Loans

9 Months Ended

Sep. 30, 2022

Receivables [Abstract]

Loans

Loans

The following table presents a summary of loans:

(Dollars in thousands)	September 30, 2022	December 31, 2021
Commercial:
Commercial real estate (1)	$1,762,687	$1,639,062
Commercial & industrial (2)	652,758	641,555
Total commercial	2,415,445	2,280,617
Residential Real Estate:
Residential real estate (3)	2,144,098	1,726,975
Consumer:
Home equity	273,742	247,697
Other (4)	15,588	17,636
Total consumer	289,330	265,333
Total loans (5)	$4,848,873	$4,272,925

(1)CRE consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.

(2)C&I consists of loans to businesses and individuals, a portion of which are fully or partially collateralized by real estate. C&I also includes $1.4 million and $38.0 million, respectively, of PPP loans as of September 30, 2022 and December 31, 2021.

(3)Residential real estate consists of mortgage and homeowner construction loans secured by one- to four-family residential properties.

(4)Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans.

(5)Includes net unamortized loan origination costs of $10.7 million and $6.7 million, respectively, at September 30, 2022 and December 31, 2021 and net unamortized premiums on purchased loans of $329 thousand and $414 thousand, respectively, at September 30, 2022 and December 31, 2021.

Loan balances exclude accrued interest receivable of $14.6 million and $10.3 million, respectively, as of September 30, 2022 and December 31, 2021.

As of September 30, 2022 and December 31, 2021, loans amounting to $2.3 billion and $2.2 billion, respectively, were pledged as collateral to the FHLB under a blanket pledge agreement and to the FRBB for the discount window. See Note 7 for additional disclosure regarding borrowings.

The Corporation elected to account for eligible loan modifications under Section 4013 of the CARES Act, as amended by the CRRSA Act. Eligible loan modifications from March 1, 2020 through January 1, 2022 made in response to the COVID-19 pandemic were not required to be classified as TDRs. The vast majority of the loan payment deferral modifications, or “deferments,” qualified as eligible loan modifications and were not classified as TDRs. All of these loans with qualified deferments exited their payment deferral period prior to March 31, 2022.

Concentrations of Credit Risk

A significant portion of our loan portfolio is concentrated among borrowers in southern New England and a substantial portion of the portfolio is collateralized by real estate in this area. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy, as well as the health of the real estate economic sector in the Corporation’s market area.

Past Due Loans

Past due status is based on the contractual payment terms of the loan. The following tables present an aging analysis of past due loans, segregated by class of loans:

(Dollars in thousands)	Days Past Due
September 30, 2022	30-59	60-89	Over 90	Total Past Due	Current	Total Loans
Commercial:
Commercial real estate	$—	$—	$—	$—	$1,762,687	$1,762,687
Commercial & industrial	4	—	—	4	652,754	652,758
Total commercial	4	—	—	4	2,415,441	2,415,445
Residential Real Estate:
Residential real estate	1,607	219	5,430	7,256	2,136,842	2,144,098
Consumer:
Home equity	202	—	50	252	273,490	273,742
Other	17	—	—	17	15,571	15,588
Total consumer	219	—	50	269	289,061	289,330
Total loans	$1,830	$219	$5,480	$7,529	$4,841,344	$4,848,873

(Dollars in thousands)	Days Past Due
December 31, 2021	30-59	60-89	Over 90	Total Past Due	Current	Total Loans
Commercial:
Commercial real estate	$—	$—	$—	$—	$1,639,062	$1,639,062
Commercial & industrial	3	—	—	3	641,552	641,555
Total commercial	3	—	—	3	2,280,614	2,280,617
Residential Real Estate:
Residential real estate	1,784	3,176	4,662	9,622	1,717,353	1,726,975
Consumer:
Home equity	580	77	108	765	246,932	247,697
Other	21	—	—	21	17,615	17,636
Total consumer	601	77	108	786	264,547	265,333
Total loans	$2,388	$3,253	$4,770	$10,411	$4,262,514	$4,272,925

Included in past due loans as of September 30, 2022 and December 31, 2021, were nonaccrual loans of $7.1 million and $9.4 million, respectively. In addition, all loans 90 days or more past due at September 30, 2022 and December 31, 2021 were classified as nonaccrual.

