UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended | ||||||||
| or | ||||||||
| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______. | |||||
Commission file number: 001-32991
WASHINGTON TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(401 ) 348-1200
(Registrant’s telephone number, including area code)
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | ||||||||||||
| 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).
The number of shares of common stock of the registrant outstanding as of April 30, 2024 was 17,054,366 .
| FORM 10-Q | |||||
| WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES | |||||
| For the Quarter Ended March 31, 2024 | |||||
| TABLE OF CONTENTS | |||||
| Page Number | |||||
-2-
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:
| 2023 Repurchase Program | Washington Trust Bancorp, Inc.'s Stock Repurchase Program commencing January 1, 2023 | ||||
| 2024 Repurchase Program | Washington Trust Bancorp, Inc.'s Stock Repurchase Program commencing January 1, 2024 | ||||
| ACL | Allowance for credit losses | ||||
| ALCO | Asset/Liability Committee | ||||
| AOCL | Accumulated other comprehensive loss | ||||
| ASC | Accounting Standards Codification | ||||
| ASU | Accounting Standards Update | ||||
| ATM | Automated teller machine | ||||
| AUA | Assets under administration | ||||
| Bancorp | Washington Trust Bancorp, Inc. | ||||
| Bank | The Washington Trust Company, of Westerly | ||||
| BOLI | Bank-owned life insurance | ||||
| C&I | Commercial and industrial | ||||
| CDARS | Certificate of Deposit Account Registry Service | ||||
| Corporation | The Bancorp and its subsidiaries | ||||
| CRE | Commercial real estate | ||||
| DCF | Discounted cash flow | ||||
| DDM | Demand Deposit Marketplace | ||||
| EPS | Earnings per common share | ||||
| ERM | Enterprise risk management | ||||
| Exchange Act | Securities Exchange Act of 1934, as amended | ||||
| FDIC | Federal Deposit Insurance Corporation | ||||
| Federal Reserve | Board of Governors of the Federal Reserve System | ||||
| FHLB | Federal Home Loan Bank of Boston | ||||
| FRBB | Federal Reserve Bank of Boston | ||||
| FTE | Fully taxable equivalent | ||||
| GAAP | Accounting principles generally accepted in the United States of America | ||||
| ICS | Insured Cash Sweep | ||||
| LTV | Loan to value | ||||
| NIM | Net interest margin | ||||
| OREO | Property acquired through foreclosure or repossession | ||||
| S&P | Standard and Poors, Inc. | ||||
| SBA | Small Business Administration | ||||
| SEC | U.S. Securities and Exchange Commission | ||||
| TLM | Troubled loan modification | ||||
| Washington Trust | The Bancorp and its subsidiaries | ||||
-3-
PART I. Financial Information
Item 1. Financial Statements
| Washington Trust Bancorp, Inc. and Subsidiaries | |||||
Consolidated Balance Sheets (unaudited) | |||||
| (Dollars in thousands, except par value) | |||||
| March 31, 2024 | December 31, 2023 | |||||||
| Assets: | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Short-term investments | ||||||||
| Mortgage loans held for sale, at fair value | ||||||||
Available for sale debt securities, at fair value (amortized cost of $ | ||||||||
| Federal Home Loan Bank stock, at cost | ||||||||
| Loans: | ||||||||
| Total loans | ||||||||
| Less: allowance for credit losses on loans | ||||||||
| Net loans | ||||||||
| Premises and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Investment in bank-owned life insurance | ||||||||
| Goodwill | ||||||||
| Identifiable intangible assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities: | ||||||||
| Deposits: | ||||||||
| Noninterest-bearing deposits | $ | $ | ||||||
| Interest-bearing deposits | ||||||||
| Total deposits | ||||||||
| Federal Home Loan Bank advances | ||||||||
| Junior subordinated debentures | ||||||||
| Operating lease liabilities | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 16) | ||||||||
| Shareholders’ Equity: | ||||||||
Common stock of $ | ||||||||
| Paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||
Treasury stock, at cost; | ( | ( | ||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-4-
| Washington Trust Bancorp, Inc. and Subsidiaries | |||||
Consolidated Statements of Income (unaudited) | |||||
| (Dollars and shares in thousands, except per share amounts) | |||||
| Three months ended March 31, | 2024 | 2023 | |||||||||
| Interest income: | |||||||||||
| Interest and fees on loans | $ | $ | |||||||||
| Interest on mortgage loans held for sale | |||||||||||
| Taxable interest on debt securities | |||||||||||
| Dividends on Federal Home Loan Bank stock | |||||||||||
| Other interest income | |||||||||||
| Total interest and dividend income | |||||||||||
| Interest expense: | |||||||||||
| Deposits | |||||||||||
| Federal Home Loan Bank advances | |||||||||||
| Junior subordinated debentures | |||||||||||
| Total interest expense | |||||||||||
| Net interest income | |||||||||||
| Provision for credit losses | |||||||||||
| Net interest income after provision for credit losses | |||||||||||
| Noninterest income: | |||||||||||
| Wealth management revenues | |||||||||||
| Mortgage banking revenues | |||||||||||
| Card interchange fees | |||||||||||
| Service charges on deposit accounts | |||||||||||
| Loan related derivative income | ( | ||||||||||
| Income from bank-owned life insurance | |||||||||||
| Other income | |||||||||||
| Total noninterest income | |||||||||||
| Noninterest expense: | |||||||||||
| Salaries and employee benefits | |||||||||||
| Outsourced services | |||||||||||
| Net occupancy | |||||||||||
| Equipment | |||||||||||
| Legal, audit, and professional fees | |||||||||||
FDIC deposit insurance costs | |||||||||||
| Advertising and promotion | |||||||||||
| Amortization of intangibles | |||||||||||
| Other expenses | |||||||||||
| Total noninterest expense | |||||||||||
| Income before income taxes | |||||||||||
| Income tax expense | |||||||||||
| Net income | $ | $ | |||||||||
| Net income available to common shareholders | $ | $ | |||||||||
| Weighted average common shares outstanding - basic | |||||||||||
| Weighted average common shares outstanding - diluted | |||||||||||
| Per share information: | Basic earnings per common share | $ | $ | ||||||||
| Diluted earnings per common share | $ | $ | |||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-5-
| Washington Trust Bancorp, Inc. and Subsidiaries | |||||
Consolidated Statements of Comprehensive Income (unaudited) | |||||
| (Dollars in thousands) | |||||
| Three months ended March 31, | 2024 | 2023 | ||||||
| Net income | $ | $ | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||
| Net change in fair value of available for sale debt securities | ( | |||||||
| Net change in fair value of cash flow hedges | ||||||||
| Net change in defined benefit plan obligations | ||||||||
| Total other comprehensive (loss) income, net of tax | ( | |||||||
| Total comprehensive income | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-6-
| Washington Trust Bancorp, Inc. and Subsidiaries | |||||
Consolidated Statements of Changes in Shareholders' Equity (unaudited) | |||||
| (Dollars and shares in thousands, except per share amounts) | |||||
| For the three months ended March 31, 2024 | Common Shares Outstanding | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | ||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ($ | ($ | $ | |||||||||||||||||
Net income | — | — | — | — | — | ||||||||||||||||||
| Total other comprehensive loss, net of tax | — | — | — | — | ( | — | ( | ||||||||||||||||
Cash dividends declared ($ | — | — | — | ( | — | — | ( | ||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered | ( | — | — | ( | |||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | ($ | ($ | $ | |||||||||||||||||
| For the three months ended March 31, 2023 | Common Shares Outstanding | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | ||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ($ | ($ | $ | |||||||||||||||||
Net income | — | — | — | — | — | ||||||||||||||||||
| Total other comprehensive income, net of tax | — | — | — | — | — | ||||||||||||||||||
Cash dividends declared ($ | — | — | — | ( | — | — | ( | ||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered | ( | — | — | ( | |||||||||||||||||||
Treasury stock purchased under 2023 Repurchase Program | ( | — | — | — | — | ( | ( | ||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ($ | ($ | $ | |||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-7-
| Washington Trust Bancorp, Inc. and Subsidiaries | |||||
Consolidated Statement of Cash Flows (unaudited) | |||||
| (Dollars in thousands) | |||||
| Three months ended March 31, | 2024 | 2023 | |||||||||
| Cash flows from operating activities: | |||||||||||
Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Provision for credit losses | |||||||||||
Depreciation of premises and equipment | |||||||||||
Net amortization of premiums and discounts on debt securities and loans | |||||||||||
Amortization of intangibles | |||||||||||
Share-based compensation | |||||||||||
| Tax expense from stock option exercises and other equity awards | ( | ( | |||||||||
Income from bank-owned life insurance | ( | ( | |||||||||
| Net gains on loan sales, including changes in fair value | ( | ( | |||||||||
Proceeds from sales of loans, net | |||||||||||
Loans originated for sale | ( | ( | |||||||||
| Decrease in operating lease right-of-use assets | |||||||||||
| Decrease in operating lease liabilities | ( | ( | |||||||||
| Increase in other assets | ( | ( | |||||||||
| Increase (decrease) in other liabilities | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
Purchases of: | Available for sale debt securities: Mortgage-backed | ( | |||||||||
| Available for sale debt securities: Other | ( | ||||||||||
| Maturities, calls, and principal payments of: | Available for sale debt securities: Mortgage-backed | ||||||||||
| Available for sale debt securities: Other | |||||||||||
| Net (purchases) redemptions of Federal Home Loan Bank stock | ( | ||||||||||
| Net increase in loans | ( | ( | |||||||||
Purchases of loans | ( | ( | |||||||||
Purchases of premises and equipment | ( | ( | |||||||||
| Proceeds from bank-owned life insurance | |||||||||||
| Equity investments in real estate limited partnerships | ( | ( | |||||||||
| Purchases of other equity investments | ( | ||||||||||
Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Net (decrease) increase in deposits | ( | ||||||||||
Proceeds from Federal Home Loan Bank advances | |||||||||||
| Repayments of Federal Home Loan Bank advances | ( | ( | |||||||||
| Treasury stock purchased | ( | ||||||||||
Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered | ( | ( | |||||||||
Cash dividends paid | ( | ( | |||||||||
Net cash provided by financing activities | |||||||||||
| Net increase in cash and cash equivalents | |||||||||||
Cash and cash equivalents at beginning of period | |||||||||||
Cash and cash equivalents at end of period | $ | $ | |||||||||
| Noncash Activities: | |||||||||||
| Loans charged-off | $ | $ | |||||||||
| Loans transferred to property acquired through foreclosure or repossession | |||||||||||
| Commitment for equity investments in real estate limited partnerships | |||||||||||
| Supplemental Disclosures: | |||||||||||
| Interest payments | $ | $ | |||||||||
| Income tax payments | |||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
-8-
Condensed Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation
Nature of Operations
The Bancorp is a publicly-owned registered bank holding company that has elected to be a financial holding company. The Bancorp’s principal subsidiary is the Bank, a Rhode Island chartered financial institution founded in 1800. The Bank is the oldest community bank in the nation and the largest state-chartered bank headquartered in Rhode Island.
Washington Trust offers a full range of financial services, including commercial, residential, and consumer lending, retail and commercial deposit products, and wealth management and trust services through its offices in Rhode Island, Massachusetts, and Connecticut.
Basis of Presentation
The accounting and reporting policies of the Washington Trust conform to GAAP and to general practices of the banking industry.
The Unaudited Consolidated Financial Statements include the accounts of the Bancorp and its wholly-owned subsidiaries, except subsidiaries that are not deemed necessary to be consolidated. Through consolidation, intercompany balances and transactions have been eliminated.
The Unaudited Consolidated Financial Statements of the Corporation presented herein have been prepared pursuant to the rules of the SEC for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP for complete financial statements. 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, 2023.
Use of Estimates
In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Management considers the ACL on loans to be a material estimate that is particularly susceptible to change.
Note 2 - Recently Issued Accounting Pronouncements
Accounting Standards Pending Adoption
Segment Reporting - Topic 280
Accounting Standards Update No. 2023-07, “Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures” (“ASU 2023-07”), was issued in November 2023 to enhance and provide additional transparency on segment disclosures, including disclosure of significant segment expense provided to the chief operating decision maker (“CODM”), as well as disclosing the title and position of the CODM and how they use reported results in assessing segment performance and allocation of resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The provisions under ASU 2023-07 should be applied on a retrospective basis. ASU 2023-07 is not expected to have a material impact on the Corporation’s financial statements.
Income Taxes - Topic 740
Accounting Standards Update No. 2023-09, “Income Taxes (Topic 740) - Improvements to Income Tax Disclosures” (“ASU 2023-09”), was issued in December 2023 to enhance and provide additional transparency on income tax disclosures. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The provisions under ASU 2023-09 should be applied on a prospective basis; however, retrospective application is also permitted. ASU 2023-09 is not expected to have a material impact on the Corporation’s financial statements.
-9-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 3 - Securities
Available for Sale Debt Securities
The following tables present the amortized cost, gross unrealized holding gains, gross unrealized holding losses, ACL on securities, and fair value of securities by major security type and class of security:
| (Dollars in thousands) | |||||||||||||||||
| March 31, 2024 | Amortized Cost | Unrealized Gains | Unrealized Losses | ACL | Fair Value | ||||||||||||
| Available for Sale Debt Securities: | |||||||||||||||||
Obligations of U.S. government-sponsored enterprises | $ | $ | ($ | $ | $ | ||||||||||||
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | ( | ||||||||||||||||
Individual name issuer trust preferred debt securities | ( | ||||||||||||||||
Corporate bonds | ( | ||||||||||||||||
| Total available for sale debt securities | $ | $ | ($ | $ | $ | ||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| December 31, 2023 | Amortized Cost | Unrealized Gains | Unrealized Losses | ACL | Fair Value | ||||||||||||
| Available for Sale Debt Securities: | |||||||||||||||||
Obligations of U.S. government-sponsored enterprises | $ | $ | ($ | $ | $ | ||||||||||||
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | ( | ||||||||||||||||
Individual name issuer trust preferred debt securities | ( | ||||||||||||||||
Corporate bonds | ( | ||||||||||||||||
| Total available for sale debt securities | $ | $ | ($ | $ | $ | ||||||||||||
Available for sale debt securities balances exclude accrued interest receivable of $3.0 million and $3.7 million, respectively, as of March 31, 2024 and December 31, 2023.
At March 31, 2024 and December 31, 2023, securities with a fair value of $292.9 million and $311.9 million, respectively, were pledged as collateral for FHLB borrowings, potential borrowings with the FRBB, certain public deposits, and for other purposes. See Note 9 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) | ||||||||
| March 31, 2024 | Amortized Cost | Fair Value | ||||||
| Due in one year or less | $ | $ | ||||||
Due after one year to five years | ||||||||
Due after five years to ten years | ||||||||
Due after ten years | ||||||||
Total debt securities | $ | $ | ||||||
-10-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Included in the above table are debt securities with an amortized cost balance of $253.0 million and a fair value of $225.5 million at March 31, 2024 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 3 months to 13 years, with call features ranging from 1 month to 4 months.
Assessment of Available for Sale Debt Securities for Impairment
Management assesses the decline in fair value of investment securities on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates both qualitative and quantitative factors to assess whether an impairment exists.
The following tables summarize available for sale debt securities in an unrealized loss position, for which an ACL on securities has not been recorded, segregated by length of time that the securities have been in a continuous unrealized loss position:
| (Dollars in thousands) | Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||||||||||
| March 31, 2024 | # | Fair Value | Unrealized Losses | # | Fair Value | Unrealized Losses | # | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||||||||
| Obligations of U.S. government-sponsored enterprises | $ | ($ | $ | ($ | $ | ($ | ||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
Individual name issuer trust preferred debt securities | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | ($ | $ | ($ | $ | ($ | ||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||||||||||
| December 31, 2023 | # | Fair Value | Unrealized Losses | # | Fair Value | Unrealized Losses | # | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||||||||
Obligations of U.S. government-sponsored enterprises | $ | ($ | $ | ($ | $ | ($ | ||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
Individual name issuer trust preferred debt securities | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | ($ | $ | ($ | $ | ($ | ||||||||||||||||||||||||||||||||||||||
There were no debt securities on nonaccrual status at March 31, 2024 and 2023 and, therefore there was no accrued interest related to debt securities reversed against interest income for the three months ended March 31, 2024 and 2023.
As of March 31, 2024, the Corporation does not intend to sell the debt securities in an unrealized loss position and has determined that it is more-likely-than-not that the Corporation will not be required to sell each security before the recovery of its amortized cost basis. In addition, management does not believe that any of the securities are impaired due to reasons of credit quality. As further described below, management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates. Therefore, no ACL was recorded at both March 31, 2024 and December 31, 2023.
Obligations of U.S. Government Agency and U.S. Government-Sponsored Enterprise Securities, including Mortgage-Backed Securities
The contractual cash flows for these securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. The issuers of these securities
-11-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
continue to make timely principal and interest payments, and none of these securities were past due at March 31, 2024. Additionally, the Corporation utilizes a zero credit loss estimate for these securities.
