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What changed in WASHINGTON TRUST BANCORP INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of WASHINGTON TRUST BANCORP INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+361 added−342 removedSource: 10-K (2024-02-26) vs 10-K (2023-02-23)

Top changes in WASHINGTON TRUST BANCORP INC's 2023 10-K

361 paragraphs added · 342 removed · 275 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

50 edited+11 added−5 removed127 unchanged
Biggest changeAs noted above, Washington Trust’s lending activities are conducted primarily in southern New England and, to a lesser extent, other states. In addition to branch offices, the Bank has a commercial lending office at its main office and in the financial district of Providence, Rhode Island.
Biggest changeAs of December 31, 2023, the Bank had 10 branch offices located in southern Rhode Island (Washington County), 15 branch offices located in the greater Providence area in Rhode Island and one branch office located in southeastern Connecticut. As noted above, Washington Trust’s lending activities are conducted primarily in southern New England and, to a lesser extent, other states.
Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial or other transactions relating to a sanctioned country or with certain designated persons and entities; (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons); and (iii) restrictions on transactions with or involving certain persons or entities.
Generally, -16- however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial or other transactions relating to a sanctioned country or with certain designated persons and entities; (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons); and (iii) restrictions on transactions with or involving certain persons or entities.
If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order restricting asset growth, requiring an institution to increase its ratio of tangible equity to assets or directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDIA.
If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the -14- agency must issue an order directing action to correct the deficiency and may issue an order restricting asset growth, requiring an institution to increase its ratio of tangible equity to assets or directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDIA.
Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences for Washington Trust. -17- Regulation of Other Activities Registered Investment Adviser. WTA is registered as an investment adviser under the Advisers Act.
Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences for Washington Trust. Regulation of Other Activities Registered Investment Adviser. WTA is registered as an investment adviser under the Advisers Act.
We evaluate compensation in relation to market trends and internal pay equity to ensure that we are providing fair and competitive pay; promote and recognize employees for their work successes; provide training and professional development opportunities for employees to enhance their skills; offer a flexible, wide-ranging benefit package to meet the diverse needs of our workforce; and provide policies and benefits to help employees create a work-life balance.
We evaluate compensation in relation to market trends and internal pay equity to ensure that we are providing fair and competitive pay; promote and recognize employees for their work -9- successes; provide training and professional development opportunities for employees to enhance their skills; offer a flexible, wide-ranging benefit package to meet the diverse needs of our workforce; and provide policies and benefits to help employees create a work-life balance.
The FDIA and FDIC regulations generally limit the ability of an insured depository institution to accept, renew or roll over any brokered deposit unless the institution’s capital category is “well capitalized” or, with the FDIC’s approval, “adequately capitalized.” Depository institutions that have brokered deposits in excess of 10% of total assets may be subject to increased FDIC deposit insurance premium assessments.
The FDIA and FDIC regulations generally limit the ability of an insured depository institution to accept, renew or roll over any brokered deposit unless the institution’s capital category is “well capitalized” or, with the FDIC’s approval, “adequately capitalized.” Certain depository institutions that have brokered deposits in excess of 10% of total assets may be subject to increased FDIC deposit insurance premium assessments.
Among other circumstances, under the BHCA, a company has control of a bank or bank holding company if the company owns, controls or holds with power to vote 25% or more of a class of voting securities of the bank or bank holding company, controls in any manner the election of a majority of directors or -12- trustees of the bank or bank holding company, or the Federal Reserve has determined, after notice and opportunity for hearing, that the company has the power to exercise a controlling influence over the management or policies of the bank or bank holding company.
Among other circumstances, under the BHCA, a company has control of a bank or bank holding company if the company owns, controls or holds with power to vote 25% or more of a class of voting securities of the bank or bank holding company, controls in any manner the election of a majority of directors or trustees of the bank or bank holding company, or the Federal Reserve has determined, after notice and opportunity for hearing, that the company has the power to exercise a controlling influence over the management or policies of the bank or bank holding company.
The Bancorp and the Bank are subject to federal and state laws designed to protect consumers and prohibit unfair or deceptive business practices including the Equal Credit Opportunity Act, Fair Housing Act, Home Ownership Protection Act, Fair Credit Reporting Act, as amended by the FACT Act, the GLBA, the TILA, the CRA, the Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, National Flood Insurance Act and various state law counterparts.
The Bancorp and the Bank are subject to federal and state laws designed to protect consumers and prohibit unfair or deceptive business practices including the Equal Credit Opportunity Act, Fair Housing Act, Home Ownership Protection Act, Fair Credit Reporting Act, as amended by the FACT Act, the GLBA, the TILA, the CRA, the Home Mortgage Disclosure -15- Act, Real Estate Settlement Procedures Act, National Flood Insurance Act and various state law counterparts.
Attracting and retaining top talent continues to be challenging, and an important -10- tool in our human capital strategy is the availability of a remote or hybrid scheduling option for many of our team members. To ensure human connectivity, continued collaboration and team engagement, we have adopted a philosophy of “intentional presence” regardless of an individual's physical location.
Attracting and retaining top talent continues to be challenging, and an important tool in our human capital strategy is the availability of a remote or hybrid scheduling option for many of our team members. To ensure human connectivity, continued collaboration and team engagement, we have adopted a philosophy of “intentional presence” regardless of an individual's physical location.
Washington Trust’s residential mortgage origination business conducted in our residential mortgage lending offices located outside of Rhode Island is performed by this Bank subsidiary. -9- The Bank has other subsidiaries whose primary functions are to provide servicing on passive investments, such as loans acquired from the Bank and investment securities.
Washington Trust’s residential mortgage origination business conducted in our residential mortgage lending offices located outside of Rhode Island is performed by this Bank subsidiary. The Bank has other subsidiaries whose primary functions are to provide servicing on passive investments, such as loans acquired from the Bank and investment securities.
In addition, the Bank has a subsidiary that was formed for the purpose of holding, monitoring and disposing of certain foreclosed properties. Market Area Washington Trust’s headquarters and main office is located in Westerly in Washington County, Rhode Island. Washington Trust’s primary deposit gathering area consists of the communities that are served by its branch network.
In addition, the Bank has a subsidiary that was formed for the purpose of holding, monitoring and disposing of certain foreclosed properties. -8- Market Area Washington Trust’s headquarters and main office is located in Westerly in Washington County, Rhode Island. Washington Trust’s primary deposit gathering area consists of the communities that are served by its branch network.
Under the Federal Reserve’s rules applicable to the Bancorp and the FDIC’s capital rules applicable to the Bank, the Bancorp and the Bank are each required to maintain a minimum common -14- equity Tier 1 capital to risk-weighted assets ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum leverage ratio requirement of 4.0%.
Under the Federal Reserve’s rules applicable to the Bancorp and the FDIC’s capital rules applicable to the Bank, the Bancorp and the Bank are each required to maintain a minimum common equity Tier 1 capital to risk-weighted assets ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0% and a minimum leverage ratio requirement of 4.0%.
In order to form a financial subsidiary, a state-chartered bank must be “well capitalized,” and such banks must comply with certain capital deduction, risk management and affiliate transaction rules, among other requirements. Brokered Deposits.
In order to form a financial subsidiary, a state-chartered bank must be “well -12- capitalized,” and such banks must comply with certain capital deduction, risk management and affiliate transaction rules, among other requirements. Brokered Deposits.
Wealth Management Services Washington Trust provides a broad range of wealth management services to personal and institutional clients. These services include investment management; holistic financial planning services; personal trust and estate services, including services as trustee, personal representative, custodian and guardian; settlement of decedents’ estates; and institutional trust services, including custody and fiduciary services.
Wealth Management Services Washington Trust provides a broad range of wealth management services to personal and institutional clients. These services include 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.
Source of Strength. Under the BHCA, as amended by the Dodd-Frank Act, the Bancorp is required to serve as a source of financial strength for the Bank. This support may be required at times when the Bancorp may not have the resources to provide support to the Bank.
Under the BHCA, as amended by the Dodd-Frank Act, the Bancorp is required to serve as a source of financial strength for the Bank. This support may be required at times when the Bancorp may not have the resources to -10- provide support to the Bank.
Prior to the effectiveness of certain provisions of the Dodd-Frank Act, bank holding companies were permitted to include trust preferred securities and cumulative perpetual preferred stock in Tier 1 capital, subject to limitations.
Prior to the effectiveness of certain provisions of the Dodd-Frank -13- Act, bank holding companies were permitted to include trust preferred securities and cumulative perpetual preferred stock in Tier 1 capital, subject to limitations.
WTMC, formed in 2012, is a mortgage banking subsidiary of the Bank and licensed to do business in Rhode Island, Massachusetts, Connecticut and New Hampshire. WTMC is subject to the regulation, supervision and examination by the banking divisions in each of these states. See “-Consumer Protection Regulation” for a description of certain regulations that apply to WTMC.
WTMC is a mortgage banking subsidiary of the Bank and licensed to do business in Rhode Island, Massachusetts, Connecticut and New Hampshire. WTMC is subject to the regulation, supervision and examination by the banking divisions in each of these states. See “-Consumer Protection Regulation” for a description of certain regulations that apply to WTMC.
In addition, under the FDIA, the FDIC may terminate deposit insurance, among other circumstances, upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
In addition, under the FDIA, the FDIC may terminate deposit insurance, among other circumstances, upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Acquisitions and Branching.
Community Reinvestment Act. The CRA requires the FDIC to evaluate the Bank’s performance in helping to meet the credit needs of the entire community it serves, including low- and moderate-income neighborhoods, consistent with its safe and sound banking operations, and to take this record into consideration when evaluating certain applications.
