785 | | | 39 | % | | $1,633,024 | | | 39 | % | Commercial real estate (1) | $1,762,687 | | | 36 | % | | $1,639,062 | | | 38 | % |
Commercial & industrial (2) | Commercial & industrial (2) | 682,774 | | | 16 | | | 817,408 | | | 19 | | Commercial & industrial (2) | 652,758 | | | 14 | | | 641,555 | | | 15 | |
Total commercial | Total commercial | 2,344,559 | | | 55 | | | 2,450,432 | | | 58 | | Total commercial | 2,415,445 | | | 50 | | | 2,280,617 | | | 53 | |
Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
Residential real estate (3) | Residential real estate (3) | 1,672,364 | | | 39 | | | 1,467,312 | | | 35 | | Residential real estate (3) | 2,144,098 | | | 44 | | | 1,726,975 | | | 40 | |
Consumer: | Consumer: | | Consumer: | |
Home equity | Home equity | 249,874 | | | 6 | | | 259,185 | | | 6 | | Home equity | 273,742 | | | 6 | | | 247,697 | | | 6 | |
Other (4) | Other (4) | 19,607 | | | — | | | 19,061 | | | 1 | | Other (4) | 15,588 | | | — | | | 17,636 | | | 1 | |
Total consumer | Total consumer | 269,481 | | | 6 | | | 278,246 | | | 7 | | Total consumer | 289,330 | | | 6 | | | 265,333 | | | 7 | |
Total loans | Total loans | $4,286,404 | | | 100 | % | | $4,195,990 | | | 100 | % | Total loans | $4,848,873 | | | 100 | % | | $4,272,925 | | | 100 | % |
(1)CRE consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.
(2)C&I consists of loans to businesses and individuals, a portion of which are fully or partially collateralized by real estate. C&I also includes PPP loans.
(3)Residential real estate consists of mortgage and homeowner construction loans secured by one- to four-family residential properties.
(4)Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans.
Washington Trust has processed loan payment deferral modifications, or "deferments", on 654 loans totaling $728 million since the beginning of the second quarter of 2020, in response
Management's Discussion and Analysis
COVID-19 Pandemic Related
The Corporation elected to the COVID-19 pandemic. The majority of these deferments qualified asaccount for eligible loan modifications under Section 4013 of the CARES Act, as amended and thereforeby the CRRSA Act. Eligible loan modifications from March 1, 2020 through January 1, 2022 made in response to the COVID-19 pandemic were not required to be classified as TDRsTDRs. During this period of time, we processed loan payment deferral modifications, or “deferments”, on 654 loans totaling $727.7 million. The vast majority of the deferments qualified as eligible loan modifications and were not reportedclassified as past due.
Deferment extensions were prudently underwritten and resulted in loan risk rating downgrades when warranted. Management considersTDRs. All of these loans with qualified deferments when estimating the ACL on loans. 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 has been incorporated into the ACL on loans.
Management continuesexited their payment deferral period prior to monitor active deferments through its quarterly watched asset list review. At September 30, 2021, we had active deferments remaining on 5 loans totaling $38.0 million, or 1% of the outstanding balance of total loans, excluding PPP loan balances as of September 30, 2021.March 31, 2022.
Commercial Loans
The commercial loan portfolio represented 55%50% of total loans at September 30, 2021.2022.
In making commercial loans, we may occasionally solicit the participation of other banks. The Bank also participates in commercial loans originated by other banks. In such cases, these loans are individually underwritten by us using standards similar to those employed for our self-originated loans. Our participation in commercial loans originated by other banks amounted to $439.9$431.9 million and $408.8$451.6 million, respectively, at September 30, 20212022 and December 31, 2020.2021. Our participation in commercial loans originated by other banks also includes shared national credits. Shared national credits are defined as participation in loans or loan commitments of at least $100.0 million that are shared by three or more banks.
Management's Discussion and Analysis
Commercial loans fall into two majormain categories, commercial real estateCRE and commercial and industrialC&I loans. Commercial real estateCRE 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 estateCRE loans also include construction loans made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. Commercial and industrialC&I loans primarily provide working capital, equipment financing and financing for other business-related purposes. Commercial and industrialC&I loans are frequently collateralized by equipment, inventory, accounts receivable, and/or general business assets. A portion of the Bank’s commercial and industrialC&I loans is also collateralized by real estate. Commercial and industrialC&I loans also include PPP loans that are fully guaranteed by the U.S. government, tax-exempt loans made to states and political subdivisions, as well as industrial development or revenue bonds issued through quasi-public corporations for the benefit of a private or non-profit entity where that entity rather than the governmental entity is obligated to pay the debt service.
Commercial Real Estate Loans (“CRE”)
CRE loans totaled $1.7$1.8 billion at September 30, 2021,2022, up by $28.8$123.6 million, or 2%8%, from the balance at December 31, 2020. 2021. Loan originations and advances of approximately $420 million were partially offset by payoffs and pay-downs.
Included in CRE loans were construction and development loans with carrying values of $125.4$118.3 million and $111.2$122.4 million, respectively, as of September 30, 20212022 and December 31, 2020. For the nine months ended September 30, 2021, CRE loan originations and construction advances were partially offset by payoffs and pay-downs of approximately $204 million.2021.
Shared national credit balances outstanding included in the CRE loan portfolio totaled $8.1 million at September 30, 2022. The following table presents a geographic summarybalance was included in the pass-rated category of CRE loans by property location:
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | September 30, 2021 | | December 31, 2020 |
| Outstanding Balance | % of Total | | Outstanding Balance | % of Total |
Connecticut | $632,339 | | 38 | % | | $649,919 | | 40 | % |
Rhode Island | 467,182 | | 28 | | | 431,133 | | 26 | |
Massachusetts | 462,456 | | 28 | | | 468,947 | | 29 | |
Subtotal | 1,561,977 | | 94 | | | 1,549,999 | | 95 | |
All other states | 99,808 | | 6 | | | 83,025 | | 5 | |
Total | $1,661,785 | | 100 | % | | $1,633,024 | | 100 | % |
commercial loan credit quality and current with respect to contractual payment terms at September 30, 2022.
The following table presents a summary of CRE loans by property type segmentation:location:
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | September 30, 2021 | | December 31, 2020 |
| Count | Outstanding Balance | % of Total | | Count | Outstanding Balance | % of Total |
CRE Portfolio Segmentation: | | | | | | | |
Multi-family dwelling | 130 | | $488,500 | | 29 | % | | 137 | | $524,874 | | 32 | % |
Retail | 127 | | 353,103 | | 21 | | | 136 | | 339,569 | | 21 | |
Office | 62 | | 229,846 | | 14 | | | 73 | | 290,756 | | 18 | |
Hospitality | 39 | | 199,379 | | 12 | | | 40 | | 157,720 | | 10 | |
Industrial and warehouse | 37 | | 143,597 | | 9 | | | 28 | | 97,055 | | 6 | |
Healthcare | 15 | | 136,615 | | 8 | | | 15 | | 109,321 | | 7 | |
Commercial mixed use | 20 | | 39,293 | | 2 | | | 22 | | 42,405 | | 3 | |
Other | 36 | | 71,452 | | 5 | | | 38 | | 71,324 | | 3 | |
Total CRE loans | 466 | | $1,661,785 | | 100 | % | | 489 | | $1,633,024 | | 100 | % |
| | | | | | | |
Average CRE loan size | | $3,566 | | | | | $3,340 | | |
Largest individual CRE loan outstanding | | $32,200 | | | | | $32,200 | | |
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | September 30, 2022 | | December 31, 2021 |
| Outstanding Balance | % of Total | | Outstanding Balance | % of Total |
Connecticut | $674,816 | | 38 | % | | $643,182 | | 39 | % |
Massachusetts | 529,364 | | 30 | | | 464,018 | | 28 | |
Rhode Island | 396,869 | | 23 | | | 408,496 | | 25 | |
Subtotal | 1,601,049 | | 91 | | | 1,515,696 | | 92 | |
All other states | 161,638 | | 9 | | | 123,366 | | 8 | |
Total | $1,762,687 | | 100 | % | | $1,639,062 | | 100 | % |
Management's Discussion and Analysis
The following table presents a summary of CRE loan deferments:loans by property type segmentation:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
(Dollars in thousands) | | | September 30, 2021 | | December 31, 2020 |
| | | | | Count | Balance | % of Outstanding Balance (1) | | Count | Balance | % of Outstanding Balance (1) |
Total CRE deferments | | | | | 5 | | $37,955 | | 2 | % | | 38 | | $176,132 | | 11 | % |
(1)CRE deferments as a percent of the outstanding CRE portfolio balance as of the dates indicated.