Individual Name Issuer Trust Preferred Debt Securities
These securities in an unrealized loss position at March 31, 2024 included three trust preferred securities issued by three individual companies in the banking sector. Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date, as well as credit rating changes between the reporting period date and the filing date of this report, and other information. As of March 31, 2024, there was one individual name issuer trust preferred debt security with an amortized cost of $2.0 million and unrealized losses of $192 thousand that was rated below investment grade by S&P. We noted no downgrades to below investment grade between March 31, 2024 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 continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers.
Corporate Bonds
These securities in an unrealized loss position at March 31, 2024 included four corporate bond holdings issued by three individual companies in the financial services industry. Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date, as well as credit rating changes between the reporting period date and the filing date of this report, and other information. As of March 31, 2024, there was one corporate bond debt security with an amortized cost of $2.0 million and unrealized losses of $46 thousand that was rated below investment grade by S&P. We noted no downgrades to below investment grade between March 31, 2024 and the filing date of this report. Based on the information available through the filing date of this report, all corporate bond debt securities continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers.
Note 4 - Loans
The following table presents a summary of loans:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | ||||||
| Commercial: | ||||||||
Commercial real estate (1) | $ | $ | ||||||
Commercial & industrial (2) | ||||||||
| Total commercial | ||||||||
| Residential Real Estate: | ||||||||
Residential real estate (3) | ||||||||
| Consumer: | ||||||||
Home equity | ||||||||
Other (4) | ||||||||
| Total consumer | ||||||||
Total loans (5) | $ | $ | ||||||
(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.
(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 $13.1 million and $13.0 million, respectively, at March 31, 2024 and December 31, 2023 and net unamortized premiums on loans purchased from and serviced by other financial institutions of $273 thousand and $286 thousand, respectively, at March 31, 2024 and December 31, 2023.
Loan balances exclude accrued interest receivable of $23.8 million and $22.9 million, respectively, as of March 31, 2024 and December 31, 2023.
-12-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
As of both March 31, 2024 and December 31, 2023, loans amounting to $3.4
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 | |||||||||||||||||||
| March 31, 2024 | Current | 30-59 | 60-89 | 90 or More | Total Past Due | Total Loans | ||||||||||||||
| Commercial: | ||||||||||||||||||||
Commercial real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||
Commercial & industrial | ||||||||||||||||||||
| Total commercial | ||||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||
Residential real estate | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
Home equity | ||||||||||||||||||||
Other | ||||||||||||||||||||
| Total consumer | ||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | ||||||||||||||
| (Dollars in thousands) | Days Past Due | |||||||||||||||||||
| December 31, 2023 | Current | 30-59 | 60-89 | 90 or More | Total Past Due | Total Loans | ||||||||||||||
| Commercial: | ||||||||||||||||||||
Commercial real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||
Commercial & industrial | ||||||||||||||||||||
| Total commercial | ||||||||||||||||||||
| Residential Real Estate: | ||||||||||||||||||||
Residential real estate | ||||||||||||||||||||
| Consumer: | ||||||||||||||||||||
Home equity | ||||||||||||||||||||
Other | ||||||||||||||||||||
| Total consumer | ||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | ||||||||||||||
Included in past due loans as of March 31, 2024 and December 31, 2023, were nonaccrual loans of $5.1 million and $6.9 million, respectively. In addition, all loans 90 days or more past due at March 31, 2024 and December 31, 2023 were classified as nonaccrual.
-13-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Nonaccrual Loans
Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. When loans are placed on nonaccrual status, interest previously accrued but not collected is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest (generally for six months), 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.
The following table is a summary of nonaccrual loans, segregated by class of loans:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | |||||||||||||||||||||
| Nonaccrual Loans | Nonaccrual Loans | ||||||||||||||||||||||
With an ACL | Without an ACL | Total | With an ACL | Without an ACL | Total | ||||||||||||||||||
| Commercial: | |||||||||||||||||||||||
| Commercial real estate | $ | $ | $ | $ | $ | $ | |||||||||||||||||
| Commercial & industrial | |||||||||||||||||||||||
| Total commercial | |||||||||||||||||||||||
| Residential Real Estate: | |||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||
| Home equity | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total consumer | |||||||||||||||||||||||
| Total nonaccrual loans | $ | $ | $ | $ | $ | $ | |||||||||||||||||
| Accruing loans 90 days or more past due | $ | $ | |||||||||||||||||||||
Nonaccrual loans of $25.6 million and $37.7 million, respectively, at March 31, 2024 and December 31, 2023 were current as to the payment of principal and interest.
As of March 31, 2024 and December 31, 2023, nonaccrual loans secured by one- to four-family residential property amounting to $3.2 million and $960 thousand, respectively, were in process of foreclosure.
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2024.
-14-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents interest income recognized on nonaccrual loans:
| (Dollars in thousands) | ||||||||
| Three months ended March 31, | 2024 | 2023 | ||||||
| Commercial: | ||||||||
Commercial real estate | $ | $ | ||||||
Commercial & industrial | ||||||||
| Total commercial | ||||||||
| Residential Real Estate: | ||||||||
Residential real estate | ||||||||
| Consumer: | ||||||||
Home equity | ||||||||
Other | ||||||||
| Total consumer | ||||||||
| Total | $ | $ | ||||||
Troubled Loan Modifications
In the course of resolving problem loans, the Corporation may choose to modify the contractual terms of certain loans. A loan that has been modified is considered a TLM when the modification is made to a borrower experiencing financial difficulty and the modification has a direct impact to the contractual cash flows. The decision to modify a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection.
Modifications to borrowers experiencing financial difficulty may include modified contractual terms that have a direct impact to contractual cash flows, including principal forgiveness, interest rate reductions, maturity extensions, other-than-insignificant payment delays, or any combination thereof.
Nonaccrual loans that become TLMs generally remain on nonaccrual status for six months, subsequent to being modified, before management considers their return to accrual status. If a TLM is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status.
TLMs are reported as such for at least one year from the date of the modification. If the TLM performs in accordance with the modified contractual terms for that period of time, it would be removed from this classification.
The following table presents the carrying value at March 31, 2024, of TLMs made during the period indicated, segregated by class of loans and type of concession granted:
| (Dollars in thousands) | |||||||||||
Three months ended March 31, 2024 | Maturity Extension | Total | % of Loan Class (1) | ||||||||
| Commercial: | |||||||||||
| Commercial real estate | $ | $ | % | ||||||||
| Commercial & industrial | |||||||||||
| Total commercial | |||||||||||
| Total | $ | $ | % | ||||||||
(1)Percentage of TLMs to the total loans outstanding within the respective loan class.
During the three months ended March 31, 2023, there were no TLMs.
-15-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the financial effect of TLMs made during the period indicated, segregated by class of loans:
Three months ended March 31, 2024 | Weighted Average Maturity Extension (in months) | ||||
| Commercial: | |||||
| Commercial real estate | — | ||||
| Commercial & industrial | |||||
| Total commercial | |||||
| Total | |||||
Management closely monitors the performance of TLMs to understand the effectiveness of the modifications. The following tables present an aging analysis, as of the date indicated, of TLMs that have been modified in the past 12 months:
| (Dollars in thousands) | Days Past Due | |||||||||||||||||||
| March 31, 2024 | Current | 30-59 | 60-89 | 90 or More | Total Past Due | Total Loans | ||||||||||||||
| Commercial: | ||||||||||||||||||||
Commercial real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||
Commercial & industrial | ||||||||||||||||||||
| Total commercial | ||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | ||||||||||||||
| (Dollars in thousands) | Days Past Due | |||||||||||||||||||
| December 31, 2023 | Current | 30-59 | 60-89 | 90 or More | Total Past Due | Total Loans | ||||||||||||||
| Commercial: | ||||||||||||||||||||
Commercial real estate | $ | $ | $ | $ | $ | $ | ||||||||||||||
Commercial & industrial | ||||||||||||||||||||
| Total commercial | ||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | ||||||||||||||
There were no TLMs made in the previous 12 months for which there was a subsequent payment default.
There were no significant commitments to lend additional funds to borrowers experiencing financial difficulty whose loans were TLMs at March 31, 2024.
Individually Analyzed Loans
Individually analyzed loans are individually assessed for credit impairment and include nonaccrual commercial loans, TLMs, as well as certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans.
As of March 31, 2024 and December 31, 2023, individually analyzed loans amounted to $34.2 million and $34.6 million, respectively, all of which 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 7 for additional disclosure regarding fair value of individually analyzed collateral dependent loans.
-16-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the carrying value of collateral dependent individually analyzed loans:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | |||||||||||||||
| Carrying Value | Related Allowance | Carrying Value | Related Allowance | ||||||||||||||
| Commercial: | |||||||||||||||||
Commercial real estate (1) | $ | $ | $ | $ | |||||||||||||
Commercial & industrial (2) | |||||||||||||||||
| Total commercial | |||||||||||||||||
| Residential Real Estate: | |||||||||||||||||
Residential real estate (3) | |||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||
(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 ACL on loans. See Note 5 for additional information.
A description of the commercial loan categories is as follows:
Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality, but may exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, performance or may be in an industry or of a loan type known to have a higher degree of risk. These weaknesses may be mitigated by secondary sources of repayment, including SBA guarantees.
Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate, and frequent delinquencies.
Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectability. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be 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
-17-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
commercial real estate, and other selected loans. Management’s review focuses on the current status of the loans, the appropriateness of risk ratings and strategies to improve the credit.
An annual credit review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices, and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio.
Residential and Consumer
Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type.
In addition, other techniques are utilized to monitor indicators of credit deterioration in the residential real estate loans and home equity consumer loans. Among these techniques is the periodic tracking of loans with an updated Fair Isaac Corporation (commonly known as “FICO”) score and an updated estimated LTV ratio. LTV is estimated based on such factors as geographic location, the original appraised value, and changes in median home prices, and takes into consideration the age of the loan. The results of these analyses and other credit review procedures, including selected targeted internal reviews, are taken into account in the determination of qualitative loss factors for residential real estate and home equity consumer credits.
-18-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table includes information on credit quality indicators and gross charge-offs for the Corporation’s loan portfolio, segregated by class of loans as of March 31, 2024:
| (Dollars in thousands) | Term Loans Amortized Cost by Origination Year | ||||||||||||||||||||||||||||
| 2024 | 2023 | 2022 | 2021 | 2020 | Prior | Revolving Loans Amortized Cost | Revolving Loans Converted to Term Loans | Total | |||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||
CRE: | |||||||||||||||||||||||||||||
Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
Special Mention | |||||||||||||||||||||||||||||
Classified | |||||||||||||||||||||||||||||
Total CRE | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
C&I: | |||||||||||||||||||||||||||||
Pass | |||||||||||||||||||||||||||||
Special Mention | |||||||||||||||||||||||||||||
Classified | |||||||||||||||||||||||||||||
Total C&I | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Residential Real Estate: | |||||||||||||||||||||||||||||
| Residential real estate: | |||||||||||||||||||||||||||||
Current | |||||||||||||||||||||||||||||
Past Due | |||||||||||||||||||||||||||||
Total residential real estate | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||
| Home equity: | |||||||||||||||||||||||||||||
Current | |||||||||||||||||||||||||||||
Past Due | |||||||||||||||||||||||||||||
Total home equity | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Other: | |||||||||||||||||||||||||||||
Current | |||||||||||||||||||||||||||||
Past Due | |||||||||||||||||||||||||||||
Total other | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Total gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
-19-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table includes information on credit quality indicators and gross charge-offs for the Corporation’s loan portfolio, segregated by class of loans as of December 31, 2023:
| (Dollars in thousands) | Term Loans Amortized Cost by Origination Year | ||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost | Revolving Loans Converted to Term Loans | Total | |||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||
CRE: | |||||||||||||||||||||||||||||
Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
Special Mention | |||||||||||||||||||||||||||||
Classified | |||||||||||||||||||||||||||||
Total CRE | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
C&I: | |||||||||||||||||||||||||||||
Pass | |||||||||||||||||||||||||||||
Special Mention | |||||||||||||||||||||||||||||
Classified | |||||||||||||||||||||||||||||
Total C&I | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Residential Real Estate: | |||||||||||||||||||||||||||||
| Residential real estate: | |||||||||||||||||||||||||||||
Current | |||||||||||||||||||||||||||||
Past Due | |||||||||||||||||||||||||||||
Total residential real estate | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||
| Home equity: | |||||||||||||||||||||||||||||
Current | |||||||||||||||||||||||||||||
Past Due | |||||||||||||||||||||||||||||
Total home equity | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Other: | |||||||||||||||||||||||||||||
Current | |||||||||||||||||||||||||||||
Past Due | |||||||||||||||||||||||||||||
Total other | |||||||||||||||||||||||||||||
| Gross charge-offs | |||||||||||||||||||||||||||||
| Total Loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Total gross charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
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. In addition, loans with extensions of maturity dates of more than three months are reported as originations in the period extended.
-20-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 5 - Allowance for Credit Losses on Loans
The ACL on loans is management’s estimate of expected lifetime credit losses on loans carried at amortized cost. 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.
The following table presents the activity in the ACL on loans for the three months ended March 31, 2024:
| (Dollars in thousands) | Commercial | Consumer | ||||||||||||||||||||||||
CRE | C&I | Total Commercial | Residential Real Estate | Home Equity | Other | Total Consumer | Total | |||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs | ( | ( | ( | ( | ( | |||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||
| Provision | ( | |||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (Dollars in thousands) | Commercial | Consumer | ||||||||||||||||||||||||
CRE | C&I | Total Commercial | Residential Real Estate | Home Equity | Other | Total Consumer | Total | |||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge-offs | ( | ( | ( | ( | ( | |||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||
| Provision | ( | ( | ( | ( | ||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Note 6 - 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. Derivative assets are included in other assets. and derivative liabilities are included in other liabilities in the Unaudited Consolidated Balance Sheets. 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 March 31, 2024 and December 31, 2023, the Corporation had interest rate swap contracts that were designated as cash flow hedges to hedge the interest rate risk associated with short-term borrowings. See Note 9 for additional disclosure on borrowings.
-21-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Additionally, the Corporation had an interest rate swap contract that was designated as a cash flow hedge to hedge the interest rate risk associated with a pool of variable rate commercial loans. On March 31, 2023, the Corporation terminated this interest rate swap contract, and the derivative liability was derecognized. The loss on this interest rate swap included in the AOCL component of shareholders’ equity was updated to its termination date fair value of $26.5 million, or $20.1 million after tax. This loss is being amortized into earnings as a reduction of interest income on a straight-line basis over the remaining life of the original interest rate swap term, or through May 1, 2026. At March 31, 2024, the remaining unamortized balance of the loss included in the AOCL component of shareholders’ equity was $17.9 million, or $13.3 million after tax.
The changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) and subsequently reclassified to earnings when gains or losses are realized.
Loan Related Derivative Contracts
Interest Rate Derivative Contracts with Customers
The Corporation enters into interest rate swap and interest rate cap contracts to help commercial loan borrowers manage their interest rate risk. These interest rate swap contracts allow borrowers to convert variable-rate loan payments to fixed-rate loan payments, while interest rate cap contracts allow borrowers to limit their interest rate exposure in a rising rate environment. When the Corporation enters into an interest rate derivative contract with a commercial loan borrower, it simultaneously enters into a “mirror” interest rate contract with a third party. For interest rate swaps, the third party exchanges the client’s fixed-rate loan payments for variable-rate loan payments. The Corporation’s credit policies with respect to interest rate contracts with commercial borrowers are similar to those used for loans. The Corporation retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans. The interest rate contracts with counterparties are generally subject to bilateral collateralization terms. 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.
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 recognized in earnings.
-22-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the notional amounts and fair values of derivative instruments in the Unaudited Consolidated Balance Sheets:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | |||||||||||||||||||||
| Fair Value | Fair Value | ||||||||||||||||||||||
| Notional Amounts | Derivative Assets | Derivative Liabilities | Notional Amounts | Derivative Assets | Derivative Liabilities | ||||||||||||||||||
Derivatives Designated as Cash Flow Hedging Instruments: | |||||||||||||||||||||||
Interest rate risk management contracts: | |||||||||||||||||||||||
Interest rate swaps (1) | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Derivatives not Designated as Hedging Instruments: | |||||||||||||||||||||||
Loan related derivative contracts: | |||||||||||||||||||||||
| Interest rate contracts with customers | |||||||||||||||||||||||
| Mirror contracts with counterparties | |||||||||||||||||||||||
Risk participation agreements | |||||||||||||||||||||||
| Mortgage loan commitments: | |||||||||||||||||||||||
Interest rate lock commitments | |||||||||||||||||||||||
Forward sale commitments | |||||||||||||||||||||||
Gross amounts | |||||||||||||||||||||||
Less: amounts offset (2) | |||||||||||||||||||||||
| Derivative balances, net of offset | |||||||||||||||||||||||
Less: collateral pledged (3) | |||||||||||||||||||||||
| Net amounts | $ | $ | $ | $ | |||||||||||||||||||
(1)The fair value of derivative assets includes accrued interest receivable of $233 thousand and $239 thousand, respectively, at March 31, 2024 and December 31, 2023. There was no
(2)Interest rate risk management contracts and loan related derivative contracts with counterparties are subject to master netting arrangements.