The CRA requires the FDIC to evaluate the Bank’s performance in helping to meet the credit needs of the entire community it serves, including low- and moderate-income neighborhoods, consistent with its safe and sound banking operations, and to take this record into consideration when evaluating certain applications.
Wealth management services are provided through the Bank and its registered investment adviser subsidiary. See additional information under the caption “Subsidiaries.” At December 31, 2022, wealth management AUA totaled $6.0 billion. These assets are not included in the Consolidated Financial Statements. Washington Trust’s wealth management revenues represented 18% of total revenues in December 31, 2022.
Wealth management services are provided through the Bank and its registered investment adviser subsidiary. See additional information under the caption “Subsidiaries.” At December 31, 2023, wealth management AUA totaled $6.6 billion. These assets are not included in the Consolidated Financial Statements. Washington Trust’s wealth management revenues represented 18% of total revenues in December 31, 2023.
These loans were individually underwritten by us at the time of purchase using standards similar to those employed for self-originated consumer loans. At December 31, 2022, these purchased loans represented 3% of the total consumer loan portfolio and 0.2% of the total loan portfolio. Deposit Activities At December 31, 2022, total deposits amounted to $5.0 billion.
These loans were individually underwritten by us at the time of purchase using standards similar to those employed for self-originated consumer loans. At December 31, 2023, these purchased loans represented 4% of the total consumer loan portfolio and 0.2% of the total loan portfolio. Deposit Activities At December 31, 2023, total deposits amounted to $5.3 billion.
Many of these companies have greater resources than Washington Trust. Human Capital Washington Trust had 651 full-time equivalent employees at December 31, 2022. Our employees are the foundation of our success. They serve as trusted advisors, brand ambassadors, and leaders within the community, embodying our core values of quality, integrity and community.
Many of these companies have greater resources than Washington Trust. Human Capital Washington Trust had 665 full-time equivalent employees at December 31, 2023. Our employees are the foundation of our success. They serve as trusted advisors, brand ambassadors, and leaders within the community, embodying our core values of quality, integrity and community.
These assessments may result in clarification of debt service ratio calculations, changes in geographic and loan type concentrations, modifications to LTV standards for real estate collateral, changes in credit monitoring criteria and enhancements to monitoring of construction loans. Commercial Loans The commercial loan portfolio represented 49% of total loans at December 31, 2022.
These assessments may result in clarification of debt service ratio calculations, changes in geographic and loan type concentrations, modifications to LTV standards for real estate collateral, changes in credit monitoring criteria and enhancements to monitoring of construction loans. Commercial Loans The commercial loan portfolio represented 48% of total loans at December 31, 2023.
Investment Security Activities Washington Trust’s investment securities portfolio amounted to $1.0 billion, or 15% of total assets, at December 31, 2022 and 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.
Investment Security Activities Washington Trust’s investment securities portfolio amounted to $1.0 billion, or 14% of total assets, at December 31, 2023 and 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.
At December 31, 2022, the investment securities portfolio consisted of obligations of U.S. government agencies and U.S. -8- government-sponsored enterprises, including mortgage-backed securities; individual name issuer trust preferred debt securities; and corporate bonds. Wholesale Funding Activities The Bank is a member of the FHLB.
At December 31, 2023, the investment securities portfolio consisted of obligations of U.S. government agencies and U.S. -7- government-sponsored enterprises, including mortgage-backed securities; individual name issuer trust preferred debt securities; and corporate bonds. Wholesale Funding Activities The Bank is a member of the FHLB.
The right of the Bancorp, and consequently the right of shareholders of the Bancorp, to participate in any distribution of the assets or earnings of its subsidiaries, through the payment of such dividends or otherwise, is subject to the prior claims of creditors of the subsidiaries, including, with respect to the Bank, depositors of the Bank, except to the extent that certain claims of the Bancorp in a creditor capacity may be recognized. -15- Restrictions on Bank Holding Company Dividends.
The right of the Bancorp, and consequently the right of shareholders of the Bancorp, to participate in any distribution of the assets or earnings of its subsidiaries, through the payment of such dividends or otherwise, is subject to the prior claims of creditors of the subsidiaries, including, with respect to the Bank, depositors of the Bank, except to the extent that certain claims of the Bancorp in a creditor capacity may be recognized.
The primary factors in competing are interest rates, financing terms, fees charged, products offered, personalized customer service, online and mobile access to accounts and convenience of branch locations, ATMs and branch hours. Competition comes from commercial banks, credit unions, savings institutions and internet banks, as well as other non-bank institutions.
The primary factors in competing are interest rates, financing terms, fees charged, products offered, personalized customer service, online and mobile access to accounts and convenience of branch locations, ATMs and branch hours. Competition comes from commercial banks, credit unions, savings institutions and non-bank lenders.
The Federal Reserve has the authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice.
Restrictions on Bank Holding Company Dividends. The Federal Reserve has the authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice.
Consumer loans include home equity loans and lines of credit and personal installment loans. Home equity lines and home equity loans represent 95% of the total consumer portfolio at December 31, 2022. Also included in the consumer loan portfolio are purchased loans to individuals secured by general aviation aircraft.
Consumer loans include home equity loans and lines of credit and personal installment loans. Home equity lines and home equity loans represent 94% of the total consumer portfolio at December 31, 2023. Also included in the consumer loan portfolio are purchased loans to individuals secured by general aviation aircraft.
As of December 31, 2022, purchased residential mortgages serviced by others were largely secured by properties located in Massachusetts and represented 3% of the total residential real estate loan portfolio and 1% of the total loan portfolio. Consumer Loans The consumer loan portfolio represented 6% of total loans as of December 31, 2022.
As of December 31, 2023, purchased residential mortgages serviced by others were largely secured by properties located in Massachusetts and represented 2% of the total residential real estate loan portfolio and 1% of the total loan portfolio. Consumer Loans The consumer loan portfolio represented 6% of total loans as of December 31, 2023.
Statistical Disclosures The information required by Securities Act Guide 3 “Statistical Disclosure by Bank Holding Companies” is located on the pages noted below. Description Page I. Distribution of Assets, Liabilities and Stockholder Equity; Interest Rates and Interest Differentials 35-38 II. Investment Portfolio 43-45, 87 III. Loan Portfolio 45-49, 90 IV. Summary of Loan Loss Experience 54-57, 99 V.
Statistical Disclosures The information required by Securities Act Guide 3 “Statistical Disclosure by Bank Holding Companies” is located on the pages noted below. Description Page I. Distribution of Assets, Liabilities and Stockholder Equity; Interest Rates and Interest Differentials 35-37 II. Investment Portfolio 43-44, 87 III. Loan Portfolio 44-49, 90 IV. Summary of Loan Loss Experience 54-56, 100 V.
CRE loans frequently involve larger loan balances to single borrowers or groups of related borrowers. At December 31, 2022, CRE loans represented 74% of the total commercial loan portfolio and 36% of the total loan portfolio. C&I loans primarily provide working capital, equipment financing and financing for other business-related purposes.
CRE loans frequently involve larger loan balances to single borrowers or groups of related borrowers. At December 31, 2023, CRE loans represented 78% of the total commercial loan portfolio and 37% of the total loan portfolio. C&I loans primarily provide working capital, equipment financing and financing for other business-related purposes.
Deposits 57-58, 110 VI. Return on Equity and Assets 34 Supervision and Regulation The following discussion addresses elements of the regulatory framework applicable to Washington Trust.
Deposits 56-58, 113 VI. Return on Equity and Assets 34 Supervision and Regulation The following discussion addresses elements of the regulatory framework applicable to Washington Trust.
C&I loans also include PPP loans that are fully guaranteed by the U.S. government, tax-exempt loans made to states and political subdivisions, as well as industrial development or -7- 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.
C&I loans also include tax-exempt loans made to states and political subdivisions, as well as industrial development or revenue bonds issued through quasi-public corporations for -6- the benefit of a private or non-profit entity where that entity rather than the governmental entity is obligated to pay the debt service.
The Bank pledges certain qualified investment securities and loans as collateral to the FHLB. Additional funding sources are available through the FRBB and in other forms of borrowing, such as securities sold under repurchase agreements. As noted above under the caption “Deposit Activities,” the Corporation also utilizes wholesale brokered deposits as part of its overall funding program.
Additional funding sources are available through the FRBB and in other forms of borrowing, such as securities sold under repurchase agreements. As noted above under the caption “Deposit Activities,” the Corporation also utilizes wholesale brokered deposits as part of its overall funding program.
At December 31, 2022, Washington Trust had total assets of $6.7 billion, total deposits of $5.0 billion and total shareholders’ equity of $453.7 million. Lending Activities Washington Trust’s total loan portfolio amounted to $5.1 billion, or 77% of total assets, at December 31, 2022. The Corporation classifies loans as commercial, residential real estate or consumer.
At December 31, 2023, Washington Trust had total assets of $7.2 billion, total deposits of $5.3 billion and total shareholders’ equity of $472.7 million. Lending Activities Washington Trust’s total loan portfolio amounted to $5.6 billion, or 78% of total assets, at December 31, 2023. The Corporation classifies loans as commercial, residential real estate or consumer.
At December 31, 2022, C&I loans represented 26% of the total commercial loan portfolio and 13% of the total loan portfolio. Residential Real Estate Loans The residential real estate loan portfolio consists of mortgage and homeowner construction loans secured by one- to four-family residential properties and represented 45% of total loans at December 31, 2022.
At December 31, 2023, C&I loans represented 22% of the total commercial loan portfolio and 11% of the total loan portfolio. Residential Real Estate Loans The residential real estate loan portfolio consists of mortgage and homeowner construction loans secured by one- to four-family residential properties and represented 46% of total loans at December 31, 2023.
Wealth management revenues also include “transaction-based” revenues, such as commissions and other service fees that are not primarily derived from the value of assets. Subsidiaries At December 31, 2022, the Bancorp’s principal subsidiary is the Bank.