Nonaccrual Loans

Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. When loans are placed on nonaccrual status, interest previously accrued but not collected is reversed against current period income.  Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.

The following table is a summary of nonaccrual loans, segregated by class of loans:

(Dollars in thousands)	Sep 30, 2022	Dec 31, 2021
Commercial:
Commercial real estate	$—	$—
Commercial & industrial	—	—
Total commercial	—	—
Residential Real Estate:
Residential real estate	11,700	13,576
Consumer:
Home equity	422	627
Other	—	—
Total consumer	422	627
Total nonaccrual loans	$12,122	$14,203
Accruing loans 90 days or more past due	$—	$—

No ACL was deemed necessary on nonaccrual loans with carrying values of $4.3 million and $4.2 million, respectively, as of September 30, 2022 and December 31, 2021.

Nonaccrual loans of $5.1 million and $4.8 million, respectively, at September 30, 2022 and December 31, 2021 were current as to the payment of principal and interest.

As of September 30, 2022 and December 31, 2021, nonaccrual loans secured by one- to four-family residential property amounting to $4.4 million and $1.5 million, respectively, were in process of foreclosure.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2022.

The following table presents interest income recognized on nonaccrual loans:

(Dollars in thousands)	Three Months		Nine Months
Periods ended September 30,	2022	2021	2022	2021
Commercial:
Commercial real estate	$—	$—	$—	$—
Commercial & industrial	—	—	—	—
Total commercial	—	—	—	—
Residential Real Estate:
Residential real estate	77	131	242	288
Consumer:
Home equity	9	9	21	44
Other	—	—	3	—
Total consumer	9	9	24	44
Total	$86	$140	$266	$332

Troubled Debt Restructurings

A loan that has been modified or renewed is considered to be a TDR when two conditions are met: (1) the borrower is experiencing financial difficulty and (2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or a transaction with similar credit risk characteristics. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance,

reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring of a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection.

The Corporation's ACL reflects the effects of a TDR when management reasonably expects at the reporting date that a TDR will be executed with an individual borrower. A TDR is considered reasonably expected no later than the point when management concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession to avoid a default. Reasonably expected TDRs and executed TDRs are evaluated individually to determine the required ACL. TDRs that did not involve a below-market rate concession and perform in accordance with their modified contractual terms for a reasonable period of time may be included in the Corporation’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.

TDRs are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan.  Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status.  Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term and full collection of principal and interest is in doubt.

TDRs are reported as such for at least one year from the date of the restructuring.  In years after the restructuring, TDRs are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is performing in accordance with their modified contractual terms for a reasonable period of time.

The recorded investment in TDRs consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. For accruing TDRs, the recorded investment also includes accrued interest.

The following table presents the recorded investment in TDRs and other pertinent information:

(Dollars in thousands)	Sep 30, 2022	Dec 31, 2021
Accruing TDRs	$7,275	$16,564
Nonaccrual TDRs	2,890	2,819
Total TDRs	$10,165	$19,383
Specific reserves on TDRs included in the ACL on loans	$132	$148
Additional commitments to lend to borrowers with TDRs	$—	$—

The following tables present TDRs occurring during the period indicated and the recorded investment pre- and post-modification:

(Dollars in thousands)			Outstanding Recorded Investment
	# of Loans		Pre-Modifications		Post-Modifications
Three months ended September 30,	2022	2021	2022	2021	2022	2021
Commercial:
Commercial real estate	—	—	$—	$—	$—	$—
Commercial & industrial	2	—	844	—	844	—
Total commercial	2	—	844	—	844	—
Total	2	—	$844	$—	$844	$—