(3)Collateral contractually required to be pledged to derivative counterparties is in the form of cash. Washington Trust may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.
The following table presents the effect of derivative instruments in the Unaudited Consolidated Statements of Changes in Shareholders’ Equity:
| (Dollars in thousands) | Gain Recognized in Other Comprehensive Income (Loss), Net of Tax | |||||||
| Three months ended March 31, | 2024 | 2023 | ||||||
Derivatives Designated as Cash Flow Hedging Instruments: | ||||||||
Interest rate risk management contracts: | ||||||||
Interest rate swaps | $ | $ | ||||||
| Total | $ | $ | ||||||
For derivatives designated as cash flow hedging instruments, see Note 14 for additional disclosure pertaining to the amounts and location of reclassifications from AOCL into earnings.
-23-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the effect of derivative instruments in the Unaudited Consolidated Statements of Income:
| (Dollars in thousands) | Amount of Gain (Loss) Recognized in Noninterest Income | |||||||||||||
| Three months ended March 31, | Statement of Income Location | 2024 | 2023 | |||||||||||
Derivatives not Designated as Hedging Instruments: | ||||||||||||||
| Loan related derivative contracts: | ||||||||||||||
| Interest rate contracts with customers | Loan related derivative income | ($ | $ | |||||||||||
| Mirror interest rate contracts with counterparties | Loan related derivative income | ( | ||||||||||||
Risk participation agreements | Loan related derivative income | ( | ( | |||||||||||
| Mortgage loan commitments: | ||||||||||||||
Interest rate lock commitments | Mortgage banking revenues | |||||||||||||
Forward sale commitments | Mortgage banking revenues | ( | ||||||||||||
| Total | $ | $ | ||||||||||||
Note 7 - 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 other assets at fair value on a nonrecurring basis, such as collateral dependent individually analyzed loans.
Fair value is a market-based measurement, not an entity-specific measurement. Fair value measurements are determined based on the assumptions the market participants would use in pricing the asset or liability. In addition, GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information, or “inputs”, are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Corporation’s market assumptions. These two types of inputs have created the following fair value hierarchy:
•Level 1 – Quoted prices for identical assets or liabilities in active markets.
•Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
•Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in the markets and which reflect the Corporation’s market assumptions.
Fair Value Option Election
GAAP allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain 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) | March 31, 2024 | December 31, 2023 | ||||||
| Aggregate fair value | $ | $ | ||||||
Aggregate principal balance | ||||||||
| Difference between fair value and principal balance | $ | $ | ||||||
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 a decrease in mortgage banking revenues of $69 thousand for the three months ended March 31, 2024, compared to an increase in mortgage banking revenues of $24 thousand for the same period in 2023.
-24-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
There were no mortgage loans held for sale 90 days or more past due as of March 31, 2024 and December 31, 2023.
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 March 31, 2024 and December 31, 2023.
Level 2 debt securities are traded less frequently than exchange-traded instruments. The fair value of these securities is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category includes obligations of U.S. government-sponsored enterprises, including mortgage-backed securities, individual name issuer trust preferred debt securities, and corporate bonds.
Debt securities not actively traded whose fair value is determined through the use of cash flows utilizing inputs that are unobservable are classified as Level 3. There were no Level 3 debt securities held at March 31, 2024 and December 31, 2023.
Mortgage Loans Held for Sale
The Corporation has elected the fair value option for mortgage loans held for sale. The fair value 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
Collateral dependent individually analyzed loans are valued based upon the lower of amortized cost or fair value. Fair value is determined based on the appraised value of the underlying collateral. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For collateral dependent loans that are expected to be repaid substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the collateral. Internal valuations may be utilized to determine the fair value of other business assets. Collateral dependent individually analyzed loans are categorized as Level 3.
Derivatives
Interest rate derivative contracts are traded in over-the-counter markets where quoted market prices are not readily available. Fair value measurements are determined using independent valuation software, which utilizes the present value of future cash flows discounted using market observable inputs such as forward rate assumptions. The Corporation evaluates the credit risk of its counterparties, as well as that of the Corporation. Accordingly, factors such as the likelihood of default by the Corporation and its counterparties, its net exposures, and remaining contractual life are considered in determining if 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 March 31, 2024 and December 31, 2023, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Corporation has classified its derivative valuations in their entirety as Level 2.
Fair value measurements of forward loan commitments (interest rate lock commitments and forward sale commitments) are primarily based on current market prices for similar assets in the secondary market for mortgage loans and therefore are classified as Level 2 assets. The fair value of interest rate lock commitments is also dependent on the ultimate closing of the loans. Pull-through rates are based on the Corporation’s historical data and reflect the Corporation’s best estimate of the likelihood that a commitment will result in a closed loan. Although the pull-through rates are Level 3 inputs, the Corporation has assessed the significance of the impact of pull-through rates on the overall valuation of its interest rate lock commitments and has determined that they are not significant to the overall valuation. As a result, the Corporation has classified its interest rate lock commitments as Level 2.
-25-
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) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
| March 31, 2024 | ||||||||||||||
| Assets: | ||||||||||||||
| Available for sale debt securities: | ||||||||||||||
Obligations of U.S. government-sponsored enterprises | $ | $ | $ | $ | ||||||||||
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | ||||||||||||||
Individual name issuer trust preferred debt securities | ||||||||||||||
Corporate bonds | ||||||||||||||
| Mortgage loans held for sale | ||||||||||||||
| Derivative assets | ||||||||||||||
| Total assets at fair value on a recurring basis | $ | $ | $ | $ | ||||||||||
| Liabilities: | ||||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||
| Total liabilities at fair value on a recurring basis | $ | $ | $ | $ | ||||||||||
| (Dollars in thousands) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
| December 31, 2023 | ||||||||||||||
| Assets: | ||||||||||||||
| Available for sale debt securities: | ||||||||||||||
Obligations of U.S. government-sponsored enterprises | $ | $ | $ | $ | ||||||||||
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | ||||||||||||||
Individual name issuer trust preferred debt securities | ||||||||||||||
Corporate bonds | ||||||||||||||
| Mortgage loans held for sale | ||||||||||||||
| Derivative assets | ||||||||||||||
| Total assets at fair value on a recurring basis | $ | $ | $ | $ | ||||||||||
| Liabilities: | ||||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||
| Total liabilities at fair value on a recurring basis | $ | $ | $ | $ | ||||||||||
Items Recorded at Fair Value on a Nonrecurring Basis
There were no assets written down to fair value during the three months ended March 31, 2024.
-26-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
The following table presents the carrying value of assets held at December 31, 2023, which were written down to fair value during the year ended December 31, 2023.
| (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 | $ | $ | $ | $ | |||||||||||||||||||
| Loan servicing rights | |||||||||||||||||||||||
| Total assets at fair value on a nonrecurring basis | $ | $ | $ | $ | |||||||||||||||||||
The following table presents valuation techniques and unobservable inputs for assets measured at fair value on a nonrecurring
basis for which the Corporation has utilized Level 3 inputs to determine fair value:
| (Dollars in thousands) | Fair Value | Valuation Technique | Unobservable Input | Inputs Utilized (Weighted Average) | ||||||||||
| December 31, 2023 | ||||||||||||||
| Collateral dependent individually analyzed loans | $ | Appraisals of collateral | Discount for costs to sell | |||||||||||
| Appraisal adjustments | ||||||||||||||
| Loan servicing rights | Discounted cash flow | Discount rates | ||||||||||||
| Prepayment rates | ||||||||||||||
Items for which Fair Value is Only Disclosed
The estimated fair values and related carrying amounts for financial instruments for which fair value is only disclosed are presented in the tables below:
| (Dollars in thousands) | |||||||||||||||||
| March 31, 2024 | 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: | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||
| Loans, net of allowance for credit losses on loans | |||||||||||||||||
FHLB stock | |||||||||||||||||
Investment in BOLI | |||||||||||||||||
| Financial Liabilities: | |||||||||||||||||
| Non-maturity deposits | $ | $ | $ | $ | $ | ||||||||||||
| Time deposits | |||||||||||||||||
FHLB advances | |||||||||||||||||
| Junior subordinated debentures | |||||||||||||||||
-27-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
| (Dollars in thousands) | |||||||||||||||||
| December 31, 2023 | 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: | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | ||||||||||||
| Loans, net of allowance for credit losses on loans | |||||||||||||||||
FHLB stock | |||||||||||||||||
Investment in BOLI | |||||||||||||||||
| Financial Liabilities: | |||||||||||||||||
| Non-maturity deposits | $ | $ | $ | $ | $ | ||||||||||||
| Time deposits | |||||||||||||||||
FHLB advances | |||||||||||||||||
| Junior subordinated debentures | |||||||||||||||||
Note 8 - Deposits
The following table presents a summary of deposits:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | ||||||
| Noninterest-bearing: | ||||||||
| Noninterest-bearing demand deposits | $ | $ | ||||||
| Interest-bearing: | ||||||||
| Interest-bearing demand deposits | ||||||||
| NOW accounts | ||||||||
| Money market accounts | ||||||||
| Savings accounts | ||||||||
Time deposits (1) | ||||||||
| Total interest-bearing deposits | ||||||||
| Total deposits | $ | $ | ||||||
(1)Includes wholesale brokered time deposit balances of $673.7 million and $654.1 million, respectively, as of March 31, 2024 and December 31, 2023.
The following table presents scheduled maturities of time certificates of deposit:
| (Dollars in thousands) | Scheduled Maturity | Weighted Average Rate | ||||||
| April 1, 2024 to December 31, 2024 | $ | % | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 and thereafter | ||||||||
| Balance at March 31, 2024 | $ | % | ||||||
Time certificates of deposit in denominations of $250 thousand or more totaled $297.5 million and $271.2 million, respectively, at March 31, 2024 and December 31, 2023.
-28-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 9 - Borrowings
Advances payable to the FHLB amounted to $1.2
At March 31, 2024, the Corporation has interest rate swaps with a notional amount of $120.0 million that were designated as cash flow hedges to hedge the interest rate risk associated with short-term FHLB advances. See Note 6 for additional disclosure on derivatives.
As of March 31, 2024 and December 31, 2023, the Bank had access to a $40.0 66.0 million and $65.0 million, respectively, at March 31, 2024 and December 31, 2023. The standby letters of credit collateralize institutional deposits. The Bank had remaining available borrowing capacity of $999.4 million and $1.1 billion, respectively, with the FHLB at March 31, 2024 and December 31, 2023. 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 March 31, 2024:
| (Dollars in thousands) | Scheduled Maturity | Weighted Average Rate | ||||||
| April 1, 2024 to December 31, 2024 | $ | % | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 and thereafter | ||||||||
| Balance at March 31, 2024 | $ | % | ||||||
Note 10 - Shareholders' Equity
Stock Repurchase Program
The 2024 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 numbers 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 2024 Repurchase Program commenced on January 1, 2024 and expires on December 31, 2024, and may be modified, suspended, or discontinued at any time. As of March 31, 2024, no shares have been repurchased under the 2024 Repurchase Program.
-29-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Regulatory Capital Requirements
Capital levels at March 31, 2024 exceeded the regulatory minimum levels to be considered “well capitalized.”
The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios, as well as the corresponding minimum and well capitalized regulatory amounts and ratios that were in effect during the respective periods:
| (Dollars in thousands) | Actual | For Capital Adequacy Purposes | To Be “Well Capitalized” Under Prompt Corrective Action Provisions | ||||||||||||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||
| March 31, 2024 | |||||||||||||||||||||||||||||||||||
| Total Capital (to Risk-Weighted Assets): | |||||||||||||||||||||||||||||||||||
Corporation | $ | % | $ | % | N/A | N/A | |||||||||||||||||||||||||||||
Bank | $ | % | |||||||||||||||||||||||||||||||||
| Tier 1 Capital (to Risk-Weighted Assets): | |||||||||||||||||||||||||||||||||||
Corporation | N/A | N/A | |||||||||||||||||||||||||||||||||
Bank | |||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital (to Risk-Weighted Assets): | |||||||||||||||||||||||||||||||||||
Corporation | N/A | N/A | |||||||||||||||||||||||||||||||||
Bank | |||||||||||||||||||||||||||||||||||
| Tier 1 Capital (to Average Assets): (1) | |||||||||||||||||||||||||||||||||||
Corporation | N/A | N/A | |||||||||||||||||||||||||||||||||
Bank | |||||||||||||||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||||||||
| Total Capital (to Risk-Weighted Assets): | |||||||||||||||||||||||||||||||||||
Corporation | N/A | N/A | |||||||||||||||||||||||||||||||||
Bank | |||||||||||||||||||||||||||||||||||
| Tier 1 Capital (to Risk-Weighted Assets): | |||||||||||||||||||||||||||||||||||
Corporation | N/A | N/A | |||||||||||||||||||||||||||||||||
Bank | |||||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital (to Risk-Weighted Assets): | |||||||||||||||||||||||||||||||||||
Corporation | N/A | N/A | |||||||||||||||||||||||||||||||||
Bank | |||||||||||||||||||||||||||||||||||
| Tier 1 Capital (to Average Assets): (1) | |||||||||||||||||||||||||||||||||||
Corporation | N/A | N/A | |||||||||||||||||||||||||||||||||
Bank | |||||||||||||||||||||||||||||||||||
(1) Leverage ratio.
In addition to the minimum regulatory capital required for capital adequacy outlined in the table above, the Corporation and the Bank are required to maintain a minimum capital conservation buffer, in the form of common equity, of 2.50%, resulting in a requirement for the Corporation and the Bank to effectively maintain total capital, Tier 1 capital, and common equity Tier 1 capital ratios of 10.50%, 8.50%, and 7.00%, respectively. The Corporation and the Bank must maintain the capital conservation buffer to avoid restrictions on the ability to pay dividends and discretionary bonuses. The Corporation’s and the Bank’s capital levels exceeded the minimum regulatory capital requirements plus the capital conservation buffer at March 31, 2024 and December 31, 2023.
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 March 31, 2024 and December 31, 2023, $22.0
In accordance with regulatory capital rules, the Corporation elected the option to delay the estimated impact of ASC 326 on its regulatory capital over a two-year deferral and subsequent three-year transition period ending December 31, 2024. As a
-30-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
result, capital ratios exclude the full impact of the increased ACL on loans and unfunded loan commitments attributed to the adoption of ASC 326, adjusted for an approximation of the after-tax provision for credit losses attributable to ASC 326 relative to the incurred loss methodology during the two-year deferral period. The cumulative difference at the end of the deferral period is being phased-in to regulatory capital over the three-year transition period, which began January 1, 2022.
Note 11 - Revenue from Contracts with Customers
The following table summarizes 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 March 31, | 2024 | 2023 | |||||||||||||||
| (Dollars in thousands) | Revenue (1) | ASC 606 Revenue (2) | Revenue (1) | ASC 606 Revenue (2) | |||||||||||||
| Net interest income | $ | $ | $ | $ | |||||||||||||
| Noninterest income: | |||||||||||||||||
| Wealth management revenues | |||||||||||||||||
Mortgage banking revenues | |||||||||||||||||
Card interchange fees | |||||||||||||||||
Service charges on deposit accounts | |||||||||||||||||
Loan related derivative income | ( | ||||||||||||||||
Income from bank-owned life insurance | |||||||||||||||||
Other income | |||||||||||||||||
| Total noninterest income | |||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||
(1)As reported in the Unaudited Consolidated Statements of Income.
(2)Revenue from contracts with customers in scope of ASC 606.
The following table presents revenue from contracts with customers based on the timing of revenue recognition:
| (Dollars in thousands) | ||||||||
| Three months ended March 31, | 2024 | 2023 | ||||||
| Revenue recognized at a point in time: | ||||||||
| Card interchange fees | $ | $ | ||||||
| Service charges on deposit accounts | ||||||||
| Other income | ||||||||
| Revenue recognized over time: | ||||||||
Wealth management revenues | ||||||||
Service charges on deposit accounts | ||||||||
Other income | ||||||||
Total revenues from contracts with customers in scope of ASC 606 | $ | $ | ||||||
Receivables for revenue from contracts with customers primarily consist of amounts due for wealth management services performed for which the Corporation’s performance obligations have been fully satisfied. Receivables amounted to $5.7 million and $5.5 million, respectively, at March 31, 2024 and December 31, 2023 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 March 31, 2024 and December 31, 2023 and were included in other liabilities in the Unaudited Consolidated Balance Sheets.