Wealth management revenues also include “transaction-based” revenues that are not primarily derived from the value of assets. Subsidiaries At December 31, 2023, the Bancorp’s principal subsidiary is the Bank.
For 2022, the FDIC insurance expense for the Bank was $1.7 million. Acquisitions and Branching. Prior approval from the RI Division of Banking and the FDIC is required in order for the Bank to acquire another bank or establish a new branch office.
Prior approval from the RI Division of Banking and the FDIC is required in order for the Bank to acquire another bank or establish a new branch office.
Regulation of the Bancorp As a bank holding company, the Bancorp is subject to regulation, supervision and examination by the Federal Reserve under the BHCA, and the RI Division of Banking. -11- The Federal Reserve has the authority, among other things, to order bank holding companies to cease and desist from unsafe or unsound banking practices; to assess civil money penalties; and to order termination of non-banking activities or termination of ownership and control of a non-banking subsidiary by a bank holding company.
The Federal Reserve has the authority, among other things, to order bank holding companies to cease and desist from unsafe or unsound banking practices; to assess civil money penalties; and to order termination of non-banking activities or termination of ownership and control of a non-banking subsidiary by a bank holding company. Source of Strength.
The Federal Reserve has established presumptions of control under which the acquisition of control of 5% or more of a class of voting securities of a bank holding company, together with other factors enumerated by the Federal Reserve, could constitute the acquisition of control of a bank holding company for purposes of the BHCA.
The Federal Reserve has established presumptions of control under which the acquisition of control of 5% or more of a class of voting securities of a bank holding company, together with other factors enumerated by the Federal Reserve, could constitute the acquisition of control of a bank holding company for purposes of the BHCA. -11- Regulation of the Bank The Bank is subject to the regulation, supervision and examination by the FDIC, the RI Division of Banking and the Connecticut Department of Banking.
However, for institutions that are well capitalized and have a CAMELS composite rating of 1 or 2, reciprocal deposits are deducted from brokered deposits. Section 202 of the -13- Economic Growth Act, which was enacted in 2018, amends the FDIA to exempt a capped amount of reciprocal deposits from treatment as brokered deposits for certain insured depository institutions.
Section 202 of the Economic Growth Act, which was enacted in 2018, amends the FDIA to exempt a capped amount of reciprocal deposits from treatment as brokered deposits for certain insured depository institutions. Community Reinvestment Act.
Failure of an institution to receive at least a “satisfactory” rating could inhibit the Bank or the Bancorp from undertaking certain activities, including engaging in activities permitted as a financial holding company under GLBA and acquisitions of other financial institutions. The Bank has achieved a rating of “satisfactory” on its most recent examination dated July 29, 2019.
Failure of an institution to receive at least a “satisfactory” rating could inhibit the Bank or the Bancorp from undertaking certain activities, including engaging in activities permitted as a financial holding company under GLBA and acquisitions of other financial institutions. Rhode Island and Connecticut also have enacted substantially similar community reinvestment requirements.
Washington Trust provides wealth management services from its offices located in Westerly, Narragansett and Providence, Rhode Island; Wellesley, Massachusetts; and New Haven, Connecticut. Competition Washington Trust faces considerable competition in its market area for all aspects of banking and related financial service activities. Washington Trust contends with strong competition both in generating loans and attracting deposits.
Competition Washington Trust faces considerable competition in its market area for all aspects of banking and related financial service activities. Washington Trust contends with strong competition both in generating loans and attracting deposits.
Regulation of the Bank The Bank is subject to the regulation, supervision and examination by the FDIC, the RI Division of Banking and the Connecticut Department of Banking. The Bank is also subject to various Rhode Island and Connecticut business and banking regulations and the regulations issued by the CFPB (as enforced by the FDIC).
The Bank is also subject to various Rhode Island and Connecticut business and banking regulations and the regulations issued by the CFPB (as enforced by the FDIC). The Federal Reserve may also directly examine the subsidiaries of the Bancorp, including the Bank.
At December 31, 2022, the Bank had advances payable to the FHLB of $980.0 million. As of December 31, 2022, the Bank had access to a $40.0 million unused line of credit with the FHLB. The Bank had remaining available borrowing capacity with the FHLB of $668.3 million at December 31, 2022.
At December 31, 2023, the Bank had advances payable to the FHLB of $1.2 billion. As of December 31, 2023, the Bank had access to a $40.0 million unused line of credit with the FHLB. Additionally, the Bank had a standby letter of credit with the FHLB of $65.0 million at December 31, 2023.
Additionally, the CFPB’s qualified mortgage rule, requires creditors, such as Washington Trust, to make a reasonable good faith determination of a consumer's ability to repay any -16- consumer credit transaction secured by a dwelling.
Additionally, the CFPB’s qualified mortgage rule, requires creditors, such as Washington Trust, to make a reasonable good faith determination of a consumer's ability to repay any consumer credit transaction secured by a dwelling. The Economic Growth Act included provisions that ease certain requirements related to residential mortgage transactions for certain institutions with less than $10 billion in total consolidated assets.
In addition, in July 2022, the Bank opened a new commercial lending office in New Haven, Connecticut. Washington Trust also has 6 residential mortgage lending offices located in eastern Massachusetts (Sharon, Burlington, Braintree and Wellesley); in Glastonbury, Connecticut; and in Warwick, Rhode Island.
Washington Trust has residential mortgage lending offices located in eastern Massachusetts (Sharon, Burlington, Braintree and Wellesley); in Glastonbury, Connecticut; and in Rhode Island (Westerly and Warwick). Washington Trust provides wealth management services from its offices located in Westerly, Narragansett and Providence, Rhode Island; Wellesley, Massachusetts; and New Haven, Connecticut.
The Economic Growth Act included provisions that ease certain requirements related to residential mortgage transactions for certain institutions with less than $10 billion in total consolidated assets. Privacy and Customer Information Security. The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties.
Privacy and Customer Information Security. The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties.
The Federal Reserve has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless the bank holding company’s net income over the preceding year is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization’s capital needs, asset quality and overall financial condition.
The Federal Reserve has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay a dividend that exceeds earnings for the period for which the dividend is being paid.
Removed
In the fourth quarter of 2022, Weston Securities Corporation, formerly a subsidiary of the Bancorp, was dissolved and its net assets were transferred to the Bancorp though a return of capital.
Added
This standby letter of credit collateralizes an institutional deposit. The Bank had remaining available borrowing capacity with the FHLB of $1.1 billion at December 31, 2023. The Bank pledges certain qualified investment securities and loans as collateral to the FHLB.
Removed
As of December 31, 2022, the Bank had 10 branch offices located in southern Rhode Island (Washington County), 14 branch offices located in the greater Providence area in Rhode Island and 1 branch office located in southeastern Connecticut. In August 2022, we opened a new full-service branch in Cumberland, Rhode Island.
Added
Washington Trust provides commercial, residential and consumer lending services from its branch locations and other offices. The Bank has commercial lending offices at its main office, in the financial district of Providence, Rhode Island, in Warwick, Rhode Island, and in New Haven, Connecticut.
Removed
In addition, we announced that we submitted applications to establish a branch office in three northern Rhode Island locations in 2023 to further expand our branch footprint and serve the broader Rhode Island community. The three branch offices will be located in Barrington, Providence and Smithfield, Rhode Island and are subject to federal, state, local, and regulatory approvals.
Added
Regulation of the Bancorp As a bank holding company, the Bancorp is subject to regulation, supervision and examination by the Federal Reserve under the BHCA, and the RI Division of Banking.
Removed
The Federal Reserve may also directly examine the subsidiaries of the Bancorp, including the Bank.
Added
The FDIC is also required to recover losses to its Deposit Insurance Fund arising from the use of the systemic risk exception invoked on March 12, 2023, by the Secretary of the Treasury, acting on the recommendation of the Board of Directors of the FDIC and the Federal Reserve, and after consultation with the President, to allow the FDIC to complete its resolution of both Silicon Valley Bank and Signature Bank in a manner that fully protected depositors.
Removed
Rhode Island and Connecticut also have enacted substantially similar community reinvestment requirements. Lending Restrictions.
Added
The FDIC is required to recover such losses through one or more special assessments on insured depository institution, depository institution holding companies (with the concurrence of the Secretary of the Treasury with respect to holding companies), or both, as the FDIC determines appropriate.
Added
On November 16, 2023, the FDIC approved a final rule to implement a special assessment to recover such losses. Under the final rule, each insured depository institution’s assessment base for the special assessment is generally equal to estimated uninsured deposits as reported in the Consolidated Report of Condition and Income (Call Report) or Report of Assets and Liabilities of U.S.
Added
Branches and Agencies of Foreign Banks (FFIEC 002) as of December 31, 2022, after applying the $5 billion deduction. The Bank had total reported uninsured deposits as of December 31, 2022 of less than $5 billion, and therefore the Bank is not required to pay any such special assessment.
Added
For 2023, the FDIC insurance expense for the Bank was $4.7 million.
Added
However, for institutions that are well capitalized and have a CAMELS composite rating of 1 or 2, reciprocal deposits are deducted from brokered deposits, and established small banks (generally those with less than $10 billion in assets) are not subject to a brokered deposit adjustment.
Added
On October 23, 2023, the FDIC approved changes to its CRA regulations, maintaining the existing CRA ratings (outstanding, satisfactory, needs to improve, and substantial noncompliance) but modifying the evaluation framework to replace the existing tests generally applicable to banks with at least $2 billion in assets (the lending, investment, and services tests) with four new tests and associated performance metrics.