CRE loans with active deferrals remaining as of September 30, 2021 are principal only deferrals and continue to pay interest. These deferrals are in the healthcare, hospitality and retail industry segments, which are segments management previously identified as “at risk” of significant impact of the COVID-19 pandemic. | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | September 30, 2022 | | December 31, 2021 |
| Count | Outstanding Balance | % of Total | | Count | Outstanding Balance | % of Total |
CRE Portfolio Segmentation: | | | | | | | |
Retail | 109 | | $441,631 | | 25 | % | | 121 | | $389,487 | | 24 | % |
Multi-family dwelling | 123 | | 429,796 | | 24 | | | 127 | | 474,229 | | 29 | |
Office | 55 | | 253,816 | | 14 | | | 57 | | 216,602 | | 13 | |
Hospitality | 32 | | 196,503 | | 11 | | | 31 | | 184,990 | | 11 | |
Industrial and warehouse | 39 | | 176,081 | | 10 | | | 35 | | 137,254 | | 8 | |
Healthcare | 15 | | 138,475 | | 8 | | | 13 | | 128,189 | | 8 | |
Commercial mixed use | 20 | | 43,235 | | 2 | | | 20 | | 38,978 | | 2 | |
Other | 36 | | 83,150 | | 6 | | | 36 | | 69,333 | | 5 | |
Total CRE loans | 429 | | $1,762,687 | | 100 | % | | 440 | | $1,639,062 | | 100 | % |
| | | | | | | |
Average CRE loan size | | $4,109 | | | | | $3,725 | | |
Largest individual CRE loan outstanding | | $65,424 | | | | | $39,945 | | |
Commercial and Industrial Loans (“C&I”)
C&I loans amounted to $682.8$652.8 million at September 30, 2021, down2022, up by $134.6$11.2 million, or 16%2%, from the balance at December 31, 2020.2021. This included a net reduction in PPP loans of $122.4 million.$36.6 million, reflecting loans forgiven by the SBA. Excluding PPP loans, C&I loans decreasedincreased by approximately $12.2$47.8 million, with payoffsloan originations and pay-downsadvances of approximately $87$99 million, partially offset by newpayoffs and pay-downs.
As of September 30, 2022, the carrying value of PPP loans was $1.4 million and included net unamortized loan originations.origination fee balances of $58 thousand. The carrying value of PPP loans at December 31, 2021 was $38.0 million.
Shared national credit balances outstanding included in the C&I loan portfolio totaled $43.4$40.3 million at September 30, 2021.2022. All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at September 30, 2021.2022.
Management's Discussion and Analysis
The following table presents a summary of C&I loan by industry segmentation:
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | September 30, 2021 | | December 31, 2020 |
| Count | Outstanding Balance | % of Total | | Count | Outstanding Balance | % of Total |
C&I Portfolio Segmentation: | | | | | | | |
Healthcare and social assistance | 138 | | $184,906 | | 27 | % | | 253 | | $200,217 | | 24 | % |
Owner occupied and other real estate | 193 | | 76,104 | | 11 | | | 268 | | 74,309 | | 9 | |
Manufacturing | 78 | | 64,447 | | 9 | | | 146 | | 88,802 | | 11 | |
Accommodation and food services | 162 | | 57,513 | | 8 | | | 271 | | 47,020 | | 6 | |
Retail | 92 | | 49,741 | | 7 | | | 192 | | 63,895 | | 8 | |
Educational services | 33 | | 49,566 | | 7 | | | 53 | | 64,969 | | 8 | |
Entertainment and recreation | 54 | | 33,756 | | 5 | | | 91 | | 29,415 | | 4 | |
Finance and insurance | 65 | | 33,129 | | 5 | | | 106 | | 26,244 | | 3 | |
Information | 18 | | 25,536 | | 4 | | | 32 | | 28,394 | | 3 | |
Transportation and warehousing | 32 | | 20,637 | | 3 | | | 42 | | 24,061 | | 3 | |
Professional, scientific and technical | 93 | | 12,073 | | 2 | | | 265 | | 39,295 | | 5 | |
Public administration | 19 | | 6,308 | | 1 | | | 26 | | 23,319 | | 3 | |
Other | 394 | | 69,058 | | 11 | | | 772 | | 107,468 | | 13 | |
Total C&I loans | 1,371 | | $682,774 | | 100 | % | | 2,517 | | $817,408 | | 100 | % |
| | | | | | | |
Average C&I loan size | | $498 | | | | | $325 | | |
Largest individual C&I loan outstanding | | $18,916 | | | | | $19,500 | | |
At September 30, 2021, we had no active deferrals on C&I loans.
Management's Discussion and Analysis
PPP loans are included in the C&I portfolio. The following table presents a summary of PPP loans by industry segmentation:
| (Dollars in thousands) | | (Dollars in thousands) | September 30, 2022 | | December 31, 2021 |
| | September 30, 2021 | | December 31, 2020 | | Count | Outstanding Balance | % of Total | | Count | Outstanding Balance | % of Total |
C&I Portfolio Segmentation: | | C&I Portfolio Segmentation: | |
Healthcare and social assistance | | Healthcare and social assistance | 70 | | $194,128 | | 30 | % | | 101 | | $174,376 | | 27 | % |
Owner occupied and other real estate | | Owner occupied and other real estate | 162 | | 71,431 | | 11 | | | 185 | | 72,957 | | 11 | |
Manufacturing | | Manufacturing | 54 | | 55,489 | | 9 | | | 65 | | 55,341 | | 9 | |
Transportation and warehousing | | Transportation and warehousing | 20 | | 50,597 | | 8 | | | 31 | | 35,064 | | 5 | |
Retail | | Retail | 55 | | 49,365 | | 8 | | | 79 | | 47,290 | | 7 | |
Educational services | | Educational services | 20 | | 48,208 | | 7 | | | 28 | | 52,211 | | 8 | |
Finance and insurance | | Finance and insurance | 58 | | 31,579 | | 5 | | | 59 | | 31,279 | | 5 | |
Entertainment and recreation | | Entertainment and recreation | 24 | | 26,050 | | 4 | | | 37 | | 32,087 | | 5 | |
Information | | Information | 8 | | 22,258 | | 3 | | | 14 | | 25,045 | | 4 | |
Accommodation and food services | | Accommodation and food services | 49 | | 17,499 | | 3 | | | 114 | | 28,320 | | 4 | |
Professional, scientific and technical | | Professional, scientific and technical | 37 | | 6,357 | | 1 | | | 69 | | 8,912 | | 1 | |
Public administration | | Public administration | 12 | | 4,223 | | 1 | | | 16 | | 5,441 | | 1 | |
Other | | Other | 164 | | 75,574 | | 10 | | | 281 | | 73,232 | | 13 | |
Total C&I loans | | Total C&I loans | 733 | | $652,758 | | 100 | % | | 1,079 | | $641,555 | | 100 | % |
| | Count | Outstanding Balance | % of Total | | Count | Outstanding Balance | % of Total | |
PPP Loans By Industry: | | | | |
Accommodation and food services | 111 | | $24,560 | | 32 | % | | 209 | | $23,678 | | 12 | % | |
Healthcare and social assistance | 71 | | 15,684 | | 20 | | | 173 | | 47,354 | | 24 | | |
Professional, scientific and technical | 61 | | 6,078 | | 8 | | | 220 | | 20,031 | | 10 | | |
Manufacturing | 25 | | 5,662 | | 7 | | | 89 | | 23,321 | | 12 | | |
Entertainment and recreation | 27 | | 2,597 | | 3 | | | 61 | | 3,386 | | 2 | | |
Educational services | 15 | | 2,512 | | 3 | | | 32 | | 9,681 | | 5 | | |
Retail | 37 | | 2,222 | | 3 | | | 134 | | 12,107 | | 6 | | |
Information | 8 | | 2,130 | | 3 | | | 20 | | 2,478 | | 1 | | |
Owner occupied and other real estate | 33 | | 1,412 | | 2 | | | 115 | | 9,241 | | 5 | | |
Public administration | 3 | | 417 | | 1 | | | 4 | | 483 | | — | | |
Finance and insurance | 11 | | 405 | | 1 | | | 55 | | 2,000 | | 1 | | |
Transportation and warehousing | 10 | | 360 | | — | | | 21 | | 2,059 | | 1 | | |
Other | 218 | | 13,344 | | 17 | | | 573 | | 43,961 | | 21 | | |
Total PPP loans (included in the C&I loan portfolio) | 630 | | $77,383 | | 100 | % | | 1,706 | | $199,780 | | 100 | % | |
| Average PPP loan size | | $123 | | | $117 | | | |
Net unamortized fees on PPP loans | | $2,618 | | | $3,893 | | | |
Average C&I loan size | | Average C&I loan size | | $891 | | | $595 | | |
Largest individual C&I loan outstanding | | Largest individual C&I loan outstanding | | $27,671 | | | $18,721 | | |
Residential Real Estate Loans
The residential real estate loan portfolio represented 39%44% of total loans at September 30, 2022.