-31-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
For commissions and incentives that are in scope of ASC 606, such as those paid to employees in our wealth management services and commercial banking segments in order to obtain customer contracts, contract cost assets are established. The contract cost assets are capitalized and amortized over the estimated useful life that the asset is expected to generate benefits. The carrying value of contract cost assets amounted to $2.0
Note 12 - Defined Benefit Pension Plans
Washington Trust maintains a qualified pension plan for the benefit of certain eligible employees who were hired prior to October 1, 2007. Washington Trust also has non-qualified retirement plans to provide supplemental retirement benefits to certain employees, as defined in the plans. These defined benefit pension plans were previously amended to freeze benefit accruals after a 10-year transition period, which ended in December 2023.
In the fourth quarter of 2023, the Corporation’s Board of Directors approved a resolution to terminate the qualified pension plan, and participants were notified of the termination. Work on the qualified pension plan termination process has commenced and the qualified pension plan’s assets are expected to be distributed in 2025, pending completion of applicable regulatory approvals, including receipt of a determination letter from the Internal Revenue Service. The qualified pension plan liability is expected to be settled in 2025 through a combination of lump sum payments to participants and purchase of a group annuity contract from a highly-rated insurance company. Upon settlement in 2025, the Corporation expects to recognize a pre-tax pension settlement charge that will include a non-cash charge for the recognition of all pre-tax actuarial losses accumulated in AOCL at that time. The actual amount of the settlement charge will depend on various factors, including interest rates, plan asset returns, the lump sum election rate and annuity pricing.
The following table presents components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss), on a pre-tax basis:
| (Dollars in thousands) | Qualified Pension Plan | Non-Qualified Retirement Plans | |||||||||||||||
| Three months ended March 31, | 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net Periodic Benefit Cost: | |||||||||||||||||
Service cost (1) | $ | $ | $ | $ | |||||||||||||
Interest cost (2) | |||||||||||||||||
Expected return on plan assets (2) | ( | ( | |||||||||||||||
Recognized net actuarial loss (2) | |||||||||||||||||
| Net periodic benefit cost | ($ | $ | $ | $ | |||||||||||||
(1)Included in salaries and employee benefits expense in the Unaudited Consolidated Statements of Income.
(2)Included in other expenses in the Unaudited Consolidated Statements of Income.
The following table presents the measurement date and weighted-average assumptions used to determine net periodic benefit cost:
| Qualified Pension Plan | Non-Qualified Retirement Plans | ||||||||||||||||||||||
| For the three months ended March 31, | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Measurement date | Dec 31, 2023 | Dec 31, 2022 | Dec 31, 2023 | Dec 31, 2022 | |||||||||||||||||||
| Equivalent single discount rate for benefit obligations | |||||||||||||||||||||||
| Equivalent single discount rate for service cost | N/A | N/A | |||||||||||||||||||||
| Equivalent single discount rate for interest cost | |||||||||||||||||||||||
| Expected long-term return on plan assets | N/A | N/A | |||||||||||||||||||||
| Rate of compensation increase | N/A | ||||||||||||||||||||||
-32-
Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 13 - Business Segments
The Corporation manages its operations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services.
Management uses an allocation methodology to allocate income and expenses to the business lines. Direct activities are assigned to the appropriate business segment to which the activity relates. Indirect activities, such as corporate, technology and other support functions, are allocated to business segments primarily based upon full-time equivalent employee computations.
Commercial Banking
The Commercial Banking segment includes commercial, residential, and consumer lending activities; mortgage banking activities; deposit generation; cash management activities; banking activities, including customer support and the operation of ATMs, telephone banking, internet banking, and mobile banking services; as well as investment portfolio and wholesale funding activities.
Wealth Management Services
The Wealth Management Services segment includes investment management; holistic financial planning services; personal trust and estate services, including services as trustee, personal representative, and custodian; settlement of decedents’ estates; and institutional trust services, including custody and fiduciary services.
The following table presents the statement of operations and total assets for Washington Trust’s reportable segments:
| (Dollars in thousands) | Commercial Banking | Wealth Management Services | Consolidated Total | |||||||||||||||||||||||
| Three months ended March 31, | 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net interest income | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Provision for credit losses | ||||||||||||||||||||||||||
| Net interest income after provision for credit losses | ||||||||||||||||||||||||||
| Noninterest income | ||||||||||||||||||||||||||
| Noninterest expenses: | ||||||||||||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||||||||||||
| Other noninterest expenses | ||||||||||||||||||||||||||
| Total noninterest expenses | ||||||||||||||||||||||||||
| Income before income taxes | ||||||||||||||||||||||||||
| Income tax expense | ||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Total assets at period end | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Expenditures for long-lived assets | ||||||||||||||||||||||||||
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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 14 - Other Comprehensive Income (Loss)
The following table presents the activity in other comprehensive income (loss):
| Three months ended March 31, | 2024 | 2023 | |||||||||||||||||||||
| (Dollars in thousands) | Pre-tax Amounts | Income Tax Benefit (Expense) | Net of Tax | Pre-tax Amounts | Income Tax Expense | Net of Tax | |||||||||||||||||
| Available for Sale Debt Securities: | |||||||||||||||||||||||
| Change in fair value of available for sale debt securities | ($ | $ | ($ | $ | ($ | $ | |||||||||||||||||
| Cash Flow Hedges: | |||||||||||||||||||||||
| Change in fair value of cash flow hedges | ( | ( | |||||||||||||||||||||
Net cash flow hedge losses reclassified into earnings (1) | ( | ( | |||||||||||||||||||||
| Net change in fair value of cash flow hedges | ( | ( | |||||||||||||||||||||
| Defined Benefit Plan Obligations: | |||||||||||||||||||||||
Amortization of net actuarial losses (2) | ( | ( | |||||||||||||||||||||
| Total other comprehensive (loss) income | ($ | $ | ($ | $ | ($ | $ | |||||||||||||||||
(1)For the three months ended March 31, 2024 and 2023, the pre-tax amounts reclassified into earnings in the Unaudited Consolidated Statements of Income included reductions of $2.1 million and $2.8 million, respectively, in interest and fees on loans, as well as reductions of $493 thousand and $127 thousand, respectively, in FHLB interest expense.
(2)The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income.
The following tables present the changes in AOCL by component, net of tax:
| (Dollars in thousands) | Net Unrealized Losses on Available For Sale Debt Securities | Net Unrealized Losses on Cash Flow Hedges | Net Unrealized Losses on Defined Benefit Plan Obligations | Total | |||||||||||||||||||
| For the three months ended March 31, 2024 | |||||||||||||||||||||||
| Balance at December 31, 2023 | ($ | ($ | ($ | ($ | |||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | ( | ( | |||||||||||||||||||||
Amounts reclassified from AOCL | |||||||||||||||||||||||
| Net other comprehensive (loss) income | ( | ( | |||||||||||||||||||||
| Balance at March 31, 2024 | ($ | ($ | ($ | ($ | |||||||||||||||||||
| (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 March 31, 2023 | |||||||||||||||||||||||
| Balance at December 31, 2022 | ($ | ($ | ($ | ($ | |||||||||||||||||||
| Other comprehensive income before reclassifications | |||||||||||||||||||||||
Amounts reclassified from AOCL | |||||||||||||||||||||||
| Net other comprehensive income | |||||||||||||||||||||||
| Balance at March 31, 2023 | ($ | ($ | ($ | ($ | |||||||||||||||||||
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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
Note 15 - Earnings per Common Share
The following table presents the calculation of EPS:
| (Dollars and shares in thousands, except per share amounts) | ||||||||
| Three months ended March 31, | 2024 | 2023 | ||||||
| Earnings for basic and diluted earnings per common share: | ||||||||
| Net income | $ | $ | ||||||
| Less: dividends and undistributed earnings allocated to participating securities | ( | ( | ||||||
| Net income available to common shareholders | $ | $ | ||||||
| Shares: | ||||||||
Weighted average common shares outstanding for basic EPS | ||||||||
Dilutive effect of common stock equivalents | ||||||||
Weighted average common shares outstanding for diluted EPS | ||||||||
| Earnings per common share: | ||||||||
Basic EPS | $ | $ | ||||||
Diluted EPS | $ | $ | ||||||
Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 464,011 for the three months ended March 31, 2024, compared to 303,982 for the same period in 2023.
Note 16 - 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 and standby letters of credit, as well as derivative financial instruments, such as mortgage 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. See Note 6 for additional disclosure pertaining to derivative 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. At March 31, 2024 and December 31, 2023, there were no liabilities to beneficiaries resulting from standby letters of credit. Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required.
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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) | March 31, 2024 | December 31, 2023 | |||||||||
| Financial instruments whose contract amounts represent credit risk: | |||||||||||
| Commitments to extend credit | $ | $ | |||||||||
| Standby letters of credit | |||||||||||
ACL on Unfunded Commitments
The ACL on unfunded commitments is management’s estimate of expected lifetime credit losses over the expected contractual term 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.
The activity in the ACL on unfunded commitments for the three months ended March 31, 2024 is presented below:
| (Dollars in thousands) | Commercial | Consumer | ||||||||||||||||||||||||
CRE | C&I | Total Commercial | Residential Real Estate | Home Equity | Other | Total Consumer | Total | |||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Provision | ( | ( | ( | ( | ( | ( | ||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (Dollars in thousands) | Commercial | Consumer | ||||||||||||||||||||||||
CRE | C&I | Total Commercial | Residential Real Estate | Home Equity | Other | Total Consumer | Total | |||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Provision | ( | ( | ( | ( | ||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Other Contingencies
Litigation
The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated balance sheets or statements of income of the Corporation.
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Management's Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Corporation’s Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2023, 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 months ended March 31, 2024 are not necessarily indicative of the results for the full-year ended December 31, 2024 or any future period.
Forward-Looking Statements
This report contains statements that are “forward-looking statements.” We may also make forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors, or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “outlook,” “will,” “should,” and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties, and other factors, some of which are beyond our control. These risks, uncertainties, and other factors may cause our actual results, performance, or achievements to be materially different than the anticipated future results, performance, or achievements expressed or implied by the forward-looking statements.
Some of the factors that might cause these differences include the following:
•changes in general business and economic conditions on a national basis and in the local markets in which we operate;
•changes in customer behavior due to political, business, and economic conditions, including inflation and concerns about liquidity;
•interest rate changes or volatility, as well as changes in the balance and mix of loans and deposits;
•changes in loan demand and collectability;
•the possibility that future credits losses are higher than currently expected due to changes in economic assumptions or adverse economic developments;
•ongoing volatility in national and international financial markets;
•reductions in the market value or outflows of wealth management AUA;
•decreases in the value of securities and other assets;
•increases in defaults and charge-off rates;
•changes in the size and nature of our competition;
•changes in legislation or regulation and accounting principles, policies, and guidelines;
•operational risks including, but not limited to, changes in information technology, cybersecurity incidents, fraud, natural disasters, war, terrorism, civil unrest, and future pandemics;
•regulatory, litigation, and reputational risks; and
•changes in the assumptions used in making such forward-looking statements.
In addition, the factors described under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC, may result in these differences. You should carefully review all of these factors and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans, and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
Overview
Washington Trust offers a full range of financial services, including commercial, residential, and consumer lending, retail and commercial deposit products, and wealth management and trust services through its offices in Rhode Island, Massachusetts, and Connecticut.
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
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Management's Discussion and Analysis
sources, including wealth management services, mortgage banking activities, and deposit services. Our principal noninterest expenses include salaries and employee benefit costs, outsourced services provided by third-party vendors, occupancy and facility-related costs, and other administrative expenses.
We continue to leverage our strong regional brand to build market share and remain steadfast in our commitment to provide superior service. We believe the key to future growth is providing customers with convenient in-person service and digital banking solutions. In January 2024, we opened a new full-service branch in Smithfield, Rhode Island. In addition, we plan to open another branch in the Olneyville section of Providence later in 2024.
Risk Management
The Corporation has a comprehensive ERM program through which the Corporation identifies, measures, monitors, and controls current and emerging material risks.
The Board of Directors is responsible for oversight of the ERM program. The ERM program enables the aggregation of risk across the Corporation and ensures the Corporation has the tools, programs, and processes in place to support informed decision making, to anticipate risks before they materialize and to maintain the Corporation’s risk profile consistent with its risk strategy. The Board of Directors has approved an ERM 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 Notes 4 and 5 to the Unaudited Consolidated Financial Statements. For further discussion regarding credit risk associated with unfunded commitments, see Note 16 to the Unaudited Consolidated Financial Statements. For further discussion regarding the Corporation’s securities portfolio, see Note 3 to the Unaudited Consolidated Financial Statements.
Interest rate risk is the risk of loss to earnings due to movements in interest rates. Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows. 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 in the most economical way for it to meet its maturing liability obligations and customer loan demand. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources. For detailed disclosure regarding liquidity management, see the “Liquidity and Capital Resources” section below.
Price and market risk refers to the risk of loss arising from adverse changes in interest rates and other relevant market rates and prices, such as equity prices. Interest rate risk, discussed above, is the most significant market risk to which the Corporation is exposed. The Corporation is also exposed to financial market risk and housing market risk.
Compliance risk represents the risk of regulatory sanctions or financial loss resulting from the failure to comply with laws, rules, and regulations and standards of good banking practice. Activities which may expose the Corporation to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, adherence to all applicable laws and regulations, and employment and tax matters.
Strategic and reputation risk represent the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, and failure to assess existing and new opportunities and threats in business, markets, and products.
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Management's Discussion and Analysis
Operational risk is the risk of loss due to human behavior, inadequate or failed internal processes, systems and controls, information technology changes or failures, and external influences such as market conditions, fraudulent activities, cybersecurity incidents, 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 represent the second line of defense. They are responsible for policy setting and for reviewing and challenging the risk management activities of the business units. They collaborate closely with business units on planning and resource allocation with respect to risk management. Internal Audit is a 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 Part II, Item 1A below and the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC.
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Management's Discussion and Analysis
Results of Operations
Summary
The following table presents a summarized consolidated statement of operations:
| (Dollars in thousands) | |||||||||||||||||
| Change | |||||||||||||||||
| Three months ended March 31, | 2024 | 2023 | $ | % | |||||||||||||
| Net interest income | $31,665 | $37,193 | ($5,528) | (15 | %) | ||||||||||||
| Noninterest income | 17,163 | 13,283 | 3,880 | 29 | |||||||||||||
| Total revenues | 48,828 | 50,476 | (1,648) | (3) | |||||||||||||
| Provision for credit losses | 700 | 800 | (100) | (13) | |||||||||||||
| Noninterest expense | 34,363 | 33,564 | 799 | 2 | |||||||||||||
| Income before income taxes | 13,765 | 16,112 | (2,347) | (15) | |||||||||||||
| Income tax expense | 2,829 | 3,300 | (471) | (14) | |||||||||||||
| Net income | $10,936 | $12,812 | ($1,876) | (15 | %) | ||||||||||||
The following table presents a summary of performance metrics and ratios:
| Three months ended March 31, | 2024 | 2023 | ||||||
| Diluted earnings per common share | $0.64 | $0.74 | ||||||
| Return on average assets (net income divided by average assets) | 0.61 | % | 0.77 | % | ||||
Return on average equity (net income available for common shareholders divided by average equity) | 9.33 | % | 11.27 | % | ||||
| Net interest income as a percentage of total revenues | 65 | % | 74 | % | ||||
| Noninterest income as a percentage of total revenues | 35 | % | 26 | % | ||||
Net income totaled $10.9 million for the three months ended March 31, 2024, down by 15%, from the $12.8 million reported for the same period in 2023. Results in 2024 largely reflected lower net interest income, partially offset by higher noninterest income.
The decline in net interest income in 2024 was driven by higher rates paid on, and increases in, average interest-bearing liability balances, which offset the benefit of higher yields on, and growth in, average interest-earning asset balances. Noninterest income benefited from a $2.1 litigation settlement received in the first quarter of 2024, as well as higher mortgage banking revenues and wealth management revenues. There was a modest decline in the provision for credit losses in 2024 as compared to the same period in 2023. The increase in noninterest expenses largely reflected an increase in FDIC deposit insurance costs.