(Dollars in thousands)			Outstanding Recorded Investment
	# of Loans		Pre-Modifications		Post-Modifications
Nine months ended September 30,	2022	2021	2022	2021	2022	2021
Commercial:
Commercial real estate	—	—	$—	$—	$—	$—
Commercial & industrial	2	—	844	—	844	—
Total commercial	2	—	844	—	844	—
Total	2	—	$844	$—	$844	$—

The following table presents TDRs occurring during the period indicated by type of modification:

(Dollars in thousands)	Three Months		Nine Months
Periods ended September 30,	2022	2021	2022	2021
Below-market interest rate concession	$—	$—	$—	$—
Payment deferral	—	—	—	—
Maturity / amortization concession	—	—	—	—
Interest only payments	—	—	—	—
Combination (1)	844	—	844	—
Total	$844	$—	$844	$—

(1) Loans included in this classification were modified with a combination of any two of the concessions listed in this table.

The following table presents information on TDRs modified within the previous 12 months for which there was a payment default:

(Dollars in thousands)	Three Months				Nine Months
	# of Loans		Recorded Investment		# of Loans		Recorded Investment
Periods ended September 30,	2022	2021	2022	2021	2022	2021	2022	2021
TDRs with a Payment Default:
Residential real estate	—	1	$—	$330	—	1	$—	$330

Individually Analyzed Loans

Individually analyzed loans include nonaccrual commercial loans, reasonably expected TDRs and executed TDRs, as well as certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans.

As of September 30, 2022, the carrying value of individually analyzed loans amounted to $12.0 million, of which $8.3 million were considered collateral dependent. As of December 31, 2021, the carrying value of individually analyzed loans amounted to $21.1 million, of which $14.4 million were considered collateral dependent.

For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. See Note 10 for additional disclosure regarding fair value of individually analyzed collateral dependent loans.

The following table presents the carrying value of collateral dependent individually analyzed loans:

(Dollars in thousands)	September 30, 2022		December 31, 2021
	Carrying Value	Related Allowance	Carrying Value	Related Allowance
Commercial:
Commercial real estate (1)	$3,609	$—	$10,603	$—
Commercial & industrial	—	—	—	—
Total commercial	3,609	—	10,603	—
Residential Real Estate:
Residential real estate (2)	4,612	520	3,803	534
Consumer:
Home equity (2)	71	—	—	—
Other	—	—	—	—
Total consumer	71	—	—	—
Total	$8,292	$520	$14,406	$534

(1)    Secured by income-producing property.

(2)    Secured by one- to four-family residential properties.

Credit Quality Indicators

Commercial

The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan risk rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. The Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for loan losses. See Note 5 for additional information.

A description of the commercial loan categories is as follows:

Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality, but may exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, performance or may be in an industry or of a loan type known to have a higher degree of risk. These weaknesses may be mitigated by secondary sources of repayment, including SBA guarantees.

Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies.

Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectability. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be

determined. “Loss” is not intended to imply that the loan has no recovery value, but rather, it is not practical or desirable to continue to carry the asset.

The Corporation’s procedures call for loan risk ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. On a quarterly basis, management reviews a watched asset list, which generally consists of commercial loans that are risk-rated 6 or worse, highly leveraged transaction loans, high-volatility commercial real estate and other selected loans. Management’s review focuses on the current status of the loans, the appropriateness of risk ratings and strategies to improve the credit.

An annual credit review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio.

Residential and Consumer

Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type.

In addition, other techniques are utilized to monitor indicators of credit deterioration in the residential real estate loans and home equity consumer loans. Among these techniques is the periodic tracking of loans with an updated FICO score and an updated estimated LTV ratio. LTV is estimated based on such factors as geographic location, the original appraised value and changes in median home prices, and takes into consideration the age of the loan. The results of these analyses and other credit review procedures, including selected targeted internal reviews, are taken into account in the determination of qualitative loss factors for residential real estate and home equity consumer credits.