Residential real estate loans held in portfolio amounted to $2.1 billion at September 30, 2022, up by $417.1 million, or 24%, from the balance at December 31, 2021, reflecting a higher proportion of loans originated for portfolio in 2022.
The following is a summary of residential real estate mortgages by property location:
| | | | | | | | | | | | | | | | | |
(Dollars in thousands) | September 30, 2022 | | December 31, 2021 |
| Amount | % of Total | | Amount | % of Total |
Massachusetts | $1,552,728 | | 72 | % | | $1,207,789 | | 70 | % |
Rhode Island | 423,070 | | 20 | | | 365,831 | | 21 | |
Connecticut | 143,701 | | 7 | | | 132,430 | | 8 | |
Subtotal | 2,119,499 | | 99 | | | 1,706,050 | | 99 | |
All other states | 24,599 | | 1 | | | 20,925 | | 1 | |
Total (1) | $2,144,098 | | 100 | % | | $1,726,975 | | 100 | % |
(1)Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $62.7 million and $78.7 million, respectively, as of September 30, 2022 and December 31, 2021.
Residential real estate loans are originated both for sale to the secondary market as well as for retention in the Bank’s loan portfolio. We also originate residential real estate loans for various investors in a broker capacity, including conventional mortgages and reverse mortgages.
Management's Discussion and Analysis
The table below presents residential real estate loan origination activity:
| | (Dollars in thousands) | (Dollars in thousands) | Three Months | | Nine Months | (Dollars in thousands) | Three Months | | Nine Months |
Periods ended September 30, | Periods ended September 30, | 2021 | | 2020 | | 2021 | | 2020 | Periods ended September 30, | 2022 | | 2021 | | 2022 | | 2021 |
| | Amount | % of Total | | Amount | % of Total | | Amount | % of Total | | Amount | % of Total | | Amount | % of Total | | Amount | % of Total | | Amount | % of Total | | Amount | % of Total |
Originations for retention in portfolio (1) | Originations for retention in portfolio (1) | $205,293 | | 52 | % | | $132,726 | | 26 | % | | $581,905 | | 44 | % | | $368,118 | | 30 | % | Originations for retention in portfolio (1) | $225,132 | | 74 | % | | $205,293 | | 52 | % | | $653,295 | | 71 | % | | $581,905 | | 44 | % |
Originations for sale to the secondary market (2) | Originations for sale to the secondary market (2) | 190,702 | | 48 | | | 377,137 | | 74 | | | 744,589 | | 56 | | | 859,680 | | 70 | | Originations for sale to the secondary market (2) | 77,242 | | 26 | | | 190,702 | | 48 | | | 270,320 | | 29 | | | 744,589 | | 56 | |
Total | Total | $395,995 | | 100 | % | | $509,863 | | 100 | % | | $1,326,494 | | 100 | % | | $1,227,798 | | 100 | % | Total | $302,374 | | 100 | % | | $395,995 | | 100 | % | | $923,615 | | 100 | % | | $1,326,494 | | 100 | % |
(1)Includes the full commitment amount of homeowner construction loans.
(2)Includes brokered loans (loans originated for others).
Management's Discussion and Analysis
The table below presents residential real estate loan sales activity:
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
| | Three Months | | Nine Months | | Three Months | | Nine Months |
Periods ended September 30, | Periods ended September 30, | 2021 | | 2020 | | 2021 | | 2020 | Periods ended September 30, | 2022 | | 2021 | | 2022 | | 2021 |
| | Amount | % of Total | | Amount | % of Total | | Amount | % of Total | | Amount | % of Total | | Amount | % of Total | | Amount | % of Total | | Amount | % of Total | | Amount | % of Total |
Loans sold with servicing rights retained | Loans sold with servicing rights retained | $108,445 | | 62 | % | | $317,920 | | 90 | % | | $570,370 | | 75 | % | | $609,363 | | 74 | % | Loans sold with servicing rights retained | $34,659 | | 46 | % | | $108,445 | | 62 | % | | $72,764 | | 26 | % | | $570,370 | | 75 | % |
Loans sold with servicing rights released (1) | Loans sold with servicing rights released (1) | 65,416 | | 38 | | | 36,250 | | 10 | | | 186,068 | | 25 | | | 212,222 | | 26 | | Loans sold with servicing rights released (1) | 40,665 | | 54 | | | 65,416 | | 38 | | | 212,429 | | 74 | | | 186,068 | | 25 | |
Total | Total | $173,861 | | 100 | % | | $354,170 | | 100 | % | | $756,438 | | 100 | % | | $821,585 | | 100 | % | Total | $75,324 | | 100 | % | | $173,861 | | 100 | % | | $285,193 | | 100 | % | | $756,438 | | 100 | % |
(1)Includes brokered loans (loans originated for others).
Residential real estate loan origination, refinancing and sales activity increaseddecreased year-over-year in response to declinesincreases in market interest rates.
Loans are sold with servicing retained or released. Loans sold with servicing rights retained result in the capitalization of servicing rights. Loan servicing rights are included in other assets and are subsequently amortized as an offset to mortgage banking revenues over the estimated period of servicing. The net balance of capitalized servicing rights amounted to $10.7$9.2 million and $7.4$9.8 million, respectively, as of September 30, 20212022 and December 31, 2020.2021. The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $1.6$1.5 billion and $1.2 billion, respectively, as of both September 30, 20212022 and December 31, 2020.
Residential real estate loans held in portfolio amounted to $1.7 billion at September 30, 2021, up by $205.1 million, or 14%, from the balance at December 31, 2020, reflecting a higher proportion of loans originated for portfolio, as well as purchases of $39.3 million of loans with a weighted average rate of 2.74%. The purchased loans were individually evaluated to our underwriting standards and are 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, 2021 | | December 31, 2020 |
| Amount | % of Total | | Amount | % of Total |
Massachusetts | $1,161,977 | | 69 | % | | $994,800 | | 68 | % |
Rhode Island | 357,445 | | 21 | | | 331,713 | | 23 | |
Connecticut | 131,832 | | 8 | | | 122,102 | | 8 | |
Subtotal | 1,651,254 | | 99 | | | 1,448,615 | | 99 | |
All other states | 21,110 | | 1 | | | 18,697 | | 1 | |
Total (1) | $1,672,364 | | 100 | % | | $1,467,312 | | 100 | % |
(1)Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $89.5 million and $131.8 million, respectively, as of September 30, 2021 and December 31, 2020.
At September 30, 2021, we had no active deferrals on residential real estate loans.2021.
Consumer Loans
Consumer loans include home equity loans and lines of credit and personal installment loans.
The consumer loan portfolio totaled $269.5 million at September 30, 2021, down by $8.8 million from December 31, 2020. Home equity lines of credit and home equity loans represented 93%95% of the total consumer portfolio at September 30, 2021.2022. Our home equity line and home equity loan origination activities are conducted primarily in southern New England. The Bank estimates that approximately 60%55% of the combined home equity lines of credit and home equity loan balances are first lien positions or subordinate to other Washington Trust mortgages.
The consumer loan portfolio totaled $289.3 million at September 30, 2022, up by $24.0 million, or 9%, from December 31, 2021, reflecting increases in home equity lines and loans. Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $9.4$8.9 million and $10.0$9.4 million, respectively, at September 30, 20212022 and December 31, 2020.2021.
At September 30, 2021, we had no active deferrals on consumer loans.
Management's Discussion and Analysis
Asset Quality
Nonperforming Assets
Nonperforming assets include nonaccrual loans and property acquired through foreclosure or repossession.OREO.