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Management's Discussion and Analysis
Average Balances / Net Interest Margin - Fully Taxable Equivalent Basis
The following table presents average balance and interest rate information. Tax-exempt income is converted to an 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 March 31, | 2024 | 2023 | 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 | $78,992 | $1,196 | 6.09 | $103,269 | $1,070 | 4.20 | ($24,277) | $126 | 1.89 | ||||||||||||||||||||||||||
| Mortgage loans held for sale | 15,452 | 255 | 6.64 | 13,132 | 152 | 4.69 | 2,320 | 103 | 1.95 | ||||||||||||||||||||||||||
| Taxable debt securities | 1,146,454 | 7,096 | 2.49 | 1,193,852 | 7,194 | 2.44 | (47,398) | (98) | 0.05 | ||||||||||||||||||||||||||
FHLB stock | 53,858 | 1,073 | 8.01 | 46,102 | 597 | 5.25 | 7,756 | 476 | 2.76 | ||||||||||||||||||||||||||
| Commercial real estate | 2,140,887 | 34,220 | 6.43 | 1,859,331 | 25,300 | 5.52 | 281,556 | 8,920 | 0.91 | ||||||||||||||||||||||||||
| Commercial & industrial | 610,747 | 9,892 | 6.51 | 630,778 | 9,070 | 5.83 | (20,031) | 822 | 0.68 | ||||||||||||||||||||||||||
Total commercial | 2,751,634 | 44,112 | 6.45 | 2,490,109 | 34,370 | 5.60 | 261,525 | 9,742 | 0.85 | ||||||||||||||||||||||||||
| Residential real estate | 2,592,769 | 26,531 | 4.12 | 2,353,266 | 21,664 | 3.73 | 239,503 | 4,867 | 0.39 | ||||||||||||||||||||||||||
| Home equity | 310,231 | 5,004 | 6.49 | 286,348 | 3,759 | 5.32 | 23,883 | 1,245 | 1.17 | ||||||||||||||||||||||||||
| Other | 19,112 | 212 | 4.46 | 16,405 | 184 | 4.55 | 2,707 | 28 | (0.09) | ||||||||||||||||||||||||||
Total consumer | 329,343 | 5,216 | 6.37 | 302,753 | 3,943 | 5.28 | 26,590 | 1,273 | 1.09 | ||||||||||||||||||||||||||
Total loans | 5,673,746 | 75,859 | 5.38 | 5,146,128 | 59,977 | 4.73 | 527,618 | 15,882 | 0.65 | ||||||||||||||||||||||||||
Total interest-earning assets | 6,968,502 | 85,479 | 4.93 | 6,502,483 | 68,990 | 4.30 | 466,019 | 16,489 | 0.63 | ||||||||||||||||||||||||||
| Noninterest-earning assets | 263,333 | 241,513 | 21,820 | ||||||||||||||||||||||||||||||||
Total assets | $7,231,835 | $6,743,996 | $487,839 | ||||||||||||||||||||||||||||||||
| Liabilities and Shareholders’ Equity: | |||||||||||||||||||||||||||||||||||
| Interest-bearing demand deposits (in-market) | $506,239 | $5,706 | 4.53 | $298,158 | $2,639 | 3.59 | $208,081 | $3,067 | 0.94 | ||||||||||||||||||||||||||
| NOW accounts | 720,918 | 375 | 0.21 | 821,590 | 358 | 0.18 | (100,672) | 17 | 0.03 | ||||||||||||||||||||||||||
| Money market accounts | 1,107,591 | 10,417 | 3.78 | 1,253,141 | 7,576 | 2.45 | (145,550) | 2,841 | 1.33 | ||||||||||||||||||||||||||
| Savings accounts | 490,268 | 752 | 0.62 | 566,258 | 314 | 0.22 | (75,990) | 438 | 0.40 | ||||||||||||||||||||||||||
| Time deposits (in-market) | 1,149,442 | 11,720 | 4.10 | 830,574 | 4,577 | 2.23 | 318,868 | 7,143 | 1.87 | ||||||||||||||||||||||||||
| Interest-bearing in-market deposits | 3,974,458 | 28,970 | 2.93 | 3,769,721 | 15,464 | 1.66 | 204,737 | 13,506 | 1.27 | ||||||||||||||||||||||||||
| Wholesale brokered demand deposits | — | — | — | 16,257 | 177 | 4.42 | (16,257) | (177) | (4.42) | ||||||||||||||||||||||||||
| Wholesale brokered time deposits | 699,605 | 9,077 | 5.22 | 427,051 | 3,948 | 3.75 | 272,554 | 5,129 | 1.47 | ||||||||||||||||||||||||||
| Wholesale brokered deposits | 699,605 | 9,077 | 5.22 | 443,308 | 4,125 | 3.77 | 256,297 | 4,952 | 1.45 | ||||||||||||||||||||||||||
| Total interest-bearing deposits | 4,674,063 | 38,047 | 3.27 | 4,213,029 | 19,589 | 1.89 | 461,034 | 18,458 | 1.38 | ||||||||||||||||||||||||||
FHLB advances | 1,239,945 | 15,138 | 4.91 | 1,044,056 | 11,626 | 4.52 | 195,889 | 3,512 | 0.39 | ||||||||||||||||||||||||||
Junior subordinated debentures | 22,681 | 406 | 7.20 | 22,681 | 354 | 6.33 | — | 52 | 0.87 | ||||||||||||||||||||||||||
Total interest-bearing liabilities | 5,936,689 | 53,591 | 3.63 | 5,279,766 | 31,569 | 2.42 | 656,923 | 22,022 | 1.21 | ||||||||||||||||||||||||||
| Noninterest-bearing demand deposits | 664,656 | 835,298 | (170,642) | ||||||||||||||||||||||||||||||||
| Other liabilities | 159,394 | 168,826 | (9,432) | ||||||||||||||||||||||||||||||||
| Shareholders’ equity | 471,096 | 460,106 | 10,990 | ||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $7,231,835 | $6,743,996 | $487,839 | ||||||||||||||||||||||||||||||||
Net interest income (FTE) | $31,888 | $37,421 | ($5,533) | ||||||||||||||||||||||||||||||||
| Interest rate spread | 1.30 | 1.88 | (0.58) | ||||||||||||||||||||||||||||||||
| Net interest margin | 1.84 | 2.33 | (0.49) | ||||||||||||||||||||||||||||||||
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Management's Discussion and Analysis
Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:
| (Dollars in thousands) | |||||||||||
| Three months ended March 31, | 2024 | 2023 | Change | ||||||||
| Commercial loans | $223 | $228 | ($5) | ||||||||
Net Interest Income
Net interest income, the primary source of our operating income, totaled $31.7 million for the three months ended March 31, 2024, compared to $37.2 million for the same period in 2023. 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 to be comparable to taxable loans.
Net interest income includes the periodic recognition of prepayment penalty fee income associated with commercial loan payoffs. Prepayment penalty fee income amounted to $20 thousand and $124 thousand, respectively, for the three months ended March 31, 2024 and 2023, and had no basis point benefit to NIM in either period.
The analysis of net interest income, NIM, and the yield on loans is also impacted by changes in the level of net amortization of premiums and discounts on securities and loans, which is included in interest income. Changes in market interest rates affect the level of loan prepayments and the receipt of payments on mortgage-backed securities. Prepayment speeds generally increase as market interest rates decline and decrease as market interest rates rise. Changes in prepayment speeds could increase or decrease the level of net amortization of premiums and discounts, thereby affecting interest income. As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to net interest income) amounted to $265 thousand for the three months ended March 31, 2024, compared to $324 thousand for the same period in 2023.
FTE net interest income for the three months ended March 31, 2024 amounted to $31.9 million, down by $5.5 million, or 15%, from the same period in 2023. For the three months ended March 31, 2024, increases in average interest-bearing liability balances, net of increased average interest-earning assets, reduced net income by $2.7 million. Increases in funding costs outpaced increases in asset yields, reducing net interest income by $2.8 million for the three months ended March 31, 2024.
NIM was 1.84% for the three months ended March 31, 2024, compared to 2.33% for the same period in 2023. While NIM benefited from higher market interest rates on loans, it was adversely impacted by a higher cost of funds.
Total average securities for the three months ended March 31, 2024 decreased by $47.4 million, or 4%, from the average balances for the same period a year earlier primarily due to routine pay-downs. The FTE rate of return on the securities portfolio for the three months ended March 31, 2024 was 2.49%, compared to 2.44% for the same period in 2023.
Total average loan balances for the three months ended March 31, 2024 increased by $527.6 million, or 10%, from the average loan balances for the comparable 2023 period, largely reflecting growth in average balances of CRE and residential real estate loans. The yield on total loans for the three months ended March 31, 2024 was 5.38%, compared to 4.73% in the corresponding period in 2023.
Higher levels of wholesale funding were used to fund balance sheet growth. The average balance of FHLB advances for the three months ended March 31, 2024 increased by $195.9 million, or 19%, compared to the average balance for the same period in 2023. Due to increases in market interest rates, the average rate paid on such advances for the three months ended March 31, 2024 was 4.91%, up 39 basis points from 4.52% for the same period in 2023. Included in total average interest-bearing deposits were wholesale brokered deposits, which increased by $256.3 million, or 58%, from the same period in 2023. The average rate paid on wholesale brokered deposits for the three months ended March 31, 2024 was 5.22%, up by 145 basis points from 3.77% for the same period in 2023.
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Management's Discussion and Analysis
As market interest rates rose, deposit balances shifted from lower cost deposits to higher cost deposits. Average in-market interest-bearing deposits, which excludes wholesale brokered deposits, for the three months ended March 31, 2024 increased by $204.7 million, or 5%, from the average balances for the same period in 2023, with increases in time deposits and interest-bearing demand deposits. The average rate paid on in-market interest-bearing deposits for the three months ended March 31, 2024 was 2.93%, up by 127 basis points from 1.66% for the same period in 2023. The average balance of noninterest-bearing demand deposits for the three months ended March 31, 2024 decreased by $170.6 million from the average balances for the same period in 2023.
Volume / Rate Analysis - Interest Income and Expense (FTE Basis)
The following table presents certain information on an FTE basis regarding changes in our interest income and interest expense for the period indicated. The net change attributable to both volume and rate has been allocated proportionately.
| (Dollars in thousands) | Three Months Ended March 31, 2024 vs. 2023 | ||||||||||
| Change Due to | |||||||||||
| Volume | Rate | Net Change | |||||||||
| Interest on Interest-Earning Assets: | |||||||||||
| Cash, federal funds sold, and other short-term investments | ($291) | $417 | $126 | ||||||||
| Mortgage loans held for sale | 30 | 73 | 103 | ||||||||
| Taxable debt securities | (297) | 199 | (98) | ||||||||
FHLB stock | 113 | 363 | 476 | ||||||||
| Commercial real estate | 4,143 | 4,777 | 8,920 | ||||||||
| Commercial & industrial | (294) | 1,116 | 822 | ||||||||
Total commercial | 3,849 | 5,893 | 9,742 | ||||||||
| Residential real estate | 2,298 | 2,569 | 4,867 | ||||||||
| Home equity | 331 | 914 | 1,245 | ||||||||
| Other | 30 | (2) | 28 | ||||||||
| Total consumer | 361 | 912 | 1,273 | ||||||||
| Total loans | 6,508 | 9,374 | 15,882 | ||||||||
| Total interest income | 6,063 | 10,426 | 16,489 | ||||||||
| Interest on Interest-Bearing Liabilities: | |||||||||||
| Interest-bearing demand deposits (in-market) | 2,206 | 861 | 3,067 | ||||||||
| NOW accounts | (46) | 63 | 17 | ||||||||
| Money market accounts | (963) | 3,804 | 2,841 | ||||||||
| Savings accounts | (47) | 485 | 438 | ||||||||
| Time deposits (in-market) | 2,215 | 4,928 | 7,143 | ||||||||
| Interest-bearing in-market deposits | 3,365 | 10,141 | 13,506 | ||||||||
| Wholesale brokered demand deposits | (89) | (88) | (177) | ||||||||
| Wholesale brokered time deposits | 3,142 | 1,987 | 5,129 | ||||||||
| Wholesale brokered deposits | 3,053 | 1,899 | 4,952 | ||||||||
| Total interest-bearing deposits | 6,418 | 12,040 | 18,458 | ||||||||
FHLB advances | 2,329 | 1,183 | 3,512 | ||||||||
| Junior subordinated debentures | — | 52 | 52 | ||||||||
| Total interest expense | 8,747 | 13,275 | 22,022 | ||||||||
Net interest income (FTE) | ($2,684) | ($2,849) | ($5,533) | ||||||||
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
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Management's Discussion and Analysis
estimate, at the reporting date, of expected lifetime credit losses and includes consideration of current forecasted economic conditions. Estimating an appropriate level of ACL necessarily involves a high degree of judgment.
The following table presents the provision for credit losses:
| (Dollars in thousands) | |||||||||||||||||||||||
| Change | |||||||||||||||||||||||
| Three months ended March 31, | 2024 | 2023 | $ | % | |||||||||||||||||||
| Provision for credit losses on loans | $900 | $800 | $100 | 13 | % | ||||||||||||||||||
| Provision for credit losses on unfunded commitments | (200) | — | ($200) | (100) | |||||||||||||||||||
| Provision for credit losses | $700 | $800 | ($100) | (13 | %) | ||||||||||||||||||
The provisions recognized provided for loan growth and were reflective of continued slowdown of loan prepayment speeds and estimated forecasted economic conditions. The provision recognized in 2023 also included modest additional reserve allocation for commercial loans migrating to nonaccrual status.
Net charge-offs totaled $52 thousand for the three months ended March 31, 2024, compared to net charge-offs of $47 thousand for the same period in 2023.
The ACL on loans was $41.9 million, or 0.74% of total loans, at March 31, 2024, compared to $41.1 million, or 0.73% of total loans, at December 31, 2023. See additional discussion under the caption “Asset Quality” for further information on asset quality metrics and 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) | |||||||||||||||||||||||
| Change | |||||||||||||||||||||||
| Three months ended March 31, | 2024 | 2023 | $ | % | |||||||||||||||||||
| Noninterest income: | |||||||||||||||||||||||
| Wealth management revenues | $9,338 | $8,663 | $675 | 8 | % | ||||||||||||||||||
Mortgage banking revenues | 2,506 | 1,245 | 1,261 | 101 | |||||||||||||||||||
| Card interchange fees | 1,145 | 1,132 | 13 | 1 | |||||||||||||||||||
| Service charges on deposit accounts | 685 | 777 | (92) | (12) | |||||||||||||||||||
Loan related derivative income | 284 | (51) | 335 | 657 | |||||||||||||||||||
| Income from bank-owned life insurance | 739 | 1,165 | (426) | (37) | |||||||||||||||||||
| Other income | 2,466 | 352 | 2,114 | 601 | |||||||||||||||||||
Total noninterest income | $17,163 | $13,283 | $3,880 | 29 | % | ||||||||||||||||||
Noninterest Income Analysis
Revenue from wealth management services represented 54% of total noninterest income for the three months ended March 31, 2024, compared to 65% for the same period in 2023. A substantial portion of wealth management revenues is dependent on the value of wealth management AUA and is closely tied to the performance of the financial markets. This portion of wealth management revenues is referred to as “asset-based” and includes trust and investment management fees. Wealth management revenues also include “transaction-based” revenues that are not primarily derived from the value of assets.
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Management's Discussion and Analysis
The categories of wealth management revenues are shown in the following table:
| (Dollars in thousands) | |||||||||||||||||||||||
| Change | |||||||||||||||||||||||
| Three months ended March 31, | 2024 | 2023 | $ | % | |||||||||||||||||||
| Wealth management revenues: | |||||||||||||||||||||||
| Asset-based revenues | $9,089 | $8,429 | $660 | 8 | % | ||||||||||||||||||
| Transaction-based revenues | 249 | 234 | 15 | 6 | |||||||||||||||||||
| Total wealth management revenues | $9,338 | $8,663 | $675 | 8 | % | ||||||||||||||||||
Wealth management revenues for the three months ended March 31, 2024 increased by $675 thousand, or 8%, from the same period in 2023, reflecting an increase in asset-based revenues. The change in asset-based revenues correlated with the change in average AUA balances. The average balance of AUA for the three months ended March 31, 2024 increased by 10% from the average balance for the same period in 2023.
The end of period AUA balance amounted to $6.9 billion at March 31, 2024, up by $269.9 million, or 4%, from the end of 2023, reflecting net investment appreciation and income. The following table presents the changes in wealth management AUA balances:
| (Dollars in thousands) | |||||||||||
| Three months ended March 31, | 2024 | 2023 | |||||||||
| Wealth management assets under administration: | |||||||||||
| Balance at the beginning of period | $6,588,406 | $5,961,990 | |||||||||
| Net investment appreciation & income | 364,244 | 286,262 | |||||||||
| Net client asset (outflows) inflows | (94,328) | (84,830) | |||||||||
| Balance at the end of period | $6,858,322 | $6,163,422 | |||||||||
Mortgage banking revenues represented 15% of total noninterest income for three months ended March 31, 2024, compared to 9% for the same period in 2023. These revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets. While loan origination and refinancing activities decreased in response to increases in market interest rates, a larger proportion of loans were originated for sale in 2024. 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) | |||||||||||||||||
| Change | |||||||||||||||||
| Three months ended March 31, | 2024 | 2023 | $ | % | |||||||||||||
| Mortgage banking revenues: | |||||||||||||||||
Realized gains on loan sales, net (1) | $1,586 | $576 | $1,010 | 175 | % | ||||||||||||
Changes in fair value, net (2) | 324 | 86 | 238 | 277 | |||||||||||||
Loan servicing fee income, net (3) | 596 | 583 | 13 | 2 | |||||||||||||
| Total mortgage banking revenues | $2,506 | $1,245 | $1,261 | 101 | % | ||||||||||||
Loans sold to the secondary market (4) | $72,644 | $29,328 | $43,316 | 148 | % | ||||||||||||
(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 months ended March 31, 2024, mortgage banking revenues were up by $1.3 million, or 101%, compared to the same period in 2023. The increase in mortgage banking revenues was mainly attributable to increases in both sales volume
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Management's Discussion and Analysis
and sales yield. Mortgage banking revenues are 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.