The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment as of September 30, 2022:

(Dollars in thousands)	Term Loans Amortized Cost by Origination Year
	2022	2021	2020	2019	2018	Prior	Revolving Loans Amortized Cost	Revolving Loans Converted to Term Loans	Total
Commercial:
CRE:
Pass	$461,435	$354,011	$175,390	$193,425	$175,084	$316,290	$3,579	$1,466	$1,680,680
Special Mention	14,142	22,345	406	13,115	17,567	10,633	190	—	78,398
Classified	—	—	510	—	2,685	414	—	—	3,609
Total CRE	475,577	376,356	176,306	206,540	195,336	327,337	3,769	1,466	1,762,687
C&I:
Pass	86,981	63,805	76,341	88,235	94,240	121,837	103,130	798	635,367
Special Mention	1,605	—	—	—	1,444	12,123	1,497	—	16,669
Classified	—	—	—	26	—	—	696	—	722
Total C&I	88,586	63,805	76,341	88,261	95,684	133,960	105,323	798	652,758
Residential Real Estate:
Residential real estate:
Current	622,899	718,371	283,621	127,157	74,789	310,005	—	—	2,136,842
Past Due	—	—	1,397	1,156	2,107	2,596	—	—	7,256
Total residential real estate	622,899	718,371	285,018	128,313	76,896	312,601	—	—	2,144,098
Consumer:
Home equity:
Current	15,354	8,709	3,842	2,643	2,106	3,428	229,083	8,326	273,491
Past Due	—	—	—	—	—	81	95	75	251
Total home equity	15,354	8,709	3,842	2,643	2,106	3,509	229,178	8,401	273,742
Other:
Current	3,182	4,400	1,742	736	258	4,987	266	—	15,571
Past Due	17	—	—	—	—	—	—	—	17
Total other	3,199	4,400	1,742	736	258	4,987	266	—	15,588
Total Loans	$1,205,615	$1,171,641	$543,249	$426,493	$370,280	$782,394	$338,536	$10,665	$4,848,873

The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment as of December 31, 2021:

(Dollars in thousands)	Term Loans Amortized Cost by Origination Year
	2021	2020	2019	2018	2017	Prior	Revolving Loans Amortized Cost	Revolving Loans Converted to Term Loans	Total
Commercial:
CRE:
Pass	$417,705	$212,649	$260,940	$206,164	$163,132	$266,067	$7,015	$2,202	$1,535,874
Special Mention	9,089	489	33,982	28,432	—	20,273	320	—	92,585
Classified	—	958	—	2,685	6,959	1	—	—	10,603
Total CRE	426,794	214,096	294,922	237,281	170,091	286,341	7,335	2,202	1,639,062
C&I:
Pass	116,959	78,601	104,827	87,619	51,579	83,182	89,686	911	613,364
Special Mention	—	—	606	4,599	6,195	15,605	1,186	—	28,191
Classified	—	—	—	—	—	—	—	—	—
Total C&I	116,959	78,601	105,433	92,218	57,774	98,787	90,872	911	641,555
Residential Real Estate:
Residential real estate:
Current	733,658	353,742	158,140	85,656	88,365	297,792	—	—	1,717,353
Past Due	—	1,402	1,167	2,379	763	3,911	—	—	9,622
Total residential real estate	733,658	355,144	159,307	88,035	89,128	301,703	—	—	1,726,975
Consumer:
Home equity:
Current	10,434	5,850	3,703	2,380	1,064	3,592	211,488	8,421	246,932
Past Due	—	—	185	—	—	245	115	220	765
Total home equity	10,434	5,850	3,888	2,380	1,064	3,837	211,603	8,641	247,697
Other:
Current	5,536	3,264	1,313	407	747	6,090	258	—	17,615
Past Due	21	—	—	—	—	—	—	—	21
Total other	5,557	3,264	1,313	407	747	6,090	258	—	17,636
Total Loans	$1,293,402	$656,955	$564,863	$420,321	$318,804	$696,758	$310,068	$11,754	$4,272,925

Consistent with industry practice, Washington Trust may renew commercial loans at or immediately prior to their maturity. In the tables above, renewals subject to full credit evaluation before being granted are reported as originations in the period renewed.