Loans | Loans The following is a summary of loans: (Dollars in thousands) December 31, 2020 2019 Commercial: Commercial real estate (1) $1,633,024 $1,547,572 Commercial & industrial (2) 817,408 585,289 Total commercial 2,450,432 2,132,861 Residential Real Estate: Residential real estate (3) 1,467,312 1,449,090 Consumer: Home equity 259,185 290,874 Other (4) 19,061 20,174 Total consumer 278,246 311,048 Total loans (5) $4,195,990 $3,892,999 (1) Commercial real estate (“CRE”) consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. (2) Commercial & industrial (“C&I”) consists of loans to businesses and individuals, a portion of which are fully or partially collateralized by real estate. C&I also includes $199.8 million of PPP loans as of December 31, 2020. (3) Residential real estate consists of mortgage and homeowner construction loans secured by one- to four-family residential properties. (4) Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans. (5) Includes net unamortized loan origination costs of $1.5 million and $5.3 million, respectively, at December 31, 2020 and 2019 and net unamortized premiums on purchased loans of $787 thousand and $995 thousand, respectively, at December 31, 2020 and 2019. Accrued interest receivable on loans totaled $11.3 million and $11.0 million, respectively, as of December 31, 2020 and December 31, 2019. As of both December 31, 2020 and 2019, loans amounting to $2.1 billion were pledged as collateral to the FHLB under a blanket pledge agreement and to the FRB for the discount window. See Note 12 for additional disclosure regarding borrowings. As disclosed in Note 1, the Corporation has elected to account for eligible loan modifications under Section 4013 of the CARES Act, as amended by the CRRSA Act. Eligible loan modifications are not required to be classified as TDRs and are not reported as past due provided that they are performing in accordance with 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 disclosed in Note 1. In 2020, we executed loan payment deferment modifications on 636 loans totaling $717.4 million. The majority of these modifications qualified as eligible loan modifications under Section 4013 of the CARES Act, as amended, and therefore, were not required to be classified as TDRs and were not reported as past due. See additional disclosure regarding TDRs below. As of December 31, 2020, Washington Trust has active loan payment deferment modifications on 136 loans totaling $244.7 million. 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. Past Due Loans Past due status is based on the contractual payment terms of the loan. The following tables present an aging analysis of past due loans, segregated by class of loans: (Dollars in thousands) Days Past Due December 31, 2020 30-59 60-89 Over 90 Total Past Due Current Total Loans Commercial: Commercial real estate $265 $— $— $265 $1,632,759 $1,633,024 Commercial & industrial 1 2 — 3 817,405 817,408 Total commercial 266 2 — 268 2,450,164 2,450,432 Residential Real Estate: Residential real estate 4,466 701 5,172 10,339 1,456,973 1,467,312 Consumer: Home equity 894 129 644 1,667 257,518 259,185 Other 23 7 88 118 18,943 19,061 Total consumer 917 136 732 1,785 276,461 278,246 Total loans $5,649 $839 $5,904 $12,392 $4,183,598 $4,195,990 (Dollars in thousands) Days Past Due December 31, 2019 30-59 60-89 Over 90 Total Past Due Current Total Loans Commercial: Commercial real estate $830 $— $603 $1,433 $1,546,139 $1,547,572 Commercial & industrial 1 — — 1 585,288 585,289 Total commercial 831 — 603 1,434 2,131,427 2,132,861 Residential Real Estate: Residential real estate 4,574 2,155 4,700 11,429 1,437,661 1,449,090 Consumer: Home equity 971 729 996 2,696 288,178 290,874 Other 42 — 88 130 20,044 20,174 Total consumer 1,013 729 1,084 2,826 308,222 311,048 Total loans $6,418 $2,884 $6,387 $15,689 $3,877,310 $3,892,999 Included in past due loans as of December 31, 2020 and 2019, were nonaccrual loans of $8.5 million and $11.5 million, respectively. All loans 90 days or more past due at December 31, 2020 and 2019 were classified as nonaccrual. Nonaccrual Loans The following is a summary of nonaccrual loans, segregated by class of loans: (Dollars in thousands) December 31, 2020 2019 Commercial: Commercial real estate $— $603 Commercial & industrial — 657 Total commercial — 1,260 Residential Real Estate: Residential real estate 11,981 14,297 Consumer: Home equity 1,128 1,763 Other 88 88 Total consumer 1,216 1,851 Total nonaccrual loans $13,197 $17,408 Accruing loans 90 days or more past due $— $— For nonaccrual loans with a carrying value of $3.0 million as of December 31, 2020, no ACL was deemed necessary. As of December 31, 2020 and December 31, 2019, nonaccrual loans secured by one- to four-family residential property amounting to $3.4 million and $5.8 million, respectively, were in process of foreclosure. Nonaccrual loans of $4.7 million and $5.9 million, respectively, were current as to the payment of principal and interest at December 31, 2020 and December 31, 2019. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2020. The following table presents interest income recognized on nonaccrual loans segregated by loan class: (Dollars in thousands) Interest Income Recognized Year ended December 31, 2020 Commercial: Commercial real estate $— Commercial & industrial 2 Total commercial 2 Residential Real Estate: Residential real estate 379 Consumer: Home equity 35 Other — Total consumer 35 Total $416 Troubled Debt Restructurings The recorded investment in TDRs consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. For accruing TDRs, the recorded investment also includes accrued interest. The following table presents the recorded investment in TDRs and certain other information related to TDRs: (Dollars in thousands) December 31, 2020 2019 Accruing TDRs $13,418 $377 Nonaccrual TDRs 2,345 492 Total TDRs $15,763 $869 Specific reserves on TDRs included in the ACL on loans $159 $97 Additional commitments to lend to borrowers with TDRs $— $— The following table presents loans modified as a TDR: (Dollars in thousands) Outstanding Recorded Investment # of Loans Pre-Modifications Post-Modifications Years ended December 31, 2020 2019 2020 2019 2020 2019 Commercial: Commercial real estate 3 — $1,798 $— $1,798 $— Commercial & industrial 5 — 6,844 — 6,844 — Total commercial 8 — 8,642 — 8,642 — Residential Real Estate: Residential real estate 11 — 5,943 — 5,943 — Consumer: Home equity 4 — 873 — 873 — Other — — — — — — Total consumer 4 — $873 $— $873 $— Total 23 — $15,458 $— $15,458 $— The following table presents information on how loans were modified as a TDR: (Dollars in thousands) Years ended December 31, 2020 2019 Below-market interest rate concession $— $— Payment deferral 7,704 — Maturity / amortization concession — — Interest only payments 6,384 — Combination (1) 1,370 — Total $15,458 $— (1) Loans included in this classification were modified with a combination of any two of the concessions listed in this table. The following table presents information on TDRs modified within the previous 12 months for which there was a payment default: (Dollars in thousands) # of Loans Recorded Investment Years ended December 31, 2020 2019 2020 2019 Commercial: Commercial real estate 1 — $850 $— Commercial & industrial — — — — Residential real estate: Residential real estate 2 — 1,299 — Consumer: Home equity 2 — 118 — Other — — — — Total 5 — $2,267 $— Individually Analyzed Loans Effective January 1, 2020, individually analyzed loans include nonaccrual commercial loans, reasonably expected TDRs, executed TDRs, and certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans. 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. The following table presents the carrying value of collateral dependent individually analyzed loans as of December 31, 2020: (Dollars in thousands) Carrying Value Related Allowance Commercial: Commercial real estate (1) $1,792 $— Commercial & industrial (2) 451 — Total commercial 2,243 — Residential Real Estate: Residential real estate (3) 5,947 38 Consumer: Home equity (3) 254 183 Other — — Total consumer 254 183 Total $8,444 $221 (1) Secured by income-producing property. (2) Secured by business assets. (3) Secured by one- to four-family residential properties. Prior to January 1, 2020, impaired loans individually analyzed for impairment included nonaccrual loans and executed TDRs. The following is a summary of impaired loans as of December 31, 2019: (Dollars in thousands) Recorded Investment (1) Unpaid Principal Related Allowance No Related Allowance Recorded Residential Real Estate: Residential real estate $13,968 $14,803 $— Consumer: Home equity 1,471 1,472 — Other 88 88 — Total consumer 1,559 1,560 — Subtotal 15,527 16,363 — With Related Allowance Recorded Commercial: Commercial real estate $603 $926 $— Commercial & industrial 657 657 580 Total commercial 1,260 1,583 580 Residential Real Estate: Residential real estate 687 714 95 Consumer: Home equity 292 291 291 Other 18 18 2 Total consumer 310 309 293 Subtotal 2,257 2,606 968 Total impaired loans $17,784 $18,969 $968 Total: Commercial $1,260 $1,583 $580 Residential real estate 14,655 15,517 95 Consumer 1,869 1,869 293 Total impaired loans $17,784 $18,969 $968 (1) The recorded investment in impaired loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs. For accruing impaired loans (TDRs for which management has concluded that the collectability of the loan is not in doubt), the recorded investment also includes accrued interest. As required under the GAAP in effect prior to the adoption of ASC 326, the following table presents the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class: (Dollars in thousands) Average Recorded Investment Interest Income Recognized Years ended December 31, 2019 2018 2019 2018 Commercial: Commercial real estate $864 $1,050 $1 $— Commercial & industrial 2,149 5,403 106 259 Total commercial 3,013 6,453 107 259 Residential real estate: Residential real estate 11,575 9,645 473 393 Consumer: Home equity 1,466 1,182 58 52 Other 68 69 2 5 Total consumer 1,534 1,251 60 57 Totals $16,122 $17,349 $640 $709 Credit Quality Indicators Commercial The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. For non-impaired loans, the Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for loan losses. See Note 6 for additional information. A description of the commercial loan categories is as follows: Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality, but may exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, performance or may be in an industry or of a loan type known to have a higher degree of risk. These weaknesses may be mitigated by secondary sources of repayment, including SBA guarantees. Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies. Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of 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 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 ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. On a quarterly basis, management reviews the watched asset list, which generally consists of commercial loans that are risk-rated 6 or worse, highly leveraged transaction loans, high-volatility commercial real estate and other selected loans. Management’s review focuses on the current status of the loans and strategies to improve the credit. An annual 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”) score and an estimated loan to value (“LTV”) ratio. LTV is estimated based on such factors as the location, the original LTV ratio, and the date of origination of the loan and do not reflect actual appraisal amounts. The results of these analyses and other credit review procedures, including selected targeted internal reviews, are taken into consideration in the determination of qualitative loss factors for residential real estate and home equity consumer credits. The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment as of December 31, 2020: (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 Commercial: CRE: Pass $283,341 $353,875 $260,917 $236,310 $136,490 $249,359 $10,333 $2,386 $1,533,011 Special Mention 756 20,235 39,387 16,222 11,318 10,367 771 — 99,056 Classified 957 — — — — — — — 957 Total CRE 285,054 374,110 300,304 252,532 147,808 259,726 11,104 2,386 1,633,024 C&I: Pass 293,493 95,775 98,146 56,792 44,445 91,128 95,817 1,296 776,892 Special Mention 1,123 722 3,210 6,839 3,141 14,853 3,806 56 33,750 Classified 403 — — — — 6,363 — — 6,766 Total C&I 295,019 96,497 101,356 63,631 47,586 112,344 99,623 1,352 817,408 Residential Real Estate: Residential real estate: Current 463,477 253,228 146,839 155,976 128,139 309,314 — — 1,456,973 Past Due 238 1,698 1,310 886 110 6,097 — — 10,339 Total residential real estate 463,715 254,926 148,149 156,862 128,249 315,411 — — 1,467,312 Consumer: Home equity: Current 9,838 6,771 3,898 1,474 1,217 3,955 219,085 11,280 257,518 Past Due — 35 24 — — 186 310 1,112 1,667 Total home equity 9,838 6,806 3,922 1,474 1,217 4,141 219,395 12,392 259,185 Other: Current 5,214 2,241 1,237 1,544 548 7,850 308 1 18,943 Past Due 19 1 — — 88 7 3 — 118 Total other 5,233 2,242 1,237 1,544 636 7,857 311 1 19,061 Total Loans $1,058,859 $734,581 $554,968 $476,043 $325,496 $699,479 $330,433 $16,131 $4,195,990 Consistent with industry practice, Washington Trust may renew commercial loans at or immediately prior to their maturity. In the table above, renewals subject to full credit evaluation before being granted are reported as originations in the period renewed. As required under the GAAP in effect prior to the adoption of ASC 326, the following table presents the commercial loan portfolio, segregated by category of credit quality indicator as of December 31, 2019: (Dollars in thousands) Pass Special Mention Classified Commercial: Commercial real estate $1,546,139 $830 $603 Commercial & industrial 549,416 24,961 10,912 Total commercial $2,095,555 $25,791 $11,515 As required under the GAAP in effect prior to the adoption of ASC 326, the following table presents the residential and consumer loan portfolios, segregated by category of credit quality indicator as of December 31, 2019: (Dollars in thousands) As of December 31, 2019 Current Past Due Residential Real Estate: Residential real estate $1,437,661 $11,429 Consumer: Home equity 288,178 2,696 Other 20,044 130 Total consumer $308,222 $2,826 Loan Servicing Activities Loans sold with servicing retained result in the capitalization of loan servicing rights. The following table presents an analysis of loan servicing rights: (Dollars in thousands) Loan Servicing Valuation Total Balance at December 31, 2017 $3,613 $— $3,613 Loan servicing rights capitalized 905 — 905 Amortization (867) — (867) Balance at December 31, 2018 3,651 — 3,651 Loan servicing rights capitalized 902 — 902 Amortization (1,027) — (1,027) Balance at December 31, 2019 3,526 — 3,526 Loan servicing rights capitalized 6,569 — 6,569 Amortization (2,507) — (2,507) Increase in impairment reserve — (154) (154) Balance at December 31, 2020 $7,588 ($154) $7,434 The following table presents estimated aggregate amortization expense related to loan servicing assets: (Dollars in thousands) Years ending December 31: 2021 $2,407 2022 1,644 2023 1,122 2024 766 2025 523 2026 and thereafter 1,126 Total estimated amortization expense $7,588 Loans sold to others are serviced by the Corporation on a fee basis under various agreements. Loans serviced for others are not included in the Consolidated Balance Sheets. The following table presents the balance of loans serviced for others by loan portfolio: (Dollars in thousands) December 31, 2020 2019 Residential real estate $1,231,201 $586,996 Commercial 155,935 159,948 Total $1,387,136 $746,944 |