For the three months ended March 31, 2024, loan related derivative income increased by $335 thousand, or 657%, from the same period in 2023, reflecting an increase in volume.
Income from BOLI for the three months ended March 31, 2024, was down by $426 thousand, or 37%, from the same period in 2023, reflecting the recognition of $476 thousand in non-taxable income in the first quarter of 2023 associated with the receipt of life insurance proceeds.
Other income for the three months ended March 31, 2024 was up by $2.1 million, or 601%, from the same period in 2023, due to the receipt of $2.1 million in the first quarter of 2024 associated with a litigation settlement.
Noninterest Expense
The following table presents noninterest expense comparisons:
| (Dollars in thousands) | |||||||||||||||||||||||
| Change | |||||||||||||||||||||||
| Three months ended March 31, | 2024 | 2023 | $ | % | |||||||||||||||||||
| Noninterest expense: | |||||||||||||||||||||||
| Salaries and employee benefits | $21,775 | $21,784 | ($9) | — | % | ||||||||||||||||||
| Outsourced services | 3,780 | 3,496 | 284 | 8 | |||||||||||||||||||
| Net occupancy | 2,561 | 2,437 | 124 | 5 | |||||||||||||||||||
| Equipment | 1,020 | 1,028 | (8) | (1) | |||||||||||||||||||
| Legal, audit, and professional fees | 706 | 896 | (190) | (21) | |||||||||||||||||||
FDIC deposit insurance costs | 1,441 | 872 | 569 | 65 | |||||||||||||||||||
| Advertising and promotion | 548 | 408 | 140 | 34 | |||||||||||||||||||
| Amortization of intangibles | 208 | 212 | (4) | (2) | |||||||||||||||||||
| Other | 2,324 | 2,431 | (107) | (4) | |||||||||||||||||||
| Total noninterest expense | $34,363 | $33,564 | $799 | 2 | % | ||||||||||||||||||
Noninterest Expense Analysis
Salaries and employee benefits expense, the largest component of noninterest expense, for the three months ended March 31, 2024 was essentially unchanged compared to the same period in 2023.
Outsourced services expense for the three months ended March 31, 2024, increased by $284 thousand, or 8%, compared to the same period in the prior year, largely reflecting higher third-party costs and volume-related increases.
FDIC deposit insurance costs for the three months ended March 31, 2024 increased by $569 thousand, or 65%, compared to the same period in 2023, reflecting the impact of growth in assets and a higher FDIC deposit assessment rate.
Income Taxes
The following table presents the Corporation’s income tax provision and applicable tax rates for the periods indicated:
| (Dollars in thousands) | ||||||||
| Three months ended March 31, | 2024 | 2023 | ||||||
| Income tax expense | $2,829 | $3,300 | ||||||
| Effective income tax rate | 20.6 | % | 20.5 | % | ||||
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Management's Discussion and Analysis
The effective income tax rates for the three months ended March 31, 2024 and 2023 differed from the federal rate of 21%, primarily due to the benefits of tax-exempt income, income from BOLI, and federal tax credits, partially offset by state income tax expense.
The Corporation’s net deferred tax assets amounted to $56.6 million at March 31, 2024, compared to $53.8 million at December 31, 2023. Net deferred tax assets increased in 2024, largely reflecting increases in deferred tax assets associated with a decline in fair value of securities available for sale due to changes in market interest rates.
Segment Reporting
The Corporation manages its operations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services. See Note 13 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) | |||||||||||||||||
| Change | |||||||||||||||||
| Three months ended March 31, | 2024 | 2023 | $ | % | |||||||||||||
| Net interest income | $31,665 | $37,180 | ($5,515) | (15 | %) | ||||||||||||
| Provision for credit losses | 700 | 800 | (100) | (13) | |||||||||||||
Net interest income after provision for credit losses | 30,965 | 36,380 | (5,415) | (15) | |||||||||||||
| Noninterest income | 5,572 | 4,431 | 1,141 | 26 | |||||||||||||
| Noninterest expense | 27,033 | 25,466 | 1,567 | 6 | |||||||||||||
| Income before income taxes | 9,504 | 15,345 | (5,841) | (38) | |||||||||||||
| Income tax expense | 1,906 | 3,087 | (1,181) | (38) | |||||||||||||
| Net income | $7,598 | $12,258 | ($4,660) | (38 | %) | ||||||||||||
Net interest income for the Commercial Banking segment for the three months ended March 31, 2024 decreased by $5.5 million, or 15%, from the same period in 2023. Net interest income was adversely impacted by higher rates paid on, and increases in, average interest-bearing liability balances, which offset the benefit of higher yields on, and growth in, average interest-earning asset balances.
The provision for credit losses for the three months ended March 31, 2024 decreased by $100 thousand from the same period in 2023.
Noninterest income derived from the Commercial Banking segment for the three months ended March 31, 2024 was up by $1.1 million, or 26%, from the comparable period in 2023. The increase in Commercial Banking noninterest income reflected higher mortgage banking revenues and loan related derivative income, partially offset by lower BOLI income. See additional discussion under the caption “Noninterest Income” above.
Commercial Banking noninterest expenses for the three months ended March 31, 2024 were up by $1.6 million, or 6%, from the same period in 2023, with increases in FDIC deposit insurance costs, salaries and employee benefits, and outsourced services. See additional discussion under the caption “Noninterest Expense” above.
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Management's Discussion and Analysis
Wealth Management Services
The following table presents a summarized statement of operations for the Wealth Management Services business segment:
| (Dollars in thousands) | |||||||||||||||||
| Change | |||||||||||||||||
| Three months ended March 31, | 2024 | 2023 | $ | % | |||||||||||||
| Net interest income | $— | $13 | ($13) | (100 | %) | ||||||||||||
| Noninterest income | 11,591 | 8,852 | 2,739 | 31 | |||||||||||||
| Noninterest expense | 7,330 | 8,098 | (768) | (9) | |||||||||||||
| Income before income taxes | 4,261 | 767 | 3,494 | 456 | |||||||||||||
| Income tax expense | 923 | 213 | 710 | 333 | |||||||||||||
| Net income | $3,338 | $554 | $2,784 | 503 | % | ||||||||||||
For the three months ended March 31, 2024, noninterest income derived from the Wealth Management Services segment increased by $2.7 million, or 31%, from the same period in 2023, reflecting income of $2.1 million associated with a litigation settlement, as well as an increase in asset-based revenues. See further discussion under the caption “Noninterest Income” above.
For the three months ended March 31, 2024, noninterest expenses for the Wealth Management Services segment decreased by $768 thousand, or 9%, from the comparable period in 2023, largely reflecting a decrease in salaries and employee benefits expense.
Financial Condition
Summary
The following table presents selected financial condition data:
| (Dollars in thousands) | Change | |||||||||||||||||||
| March 31, 2024 | December 31, 2023 | $ | % | |||||||||||||||||
| Cash and due from banks | $102,136 | $86,824 | $15,312 | 18 | % | |||||||||||||||
| Total securities | 970,060 | 1,000,380 | (30,320) | (3) | ||||||||||||||||
| Total loans | 5,685,232 | 5,647,706 | 37,526 | 1 | ||||||||||||||||
| Allowance for credit losses on loans | 41,905 | 41,057 | 848 | 2 | ||||||||||||||||
| Total assets | 7,249,124 | 7,202,847 | 46,277 | 1 | ||||||||||||||||
| Total deposits | 5,347,893 | 5,348,160 | (267) | — | ||||||||||||||||
FHLB advances | 1,240,000 | 1,190,000 | 50,000 | 4 | ||||||||||||||||
| Total shareholders’ equity | 466,920 | 472,686 | (5,766) | (1) | ||||||||||||||||
Total assets amounted to $7.2 billion at March 31, 2024, up by $46.3 million, or 1%, from the end of 2023.
Cash and due from banks increased by 15.3 million. or 18%, from December 31, 2023, reflecting higher cash balances on deposit at correspondent banks.
The securities portfolio decreased by $30.3 million, or 3%, from the end of 2023, reflecting routine pay-downs on mortgage-backed securities and a decrease in fair value of available for sale securities due to changes in market interest rates.
Total loans increased by $37.5 million, or 1%, from the end of 2023, with the increase concentrated in commercial loans.
Total deposit balances were comparable to the end of 2023 and reflective of a competitive rate environment. FHLB advances increased by $50.0 million, or 4%, from December 31, 2023, as higher levels of wholesale funding were utilized.
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Management's Discussion and Analysis
Shareholders’ equity decreased by $5.8 million, or 1%. Net income was offset by dividend declarations and a decrease in the AOCL component of shareholders' equity that reflected a decline in the fair value of available for sale securities as noted above.
Securities
Investment security activity is monitored by the Investment Committee, the members of which also sit on the ALCO. Asset and liability management objectives are the primary influence on the Corporation’s investment activities. However, the Corporation also recognizes that there are certain specific risks inherent in investment activities. The securities portfolio is managed in accordance with regulatory guidelines and established internal corporate investment policies that provide limitations on specific risk factors such as market risk, credit risk and concentration, liquidity risk, and operational risk to help monitor risks associated with investing in securities. Reports on the activities conducted by the Investment Committee and the ALCO are presented to the Board of Directors on a regular basis.
The Corporation’s securities portfolio is managed to generate interest income, to implement interest rate risk management strategies, and to provide a readily available source of liquidity for balance sheet management. Securities are designated as either available for sale, held to maturity or trading at the time of purchase. The Corporation does not maintain a portfolio of trading securities and does not have securities designated as held to maturity. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Debt securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized.
Determination of Fair Value
The Corporation uses an independent pricing service to obtain quoted prices. The prices provided by the independent pricing service are generally based on observable market data in active markets. The determination of whether markets are active or inactive is based upon the level of trading activity for a particular security class. Management reviews the independent pricing service’s documentation to gain an understanding of the appropriateness of the pricing methodologies. Management 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 March 31, 2024 and December 31, 2023, management did not make any adjustments to the prices provided by the pricing service.
Our fair value measurements generally utilize Level 2 inputs, representing quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and model-derived valuations in which all significant input assumptions are observable in active markets.
See Notes 3 and 7 to the Unaudited Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities.
Securities Portfolio
The carrying amounts of securities held are as follows:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | |||||||||||||||||||||
| Amount | % of Total | Amount | % of Total | ||||||||||||||||||||
| Available for Sale Debt Securities: | |||||||||||||||||||||||
Obligations of U.S. government-sponsored enterprises | $223,910 | 23 | % | $225,742 | 23 | % | |||||||||||||||||
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 724,770 | 75 | 753,956 | 75 | |||||||||||||||||||
| Individual name issuer trust preferred debt securities | 8,975 | 1 | 8,793 | 1 | |||||||||||||||||||
| Corporate bonds | 12,405 | 1 | 11,889 | 1 | |||||||||||||||||||
| Total available for sale debt securities | $970,060 | 100 | % | $1,000,380 | 100 | % | |||||||||||||||||
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Management's Discussion and Analysis
The securities portfolio represented 13% of total assets at March 31, 2024, compared to 14% of total assets at December 31, 2023. The largest component of the securities portfolio is mortgage-backed securities, all of which are issued by U.S. government agencies or U.S. government-sponsored enterprises.
The securities portfolio decreased by $30.3 million, or 3%, from the end of 2023. This decrease included $15.3 million of routine pay-downs on mortgage-backed securities and a decrease of $14.7 million (pre-tax) in the fair value of available for sale securities.
As of March 31, 2024, the carrying amount of available for sale debt securities included net unrealized losses of $167.0 million, compared to net unrealized losses of $152.2 million as of December 31, 2023. The decrease in fair value of available for sale debt securities from the end of 2023 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 market interest rates since the time of purchase. See Note 3 to the Unaudited Consolidated Financial Statements for additional information.
Loans
Total loans amounted to $5.7 billion at March 31, 2024, up by $37.5 million, or 1%, from the end of 2023.
The following is a summary of loans:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | |||||||||||||||||||||
| Amount | % of Total | Amount | % of Total | ||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||
| Commercial real estate | $2,158,518 | 38 | % | $2,106,359 | 37 | % | |||||||||||||||||
| Commercial & industrial | 613,376 | 11 | 605,072 | 11 | |||||||||||||||||||
| Total commercial | 2,771,894 | 49 | 2,711,431 | 48 | |||||||||||||||||||
| Residential Real Estate: | |||||||||||||||||||||||
| Residential real estate | 2,585,524 | 45 | 2,604,478 | 46 | |||||||||||||||||||
| Consumer: | |||||||||||||||||||||||
| Home equity | 309,302 | 5 | 312,594 | 6 | |||||||||||||||||||
| Other | 18,512 | 1 | 19,203 | — | |||||||||||||||||||
| Total consumer | 327,814 | 6 | 331,797 | 6 | |||||||||||||||||||
| Total loans | $5,685,232 | 100 | % | $5,647,706 | 100 | % | |||||||||||||||||
Commercial Loans
The commercial loan portfolio represented 49% of total loans at March 31, 2024, compared to 48% of total loans at December 31, 2023.
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 $680.1 million and $652.7 million, respectively, at March 31, 2024 and December 31, 2023. Our participation in commercial loans originated by other banks also includes shared national credits. Shared national credits are defined as participation in loans or loan commitments of at least $100.0 million that are shared by three or more banks.
Commercial loans fall into two main categories, CRE and C&I loans. CRE loans consist of commercial mortgages secured by real property where the primary source of repayment is derived from rental income associated with the property or the proceeds of the sale, refinancing or permanent financing of the property. CRE loans also include construction loans made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. C&I loans primarily provide working capital, equipment financing, and financing for other business-related purposes. C&I loans are frequently collateralized by equipment, inventory, accounts receivable, and/or general business assets. A portion of the Bank’s C&I loans is also collateralized by real estate. C&I loans also include tax-exempt loans made to states and political
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Management's Discussion and Analysis
subdivisions, as well as industrial development or revenue bonds issued through quasi-public corporations for the benefit of a private or non-profit entity where that entity rather than the governmental entity is obligated to pay the debt service.
Commercial Real Estate Loans
CRE loans totaled $2.2 billion at March 31, 2024, up by $52.2 million, or 2%, from the balance at December 31, 2023.
In 2024, CRE loan advances and originations of $87.3 million were partially offset by payments of approximately $29.1 million and reclassifications of $6.0 million to C&I.
Construction and development loans included in the CRE loan portfolio amounted to $237.7 million and $214.6 million, respectively, as of March 31, 2024 and December 31, 2023. Unfunded commitments associated with these construction and development loans were $246.5 million and $304.7 million, respectively, at March 31, 2024 and December 31, 2023.
Shared national credit balances outstanding included in the CRE loan portfolio at March 31, 2024 and December 31, 2023, totaled $54.0 million and $47.4 million, respectively. At March 31, 2024 and December 31, 2023, balances of $34.7 million and $29.0 million, respectively, were included in the pass-rated category of commercial loan credit quality and balances of $19.3 million and $18.4 million, respectively, were included in the classified category. All of these loans were current with respect to contractual payment terms at both dates.
The following table presents a geographic summary of CRE loans by property location:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | |||||||||||||||
| Outstanding Balance | % of Total | Outstanding Balance | % of Total | ||||||||||||||
| Connecticut | $832,389 | 39 | % | $815,975 | 39 | % | |||||||||||
| Massachusetts | 681,803 | 32 | 645,736 | 31 | |||||||||||||
| Rhode Island | 428,030 | 19 | 430,899 | 20 | |||||||||||||
| Subtotal | 1,942,222 | 90 | 1,892,610 | 90 | |||||||||||||
| All other states | 216,296 | 10 | 213,749 | 10 | |||||||||||||
| Total | $2,158,518 | 100 | % | $2,106,359 | 100 | % | |||||||||||
The following table presents a summary of CRE loans by property type segmentation:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | |||||||||||||||
Outstanding Balance (1) | % of Total | Outstanding Balance (1) | % of Total | ||||||||||||||
CRE Portfolio Segmentation: | |||||||||||||||||
| Multi-family | $574,284 | 27 | % | $546,694 | 26 | % | |||||||||||
| Retail | 438,422 | 20 | 434,913 | 21 | |||||||||||||
| Industrial and warehouse | 325,695 | 15 | 307,987 | 15 | |||||||||||||
| Office | 284,675 | 13 | 284,199 | 13 | |||||||||||||
| Hospitality | 225,608 | 10 | 235,015 | 11 | |||||||||||||
| Healthcare facility | 196,117 | 9 | 175,490 | 8 | |||||||||||||
| Mixed-use | 52,853 | 2 | 49,079 | 2 | |||||||||||||
| Other | 60,864 | 4 | 72,982 | 4 | |||||||||||||
Total CRE loans | $2,158,518 | 100 | % | $2,106,359 | 100 | % | |||||||||||
Average CRE loan size (2) | $5,354 | $5,366 | |||||||||||||||
Largest individual CRE loan outstanding | $65,465 | $65,458 | |||||||||||||||
(1)Does not include unfunded commitments of $288.2 million and $351.5 million, respectively, as of March 31, 2024 and December 31, 2023.