The following table presents nonperforming assets and additional asset quality data:
| (Dollars in thousands) | (Dollars in thousands) | Sep 30, 2021 | | Dec 31, 2020 | (Dollars in thousands) | Sep 30, 2022 | | Dec 31, 2021 |
| Commercial: | Commercial: | | Commercial: | |
Commercial real estate | Commercial real estate | $— | | | $— | | Commercial real estate | $— | | | $— | |
Commercial & industrial | Commercial & industrial | — | | | — | | Commercial & industrial | — | | | — | |
Total commercial | Total commercial | — | | | — | | Total commercial | — | | | — | |
Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
Residential real estate | Residential real estate | 10,321 | | | 11,981 | | Residential real estate | 11,700 | | | 13,576 | |
Consumer: | Consumer: | | Consumer: | |
Home equity | Home equity | 655 | | | 1,128 | | Home equity | 422 | | | 627 | |
Other | Other | — | | | 88 | | Other | — | | | — | |
Total consumer | Total consumer | 655 | | | 1,216 | | Total consumer | 422 | | | 627 | |
Total nonaccrual loans | Total nonaccrual loans | 10,976 | | | 13,197 | | Total nonaccrual loans | 12,122 | | | 14,203 | |
| Property acquired through foreclosure or repossession, net | — | | | — | | |
OREO, net | |
OREO, net | — | | | — | |
Total nonperforming assets | Total nonperforming assets | $10,976 | | | $13,197 | | Total nonperforming assets | $12,122 | | | $14,203 | |
| Nonperforming assets to total assets | Nonperforming assets to total assets | 0.18 | % | | 0.23 | % | Nonperforming assets to total assets | 0.19 | % | | 0.24 | % |
Nonperforming loans to total loans | Nonperforming loans to total loans | 0.26 | % | | 0.31 | % | Nonperforming loans to total loans | 0.25 | % | | 0.33 | % |
Total past due loans to total loans | Total past due loans to total loans | 0.22 | % | | 0.30 | % | Total past due loans to total loans | 0.16 | % | | 0.24 | % |
Accruing loans 90 days or more past due | Accruing loans 90 days or more past due | $— | | | $— | | Accruing loans 90 days or more past due | $— | | | $— | |
Total nonperforming assets decreased by $2.1 million from December 31, 2021, reflecting a decline in nonaccrual loans.
Nonaccrual Loans
During the nine months ended September 30, 2021,2022, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.
The following table presents the activity in nonaccrual loans:
| | (Dollars in thousands) | (Dollars in thousands) | Three Months | | Nine Months | (Dollars in thousands) | Three Months | | Nine Months |
For the periods ended September 30, | For the periods ended September 30, | 2021 | | 2020 | | 2021 | | 2020 | For the periods ended September 30, | 2022 | | 2021 | | 2022 | | 2021 |
Balance at beginning of period | Balance at beginning of period | $10,481 | | | $16,017 | | | $13,197 | | | $17,408 | | Balance at beginning of period | $12,414 | | | $10,481 | | | $14,203 | | | $13,197 | |
Additions to nonaccrual status | Additions to nonaccrual status | 2,583 | | | 971 | | | 3,854 | | | 2,937 | | Additions to nonaccrual status | 521 | | | 2,583 | | | 1,106 | | | 3,854 | |
Loans returned to accruing status | Loans returned to accruing status | — | | | (1,623) | | | (877) | | | (2,170) | | Loans returned to accruing status | (400) | | | — | | | (699) | | | (877) | |
Loans charged-off | Loans charged-off | (249) | | | (111) | | | (630) | | | (1,071) | | Loans charged-off | (63) | | | (249) | | | (122) | | | (630) | |
Loans transferred to other real estate owned | — | | | — | | | — | | | (28) | | |
| Payments, payoffs and other changes | Payments, payoffs and other changes | (1,839) | | | (514) | | | (4,568) | | | (2,336) | | Payments, payoffs and other changes | (350) | | | (1,839) | | | (2,366) | | | (4,568) | |
Balance at end of period | Balance at end of period | $10,976 | | | $14,740 | | | $10,976 | | | $14,740 | | Balance at end of period | $12,122 | | | $10,976 | | | $12,122 | | | $10,976 | |
Management's Discussion and Analysis
The following table presents additional detail on nonaccrual loans:
| (Dollars in thousands) | (Dollars in thousands) | September 30, 2021 | | December 31, 2020 | (Dollars in thousands) | September 30, 2022 | | December 31, 2021 |
| | Days Past Due | | | Days Past Due | | | Days Past Due | | | Days Past Due | |
| | Over 90 | | Under 90 | | Total | % (1) | | Over 90 | | Under 90 | | Total | % (1) | | Over 90 | | Under 90 | | Total | % (1) | | Over 90 | | Under 90 | | Total | % (1) |
Commercial: | Commercial: | | Commercial: | |
Commercial real estate | Commercial real estate | $— | | | $— | | | $— | | — | % | | $— | | | $— | | | $— | | — | % | Commercial real estate | $— | | | $— | | | $— | | — | % | | $— | | | $— | | | $— | | — | % |
Commercial & industrial | Commercial & industrial | — | | | — | | | — | | — | | | — | | | — | | | — | | — | | Commercial & industrial | — | | | — | | | — | | — | | | — | | | — | | | — | | — | |
Total commercial | Total commercial | — | | | — | | | — | | — | | | — | | | — | | | — | | — | | Total commercial | — | | | — | | | — | | — | | | — | | | — | | | — | | — | |
Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
Residential real estate | Residential real estate | 2,927 | | | 7,394 | | | 10,321 | | 0.62 | | | 5,172 | | | 6,809 | | | 11,981 | | 0.82 | | Residential real estate | 5,430 | | | 6,270 | | | 11,700 | | 0.55 | | | 4,662 | | | 8,914 | | | 13,576 | | 0.79 | |
Consumer: | Consumer: | | Consumer: | |
Home equity | Home equity | 103 | | | 552 | | | 655 | | 0.26 | | | 644 | | | 484 | | | 1,128 | | 0.44 | | Home equity | 50 | | | 372 | | | 422 | | 0.15 | | | 108 | | | 519 | | | 627 | | 0.25 | |
Other | Other | — | | | — | | | — | | — | | | 88 | | | — | | | 88 | | 0.46 | | Other | — | | | — | | | — | | — | | | — | | | — | | | — | | — | |
Total consumer | Total consumer | 103 | | | 552 | | | 655 | | 0.24 | | | 732 | | | 484 | | | 1,216 | | 0.44 | | Total consumer | 50 | | | 372 | | | 422 | | 0.15 | | | 108 | | | 519 | | | 627 | | 0.24 | |
Total nonaccrual loans | Total nonaccrual loans | $3,030 | | | $7,946 | | | $10,976 | | 0.26 | % | | $5,904 | | | $7,293 | | | $13,197 | | 0.31 | % | Total nonaccrual loans | $5,480 | | | $6,642 | | | $12,122 | | 0.25 | % | | $4,770 | | | $9,433 | | | $14,203 | | 0.33 | % |
(1) Percentage of nonaccrual loans to the total loans outstanding within the respective category.
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2021.2022.
As of both September 30, 20212022 and December 31, 2020,2021, the composition of nonaccrual loans was 100% residential and consumer.
Nonaccrual residential real estate mortgage loans amounted to $10.3$11.7 million at September 30, 2021,2022, down by $1.7$1.9 million from the end of 2020.2021. As of September 30, 2021,2022, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Connecticut and Rhode Island. Included in total nonaccrual residential real estate loans at September 30, 2022 were four loans purchased for portfolio and serviced by others amounting to $1.1 million. Management monitors the collection efforts of its third party servicers as part of its assessment of the collectability of nonperforming loans.
Troubled Debt Restructurings
In the course of resolving problem loans, the Corporation may choose to restructure the contractual terms of certain loans. A loan that has been modified or renewed is considered to be a TDR when two conditions are met: (1) the borrower is experiencing financial difficulty and (2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or a transaction with similar credit risk characteristics. 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.
TDRs are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term and full collection of principal and interest is in doubt.
TDRs are reported as such for at least one year from the date of the restructuring. In years after the restructuring, a TDR is removed from this classification if the restructuring did not involve a below-market rate concession and the loan is performing in accordance with its modified contractual terms for a reasonable period of time.
As of September 30, 2021,2022, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured in a TDR.
See Note 52 for discussion on ASU No. 2022-02, a recently issued accounting pronouncement that is pending adoption. ASU
Management's Discussion and Analysis
No. 2022-02, which becomes effective on January 1, 2023, updates the accounting treatment and related disclosure regardingrequirements for TDRs. As noted above under the Corporation’s electioncaption “Loans,” the Corporation elected to account for eligible loan modifications under Section 4013 of the CARES Act, as amended.amended by the CRRSA Act. Loan modifications that did not qualify for the TDR accounting relief provided under the CARES Act were classified as TDRs.