Added
The new CRA regulations will become effective on January 1, 2026. The Bank has achieved a rating of “satisfactory” on its most recent examination dated December 5, 2022. Lending Restrictions.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeChanges in these laws or regulations could have a material adverse impact on our profitability and mode of operations. -27- We are subject to numerous laws designed to protect consumers, including the CRA and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
Biggest changeWe are subject to numerous laws designed to protect consumers, including the CRA and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions. The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose community investment and nondiscriminatory lending requirements on financial institutions.
A worsening of business and economic conditions could have adverse effects on our business, including the following: • investors may have less confidence in the equity markets in general and in financial services industry stocks in particular, which could place downward pressure on our stock price and resulting market valuation; -18- • economic and market developments may further affect consumer and business confidence levels and may cause declines in credit usage and adverse changes in payment patterns, causing increases in delinquencies and default rates; • our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite loans become less predictive of future behaviors; • we could suffer decreases in demand for loans or other financial products and services or decreased deposits or other investments in accounts with us; • our Wealth Management Services customers may liquidate investments, which together with lower asset values, may reduce the level of assets under management and administration, and thereby decrease our wealth management revenues; • competition in the financial services industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions or otherwise; and • the value of loans and other assets or collateral securing loans may decrease.
A worsening of business and economic conditions could have adverse effects on our business, including the following: • investors may have less confidence in the equity markets in general and in financial services industry stocks in particular, which could place downward pressure on our stock price and resulting market valuation; • economic and market developments may further affect consumer and business confidence levels and may cause declines in credit usage and adverse changes in payment patterns, causing increases in delinquencies and default rates; • our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite loans become less predictive of future behaviors; • we could suffer decreases in demand for loans or other financial products and services or decreased deposits or other investments in accounts with us; • our Wealth Management Services customers may liquidate investments, which together with lower asset values, may reduce the level of assets under management and administration, and thereby decrease our wealth management revenues; • competition in the financial services industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions or otherwise; and • the value of loans and other assets or collateral securing loans may decrease.
Our inability to raise sufficient additional capital on acceptable terms when needed could subject us to certain activity restrictions or to a variety of enforcement remedies available to the -26- regulatory authorities, including limitations on our ability to pay dividends or pursue acquisitions, the issuance by regulatory authorities of a capital directive to increase capital and the termination of deposit insurance by the FDIC.
Our inability to raise sufficient additional capital on acceptable terms when needed could subject us to certain activity restrictions or to a variety of enforcement remedies available to the regulatory authorities, including limitations on our ability to pay dividends or pursue acquisitions, the issuance by regulatory authorities of a capital directive to increase capital and the termination of deposit insurance by the FDIC.
When we make loans, we sometimes obtain liens, such as real estate mortgages or other asset pledges, to provide us with a security interest in collateral. If there is a loan default, we may seek to foreclose upon collateral and enforce the security -20- interests to obtain repayment and eliminate or mitigate our loss.
When we make loans, we sometimes obtain liens, such as real estate mortgages or other asset pledges, to provide us with a security interest in collateral. If there is a loan default, we may seek to foreclose upon collateral and enforce the security interests to obtain repayment and eliminate or mitigate our loss.
In addition, we may incur significant training, licensing, maintenance, consulting and amortization expenses during and after systems implementations, and any such costs may continue for an extended period of time. Our business may be adversely affected if we fail to adapt our products and services to evolving industry standards and consumer preferences.
In addition, we may incur significant training, licensing, maintenance, consulting and amortization expenses during and after systems implementations, and any such costs may continue for an extended period of time. -22- Our business may be adversely affected if we fail to adapt our products and services to evolving industry standards and consumer preferences.
See “Business-Supervision and Regulation.” Our wealth management business is highly regulated, and the regulators have the ability to limit or restrict our activities and impose fines or suspensions on the conduct of our business. We offer wealth management services through the Bank and WTA. WTA is a registered investment adviser under the Advisers Act.
See “Business-Supervision and Regulation.” -26- Our wealth management business is highly regulated, and the regulators have the ability to limit or restrict our activities and impose fines or suspensions on the conduct of our business. We offer wealth management services through the Bank and WTA. WTA is a registered investment adviser under the Advisers Act.
Any damage to our reputation could affect our ability to retain and develop the business relationships necessary to conduct business, which in turn could negatively impact our financial condition, results of operations, and the market price of our common stock. -24- We may not be able to compete effectively in our increasingly competitive industry.
Any damage to our reputation could affect our ability to retain and develop the business relationships necessary to conduct business, which in turn could negatively impact our financial condition, results of operations, and the market price of our common stock. We may not be able to compete effectively in our increasingly competitive industry.
A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instruments would significantly exacerbate the other risks to which we are subject and any related adverse effects on the business, financial condition and results of operations. The soundness of other financial institutions could adversely affect us.
A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instruments could significantly exacerbate the other risks to which we are subject and any related adverse effects on the business, financial condition and results of operations. The soundness of other financial institutions could adversely affect us.
In recent years, non-financial services firms, such as financial technology companies, have begun to offer services traditionally provided by financial institutions. These firms attempt to use technology and mobile platforms to enhance the ability of companies and individuals to borrow, save and invest money.
In recent years, non-financial services firms, such as financial technology companies, have begun -23- to offer services traditionally provided by financial institutions. These firms attempt to use technology and mobile platforms to enhance the ability of companies and individuals to borrow, save and invest money.
See Item, “Business-Supervision and Regulation-Dividend Restrictions” and “Business - Supervision and Regulation-Capital Adequacy and Safety and Soundness-Regulatory Capital Requirements.” -21- We have credit and market risk inherent in our investment securities portfolio.
See Item, “Business-Supervision and Regulation-Dividend Restrictions” and “Business - Supervision and Regulation-Capital Adequacy and Safety and Soundness-Regulatory Capital Requirements.” We have credit and market risk inherent in our investment securities portfolio.
In addition, future system enhancements could have higher than expected -23- costs and/or result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations.
In addition, future system enhancements could have higher than expected costs and/or result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations.
A failure or circumvention of these controls could have a material adverse effect on our business operations and financial condition. We regularly assess and test our security systems and disaster preparedness, including back-up systems, but the risks are escalating. We also review and assess the cyber-security risk of our third-party service providers.
A failure or circumvention of these controls could have a material adverse effect on our business operations and financial condition. We regularly assess and test our security systems and disaster preparedness, including back-up systems, but the risks are escalating. We also review and assess the cybersecurity risk of our third-party service providers.
Write-downs of the amount of any impairment, if necessary, would be charged to the results of operations in the period in which the impairment occurs.
Write-downs of the amount of any impairment, if necessary, would be charged to the results of operations in the -24- period in which the impairment occurs.
Changes in interest rates and the condition of housing markets could adversely impact the volume of residential mortgage originations, sales and related mortgage banking activities. Revenues from wealth management services depend in large part on the level of AUA, which are primarily marketable securities.
Revenues from mortgage banking activities are largely dependent on mortgage origination volume and sales volume. Changes in interest rates and the condition of housing markets could adversely impact the volume of residential mortgage originations, sales and related mortgage banking activities. Revenues from wealth management services depend in large part on the level of AUA, which are primarily marketable securities.
Unfavorable or uncertain economic conditions can be caused by declines in economic growth, business activity, or investor or business confidence, limitations on the availability of or increases in the cost of credit and capital, increases in inflation or interest rates, the timing and impact of changing governmental policies, natural disasters, climate change, epidemics, the COVID-19 pandemic and future pandemics, terrorist attacks, acts of war, or a combination of these or other factors.
Unfavorable or uncertain economic conditions can be caused by declines in economic growth, business activity, or investor or business confidence, limitations on the availability of or increases in the cost of credit and capital, increases in inflation or interest rates, the timing and impact of changing governmental policies, natural disasters, climate change, epidemics, pandemics, terrorist attacks, acts of war, or a combination of these or other factors.
The ability of a borrower to make or refinance a balloon payment may be affected by a number of factors, including the financial condition of the borrower, prevailing economic conditions, interest rates, and collateral values. Repayment of these loans is generally more dependent on the economy and the successful operation of a business.
The ability of a borrower to make or refinance a balloon payment may be affected by a number of factors, including the financial condition of the borrower, prevailing economic conditions (including conditions in the real estate market), interest rates, and collateral values. Repayment of these loans is generally more dependent on the economy and the successful operation of a business.
Similarly, if we deem all or part of our investment in FHLB stock impaired, such action could have an adverse effect on our financial condition or results of operations. Our loan portfolio includes commercial loans, which are generally riskier than other types of loans. At December 31, 2022, commercial loans represented 49% of our loan portfolio.
Similarly, if we deem all or part of our investment in FHLB stock impaired, such action could have an adverse effect on our financial condition or results of operations. -19- Our loan portfolio includes commercial loans, which are generally riskier than other types of loans. At December 31, 2023, commercial loans represented 48% of our loan portfolio.
Failure to comply with these and other regulations, and supervisory expectations related thereto, may result in fines, penalties, lawsuits, regulatory sanctions, reputation damage, or restrictions on our business. We face significant legal risks, both from regulatory investigations and proceedings, and from private actions brought against us.
Failure to comply with these and other regulations or any applicable enforcement actions or settlement agreements, and supervisory expectations related thereto, may result in fines, penalties, lawsuits, regulatory sanctions, reputation damage, or restrictions on our business. -27- We face significant legal risks, both from regulatory investigations and proceedings, and from private actions brought against us.
Additionally, significant changes to accounting standards may require costly technology changes, additional training and personnel, and other expense that will negatively impact our results of operations. Changes in tax laws and regulations and differences in interpretation of tax laws and regulations may adversely impact our financial statements.
Additionally, significant changes to accounting standards may require costly technology changes, additional training and personnel, and other expense that will negatively impact our results of operations. Changes in tax laws and regulations, differences in interpretation of tax laws and regulations, and reductions in the value of our deferred tax assets may adversely impact our financial statements.
