Derivative Financial Instruments

12 Months Ended

Dec. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 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 December 31, 2022 and 2021, the Corporation had an interest rate swap contract that was designated as a cash flow hedge to hedge the interest rate risk associated with short-term variable rate FHLB advances. The interest rate swap on borrowings matures in December 2023. In addition, at December 31, 2022, and 2021, 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. The interest rate swap on loans matures in May 2026. The changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) and subsequently reclassified to earnings when gains or losses are realized.

Loan Related Derivative Contracts

Interest Rate 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 retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans. 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.

The following table presents the notional amounts and fair values of derivative instruments in the Consolidated Balance Sheets:


(Dollars in thousands)	December 31, 2022			December 31, 2021
		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)	$320,000	$548	$31,178	$320,000	$182	$5,301

Derivatives not Designated as Hedging Instruments:
Loan related derivative contracts:
Interest rate contracts with customers	935,099	32	68,137	1,022,388	32,361	2,015
Mirror contracts with counterparties	935,099	67,797	61	1,022,388	2,001	32,480
Risk participation agreements	282,191	—	2	237,446	1	2

Mortgage loan commitments:
Interest rate lock commitments	12,201	144	4	49,800	1,256	—
Forward sale commitments	23,150	58	150	103,626	54	905
Gross amounts		68,579	99,532		35,855	40,703
Less: amounts offset (2)		23,524	23,524		2,167	2,167
Derivative balances, net of offset		45,055	76,008		33,688	38,536
Less: collateral pledged (3)		—	7,716		—	34,539
Net amounts		$45,055	$68,292		$33,688	$3,997

(1)The fair value of derivative assets includes accrued interest receivable of $24 thousand and $182 thousand, respectively, at December 31, 2022 and 2021. The fair value of derivative liabilities includes accrued interest payable of $856 thousand and $19 thousand, respectively, at December 31, 2022 and 2021.

(2)Interest rate risk management contracts and loan related derivative contracts with counterparties are subject to master netting arrangements.

(3)Collateral pledged to derivative counterparties is in the form of cash. Washington Trust may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.

The following table presents the effect of derivative instruments in the Consolidated Statements of Changes in Shareholders’ Equity:


(Dollars in thousands)	Gain (Loss) Recognized in Other Comprehensive Income, Net of Tax
Years ended December 31,	2022	2021	2020
Derivatives Designated as Cash Flow Hedging Instruments:
Interest rate risk management contracts:
Interest rate caps	$—	$—	$89
Interest rate swaps	(18,632)	(2,566)	(893)
Interest rate floors	—	—	150
Total	($18,632)	($2,566)	($654)

Interest rate cap and interest rate floor contracts designated as cash flow hedges matured in 2020.

For derivatives designated as cash flow hedging instruments, see Note 19 for additional disclosure pertaining to the amounts and location of reclassifications from AOCL into earnings.

The following table presents the effect of derivative instruments in the Consolidated Statements of Income:


(Dollars in thousands)		Amount of Gain (Loss) Recognized in Noninterest Income
Years ended December 31,	Statement of Income Location	2022	2021	2020
Derivatives not Designated as Hedging Instruments:
Loan related derivative contracts:
Interest rate contracts with customers	Loan related derivative income	($92,730)	($27,846)	$60,938
Mirror contracts with counterparties	Loan related derivative income	94,759	31,547	(57,067)
Risk participation agreements	Loan related derivative income	727	641	120

Mortgage loan commitments:
Interest rate lock commitments	Mortgage banking revenues	(1,116)	(5,947)	6,106
Forward sale commitments	Mortgage banking revenues	4,530	5,383	(10,769)
Total		$6,170	$3,778	($672)