Management's Discussion and Analysis
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) | (Dollars in thousands) | Sep 30, 2021 | | Dec 31, 2020 | (Dollars in thousands) | Sep 30, 2022 | | Dec 31, 2021 |
Accruing TDRs | Accruing TDRs | | Accruing TDRs | |
Commercial: | Commercial: | | Commercial: | |
Commercial real estate | Commercial real estate | $958 | | | $1,792 | | Commercial real estate | $3,609 | | | $10,603 | |
Commercial & industrial | Commercial & industrial | 2,791 | | | 6,814 | | Commercial & industrial | 844 | | | 2,792 | |
Total commercial | Total commercial | 3,749 | | | 8,606 | | Total commercial | 4,453 | | | 13,395 | |
Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
Residential real estate | Residential real estate | 3,656 | | | 3,932 | | Residential real estate | 2,204 | | | 2,372 | |
Consumer: | Consumer: | | Consumer: | |
Home equity | Home equity | 563 | | | 788 | | Home equity | 557 | | | 561 | |
Other | Other | 11 | | | 14 | | Other | — | | | — | |
Total consumer | Total consumer | 574 | | | 802 | | Total consumer | 557 | | | 561 | |
Accruing TDRs | Accruing TDRs | 7,979 | | | 13,340 | | Accruing TDRs | 7,214 | | | 16,328 | |
Nonaccrual TDRs | Nonaccrual TDRs | | Nonaccrual TDRs | |
Commercial: | Commercial: | | Commercial: | |
Commercial real estate | Commercial real estate | — | | | — | | Commercial real estate | — | | | — | |
Commercial & industrial | Commercial & industrial | — | | | — | | Commercial & industrial | — | | | — | |
Total commercial | Total commercial | — | | | — | | Total commercial | — | | | — | |
Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
Residential real estate | Residential real estate | 1,660 | | | 2,273 | | Residential real estate | 2,819 | | | 2,748 | |
Consumer: | Consumer: | | Consumer: | |
Home equity | Home equity | 72 | | | 72 | | Home equity | 71 | | | 71 | |
Other | Other | — | | | — | | Other | — | | | — | |
Total consumer | Total consumer | 72 | | | 72 | | Total consumer | 71 | | | 71 | |
Nonaccrual TDRs | Nonaccrual TDRs | 1,732 | | | 2,345 | | Nonaccrual TDRs | 2,890 | | | 2,819 | |
Total TDRs | Total TDRs | $9,711 | | | $15,685 | | Total TDRs | $10,104 | | | $19,147 | |
As of September 30, 2022, the composition of TDRs was 44% commercial and 56% residential and consumer, compared to 70% commercial and 30% residential and consumer at December 31, 2021.
TDRs amounted to $9.7$10.1 million at September 30, 2021,2022, down by $6.0$9.0 million from the end of 2020, reflecting payoffs. As2021. The net decline reflected a pay-down of September 30, 2021,$6.5 million on one accruing CRE TDR loan and the compositiondeclassification from TDR status of TDRsone accruing C&I loan with a carrying value of $2.8 million that was 39% commercial and 61% residential and consumer, compared to 55% and 45%, respectively, as of December 31, 2020.declassified in accordance with policy.
The ACL included specific reserves for TDRs of $195$132 thousand at September 30, 2021,2022, compared to $159$148 thousand at December 31, 2020.2021.
Management's Discussion and Analysis
Past Due Loans
The following table presents past due loans by category:
| (Dollars in thousands) | (Dollars in thousands) | September 30, 2021 | | December 31, 2020 | (Dollars in thousands) | September 30, 2022 | | December 31, 2021 |
| | Amount | | % (1) | | Amount | | % (1) | | Amount | | % (1) | | Amount | | % (1) |
| Commercial: | Commercial: | | Commercial: | |
Commercial real estate | Commercial real estate | $— | | | — | % | | $265 | | | 0.02 | % | Commercial real estate | $— | | | — | % | | $— | | | — | % |
Commercial & industrial | Commercial & industrial | 2 | | | — | | | 3 | | | — | | Commercial & industrial | 4 | | | — | | | 3 | | | — | |
Total commercial | Total commercial | 2 | | | — | | | 268 | | | 0.01 | | Total commercial | 4 | | | — | | | 3 | | | — | |
Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
Residential real estate | Residential real estate | 8,698 | | | 0.52 | | | 10,339 | | | 0.70 | | Residential real estate | 7,256 | | | 0.34 | | | 9,622 | | | 0.56 | |
Consumer: | Consumer: | | Consumer: | |
Home equity | Home equity | 824 | | | 0.33 | | | 1,667 | | | 0.64 | | Home equity | 252 | | | 0.09 | | | 765 | | | 0.31 | |
Other | Other | 24 | | | 0.12 | | | 118 | | | 0.62 | | Other | 17 | | | 0.11 | | | 21 | | | 0.12 | |
Total consumer | Total consumer | 848 | | | 0.31 | | | 1,785 | | | 0.64 | | Total consumer | 269 | | | 0.09 | | | 786 | | | 0.30 | |
Total past due loans | Total past due loans | $9,548 | | | 0.22 | % | | $12,392 | | | 0.30 | % | Total past due loans | $7,529 | | | 0.16 | % | | $10,411 | | | 0.24 | % |
(1)Percentage of past due loans to the total loans outstanding within the respective category.
As of both September 30, 2022 and December 31, 2021, the composition of past due loans (loans past due 30 days or more) was essentially 100% residential and consumer and 0% commercial, compared to 98% and 2%, respectively, at December 31, 2020.consumer. Total past due loans decreased by $2.8$2.9 million from the end of 2020.2021.
Total past due loans included $6.9$7.1 million of nonaccrual loans as of September 30, 2021,2022, compared to $8.5$9.4 million as of December 31, 2020. 2021.
All loans 90 days or more past due at September 30, 20212022 and December 31, 20202021 were classified as nonaccrual.
Potential Problem Loans
The Corporation classifies certain loans as “substandard,” “doubtful,” or “loss” based on criteria consistent with guidelines provided by banking regulators. Potential problem loans include classified accruing commercial loans that were less than 90 days past due at September 30, 20212022 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future.
Potential problem loans are not included in the amounts of nonaccrual or TDRs presented above. They are assessed for loss exposure using the methods described in Note 54 to the Unaudited Consolidated Financial Statements under the caption “Credit Quality Indicators.” Management cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require an increased allowance coverage and provision for credit losses on loans.
Management has identified approximately $12.7 million intwo loans associated with one C&I relationship with carrying values totaling $722 thousand as potential problem loans at September 30, 2021.2022. These two loans were current with respect to payment terms at September 30, 2022. There were no potential problem loans identified at December 31, 2020. As of September 30, 2021, the balance of potential problem loans consisted of three loans associated with two commercial real estate relationships that management considers adequately secured. At October 31, 2021, two of the underlying loans in these relationships were past due by 38 and 42 days, respectively.
In addition, management continues to monitor active loan deferments resulting from the COVID-19 pandemic through its quarterly watched asset list review. See additional disclosure under the caption “ Commercial Loans” within the Financial Condition section.2021.
Allowance for Credit Losses on Loans
The ACL on loans is management’s current estimate, at the reporting date, of expected credit losses over the expected life of the loans. The ACL on loans is established through a provision charged tofor credit losses recognized in earnings. The ACL on loans is reduced by charge-offs on loans and is increased by recoveries of amounts previously charged off.
Management's Discussion and Analysis
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
Management's Discussion and Analysis
value of the loan. The Corporation does not recognize a recovery when new appraisals indicate a subsequent increase in value.
Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status. New appraisals are generally obtained for TDRs or nonaccrual loans or when management believes it is warranted. The Corporation has continued to maintain appropriate professional standards regarding the professional qualifications of appraisers and has an internal review process to monitor the quality of appraisals.
For residential real estate loans and real estate collateral dependent consumer loans that are in the process of collection, valuations are obtained from independent appraisal firms with values determined on an “as is” basis.
The following table presents additional detail on the Corporation’s loan portfolio and associated allowance:
| (Dollars in thousands) | (Dollars in thousands) | September 30, 2021 | | December 31, 2020 | (Dollars in thousands) | September 30, 2022 | | December 31, 2021 |
| | Loans | Related Allowance | Allowance / Loans | | Loans | Related Allowance | Allowance / Loans | | Loans | Related Allowance | Allowance / Loans | | Loans | Related Allowance | Allowance / Loans |
Individually analyzed loans | Individually analyzed loans | $15,529 | | $1,055 | | 6.79 | % | | $18,252 | | $379 | | 2.08 | % | Individually analyzed loans | $12,024 | | $652 | | 5.42 | % | | $21,080 | | $682 | | 3.24 | % |
Pooled (collectively evaluated) loans | Pooled (collectively evaluated) loans | 4,270,875 | | 40,656 | | 0.95 | | | 4,177,738 | | 43,727 | | 1.05 | | Pooled (collectively evaluated) loans | 4,836,849 | | 36,211 | | 0.75 | | | 4,251,845 | | 38,406 | | 0.90 | |
Total | Total | $4,286,404 | | $41,711 | | 0.97 | % | | $4,195,990 | | $44,106 | | 1.05 | % | Total | $4,848,873 | | $36,863 | | 0.76 | % | | $4,272,925 | | $39,088 | | 0.91 | % |
Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components. The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics. The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments.