However, certain assets and liabilities may react differently to changes in market interest rates. Further, interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types of assets and liabilities may lag behind.
Further, interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types of assets and liabilities may lag behind.
Products and services relying on internet and mobile technologies may expose us to fraud and cybersecurity risks. Failure to successfully manage these risks in the development and implementation of new or modified products or services could have an adverse effect on our business and reputation. We may incur significant losses as a result of ineffective risk management processes and strategies.
Failure to successfully manage these risks in the development and implementation of new or modified products or services could have an adverse effect on our business and reputation. We may incur significant losses as a result of ineffective risk management processes and strategies.
In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly.
The price of our common stock can fluctuate widely in response to a variety of factors. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly.
Long-lived intangible assets are amortized and are tested for recoverability whenever events or changes in circumstances indicate the carrying amount of the asset or asset group may not be recoverable.
Goodwill must be evaluated for impairment at least annually. Long-lived intangible assets are amortized and are tested for recoverability whenever events or changes in circumstances indicate the carrying amount of the asset or asset group may not be recoverable.
The valuation and liquidity of our securities could be adversely impacted by reduced market liquidity, increased normal bid-asked spreads and increased uncertainty of market participants, which could reduce the market value of our securities, even those with no apparent credit exposure. The valuation of our securities requires judgment and as market conditions change security values may also change.
The valuation and liquidity of our securities could be adversely impacted by reduced market liquidity, increased normal bid-asked spreads and increased uncertainty of market participants, which could reduce the market value of our securities, even those with no apparent credit exposure.
Fluctuations in interest rates may impair the Bank’s business. The Bank’s earnings and financial condition are largely dependent on net interest income, which is the difference between interest income from interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings.
The Bank’s earnings and financial condition are largely dependent on net interest income, which is the difference between interest income from interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. However, certain assets and liabilities may react differently to changes in market interest rates.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY The possibility of the economy entering a recession and/or experiencing further turmoil or volatility in the financial markets would likely have an adverse effect on our business, financial position, and results of operations.
This report is qualified in its entirety by these risk factors. -17- RISKS RELATED TO OUR BUSINESS AND INDUSTRY The possibility of the economy entering a recession and/or experiencing further turmoil or volatility in the financial markets would likely have an adverse effect on our business, financial position, and results of operations.
The differences in treatment may result in payment of additional taxes, interest, penalties, or litigation costs that could have a material adverse effect on our results. The market price and trading volume of our stock can be volatile. The price of our common stock can fluctuate widely in response to a variety of factors.
This may result in differences in the treatment of revenues, deductions, credits and/or differences in the timing of these items. The differences in treatment may result in payment of additional taxes, interest, penalties, or litigation costs that could have a material adverse effect on our results. The market price and trading volume of our stock can be volatile.
Consequently, the ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to increase, which could adversely affect our results of operations and financial condition.
Consequently, the ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition.
Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior. -25- If we are required to write-down goodwill or other intangible assets recorded in connection with our acquisitions, our profitability would be negatively impacted.
Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
We are a holding company and depend on the Bank for dividends, distributions and other payments. The Bancorp is a legal entity separate and distinct from the Bank. Revenues of the Bancorp are derived primarily from dividends paid to it by the Bank.
The Bancorp is a legal entity separate and distinct from the Bank. Revenues of the Bancorp are derived primarily from dividends paid to it by the Bank.
In addition, our credit risk may be exacerbated when the collateral held by us cannot be liquidated or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due to us. There is no assurance that any such losses would not materially and adversely affect our results of operations.
In addition, our credit risk may be exacerbated when the collateral held by us cannot be liquidated or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due to us.
When interest rates increase, as they have over the past year, loan prepayments generally decline and depositors may shift funds from accounts that have a comparatively lower cost, such as regular savings accounts, to accounts with a higher cost, such as certificates of deposit.
When interest rates increase, loan prepayments generally decline and depositors may shift funds from accounts that have a comparatively lower cost, such as regular savings accounts, to accounts with a higher cost, such as certificates of deposit. In addition, wholesale funds may reprice more quickly and by a greater amount than the repricing of in-market deposits.
In that event, the market price for our common stock could decline and you may lose your investment. This report is qualified in its entirety by these risk factors.
In that event, the market price for our common stock could decline and you may lose your investment.
In addition, wholesale funds may reprice more quickly and by a greater amount than the repricing of in-market deposits. When interest rates decrease, loan prepayments and the receipt of payments on mortgage-backed securities generally increase, and may result in the proceeds having to be reinvested at a lower rate than the loan or mortgage-backed security being prepaid.
When interest rates decrease, loan prepayments and the receipt of payments on mortgage-backed securities generally increase, and may result in the proceeds having to be reinvested at a lower rate than the loan or mortgage-backed security being prepaid. Changes in interest rates can also affect the value of loans and investment securities.
We assess the deferred tax assets periodically to determine the likelihood of our ability to realize the benefits. Management judgment is required in determining the appropriate recognition and valuation of deferred tax assets and liabilities, including projections of future taxable income, as well as the character of that income.
Management judgment is required in determining the appropriate recognition and valuation of deferred tax assets and liabilities, including projections of future taxable income, as well as the character of that income. A change in statutory tax rates and/or a change in realizability may result in a decrease or increase to our deferred tax assets.
Under GAAP, if the purchase price of an acquired company exceeds the fair value of the company’s net assets, the excess is carried on the acquirer’s balance sheet as goodwill or other identifiable intangible assets. Goodwill must be evaluated for impairment at least annually.
If we are required to write-down goodwill or other intangible assets recorded in connection with our acquisitions, our profitability would be negatively impacted. Under GAAP, if the purchase price of an acquired company exceeds the fair value of the company’s net assets, the excess is carried on the acquirer’s balance sheet as goodwill or other identifiable intangible assets.
The Bank has adopted asset and liability management policies to mitigate the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments, funding sources, and derivatives. However, even with these policies in place, a change in interest rates can impact our results of operations or financial condition.
Fixed-rate investment securities, mortgage-backed securities and mortgage loans typically decline in value as interest rates rise. The Bank has adopted asset and liability management policies to mitigate the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments, funding sources, and derivatives.
Investment contracts with institutional and other clients are typically terminable by the client, also without penalty, upon 30 to 60 days’ notice.
Investment contracts with institutional and other clients are typically terminable by the client, also without penalty, upon 30 to 60 days’ notice. Changes in these laws or regulations could have a material adverse impact on our profitability and mode of operations.
We are subject to liquidity risk, which could negatively affect our funding levels. We must maintain sufficient funds to respond to the needs of depositors and borrowers. To manage liquidity, we draw upon a number of funding sources in addition to in-market deposit growth and repayments and maturities of loans and investments.
To manage liquidity, we draw upon a number of funding sources in addition to in-market deposit growth and repayments and maturities of loans and investments.
Federal and state regulators, in reviewing our loan portfolio as part of a regulatory examination, may request that we increase our ACL. Any increases in our ACL will result in a decrease in our net income and, possibly, our capital, and could have an adverse effect on our financial condition and results of operations.
Federal and state regulators, in reviewing our loan portfolio as part of a regulatory examination, may request that we increase our ACL.
We could experience additional client asset withdrawals in upcoming months associated with the departure of the former advisors. Losses of such accounts could have a material adverse impact on our business. Natural disasters, acts of terrorism, pandemics and other external events could harm our business.
Also, the loss of key personnel could jeopardize our relationships with customers and clients and could lead to the loss of accounts. Losses of such accounts could have a material adverse impact on our business. Natural disasters, acts of terrorism, pandemics and other external events could harm our business.
Market changes or economic downturns may adversely affect demand for our fee-based services and level of wealth management AUA. Economic downturns could affect the volume of income earned from, and demand for, fee-based services. Revenues from mortgage banking activities are largely dependent on mortgage origination volume and sales volume.
There is no assurance that any such losses would not materially and adversely affect our results of operations. -21- Market changes or economic downturns may adversely affect demand for our fee-based services and level of wealth management AUA. Economic downturns could affect the volume of income earned from, and demand for, fee-based services.
Inflationary pressures and rising prices may affect our results of operations and financial condition. Inflation rose sharply at the end of 2021 and throughout 2022. Inflationary pressures are currently expected to remain elevated throughout 2023.
Inflationary pressures and rising prices may affect our results of operations and financial condition. Inflation continued at elevated levels in 2023. Inflationary pressures, including the impact of recent increases in inflation, may remain elevated in 2024.
The combination of these provisions may inhibit a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock.
The combination of these provisions may inhibit a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock. -25- Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults, or non-performance by financial institutions or transactional counterparties, could adversely affect our financial condition and results of operations.
Local, state or federal tax authorities may interpret tax laws and regulations differently than we do and challenge tax positions that we have taken on tax returns. This may result in differences in the treatment of revenues, deductions, credits and/or differences in the timing of these items.
A decrease in our deferred tax assets could have a material adverse effect on our results of operations or financial condition. Local, state or federal tax authorities may interpret tax laws and regulations differently than we do and challenge tax positions that we have taken on tax returns.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose community investment and nondiscriminatory lending requirements on financial institutions. The CFPB, the Department of Justice and other federal agencies are responsible for enforcing these laws and regulations.
The CFPB, the Department of Justice and other federal agencies are responsible for enforcing these laws and regulations.
Removed
Changes in interest rates can also affect the value of loans and investment -19- securities. Fixed-rate investment securities, mortgage-backed securities and mortgage loans typically decline in value as interest rates rise.
Added
Furthermore, a prolonged period of inflation could cause wages and other costs to increase, which could adversely affect our results of operations and financial condition. -18- Fluctuations in interest rates may impair the Bank’s business.