(2)Total commitment (outstanding loan balance plus unfunded commitments) divided by number of loans.
In 2024, there continues to be heightened focus in the banking industry on the CRE office sector, given the continuation of
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Management's Discussion and Analysis
remote work and an increase in vacancies across the office market. As of March 31, 2024, Washington Trust’s CRE office loan segment totaled $284.7 million, or 5% of total loans and 13% of the total CRE loans. These office loans are secured by properties located in our primary lending market area of southern New England - Connecticut, Massachusetts, and Rhode Island. Furthermore, approximately 66% of the CRE office segment balance of $284.7 million is secured by properties located in suburban areas. As of March 31, 2024, all of the CRE office loans were current with respect to payment terms, and 93% of the CRE office segment balance was on accruing status. Additionally, the credit quality of the CRE office loan segment was 83% pass-rated, 2% special mention-rated, and 15% classified as of March 31, 2024.
Commercial and Industrial Loans
C&I loans amounted to $613.4 million at March 31, 2024, up by $8.3 million, or 1%, from the balance at December 31, 2023. C&I originations and advances of $21.2 million were partially offset by payments of $18.9 million. The net increase in C&I also reflected reclassifications of $6.0 million from CRE.
Shared national credit balances outstanding included in the C&I loan portfolio totaled $68.2 million and $66.3 million, respectively, at March 31, 2024 and December 31, 2023. 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 both dates.
The following table presents a summary of C&I loan by industry segmentation:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | |||||||||||||||
Outstanding Balance (1) | % of Total | Outstanding Balance (1) | % of Total | ||||||||||||||
C&I Portfolio Segmentation: | |||||||||||||||||
| Healthcare and social assistance | $167,491 | 27 | % | $166,490 | 28 | % | |||||||||||
| Real estate rental and leasing | 71,292 | 12 | 70,540 | 12 | |||||||||||||
Transportation and warehousing | 63,664 | 10 | 63,789 | 11 | |||||||||||||
| Manufacturing | 53,348 | 9 | 54,905 | 9 | |||||||||||||
| Retail trade | 44,166 | 7 | 43,746 | 7 | |||||||||||||
| Educational services | 41,566 | 7 | 41,968 | 7 | |||||||||||||
Finance and insurance | 37,810 | 6 | 33,617 | 6 | |||||||||||||
Information | 22,645 | 4 | 22,674 | 4 | |||||||||||||
Arts, entertainment, and recreation | 21,935 | 4 | 22,249 | 4 | |||||||||||||
| Accommodation and food services | 12,833 | 2 | 13,502 | 2 | |||||||||||||
Professional, scientific, and technical services | 8,640 | 1 | 7,998 | 1 | |||||||||||||
Public administration | 2,955 | — | 3,019 | — | |||||||||||||
Other | 65,031 | 11 | 60,575 | 9 | |||||||||||||
Total C&I loans | $613,376 | 100 | % | $605,072 | 100 | % | |||||||||||
Average C&I loan size (2) | $868 | $844 | |||||||||||||||
Largest individual C&I loan outstanding | $25,330 | $25,324 | |||||||||||||||
(1)Does not include unfunded commitments of $355.1 million and $341.9 million, respectively, as of March 31, 2024 and December 31, 2023.
(2)Total commitment (outstanding loan balance plus unfunded commitments) divided by number of loans.
Residential Real Estate Loans
The residential real estate loan portfolio represented 45% of total loans at March 31, 2024, compared to 46% of total loans at December 31, 2023.
Residential real estate loans held in portfolio amounted to $2.6 billion at March 31, 2024, down by $19.0 million, or 1%, from the balance at December 31, 2023, as total loan origination activity declined and a lower proportion of loans was originated for portfolio.
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Management's Discussion and Analysis
The following is a geographic summary of residential real estate loans by property location:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | |||||||||||||||
| Amount | % of Total | Amount | % of Total | ||||||||||||||
Massachusetts | $1,910,010 | 74 | % | $1,928,206 | 74 | % | |||||||||||
| Rhode Island | 484,401 | 19 | 481,289 | 19 | |||||||||||||
Connecticut | 162,523 | 6 | 165,933 | 6 | |||||||||||||
| Subtotal | 2,556,934 | 99 | 2,575,428 | 99 | |||||||||||||
| All other states | 28,590 | 1 | 29,050 | 1 | |||||||||||||
Total (1) | $2,585,524 | 100 | % | $2,604,478 | 100 | % | |||||||||||
(1)Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $52.1 million and $53.4 million, respectively, as of March 31, 2024 and December 31, 2023.
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.
The table below presents residential real estate loan origination activity:
| (Dollars in thousands) | |||||||||||||||||
| Three months ended March 31, | 2024 | 2023 | |||||||||||||||
| Amount | % of Total | Amount | % of Total | ||||||||||||||
Originations for retention in portfolio (1) | $24,474 | 24 | % | $109,768 | 80 | % | |||||||||||
Originations for sale to the secondary market (2) | 78,098 | 76 | 27,763 | 20 | |||||||||||||
| Total | $102,572 | 100 | % | $137,531 | 100 | % | |||||||||||
(1)Includes the full commitment amount of homeowner construction loans.
(2)Includes brokered loans (loans originated for others).
The table below presents residential real estate loan sales activity:
| (Dollars in thousands) | |||||||||||||||||
| Three months ended March 31, | 2024 | 2023 | |||||||||||||||
| Amount | % of Total | Amount | % of Total | ||||||||||||||
| Loans sold with servicing rights retained | $24,057 | 33 | % | $17,114 | 58 | % | |||||||||||
Loans sold with servicing rights released (1) | 48,587 | 67 | 12,214 | 42 | |||||||||||||
| Total | $72,644 | 100 | % | $29,328 | 100 | % | |||||||||||
(1)Includes brokered loans (loans originated for others).
Residential real estate loan origination and refinancing activities decreased in response to increases in market interest rates and changes in the housing markets. The proportion of residential real estate loans originated for portfolio has decreased due to balance sheet management purposes.
We have active relationships with various secondary market investors that purchase residential real estate loans we originate. In addition to managing our interest rate risk position and earnings through the sale of these loans, we are also able to manage our liquidity position through timely sales of residential real estate loans to the secondary market.
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 $8.4 million and $8.5 million, respectively, as of March 31, 2024 and December 31, 2023. The balance of residential
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Management's Discussion and Analysis
mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $1.5 billion as of both March 31, 2024 and December 31, 2023.
Consumer Loans
The consumer loan portfolio represented 6% of total loans at both March 31, 2024 and December 31, 2023.
Consumer loans include home equity loans and lines of credit and personal installment loans. Home equity lines of credit and home equity loans represented 94% of the total consumer portfolio at March 31, 2024. Our home equity line and home equity loan origination activities are conducted primarily in southern New England. The Bank estimates that approximately 55% of the combined home equity lines of credit and home equity loan balances are first lien positions or subordinate to other Washington Trust mortgages.
The consumer loan portfolio totaled $327.8 million at March 31, 2024, down by $4.0 million, or 1%, from December 31, 2023, largely reflecting a decrease in home equity lines.
Asset Quality
The Corporation continually monitors the asset quality of the loan portfolio using all available information.
In the course of resolving problem loans, the Corporation may choose to modify the contractual terms of certain loans. A loan that has been modified is considered a TLM when the modification is made to a borrower experiencing financial difficulty and the modification has a direct impact to the contractual cash flows. The decision to modify a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection. See Note 4 for additional information regarding TLMs.
Nonperforming Assets
Nonperforming assets include nonaccrual loans and OREO.
The following table presents nonperforming assets and additional asset quality data:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | ||||||
| Commercial: | ||||||||
| Commercial real estate | $18,729 | $32,827 | ||||||
| Commercial & industrial | 668 | 682 | ||||||
Total commercial | 19,397 | 33,509 | ||||||
| Residential Real Estate: | ||||||||
| Residential real estate | 9,722 | 9,626 | ||||||
| Consumer: | ||||||||
| Home equity | 1,591 | 1,483 | ||||||
| Other | — | — | ||||||
Total consumer | 1,591 | 1,483 | ||||||
| Total nonaccrual loans | 30,710 | 44,618 | ||||||
OREO, net | 683 | 683 | ||||||
| Total nonperforming assets | $31,393 | $45,301 | ||||||
| Nonperforming assets to total assets | 0.43 | % | 0.63 | % | ||||
| Nonperforming loans to total loans | 0.54 | % | 0.79 | % | ||||
| Total past due loans to total loans | 0.18 | % | 0.20 | % | ||||
| Allowance for credit losses on loans to total loans | 0.74 | % | 0.73 | % | ||||
| Allowance for credit losses on loans to nonaccrual loans | 136.45 | % | 92.02 | % | ||||
| Accruing loans 90 days or more past due | $— | $— | ||||||
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Management's Discussion and Analysis
Nonaccrual Loans
During the three months ended March 31, 2024, 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) | |||||||||||
| For the three months ended March 31, | 2024 | 2023 | |||||||||
| Balance at beginning of period | $44,618 | $12,846 | |||||||||
| Additions to nonaccrual status | 431 | 2,570 | |||||||||
| Loans returned to accruing status | (13,764) | (110) | |||||||||
| Loans charged-off | (70) | (61) | |||||||||
| Loans transferred to other real estate owned | — | (683) | |||||||||
| Payments, payoffs, and other changes | (505) | (582) | |||||||||
| Balance at end of period | $30,710 | $13,980 | |||||||||
The following table presents additional detail on nonaccrual loans:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||
| Days Past Due | Days Past Due | ||||||||||||||||||||||||||||||||||
| Current | 30-89 | 90 or More | Total Nonaccrual | % (1) | Current | 30-89 | 90 or More | Total Nonaccrual | % (1) | ||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||
| Commercial real estate | $18,729 | $— | $— | $18,729 | 0.87 | % | $32,827 | $— | $— | $32,827 | 1.56 | % | |||||||||||||||||||||||
| Commercial & industrial | 668 | — | — | 668 | 0.11 | 682 | — | — | 682 | 0.11 | |||||||||||||||||||||||||
Total commercial | 19,397 | — | — | 19,397 | 0.70 | 33,509 | — | — | 33,509 | 1.24 | |||||||||||||||||||||||||
Residential Real Estate: | |||||||||||||||||||||||||||||||||||
Residential real estate | 5,547 | 1,122 | 3,053 | 9,722 | 0.38 | 4,105 | 3,512 | 2,009 | 9,626 | 0.37 | |||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||
| Home equity | 656 | 138 | 797 | 1,591 | 0.51 | 127 | 621 | 735 | 1,483 | 0.47 | |||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||
| Total consumer | 656 | 138 | 797 | 1,591 | 0.49 | 127 | 621 | 735 | 1,483 | 0.45 | |||||||||||||||||||||||||
| Total nonaccrual loans | $25,600 | $1,260 | $3,850 | $30,710 | 0.54 | % | $37,741 | $4,133 | $2,744 | $44,618 | 0.79 | % | |||||||||||||||||||||||
(1) Percentage of nonaccrual loans to the total loans outstanding within the respective loan class.
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2024.
As of March 31, 2024, the composition of nonaccrual loans was 63% commercial and 37% residential and consumer. This compared to 75% commercial and 25% residential and consumer as of December 31, 2023.
Total nonaccrual loans decreased by $13.9 million from the end of 2023, reflecting a decline in nonaccrual commercial real estate loans. Nonaccrual commercial real estate loans decreased by $14.1 million from the balance at December 31, 2023, primarily due to one loan secured by a healthcare facility that returned to accruing status in the quarter.
As of March 31, 2024, the balance of nonaccrual commercial real estate loans consisted of two collateral dependent loans that are current with respect to payment terms. These loans were individually assessed for credit impairment and based on the estimated fair value of the collateral less estimated costs to sell (when appropriate), no specific reserves were deemed necessary at March 31, 2024. Of the total carrying value, $10.8 million is secured by an office property in Massachusetts and $8.0 million is secured by an office property in Connecticut and was modified as a TLM in 2023.
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Management's Discussion and Analysis
As of March 31, 2024, 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 March 31, 2024 were four loans purchased for portfolio and serviced by others amounting to $1.2 million. Management monitors the collection efforts of its third-party servicers as part of its assessment of the collectability of nonperforming loans.
Past Due Loans
The following table presents past due loans by category:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | |||||||||||||||
| Amount | % (1) | Amount | % (1) | ||||||||||||||
| Commercial: | |||||||||||||||||
| Commercial real estate | $— | — | % | $— | — | % | |||||||||||
| Commercial & industrial | 270 | 0.04 | 10 | — | |||||||||||||
| Total commercial | 270 | 0.01 | 10 | — | |||||||||||||
| Residential Real Estate: | |||||||||||||||||
| Residential real estate | 6,858 | 0.27 | 8,116 | 0.31 | |||||||||||||
| Consumer: | |||||||||||||||||
| Home equity | 2,879 | 0.93 | 3,196 | 1.02 | |||||||||||||
| Other | 32 | 0.17 | 23 | 0.12 | |||||||||||||
| Total consumer | 2,911 | 0.89 | 3,219 | 0.97 | |||||||||||||
| Total past due loans | $10,039 | 0.18 | % | $11,345 | 0.20 | % | |||||||||||
(1)Percentage of past due loans to the total loans outstanding within the respective loan class.
As of March 31, 2024, the composition of past due loans (loans past due 30 days or more) was 97% residential and consumer and 3% commercial, compared to 100% residential and consumer and 0% commercial at December 31, 2023.
Total past due loans decreased by $1.3 million from the end of 2023.
Total past due loans included $5.1 million of nonaccrual loans as of March 31, 2024, compared to $6.9 million as of December 31, 2023.
All loans 90 days or more past due at March 31, 2024 and December 31, 2023 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 March 31, 2024 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 loans presented above.
Potential problem loans are assessed for loss exposure using the methods described in Note 4 to the Unaudited Consolidated Financial Statements under the caption “Credit Quality Indicators.” Management cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become modified, or require an increased allowance coverage and provision for credit losses on loans.
Management has identified $23.8 million in potential problem loans at March 31, 2024, compared to $22.9 million at December 31, 2023. The balances of potential problem loans largely consisted of two CRE loans secured by office properties in Massachusetts and Connecticut. At March 31, 2024 and December 31, 2023, these loans were all current with respect to payment terms.
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Management's Discussion and Analysis
Allowance for Credit Losses on Loans
The ACL on loans is management’s estimate of expected lifetime credit losses on loans carried at amortized cost. The ACL on loans is established through a provision for credit losses recognized in earnings. The ACL on loans is reduced by charge-offs on loans and is increased by recoveries of amounts previously charged off.
The Corporation’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely. Full or partial charge-offs on collateral dependent individually analyzed loans are recognized when the collateral is deemed to be insufficient to support the carrying 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 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) | March 31, 2024 | December 31, 2023 | |||||||||||||||||||||
| Loans | Related Allowance | Allowance / Loans | Loans | Related Allowance | Allowance / Loans | ||||||||||||||||||
| Individually analyzed loans | $34,245 | $— | — | % | $34,640 | $97 | 0.28 | % | |||||||||||||||
| Pooled (collectively evaluated) loans | 5,650,987 | 41,905 | 0.74 | 5,613,066 | 40,960 | 0.73 | |||||||||||||||||
| Total | $5,685,232 | $41,905 | 0.74 | % | $5,647,706 | $41,057 | 0.73 | % | |||||||||||||||
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 $41.9 million at March 31, 2024, up by $848 thousand, or 2%, from the balance at December 31, 2023. The ACL on loans as a percentage of total loans, also known as the reserve coverage ratio, was 0.74% at March 31, 2024, compared to 0.73% at December 31, 2023.
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Management's Discussion and Analysis
The Corporation recorded a provision for credit losses of $700 thousand for the three months ended March 31, 2024. This included a provision for credit losses on loans of $900 thousand and a negative provision (or a benefit) for credit losses on unfunded commitments of $200 thousand. The provision reflected commercial loan growth and a continued, but subsiding, slowdown of loan prepayment speeds, as well as our current estimate of forecasted economic conditions.
Net charge-offs were modest, totaling $52 thousand for the three months ended March 31, 2024 and $47 thousand for the same period in 2023.