The ACL for individually analyzed loans is measured using a DCF method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan was collateral dependent, at the fair value of the collateral.
The ACL for pooled loans is measured utilizing a DCF methodology to estimate credit losses for each pooled portfolio segment. The methodology incorporates a probability of default and loss given default framework. Loss given default is estimated based on historical credit loss experience. Probability of default is estimated using a regression model that incorporates econometric factors. Management utilizes forecasted econometric factors with a one-year reasonable and supportable forecast period and one-year straight-line reversion period in order to estimate the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, prepayment speeds and remaining life of the loan to estimate a reserve for each loan. The sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived. Quantitative loss factors for pooled loans are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates.
The ACL on loans amounted to $41.7$36.9 million at September 30, 2021,2022, down by $2.4$2.2 million from the balance at December 31, 2020. There was no provision for credit losses for the three months ended September 30, 2021 and a negative provision for credit losses (or a benefit) of $2.0 million for the nine months ended September 30, 2021. Credit loss provisioning and the ACL reflect management’s estimate of forecasted economic conditions and continued stable asset quality metrics. Net charge-offs amounted to $168 thousand and $444 thousand, respectively, for the three and nine months ended September 30, 2021.
Management's Discussion and Analysis
The ACL on loans as a percentage of total loans, also known as the reserve coverage ratio, was 0.97%0.76% at September 30, 2021,2022, compared to 1.05%0.91% at December 31, 2020. 2021.
The Corporation recorded a positive provision for credit losses (or a charge) of $800 thousand for the three months ended September 30, 2022, compared to no provision for the same period in 2021. On a year-to-date basis, the Corporation recognized a negative provision for credit losses (or a benefit) of $2.1 million, compared to a negative provision (or a benefit) of $2.0 million for the same period in 2021. The provision for credit losses recognized in 2022 provided for loan growth and was also reflective of low loss rates, strong asset and credit quality metrics and our current estimate of forecasted economic conditions.
Net recoveries totaled $54 thousand and $104 thousand, respectively, for the three and nine months ended September 30, 2022.
Management's Discussion and Analysis
The ACL on loans is an estimate and ultimate losses may vary from management’s estimate. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans; conversely, improving conditions or assumptions could lead to further reductions in the ACL on loans.
The following table presents the allocation of the ACL on loans by portfolio segment. The total ACL on loans is available to absorb losses from any segment of the loan portfolio.
| (Dollars in thousands) | (Dollars in thousands) | September 30, 2021 | | December 31, 2020 | (Dollars in thousands) | September 30, 2022 | | December 31, 2021 |
| | Allocated ACL | | ACL to Loans | | Loans to Total Portfolio (1) | | Allocated ACL | | ACL to Loans | | Loans to Total Portfolio (1) | | Allocated ACL | | ACL to Loans | | Loans to Total Portfolio (1) | | Allocated ACL | | ACL to Loans | | Loans to Total Portfolio (1) |
Commercial: | Commercial: | | Commercial: | |
| Commercial real estate | Commercial real estate | $20,837 | | | 1.25 | % | | 39 | % | | $22,065 | | | 1.35 | % | | 39 | % | Commercial real estate | $17,611 | | | 1.00 | % | | 36 | % | | $18,933 | | | 1.16 | % | | 38 | % |
Commercial & industrial | Commercial & industrial | 11,327 | | | 1.66 | | | 16 | | | 12,228 | | | 1.50 | | | 19 | | Commercial & industrial | 10,347 | | | 1.59 | | | 14 | | | 10,832 | | | 1.69 | | | 15 | |
Total commercial | Total commercial | 32,164 | | | 1.37 | | | 55 | | | 34,293 | | | 1.40 | | | 58 | | Total commercial | 27,958 | | | 1.16 | | | 50 | | | 29,765 | | | 1.31 | | | 53 | |
| Residential Real Estate: | Residential Real Estate: | | Residential Real Estate: | |
Residential real estate | Residential real estate | 7,956 | | | 0.48 | | | 39 | | | 8,042 | | | 0.55 | | | 35 | | Residential real estate | 7,447 | | | 0.35 | | | 44 | | | 7,860 | | | 0.46 | | | 40 | |
Consumer: | Consumer: | | Consumer: | |
Home equity | Home equity | 1,118 | | | 0.45 | | | 6 | | | 1,300 | | | 0.50 | | | 6 | | Home equity | 1,071 | | | 0.39 | | | 6 | | | 1,069 | | | 0.43 | | | 6 | |
Other | Other | 473 | | | 2.41 | | | — | | | 471 | | | 2.47 | | | 1 | | Other | 387 | | | 2.48 | | | — | | | 394 | | | 2.23 | | | 1 | |
Total consumer | Total consumer | 1,591 | | | 0.59 | | | 6 | | | 1,771 | | | 0.64 | | | 7 | | Total consumer | 1,458 | | | 0.50 | | | 6 | | | 1,463 | | | 0.55 | | | 7 | |
| Total allowance for credit losses on loans at end of period | Total allowance for credit losses on loans at end of period | $41,711 | | | 0.97 | % | | 100 | % | | $44,106 | | | 1.05 | % | | 100 | % | Total allowance for credit losses on loans at end of period | $36,863 | | | 0.76 | % | | 100 | % | | $39,088 | | | 0.91 | % | | 100 | % |
(1)Percentage of loans outstanding in respective category to total loans outstanding.
Sources of Funds
Our sources of funds include in-market deposits, wholesale brokered 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 MarketplaceDDM program, Insured Cash SweepICS program and the Certificate of Deposit Account Registry ServiceCDARS 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.
Management's Discussion and Analysis
The following table presents a summary of deposits:
| (Dollars in thousands) | (Dollars in thousands) | | Change | (Dollars in thousands) | | Change |
| | September 30, 2021 | | December 31, 2020 | | $ | % | | September 30, 2022 | | December 31, 2021 | | $ | % |
Noninterest-bearing demand deposits | Noninterest-bearing demand deposits | $950,974 | | | $832,287 | | | $118,687 | | 14 | % | Noninterest-bearing demand deposits | $938,572 | | | $945,229 | | | ($6,657) | | (1 | %) |
Interest-bearing demand deposits | 238,317 | | | 174,290 | | | 64,027 | | 37 | | |
Interest-bearing demand deposits (in market) | | Interest-bearing demand deposits (in market) | 273,231 | | | 251,032 | | | 22,199 | | 9 | |
NOW accounts | NOW accounts | 817,937 | | | 698,706 | | | 119,231 | | 17 | | NOW accounts | 869,984 | | | 867,138 | | | 2,846 | | — | |
Money market accounts | Money market accounts | 1,046,324 | | | 910,167 | | | 136,157 | | 15 | | Money market accounts | 1,146,826 | | | 1,072,864 | | | 73,962 | | 7 | |
Savings accounts | Savings accounts | 540,306 | | | 466,507 | | | 73,799 | | 16 | | Savings accounts | 600,568 | | | 555,177 | | | 45,391 | | 8 | |
Time deposits (in-market) | Time deposits (in-market) | 709,288 | | | 704,855 | | | 4,433 | | 1 | | Time deposits (in-market) | 797,505 | | | 773,383 | | | 24,122 | | 3 | |
Total in-market deposits | 4,303,146 | | | 3,786,812 | | | 516,334 | | 14 | | |
In-market deposits | | In-market deposits | 4,626,686 | | | 4,464,823 | | | 161,863 | | 4 | |
Wholesale brokered demand deposits | | Wholesale brokered demand deposits | 31,044 | | | — | | | 31,044 | | 100 | |
Wholesale brokered time deposits | Wholesale brokered time deposits | 754,996 | | | 591,541 | | | 163,455 | | 28 | | Wholesale brokered time deposits | 412,127 | | | 515,228 | | | (103,101) | | (20) | |
Wholesale brokered deposits | | Wholesale brokered deposits | 443,171 | | | 515,228 | | | (72,057) | | (14) | |
Total deposits | Total deposits | $5,058,142 | | | $4,378,353 | | | $679,789 | | 16 | % | Total deposits | $5,069,857 | | | $4,980,051 | | | $89,806 | | 2 | % |
In-market deposits were up by $161.9 million, or 4%, from the balance at December 31, 2021, while wholesale brokered deposits declined by $72.1 million, or 14%.