Removed
Changes to and replacement of LIBOR may adversely affect our business, financial condition, and results of operations. LIBOR is used extensively in the United States as a benchmark for various commercial and financial contracts, including loans, securities, funding sources, interest rate swaps and other derivatives.
Added
However, even with these policies in place, a change in interest rates can impact our results of operations or financial condition. We are subject to liquidity risk, which could negatively affect our funding levels. We must maintain sufficient funds to respond to the needs of depositors and borrowers.
Removed
The ICE Benchmark Administration, the authorized and regulated administrator of LIBOR, intends to end publication of remaining LIBOR tenors in June 2023. Financial services regulators and industry groups have collaborated to develop alternate reference rate indices or reference rates, such as SOFR. SOFR is a backward-looking secured rate as opposed to a forward-looking unsecured rate.
Added
Additionally, the COVID-19 pandemic has had a potentially long-term negative impact on certain commercial real estate properties due to the risk that tenants may reduce the office space they lease as some portion of the workforce continues to work remotely on a hybrid or full-time basis.
Removed
We have identified all LIBOR-related contracts and determined which ones will require language to incorporate an alternative reference rate. In the fourth quarter of 2021, we began processing modifications on loans that reference LIBOR to transition them to a new reference rate, primarily SOFR . Additionally, contracts executed after December 31, 2021 are no longer being written with LIBOR terms.
Added
Any increases in our ACL will result in a decrease in our net income and, possibly, our capital, and could have an adverse effect on our financial condition and results of operations. -20- We are a holding company and depend on the Bank for dividends, distributions and other payments.
Removed
For derivative contracts, the International Swap Dealers Association (commonly known as "ISDA") has developed fallback language for swap agreements and established a protocol to allow counterparties to modify legacy trades to include the new fallback language. We have executed agreements with the majority of our customers to adopt the fallback language protocol.
Added
Inflation and rapid increases in interest rates led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates. The valuation of our securities requires judgment and as market conditions change security values may also change.
Removed
We have remaining approximately 200 financial instruments that reference LIBOR (predominantly commercial loans) with on-balance sheet amounts of $1.0 billion and approximately 250 derivative instruments (loan related derivatives and cash flow hedging instruments) that reference LIBOR with total notional amounts of $2.0 billion as of December 31, 2022. -22- We continue to incorporate LIBOR replacement language in contracts.
Added
Products and services relying on internet and mobile technologies may expose us to fraud and cybersecurity risks. Implementation of certain new technologies, such as those related to artificial intelligence, automation and algorithms, may have unintended consequences due to their limitations, potential manipulation, or our failure to use them effectively.
Removed
In addition to changes in contracts, the transition from LIBOR involves changes to risk and pricing models, valuation tools, systems, product design and hedging strategies. Our failure to adequately manage the transition process with our customers could also impact our reputation.
Added
We assess the deferred tax assets periodically to determine the likelihood of our ability to realize the benefits. A valuation allowance is established when it is more-likely-than-not that all or some portion of our deferred tax assets will not be realized.
Removed
Given the complexity of the transition, as well as the different risk characteristics between LIBOR and the replacement reference rate, we are unable to assess the ultimate impact of the transition from LIBOR, which may, ultimately, adversely affect our business, financial condition, or results of operations.
Added
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems.
Removed
Also, the loss of key personnel could jeopardize our relationships with customers and clients and could lead to the loss of accounts. At the end of the third quarter of 2022, four client-facing wealth management advisors at WTA, our registered investment adviser subsidiary, resigned.
Added
For example, on May 1, 2023, First Republic Bank went into receivership and its deposits and substantially all of its assets were acquired by JPMorgan Chase Bank, National Association. Similarly, on March 10, 2023, Silicon Valley Bank went into receivership, and on March 12, 2023, Signature Bank went into receivership.
Removed
A change in statutory tax rates may result in a decrease or increase to our deferred tax assets. A decrease in our deferred tax assets could have a material adverse effect on our results of operations or financial condition.
Added
Inflation and rapid increases in interest rates led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates.
Added
The Federal Reserve announced a program to provide loans to FDIC-insured depository institutions and certain U.S. branches and agencies of foreign banks secured by certain of such government securities to mitigate the risk of potential losses on the sale of such instruments.
Added
Currently new advances (with terms up to one year) under the program can only be made through March 11, 2024.
Added
There is no guarantee that the Treasury, FDIC and/or Federal Reserve, as applicable, take such actions in the future in the event of the closure of other banks or financial institutions, that they would do so in a timely fashion or that such actions, if taken, would have their intended effect.
Added
On September 27, 2023, the Bank entered into a settlement with the DOJ through an agreement to resolve allegations that it violated fair lending laws in the state of Rhode Island from 2016 to 2021.
Added
Under the settlement, the Bank will provide $7.0 million in loan subsidies over a five-year period with the goal of increasing home mortgage loans, home improvement loans, and home refinance loans in specific census tracts in Rhode Island.
Added
Loan subsidies may include originating a loan for a home purchase, refinancing or home improvement at an interest rate below the otherwise prevailing market interest rate offered by Washington Trust and payment of the initial mortgage insurance premium on loans subject to such mortgage insurance.
Added
The cost of such subsidies will generally be recognized over the life of the respective loans. Loan subsidies may also include down payment assistance and closing cost assistance. The Bank also will commit $2.0 million for focused community outreach and marketing efforts over a five-year period.
Added
The expenses associated with community outreach and marketing efforts will be recorded in the period in which the activities occur and are consistent with historical spending levels. In addition, the Bank will commit to opening two full-service branches in specific census tracts in Rhode Island, including the previously announced new branch in Olneyville, Rhode Island.
Added
The settlement included no civil penalties levied against the Bank. The United States District Court for the District of Rhode Island approved the settlement on October 31, 2023. The settlement resolved all claims made by the DOJ against the Bank related to its lending practices in the state of Rhode Island from 2016 to 2021.

Item 2. Properties

Properties — owned and leased real estate

5 edited+1 added−2 removed1 unchanged
Biggest changeWashington Trust also has an executive office, commercial lending office and wealth management services office in the financial district of Providence, Rhode Island; and 2 additional wealth management services offices located in Wellesley, Massachusetts and New Haven, Connecticut. In July 2022, we opened a new commercial lending office in New Haven, Connecticut.
Biggest changeWealth management services are offered from offices that are located in Rhode Island (Westerly, Narragansett and Providence); in New Haven, Connecticut; and in Wellesley, Massachusetts. In addition, Washington Trust has an executive office in Providence, Rhode Island, an employment and training center and operations facilities located in Westerly, Rhode Island, as well as a loan servicing facility in Stonington, CT.
The Bank also brands ATMs located in retail stores and other locations primarily in Rhode Island and to a lesser extent in southeastern Connecticut. These ATMs are operated under contracts with a third-party vendor. See Notes 6 and 7 to the Consolidated Financial Statements for additional information regarding premises and equipment and leases.
All of the Corporation’s properties are considered to be in good condition and adequate for the purpose for which they are used. The Bank also brands ATMs located in retail stores and other locations primarily in Rhode Island and to a lesser extent in southeastern Connecticut. These ATMs are operated under contracts with a third-party vendor.
As of December 31, 2022, Washington Trust conducts business from 10 branch offices located in southern Rhode Island (Washington County), 14 branch offices located in the greater Providence area in Rhode Island and 1 branch office located in southeastern Connecticut. In August 2022, we opened a new full-service branch in Cumberland, Rhode Island.
As of December 31, 2023, Washington Trust conducts business from 10 branch offices located in southern Rhode Island (Washington County), 15 branch offices located in the greater Providence area in Rhode Island and one branch office located in southeastern Connecticut. In addition to branches, Washington Trust has a number of offices in which other services are offered or conducted.
Lease expiration dates range from 7 months to 25 years, with additional renewal options on certain leases ranging from 3 years to 5 years. In addition, the Bank has 1 owned offsite-ATM in a leased space. All of the Corporation’s properties are considered to be in good condition and adequate for the purpose for which they are used.
At December 31, 2023, 10 of the Corporation’s facilities were owned, 29 were leased and one branch office was owned on leased land. Lease expiration dates range from 3 months to 24 years, with additional renewal options on certain leases ranging from 3 years to 5 years. In addition, the Bank has one owned offsite-ATM in a leased space.
In addition, there are a number of offices not associated with a branch office location. Washington Trust has 6 residential mortgage lending offices that are located in eastern Massachusetts (Sharon, Burlington, Braintree and Wellesley); in Glastonbury, Connecticut; and in Warwick, Rhode Island.
Residential mortgage lending offices are located in eastern Massachusetts (Sharon, Burlington, Braintree and Wellesley); in Glastonbury, Connecticut; and in Rhode Island (Westerly and Warwick). Commercial lending offices are located in Rhode Island (Westerly, Warwick and Providence); and in New Haven, Connecticut.
Removed
In addition, we announced that we submitted applications to establish a branch office in three northern Rhode Island locations in 2023 to further expand our branch footprint and serve the broader Rhode Island community. The three branch offices will be located in Barrington, Providence and Smithfield, Rhode Island and are subject to federal, state, local, and regulatory approvals.
Added
See Notes 6 and 7 to the Consolidated Financial Statements for additional information regarding premises and equipment and leases.