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) | March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||||||||
Allocated ACL | ACL to Loans | Loans to Total Portfolio (1) | Allocated ACL | ACL to Loans | Loans to Total Portfolio (1) | ||||||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||
| Commercial real estate | $24,856 | 1.15 | % | 38 | % | $24,144 | 1.15 | % | 37 | % | |||||||||||||||||||||||||
| Commercial & industrial | 7,620 | 1.24 | 11 | 8,088 | 1.34 | 11 | |||||||||||||||||||||||||||||
Total commercial | 32,476 | 1.17 | 49 | 32,232 | 1.19 | 48 | |||||||||||||||||||||||||||||
| Residential Real Estate: | |||||||||||||||||||||||||||||||||||
| Residential real estate | 8,035 | 0.31 | 45 | 7,403 | 0.28 | 46 | |||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||
| Home equity | 1,057 | 0.34 | 5 | 1,048 | 0.34 | 6 | |||||||||||||||||||||||||||||
| Other | 337 | 1.82 | 1 | 374 | 1.95 | — | |||||||||||||||||||||||||||||
| Total consumer | 1,394 | 0.43 | 6 | 1,422 | 0.43 | 6 | |||||||||||||||||||||||||||||
Total ACL on loans at end of period | $41,905 | 0.74 | % | 100 | % | $41,057 | 0.73 | % | 100 | % | |||||||||||||||||||||||||
(1)Percentage of loans outstanding in respective class to total loans outstanding.
Sources of Funds
Our sources of funds include in-market deposits, wholesale brokered deposits, FHLB advances, other borrowings, and proceeds from the sales, maturities, and payments of loans and investment securities. The Corporation uses funds to originate and purchase loans, purchase investment securities, conduct operations, expand the branch network, and pay dividends to shareholders.
Deposits
The Corporation offers a wide variety of deposit products to consumer and business customers. Deposits provide an important source of funding for the Bank, as well as an ongoing stream of fee revenue.
The Bank is a participant in the DDM program, ICS program, and the CDARS program. The Bank uses these deposit sweep services to place customer and client funds into interest-bearing demand accounts, money market accounts, and/or time deposits issued by other participating banks. Customer and client funds are placed at one or more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a program participant, we receive reciprocal amounts of deposits from other participating banks. We consider these reciprocal deposit balances to be in-market deposits as distinguished from traditional wholesale brokered deposits.
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Management's Discussion and Analysis
The following table presents a summary of deposits:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | Change in Balance | |||||||||||||||||||||||
| Amount | % of Total | Amount | % of Total | $ | % | |||||||||||||||||||||
| Noninterest-bearing demand deposits | $648,929 | 12 | % | $693,746 | 13 | % | ($44,817) | (6 | %) | |||||||||||||||||
| Interest-bearing demand deposits | 536,923 | 10 | 504,959 | 9 | 31,964 | 6 | ||||||||||||||||||||
| NOW accounts | 735,617 | 14 | 767,036 | 14 | (31,419) | (4) | ||||||||||||||||||||
| Money market accounts | 1,111,510 | 21 | 1,096,959 | 21 | 14,551 | 1 | ||||||||||||||||||||
| Savings accounts | 484,678 | 9 | 497,223 | 9 | (12,545) | (3) | ||||||||||||||||||||
| Time deposits (in-market) | 1,156,516 | 21 | 1,134,187 | 22 | 22,329 | 2 | ||||||||||||||||||||
| Total in-market deposits | 4,674,173 | 87 | 4,694,110 | 88 | (19,937) | — | ||||||||||||||||||||
| Wholesale brokered time deposits | 673,720 | 13 | 654,050 | 12 | 19,670 | 3 | ||||||||||||||||||||
| Total deposits | $5,347,893 | 100 | % | $5,348,160 | 100 | % | ($267) | — | % | |||||||||||||||||
Total deposits amounted to $5.3 billion at March 31, 2024, essentially unchanged from December 31, 2023.
Wholesale brokered time deposits increased by $19.7 million, or 3%, from December 31, 2023, as higher levels were utilized to fund balance sheet growth.
In-market deposits, which exclude wholesale brokered time deposits, were down by $19.9 million from the balance at December 31, 2023. In-market deposits continue to shift from relatively lower cost products to higher cost products, due to elevated market interest rates and increased competition.
As of March 31, 2024, in-market deposits were approximately 61% retail and 39% commercial. Our in-market deposits are well-diversified by industry and customer type. The average size of our in-market deposit accounts was approximately $36 thousand at March 31, 2024.
The following table presents a summary of the Bank’s uninsured deposits:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | |||||||||||||||
| Balance | % of Total Deposits | Balance | % of Total Deposits | ||||||||||||||
| Uninsured Deposits: | |||||||||||||||||
Uninsured deposits (1) | $1,226,123 | 23 | % | $1,260,672 | 24 | % | |||||||||||
Less: affiliate deposits (2) | 89,872 | 2 | 92,645 | 2 | |||||||||||||
| Uninsured deposits, excluding affiliate deposits | 1,136,251 | 21 | 1,168,027 | 22 | |||||||||||||
Less: fully-collateralized preferred deposits (3) | 170,849 | 3 | 204,327 | 4 | |||||||||||||
| Uninsured deposits, after exclusions | $965,402 | 18 | % | $963,700 | 18 | % | |||||||||||
(1)Determined in accordance with regulatory reporting requirements, which includes affiliate deposits and fully-collateralized preferred deposits.
(2) Uninsured deposit balances of Washington Trust Bancorp, Inc. and its subsidiaries that are eliminated in consolidation.
(3) Uninsured deposits of states and political subdivisions, which are secured or collateralized as required by state law.
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 $1.2 billion at March 31, 2024, up by $50.0 million, or 4%, from the balance at the end of 2023, as higher levels of wholesale funding were utilized to fund balance sheet growth.
For additional information regarding FHLB advances see Note 9 to the Unaudited Consolidated Financial Statements.
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Management's Discussion and Analysis
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 64% of total average assets in the three months ended March 31, 2024. While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and brokered deposits), cash flows from the investment securities portfolio, and loan repayments. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs, although management has no intention to do so at this time.
The Corporation has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management employs stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as usual” cash flows. In management’s estimation, risks are concentrated in two major categories: (1) runoff of in-market deposit balances; and (2) unexpected drawdown of loan commitments. Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our stress test scenarios, therefore, emphasize attempts to quantify deposits at risk over selected time horizons. In addition to these unexpected outflow risks, several other “business as usual” factors enter into the calculation of the adequacy of contingent liquidity including: (1) payment proceeds from loans and investment securities; (2) maturing debt obligations; and (3) maturing time deposits. The Corporation has established collateralized borrowing capacity with the FRBB and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business. Borrowing capacity is impacted by the amount and type of assets available to be pledged.
The table below presents a summary of contingent liquidity balances by source:
| (Dollars in thousands) | March 31, 2024 | December 31, 2023 | ||||||
| Contingent Liquidity: | ||||||||
Federal Home Loan Bank of Boston (1) | $999,430 | $1,086,607 | ||||||
Federal Reserve Bank of Boston (2) | 68,549 | 65,759 | ||||||
| Noninterest-bearing cash | 52,544 | 54,970 | ||||||
| Unencumbered securities | 669,452 | 680,857 | ||||||
| Total contingent liquidity | $1,789,975 | $1,888,193 | ||||||
| Percentage of total contingent liquidity to uninsured deposits | 146.0 | % | 149.8 | % | ||||
| Percentage of total contingent liquidity to uninsured deposits, after exclusions | 185.4 | % | 195.9 | % | ||||
(1)As of March 31, 2024 and December 31, 2023, loans with a carrying value of $3.4 billion and $3.4 billion, respectively, and securities available for sale with carrying values of $90.0 million and $94.3 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.
(2)As of March 31, 2024 and December 31, 2023, loans with a carrying value of $71.6 million and $71.0 million, respectively, and securities available for sale with a carrying value of $13.7 million and $13.1 million, respectively, were pledged to the FRBB for the discount window resulting in this additional unused borrowing capacity.
In addition to the amounts presented above, the Bank also has access to a $40.0 million unused line of credit with the FHLB at March 31, 2024 and December 31, 2023. Furthermore, availability of $66.0 million and $65.0 million, respectively, at March 31, 2024 and December 31, 2023, was utilized to collateralize institutional deposits through standby letters 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 three months ended March 31, 2024. Based on its assessment of the liquidity considerations described above, management believes the Corporation’s sources of funding meet anticipated funding needs.
Contractual Obligations, Commitments, and Off-Balance Sheet Arrangements
In the ordinary course of business, the Corporation enters into contractual obligations that require future cash payments. These include payments related to lease obligations, time deposits with stated maturity dates, and borrowings. Also, in the
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Management's Discussion and Analysis
ordinary 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. 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. For additional information on derivative financial instruments and financial instruments with off-balance sheet risk see Notes 6 and 16 to the Unaudited Consolidated Financial Statements.
Capital Resources
Total shareholders’ equity amounted to $466.9 million at March 31, 2024, down by $5.8 million from December 31, 2023. Net income of $10.9 million was offset by $9.7 million in dividend declarations and a decline of $7.8 million in the AOCL component of shareholders' equity. The decline in AOCL largely reflected a decrease in the fair value of available for sale debt securities due to changes in market interest rates.
The Corporation declared a quarterly dividend of 56 cents per share for the three months ended March 31, 2024, unchanged from the 56 cents per share declared for the same period in 2023.
The ratio of total equity to total assets amounted to 6.44% at March 31, 2024, compared to a ratio of 6.56% at December 31, 2023. Book value per share was $27.41 at March 31, 2024, compared to $27.75 at December 31, 2023.
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 11.62% at March 31, 2024, compared to 11.58% at December 31, 2023.
See Note 10 to the Unaudited Consolidated Financial Statements for additional discussion regarding shareholders’ equity.
Asset/Liability Management and Interest Rate Risk
Interest rate risk is the risk to earnings due to changes in interest rates. The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. Quarterly, the ALCO reports on the status of liquidity and interest rate risk matters to the Corporation’s Audit Committee. 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, interest rate contracts, and the pricing and structure of loans and deposits, to manage interest rate risk. The 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 6 and 16 to the Unaudited Consolidated Financial Statements for additional information.
The ALCO uses income simulation to measure interest rate risk inherent in the Corporation’s 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 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 March 31, 2024 and December 31, 2023, 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
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Management's Discussion and Analysis
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 March 31, 2024 and December 31, 2023. Interest rates are assumed to shift by parallel rate changes as shown in the table below. Since market interest rates have risen sharply, management incorporated a down 300 basis point scenario into the tabular presentation below; an up 300 basis point scenario is also included. Further, deposits are assumed to have certain minimum rate levels below which they will not fall. It should be noted that the rate scenarios shown do not necessarily reflect the ALCO’s view of the “most likely” change in interest rates over the periods indicated.
| March 31, 2024 | December 31, 2023 | ||||||||||||||||
| Months 1 - 12 | Months 13 - 24 | Months 1 - 12 | Months 13 - 24 | ||||||||||||||
| 100 basis point rate decrease | (3.51) | % | 1.49 | % | (3.38) | % | 0.94 | % | |||||||||
| 200 basis point rate decrease | (7.11) | 2.51 | (6.82) | 1.53 | |||||||||||||
| 300 basis point rate decrease | (10.81) | 3.09 | (10.38) | 1.59 | |||||||||||||
| 100 basis point rate increase | 0.61 | (7.49) | 0.72 | (6.08) | |||||||||||||
| 200 basis point rate increase | 3.96 | (10.20) | 4.16 | (7.57) | |||||||||||||
| 300 basis point rate increase | 7.27 | (13.02) | 7.55 | (9.21) | |||||||||||||
The relative change in interest rate sensitivity from December 31, 2023, as shown in the above table, was attributable to changes in balance sheet composition and market interest rates. As of March 31, 2024, the ALCO estimates that negative exposure of net interest income in Year 1 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 savings and time deposit rates could decline more slowly and by a lesser amount than other market interest rates. For simulation purposes, deposit rate changes are anticipated to lag behind other market interest rates in both timing and magnitude. Asset yields would likely decline more rapidly than deposit costs as holdings mature or reprice, since cash flow from mortgage-related prepayments and redemption of callable securities would increase as market interest rates fall. The negative exposure in down rate scenarios reflects the insensitivity of certain deposit rates to market interest rate declines as they approach their floors. The positive exposure to falling rates in Year 2 is attributable to continued downward repricing of liabilities as time deposits and wholesale funding are replaced with lower rates as they mature.
As of March 31, 2024, the positive exposure of net interest income in Year 1 to rising rates as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term. As mentioned above, for simulation purposes, deposit rate changes are anticipated to lag behind other market interest rates in both timing and magnitude. The negative exposure to rising rates in Year 2 is due to a higher level of longer-term fixed rate assets, as well as larger proportion of wholesale funds to total sources of funds. Fixed rate assets would not reprice upward in a rising rate environment. Wholesale funds generally would reprice more quickly and by a greater amount than the repricing of in-market deposits in response to changes in market interest rates. As market rates increase, ALCO modeling assumes that deposits shift from lower 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 the increase in the Corporation’s cost of funds could result in a relative decline in net interest income in Year 2 compared to an unchanged rate scenario.
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
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Management's Discussion and Analysis
modeling assumes a static balance sheet, with the exception of certain modeled deposit mix shifts from low cost savings deposits to higher cost time deposits in rising rate scenarios as noted above.
The Federal Reserve has paused rate hikes and the target range for the Federal Funds rate was 5.25% - 5.50% at March 31, 2024. The increase of the Federal Funds target rate in recent years has resulted in higher rates paid on deposit balances and a shift of low cost balances into higher cost alternatives, which could continue into the future, particularly if interest rates remain elevated. As such, the ALCO 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, as well as due to heightened uncertainty in the banking industry. This may cause interest rate sensitivity to differ from the results as presented. Another significant simulation assumption is the sensitivity of savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both savings deposit rates and balances are related to changes in short-term interest rates. The relationship between short-term interest rate changes and deposit rate and balance changes may differ from the ALCO’s estimates used in income simulation.
It should also be noted that the static balance sheet assumption does not necessarily reflect the Corporation’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior.
Mortgage-backed securities and residential real estate loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.
The Corporation also monitors the potential change in market value of its available for sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to the Corporation’s capital position. Results are calculated using industry-standard analytical techniques and securities data.
The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of March 31, 2024 and December 31, 2023 resulting from immediate parallel rate shifts:
| (Dollars in thousands) | |||||||||||
| Security Type | Down 100 Basis Points | Up 200 Basis Points | |||||||||
| Obligations of U.S. government-sponsored enterprise securities (callable) | $8,028 | ($16,094) | |||||||||
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises | 50,442 | (96,752) | |||||||||
| Trust preferred debt and other corporate debt securities | (19) | 27 | |||||||||
| Total change in market value as of March 31, 2024 | $58,451 | ($112,819) | |||||||||
| Total change in market value as of December 31, 2023 | $59,659 | ($117,334) | |||||||||
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 material 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, 2023.
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information regarding quantitative and qualitative disclosures about market risk appears under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Interest Rate Risk.”
For factors that could adversely impact Washington Trust’s future results of operations and financial condition, see Part II, Item 1A below and the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, 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, 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 March 31, 2024. 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 March 31, 2024 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 Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 26, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 5. Other Information
Insider Trading Arrangements
During the three months ended March 31, 2024, none of the Corporation’s directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted terminated
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Item 6. Exhibits
(a) Exhibits. The following exhibits are included as part of this Form 10-Q:
| Exhibit Number | |||||
| 101 | The following materials from Washington Trust Bancorp, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2024 formatted in Inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related Notes to these consolidated financial statements. | ||||
| 104 | The cover page from the Corporation’s Quarterly Report on Form 10-Q for the period ended March 31, 2024 has been formatted in Inline XBRL and contained in Exhibit 101. | ||||
(1)These certifications are not “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Securities Exchange Act.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WASHINGTON TRUST BANCORP, INC. | ||||||||||||||
| (Registrant) | ||||||||||||||
| Date: | May 7, 2024 | By: | /s/ Edward O. Handy III | |||||||||||
| Edward O. Handy III | ||||||||||||||
| Chairman and Chief Executive Officer | ||||||||||||||
| (principal executive officer) | ||||||||||||||
| Date: | May 7, 2024 | By: | /s/ Ronald S. Ohsberg | |||||||||||
| Ronald S. Ohsberg | ||||||||||||||
| Senior Executive Vice President, Chief Financial Officer, and Treasurer | ||||||||||||||
| (principal financial officer) | ||||||||||||||
| Date: | May 7, 2024 | By: | /s/ Maria N. Janes | |||||||||||
| Maria N. Janes | ||||||||||||||
| Executive Vice President, Chief Accounting Officer, and Controller | ||||||||||||||
| (principal accounting officer) | ||||||||||||||
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