Total deposits amounted to $5.1 billion at September 30, 2021,2022, up by $679.8$89.8 million, or 16%2%, from December 31, 2020. This included an increase of $163.5 million, or 28%, in out-of-market brokered time deposits. Excluding out-of-market brokered time deposits, in-market deposits were up by $516.3 million, or 14%, from the balance at December 31, 2020. In-market deposit growth from the end of 2020 reflected a continuation of customer behavior fostering excess liquidity across the banking industry, as well as temporary increases associated with PPP loan origination funds deposited to customer accounts at Washington Trust.2021.
Borrowings
Borrowings primarily consist of FHLB advances, which are used as a source of funding for liquidity and interest rate risk management purposes.
FHLB advances totaled $222.6$700.0 million at September 30, 2021, down2022, up by $371.3$555.0 million, or 63%383%, from the balance at the end of 2020,2021, as lowerhigher levels of wholesale funding were needed given the in-market deposits increase. See additional disclosure regarding the prepayment of certain FHLB advancesutilized to fund loan growth and the recognitionpurchases of debt prepayment penalties under the caption “Noninterest Expense” within the Results of Operations section.securities.
For additional information regarding FHLB advances see Note 87 to the Unaudited Consolidated Financial Statements.
Liquidity and Capital Resources
Liquidity Management
Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 69%77% of total average assets in the nine months ended September 30, 2021.2022. While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and brokered time deposits), cash flows from the Corporation’sinvestment 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 FRBFRBB and also maintains additional collateralized borrowing capacity with the
Management's Discussion and Analysis
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.
Management's Discussion and Analysis
The table below presents unused funding capacity by source as of the dates indicated:
| (Dollars in thousands)
| (Dollars in thousands)
| September 30, 2021 | | December 31, 2020 | (Dollars in thousands)
| September 30, 2022 | | December 31, 2021 |
Additional Funding Capacity: | Additional Funding Capacity: | | Additional Funding Capacity: | |
Federal Home Loan Bank of Boston (1) | Federal Home Loan Bank of Boston (1) | $1,492,659 | | | $969,735 | | Federal Home Loan Bank of Boston (1) | $967,133 | | | $1,642,377 | |
Federal Reserve Bank of Boston (2) | Federal Reserve Bank of Boston (2) | 18,906 | | | 20,678 | | Federal Reserve Bank of Boston (2) | 24,392 | | | 16,919 | |
Unencumbered investment securities | Unencumbered investment securities | 693,641 | | | 594,998 | | Unencumbered investment securities | 672,024 | | | 702,963 | |
Total | Total | $2,205,206 | | | $1,585,411 | | Total | $1,663,549 | | | $2,362,259 | |
(1)As of September 30, 20212022 and December 31, 2020,2021, loans with a carrying value of $2.2$2.3 billion and $2.1$2.2 billion, respectively, and securities available for sale with carrying values of $118.7$121.4 million and $128.6$163.2 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.
(2)As of September 30, 20212022 and December 31, 2020,2021, loans with a carrying value of $8.4$17.8 million and $12.6$8.2 million, respectively, and securities available for sale with a carrying value of $15.6$12.8 million and $14.9$13.5 million, respectively, were pledged to the FRBFRBB for the discount window resulting in this additional unused borrowing capacity.
In addition to the amounts presented above, the Bank also had access to a $40.0 million unused line of credit with the FHLB, as well as a $102.0 million standby letter of credit with the FHLB.
The ALCO establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained within target ranges established by the ALCO during the nine months ended September 30, 2021.2022. Based on its assessment of the liquidity considerations described above, management believes the Corporation’s sources of funding meet anticipated funding needs.
Net cash provided by operating activities amounted to $106.9$71.8 million for the nine months ended September 30, 2021 and largely included2022, reflecting net income of $56.7$55.1 million and mortgage banking related adjustments to reconcile net income to net cash provided by operating activities. Net cash used in investing activities totaled $289.8$723.8 million for the nine months ended September 30, 2021,2022, reflecting an increase in loans, outflows to fund purchases of debt securities as well as the net increase in and purchasesa purchase of loans.BOLI. These outflows were partially offset by net inflows from maturities, calls and principal payments of debt securities. For the nine months ended September 30, 2021,2022, net cash provided by financing activities amounted to $281.0$606.3 million, with increasesa net increase in FHLB advances and growth in deposits, partially offset by a net decrease in FHLB advances and the payment of dividends to shareholders.shareholders and purchases of treasury stock. See the Unaudited Consolidated Statements of Cash Flows for further information about sources and uses of cash.
Capital Resources
Total shareholders’ equity amounted to $555.3 million at September 30, 2021, up by $21.1 million from December 31, 2020. The increase included net income of $56.7 million, partially offset by $27.4 million in dividend declarations and a decrease of $10.7 million in the accumulated other comprehensive income component of shareholders' equity that was largely attributable to a temporary decline in the fair value of available for sale debt securities.
The Corporation declared a quarterly dividend of 52 cents per share for the three months ended September 30, 2021, compared to 51 cents per share declared for the same period in 2020. On a year-to-date basis, dividend declarations totaled $1.56 per share in 2021, compared to $1.53 per share in 2020.
The ratio of total equity to total assets was 9.25% at September 30, 2021, compared to a ratio of 9.35% at December 31, 2020. Book value per share at September 30, 2021 and December 31, 2020 was $32.06 and $30.94, 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 13.83% at September 30, 2021, compared to 13.51% at December 31, 2020. See Note 9 to the Unaudited Consolidated Financial Statements for additional discussion of regulatory capital requirements and the election of the ASC 326 phase-in option provided by regulatory guidance, which delays the estimated impact of ASC 326 on regulatory capital and phases it in over a three-year period beginning in 2022.
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
Management's Discussion and Analysis
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 agreementscontracts 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 109 and 1817 to the Unaudited Consolidated Financial Statements.
Capital Resources
Total shareholders’ equity amounted to $432.3 million at September 30, 2022, down by $132.5 million from December 31, 2021. The decline reflected a decrease of $151.8 million in the AOCL component of shareholders' equity, due to decreases in the fair value of available for sale debt securities and cash flow hedges primarily attributable to relative changes in market interest rates. In addition, the decline also reflected $28.3 million in dividend declarations and a net increase in treasury stock repurchases of $8.2 million, partially offset by net income of $55.1 million.
The Corporation declared a quarterly dividend of 54 cents per share for the three months ended September 30, 2022, compared to 52 cents per share declared for the same period in 2021. On a year-to-date basis, dividend declarations totaled $1.62 per share in 2022, compared to $1.56 per share in 2021.
Management's Discussion and Analysis
The ratio of total equity to total assets was 6.75% at September 30, 2022, compared to a ratio of 9.65% at December 31, 2021. Book value per share at September 30, 2022 and December 31, 2021 was $25.17 and $32.59, respectively.
The Bancorp and the Bank are subject to various regulatory capital requirements and are considered “well capitalized” with a total risk-based capital ratio of 12.65% at September 30, 2022, compared to 14.01% at December 31, 2021. See Note 8 to the Unaudited Consolidated Financial Statements for additional discussion of regulatory capital requirements and the election of the ASC 326 phase-in option provided by regulatory guidance, which phases in the impact of ASC 326 on regulatory capital over a three-year period that commenced January 1, 2022.
Asset/Liability Management and Interest Rate Risk
Interest rate risk is the risk of loss to future earnings due to changes in interest rates. The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. Periodically, the ALCO reports on the status of liquidity and interest rate risk matters to the Bank’s Board of Directors. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with the Corporation’s liquidity, capital adequacy, growth, risk and profitability goals.
The Corporation utilizes the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, off-balance sheet interest rate contracts and the pricing and structure of loans and deposits, to manage interest rate risk. The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract. The notional amount of the interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk. See Notes 109 and 1817 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, 20212022 and December 31, 2020,2021, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation. All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where both interest rates and the composition of the Corporation’s balance sheet remain stable for a 60-month period. In addition to measuring the change in net interest income as compared to an unchanged rate scenario, the ALCO also measures the trend of both net interest income and NIM over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.
The ALCO regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve of up to 500 basis points, as well as parallel changes in interest rates of up to 400 basis points. Because income simulations assume that the Corporation’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.