Removed
Additionally, Washington Trust has an employment -28- and training center and two operations facilities located in Westerly, Rhode Island, as well as a loan servicing facility in Stonington, CT. At December 31, 2022, 10 of the Corporation’s facilities were owned, 28 were leased and 1 branch office was owned on leased land.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

5 edited+1 added−0 removed2 unchanged
Biggest changeInformation used in the graph and table was obtained from a third-party provider, a source believed to be reliable, but the Corporation is not responsible for any errors or omissions in such information. -30- For the period ending December 31, 2017 2018 2019 2020 2021 2022 Washington Trust Bancorp, Inc. $100.00 $92.25 $108.59 $95.78 $125.36 $109.71 NASDAQ Bank Stocks $100.00 $83.83 $104.26 $96.44 $137.82 $115.38 NASDAQ Stock Market (U.S.) $100.00 $97.18 $132.88 $192.74 $235.56 $158.97
Biggest changeInformation used in the graph and table was obtained from a third-party provider, a source believed to be reliable, but the Corporation is not responsible for any errors or omissions in such information.
The results presented assume that the value of the Corporation’s common stock and each index was $100.00 on December 31, 2017. The total return assumes reinvestment of dividends. The stock price performance shown on the stock performance graph and associated table below is not necessarily indicative of future price performance.
The results presented assume that the value of the Corporation’s common stock and each index was $100.00 on December 31, 2018. The total return assumes reinvestment of dividends. The stock price performance shown on the stock performance graph and associated table below is not necessarily indicative of future price performance.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. The Bancorp’s common stock trades on the NASDAQ Stock Market under the symbol WASH. At January 31, 2023, there were 1,456 holders of record of the Bancorp’s common stock.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. The Bancorp’s common stock trades on the NASDAQ Stock Market under the symbol WASH. At January 31, 2024, there were 1,395 holders of record of the Bancorp’s common stock.
Stock Performance Graph Set forth below is a line graph comparing the cumulative total shareholder return on the Corporation’s common stock against the cumulative total return of the NASDAQ Bank Stocks index and the NASDAQ Stock Market (U.S.) from December 31, 2017 to December 31, 2022.
Stock Performance Graph Set forth below is a line graph comparing the cumulative total shareholder return on the Corporation’s common stock against the cumulative total return of the NASDAQ Bank Stocks index and the NASDAQ Stock Market (U.S.) from December 31, 2018 to December 31, 2023.
Management believes that the Bank will continue to generate adequate earnings to continue to pay dividends on a quarterly basis. See additional disclosures on Equity Compensation Plan Information in Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” The Bancorp did not repurchase any shares during the fourth quarter of December 31, 2022.
Management believes that the Bank will continue to generate adequate earnings to continue to pay dividends in the future. -30- See additional disclosures on Equity Compensation Plan Information in Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” The Bancorp did not repurchase any shares during the fourth quarter of December 31, 2023.
Added
For the period ending December 31, 2018 2019 2020 2021 2022 2023 Washington Trust Bancorp, Inc. $100.00 $117.72 $103.83 $135.89 $118.94 $87.97 NASDAQ Bank Stocks $100.00 $124.38 $115.04 $164.41 $137.65 $132.92 NASDAQ Stock Market (U.S.) $100.00 $136.73 $198.33 $242.38 $163.58 $236.70

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

169 edited+54 added−50 removed74 unchanged
Biggest changeYears ended December 31, 2022 2021 Change (Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Assets: Cash, federal funds sold and short-term investments $119,932 $1,624 1.35 % $167,898 $181 0.11 % ($47,966) $1,443 1.24 % Mortgage loans held for sale 29,539 1,165 3.94 52,580 1,531 2.91 (23,041) (366) 1.03 Taxable debt securities 1,121,413 21,827 1.95 1,013,445 14,295 1.41 107,968 7,532 0.54 FHLB stock 20,721 548 2.64 21,422 436 2.04 (701) 112 0.60 Commercial real estate 1,679,300 65,660 3.91 1,643,107 49,551 3.02 36,193 16,109 0.89 Commercial & industrial 632,938 28,099 4.44 752,934 30,824 4.09 (119,996) (2,725) 0.35 Total commercial 2,312,238 93,759 4.05 2,396,041 80,375 3.35 (83,803) 13,384 0.70 Residential real estate 1,960,629 65,866 3.36 1,571,459 52,884 3.37 389,170 12,982 (0.01) Home equity 263,578 10,139 3.85 254,289 8,212 3.23 9,289 1,927 0.62 Other 15,799 724 4.58 19,765 966 4.89 (3,966) (242) (0.31) Total consumer 279,377 10,863 3.89 274,054 9,178 3.35 5,323 1,685 0.54 Total loans 4,552,244 170,488 3.75 4,241,554 142,437 3.36 310,690 28,051 0.39 Total interest-earning assets 5,843,849 195,652 3.35 5,496,899 158,880 2.89 346,950 36,772 0.46 Noninterest-earning assets 258,906 341,067 (82,161) Total assets $6,102,755 $5,837,966 $264,789 Liabilities and Shareholders’ Equity: Interest-bearing demand deposits (in-market) $263,154 $2,891 1.10 % $202,929 $259 0.13 % $60,225 $2,632 0.97 % NOW accounts 864,084 862 0.10 765,584 491 0.06 98,500 371 0.04 Money market accounts 1,198,714 8,954 0.75 984,278 2,413 0.25 214,436 6,541 0.50 Savings accounts 574,349 473 0.08 521,143 282 0.05 53,206 191 0.03 Time deposits (in-market) 799,645 8,630 1.08 702,303 7,749 1.10 97,342 881 (0.02) Interest-bearing in-market deposits 3,699,946 21,810 0.59 3,176,237 11,194 0.35 523,709 10,616 0.24 Wholesale brokered demand deposits 20,696 494 2.39 — — — 20,696 494 2.39 Wholesale brokered time deposits 386,170 3,719 0.96 644,151 1,196 0.19 (257,981) 2,523 0.77 Wholesale brokered deposits 406,866 4,213 1.04 644,151 1,196 0.19 (237,285) 3,017 0.85 Total interest-bearing deposits 4,106,812 26,023 0.63 3,820,388 12,390 0.32 286,424 13,633 0.31 FHLB advances 414,263 11,713 2.83 370,881 3,800 1.02 43,382 7,913 1.81 Junior subordinated debentures 22,681 739 3.26 22,681 370 1.63 — 369 1.63 Total interest-bearing liabilities 4,543,756 38,475 0.85 4,213,950 16,560 0.39 329,806 21,915 0.46 Noninterest-bearing demand deposits 923,423 934,626 (11,203) Other liabilities 142,324 143,197 (873) Shareholders’ equity 493,252 546,193 (52,941) Total liabilities and shareholders’ equity $6,102,755 $5,837,966 $264,789 Net interest income (FTE) $157,177 $142,320 $14,857 Interest rate spread 2.50 % 2.50 % — % Net interest margin 2.69 % 2.59 % 0.10 % -35- Management's Discussion and Analysis Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: (Dollars in thousands) Years ended December 31, 2022 2021 Change Commercial loans $1,187 $885 $302 Net Interest Income Net interest income, the primary source of our operating income, totaled $156.0 million and $141.4 million, respectively, for 2022 and 2021.
Biggest changeYears ended December 31, 2023 2022 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 $101,166 $4,975 4.92 % $119,932 $1,624 1.35 % ($18,766) $3,351 3.57 % Mortgage loans held for sale 17,384 980 5.64 29,539 1,165 3.94 (12,155) (185) 1.70 Taxable debt securities 1,185,102 29,059 2.45 1,121,413 21,827 1.95 63,689 7,232 0.50 FHLB stock 46,880 3,315 7.07 20,721 548 2.64 26,159 2,767 4.43 Commercial real estate 1,970,580 118,887 6.03 1,679,300 65,660 3.91 291,280 53,227 2.12 Commercial & industrial 615,494 38,326 6.23 632,938 28,099 4.44 (17,444) 10,227 1.79 Total commercial 2,586,074 157,213 6.08 2,312,238 93,759 4.05 273,836 63,454 2.03 Residential real estate 2,490,991 96,080 3.86 1,960,629 65,866 3.36 530,362 30,214 0.50 Home equity 297,396 17,129 5.76 263,578 10,139 3.85 33,818 6,990 1.91 Other 18,085 854 4.72 15,799 724 4.58 2,286 130 0.14 Total consumer 315,481 17,983 5.70 279,377 10,863 3.89 36,104 7,120 1.81 Total loans 5,392,546 271,276 5.03 4,552,244 170,488 3.75 840,302 100,788 1.28 Total interest-earning assets 6,743,078 309,605 4.59 5,843,849 195,652 3.35 899,229 113,953 1.24 Noninterest-earning assets 255,962 258,906 (2,944) Total assets $6,999,040 $6,102,755 $896,285 Liabilities and Shareholders’ Equity: Interest-bearing demand deposits (in-market) $415,725 $17,521 4.21 % $263,154 $2,891 1.10 % $152,571 $14,630 3.11 % NOW accounts 766,492 1,594 0.21 864,084 862 0.10 (97,592) 732 0.11 Money market accounts 1,191,036 37,145 3.12 1,198,714 8,954 0.75 (7,678) 28,191 2.37 Savings accounts 526,275 1,687 0.32 574,349 473 0.08 (48,074) 1,214 0.24 Time deposits (in-market) 1,010,629 33,609 3.33 799,645 8,630 1.08 210,984 24,979 2.25 Interest-bearing in-market deposits 3,910,157 91,556 2.34 3,699,946 21,810 0.59 210,211 69,746 1.75 Wholesale brokered demand deposits 4,015 178 4.43 20,696 494 2.39 (16,681) (316) 2.04 Wholesale brokered time deposits 602,423 28,695 4.76 386,170 3,719 0.96 216,253 24,976 3.80 Wholesale brokered deposits 606,438 28,873 4.76 406,866 4,213 1.04 199,572 24,660 3.72 Total interest-bearing deposits 4,516,595 120,429 2.67 4,106,812 26,023 0.63 409,783 94,406 2.04 FHLB advances 1,056,726 49,589 4.69 414,263 11,713 2.83 642,463 37,876 1.86 Junior subordinated debentures 22,681 1,543 6.80 22,681 739 3.26 — 804 3.54 Total interest-bearing liabilities 5,596,002 171,561 3.07 4,543,756 38,475 0.85 1,052,246 133,086 2.22 Noninterest-bearing demand deposits 778,152 923,423 (145,271) Other liabilities 169,842 142,324 27,518 Shareholders’ equity 455,044 493,252 (38,208) Total liabilities and shareholders’ equity $6,999,040 $6,102,755 $896,285 Net interest income (FTE) $138,044 $157,177 ($19,133) Interest rate spread 1.52 % 2.50 % (0.98 %) Net interest margin 2.05 % 2.69 % (0.64 %) -35- Management's Discussion and Analysis Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: (Dollars in thousands) Years ended December 31, 2023 2022 Change Commercial loans $946 $1,187 ($241) Net Interest Income Net interest income, the primary source of our operating income, totaled $137.1 million and $156.0 million, respectively, for 2023 and 2022.