The following table sets forth the estimated change in net interest income from an unchanged rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on- and off-balance sheet financial instruments as of September 30, 20212022 and December 31, 2020.2021. Interest rates are assumed to shift by a parallel 100, 200 or 300 basis points upward or 100 basis points downward over a 12-month period, except for core savings deposits, which are assumed to
Management's Discussion and Analysis
shift by lesser amounts due to their relative historical insensitivity to market interest rate movements. Further, deposits are
Management's Discussion and Analysis
assumed to have certain minimum rate levels below which they will not fall. It should be noted that the rate scenarios shown do not necessarily reflect the ALCO’s view of the “most likely” change in interest rates over the periods indicated.
| | | September 30, 2021 | | December 31, 2020 | | September 30, 2022 | | December 31, 2021 |
| | Months 1 - 12 | Months 13 - 24 | | Months 1 - 12 | Months 13 - 24 | | Months 1 - 12 | Months 13 - 24 | | Months 1 - 12 | Months 13 - 24 |
100 basis point rate decrease | 100 basis point rate decrease | (1.14) | % | (4.62) | % | | (2.05) | % | (4.73) | % | 100 basis point rate decrease | (1.68) | % | (0.01) | % | | (1.32) | % | (5.42) | % |
100 basis point rate increase | 100 basis point rate increase | 3.00 | | 3.09 | | | 5.56 | | 7.89 | | 100 basis point rate increase | 0.58 | | (2.66) | | | 3.34 | | 3.91 | |
200 basis point rate increase | 200 basis point rate increase | 6.70 | | 6.75 | | | 11.00 | | 15.05 | | 200 basis point rate increase | 2.23 | | (3.69) | | | 6.87 | | 8.18 | |
300 basis point rate increase | 300 basis point rate increase | 10.32 | | 9.55 | | | 16.47 | | 21.15 | | 300 basis point rate increase | 3.77 | | (5.42) | | | 10.32 | | 11.72 | |
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 overallAs of September 30, 2022, the ALCO estimates that positive exposure of net interest income to rising rates in Year 1 as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term. For simulation purposes, deposit rate changes are anticipated to lag behind other market interest rates in both timing and magnitude. The ALCO’s estimate of interest rate risk exposure to rising rate environments, including those involving changes to the shape of the yield curve, incorporates certain assumptions regarding the shift in deposit balances from low-cost core savings categories to higher-cost deposit categories, which has characterized a shift in funding mix during the past rising interest rate cycles.
As of September 30, 2022, the negative exposure of net interest income to rising rates as compared to an unchanged rate scenario is primarily attributable to a projected increase in funding costs. As market rates increase, ALCO modeling assumes that deposits will shift from low cost to higher cost deposits. This assumption reflects historical operating conditions in rising rate cycles. Although asset yields would increase in a rising interest rate environment, the cumulative impact of relative growth in rate-sensitive higher cost deposit categories and wholesale funds suggests that by Year 2 of rising interest rate scenarios, the increase in the Corporation’s cost of funds could result in a relative decline in net interest margin compared to an unchanged rate scenario.
The relative changeoverall decline in interest rate sensitivity to rising rates from December 31, 20202021, as shown in the above table, was largely attributable to an interest rate swap designated as a cash flow hedge that was executed in the second quarter of 2021 to hedge the interest rate risk associated with a pool of variable rate commercial loans. The receive-fixed, pay-floating interest rate swap reduced the positive exposure to rising rates, while it will enhance earnings in the current rate environment and mitigate risk in declining rate scenarios. The interest rate swap effectively fixes a portion of variable rate loan assets. A higher level of longer-term fixed rate assets, as well as an increase in the proportion of wholesale funds to total sources of funds at September 30, 2021 as compared to December 31, 2020 has also contributed to the reduction in the positive exposure to rising rates as they2022. Fixed rate assets would not reprice upward in a rising rate environment. Wholesale funds would reprice more quickly and by a greater amount than the repricing of core deposits in response to changes in market interest rates.
While the ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future NIM. Over time, the repricing, maturity and prepayment characteristics of financial instruments and the composition of the Corporation’s balance sheet may change to a different degree than estimated. Simulation modeling assumes a static balance sheet, with the exception of certain modeled deposit mix shifts from low-cost core savings deposits to higher-cost time deposits in rising rate scenarios as noted above.
As market interest rates 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 ifas 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.
Management's Discussion and Analysis
It should also be noted that the static balance sheet assumption does not necessarily reflect the Corporation’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior.
Mortgage-backed securities and residential real estate loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level
Management's Discussion and Analysis
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, 20212022 and December 31, 20202021 resulting from immediate parallel rate shifts:
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
Security Type | Security Type | Down 100 Basis Points | | Up 200 Basis Points | Security Type | Down 100 Basis Points | | Up 200 Basis Points |
| U.S. government-sponsored enterprise securities (callable) | U.S. government-sponsored enterprise securities (callable) | $3,803 | | | ($20,534) | | U.S. government-sponsored enterprise securities (callable) | $28,038 | | | ($3,760) | |
| Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 11,630 | | | (92,673) | | Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 55,880 | | | (104,798) | |
Trust preferred debt and other corporate debt securities | Trust preferred debt and other corporate debt securities | 1,489 | | | (66) | | Trust preferred debt and other corporate debt securities | (18) | | | 7 | |
Total change in market value as of September 30, 2021 | $16,922 | | | ($113,273) | | |
Total change in market value as of December 31, 2020 | $13,481 | | | ($69,538) | | |
Total change in market value as of September 30, 2022 | | Total change in market value as of September 30, 2022 | $83,900 | | | ($108,551) | |
Total change in market value as of December 31, 2021 | | Total change in market value as of December 31, 2021 | $10,166 | | | ($119,505) | |
Critical Accounting Policies and Estimates
Estimates and assumptions are necessary in the application of certain accounting policies and procedures and can be susceptible to significant change. Critical accounting policies are defined as those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Corporation’s financial condition or results of operations.
Management considers its accounting policy relating to the ACL on loans to be a critical accounting policy. There have been no significant changes in the Corporation’s critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Recently Issued Accounting Pronouncements
See Note 2 to the Unaudited Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Corporation’s financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information regarding quantitative and qualitative disclosures about market risk appears under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Interest Rate Risk.”
For factors that could adversely impact Washington Trust’s future results of operations and financial condition, see the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020,2021, 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, 2021.2022. Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Corporation’s disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Corporation’s management including its Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosures. The Corporation will continue to review and document its disclosure controls and procedures and consider such changes in future evaluations of the effectiveness of such controls and procedures, as it deems appropriate.
Internal Control Over Financial Reporting
There has been no change in the Corporation’s internal controls over financial reporting during the quarter ended September 30, 20212022 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated financial position or results of operations of the Corporation.
Item 1A. Risk Factors
There have been no material changes in the risk factors described in Item IA to Part I of Washington Trust’s Annual Report on Form 10-K for the year ended December 31, 2020.2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.The following table summarizes repurchases of the Corporation’s shares of common stock in the third quarter of 2022:
| | | | | | | | | | | | | | |
| | | | |
| Issuer Purchases of Equity Securities |
Period | (a) Total number of shares purchased | (b) Average price paid per share | (c) Total number of shares purchased as part of publicly announced plans | (d) Maximum number of shares that may yet be purchased under plans |
July 1 - 31, 2022 | 18,754 | | $47.79 | | 18,754 | | 655,838 | |
August 1 - 31, 2022 | — | | — | | — | | 655,838 | |
September 1 - 30, 2022 | — | | — | | — | | 655,838 | |
Total | 18,754 | | $47.79 | | 18,754 | | 655,838 | |
Item 6. Exhibits
(a) Exhibits. The following exhibits are included as part of this Form 10-Q:
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Exhibit Number | |
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101 | The following materials from Washington Trust Bancorp, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 20212022 formatted in Inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related Notes to these consolidated financial statements. |
104 | The cover page from the Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 20212022 has been formatted in Inline XBRL and contained in Exhibit 101. |
____________________(1)Management contract or compensatory plan or arrangement.
(1) (2)These certifications are not “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Securities Exchange Act.
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 8, 20217, 2022 | | By: | /s/ Edward O. Handy III |
| | | | Edward O. Handy III |
| | | | Chairman and Chief Executive Officer |
| | | | (principal executive officer) |
| | | | |
Date: | November 8, 20217, 2022 | | By: | /s/ Ronald S. Ohsberg |
| | | | Ronald S. Ohsberg |
| | | | Senior Executive Vice President, Chief Financial Officer and Treasurer |
| | | | (principal financial officer) |
| | | | |
Date: | November 8, 20217, 2022 | | By: | /s/ Maria N. Janes |
| | | | Maria N. Janes |
| | | | Executive Vice President, Chief Accounting Officer and Controller |
| | | | (principal accounting officer) |