The purchase of the life insurance policy results in an income-earning asset on the Consolidated Balance Sheet that provides monthly tax-free income to the Corporation. The largest risk to the BOLI program is credit risk of the insurance carriers. To mitigate this risk, annual financial condition reviews are completed -49- Management's Discussion and Analysis on all carriers.
The purchase of the -49- Management's Discussion and Analysis life insurance policy results in an income-earning asset on the Consolidated Balance Sheet that provides monthly tax-free income to the Corporation. The largest risk to the BOLI program is credit risk of the insurance carriers. To mitigate this risk, annual financial condition reviews are completed on all carriers.
Potential problem loans are not included in the amounts of nonaccrual or TDRs presented above. They are assessed for loss exposure using the methods described in Note 4 to the 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.
Potential problem loans are not included in the amounts of nonaccrual presented above. They are assessed for loss exposure using the methods described in Note 4 to the 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.
Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status. New appraisals are generally obtained for TDRs or nonaccrual loans or when management believes it is warranted.
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 Audit Committee has oversight responsibility for the risk management program, which includes credit risk management activities performed by management such as the monitoring of the credit quality of the loan portfolio, conducting a credit review program and determining the adequacy of the ACL. The Audit Committee also approves the policy and methodology for establishing the ACL.
The Audit Committee has oversight responsibility for the ERM program, which includes credit risk management activities performed by management such as the monitoring of the credit quality of the loan portfolio, conducting a credit review program and determining the adequacy of the ACL. The Audit Committee also approves the policy and methodology for establishing the ACL.
Potential problem loans include classified accruing commercial loans that were less than 90 days past due at December 31, 2022 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 include classified accruing commercial loans that were less than 90 days past due at December 31, 2023 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.
BOLI is invested in the “general account” of quality insurance companies. All such general account carriers were rated as investment grade at December 31, 2022 by credit rating agencies such as A.M. Best, Moody’s and S&P. BOLI is included in the Consolidated Balance Sheet at its cash surrender value.
BOLI is invested in the “general account” of quality insurance companies. All such general account carriers were rated as investment grade at December 31, 2023 by credit rating agencies such as A.M. Best, Moody’s and S&P. BOLI is included in the Consolidated Balance Sheet at its cash surrender value.
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 -57- Management's Discussion and Analysis reciprocal amounts of deposits from 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 -56- Management's Discussion and Analysis reciprocal amounts of deposits from other participating banks.
The Federal Reserve’s policy response to counter high levels of inflation has been to increase its Fed Funds target rate, which in turn resulted in higher market interest rates across the economy. While variable-rate assets would reprice upward if interest rates were to continue to rise, interest-bearing liabilities would also reprice upward.
The Federal Reserve’s policy response to counter high levels of inflation has been to increase its Federal Funds target rate, which in turn resulted in higher market interest rates across the economy. While variable-rate assets would reprice upward if interest rates were to rise, interest-bearing liabilities would also reprice upward.
The model 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 the remaining life of the loan to estimate a reserve for each loan.
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 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 December 31, 2022 and 2021.
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 December 31, 2023 and 2022.
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 compared to an unchanged rate scenario.
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.
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 December 31, 2022 and 2021, management did not make any adjustments to the prices provided by the pricing service.
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 December 31, 2023 and 2022, management did not make any adjustments to the prices provided by the pricing service.
As of December 31, 2022 and 2021, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation.
As of December 31, 2023 and 2022, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation.
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 $9.0 million and $9.8 million, respectively, as of December 31, 2022 and 2021.
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 $8.5 million and $9.0 million, respectively, as of December 31, 2023 and 2022.
The ALCO uses income simulation to measure interest rate risk inherent in the Corporation’s on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 12-month horizon, a 13- to 24-month horizon and a 60-month horizon.
The 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.
Interest rates are assumed to shift by a parallel 100, 200 or 300 basis points upward or 100 basis points downward over a 12-month period, except for savings deposits, which are assumed to shift by lesser amounts due to their relative historical insensitivity to market interest rate movements.
Interest rates are assumed to shift by a parallel 100 or 200 basis points upward, as well as 100 or 200 basis points downward over a 12-month period, except for savings deposits, which are assumed to shift by lesser amounts due to their relative historical insensitivity to market interest rate movements.
Reports on the activities conducted by the Investment Committee and the ALCO are presented to the Board of Directors on a regular basis. -43- Management's Discussion and Analysis 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.
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.
The ACL on loans is reduced by charge-offs on loans and is increased by recoveries of amounts previously charged off. -54- Management's Discussion and Analysis The Corporation’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely.
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.
Fixed rate assets would not reprice upward in a rising rate environment. Wholesale funds would reprice more quickly and by a greater amount than the repricing of in-market deposits in response to changes in market interest rates. As market rates increase, ALCO modeling assumes that deposits will shift from low cost to higher cost deposits.
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.
Additionally, the ACL on loans is reduced by charge-offs on loans and increased by recoveries of amounts previously charged-off. At December 31, 2022 the ACL on loans totaled $38.0 million, compared to $39.1 million at December 31, 2021. A significant portion of our ACL is allocated to the commercial portfolio (both CRE and C&I).
Additionally, the ACL on loans is reduced by charge-offs on loans and increased by recoveries of amounts previously charged-off. At December 31, 2023 the ACL on loans totaled $41.1 million, compared to $38.0 million at December 31, 2022. A significant portion of our ACL is allocated to the commercial portfolio (both CRE and C&I).
Due to the fact that the Bank may, consistent with industry practice, renew a significant portion of commercial loans at or immediately prior to their maturity by renewing the loans on substantially similar or revised terms, the principal repayments actually received by the Bank are anticipated to be significantly less than the amounts contractually due in any particular period.
Due to the fact that the Bank may, consistent with industry practice, renew a significant portion of commercial loans at or immediately prior to their maturity by renewing the loans on substantially similar or revised terms, the principal repayments actually received by the Bank are anticipated to be significantly less than the amounts contractually due in any -45- Management's Discussion and Analysis particular period.
The Corporation utilizes the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, off-balance sheet interest rate contracts and the pricing and structure of loans and deposits, to manage interest rate risk. The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors.
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.
Financial Statements and Supplementary Data.” Information pertaining to 2020 was included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, starting on page 33 under Part II, Item 7. “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” which was filed with the SEC on February 24, 2022.
Financial Statements and Supplementary Data.” Information pertaining to 2021 was included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, starting on page 32 under Part II, Item 7. “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” which was filed with the SEC on February 23, 2023.
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.
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 -60- Management's Discussion and Analysis as parallel changes in interest rates of up to 400 basis points.
As noted in the Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to net interest income) amounted to $2.9 million in 2022, compared to $3.4 million in 2021.
As noted in the Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to net interest income) amounted to $1.4 million in 2023, compared to $2.9 million in 2022.
Mortgage banking revenues represented 14% of total noninterest income in 2022, compared to 33% for 2021. These revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets.
Mortgage banking revenues represented 12% of total noninterest income in 2023, compared to 14% for 2022. These revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets.
During 2022, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status. Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $640 thousand in 2022, compared to $647 thousand in 2021.
During 2023, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status. Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $3.4 million in 2023, compared to $640 thousand in 2022.
These financial transactions include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These transactions involve, to -59- Management's Discussion and Analysis varying degrees, elements of credit, interest rate and liquidity risk.
These financial transactions include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk.
Over time, the repricing, maturity and prepayment characteristics of financial instruments -61- Management's Discussion and Analysis and the composition of the Corporation’s balance sheet may change to a different degree than estimated.
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.
See Note 11 to the Consolidated Financial Statements for additional information regarding income taxes. -41- Management's Discussion and Analysis Segment Reporting The Corporation manages its operations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services. See Note 18 to the Consolidated Financial Statements for additional disclosure related to business segments.
See Note 11 to the Consolidated Financial Statements for additional information regarding income taxes. Segment Reporting The Corporation manages its operations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services. See Note 18 to the Consolidated Financial Statements.
Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, natural disasters and security risks. ERM is an overarching program that includes all areas of the Corporation.
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.
(2) As of December 31, 2022, 2021 and 2020, loans with a carrying value of $20.9 million, $8.2 million and $12.6 million, respectively. and securities available for sale with a carrying value of $12.7 million, $13.5 million and $14.9 million, respectively, were pledged to the FRBB resulting in this additional unused borrowing capacity.
(2) As of December 31, 2023, 2022 and 2021, loans with a carrying value of $71.0 million, $20.9 million and $8.2 million, respectively. and securities available for sale with a carrying value of $13.1 million, $12.7 million and $13.5 million, respectively, were pledged to the FRBB resulting in this additional unused borrowing capacity.
Residential real estate loan origination, refinancing and sales activity decreased in 2022 in response to increases in market interest rates. We have active relationships with various secondary market investors that purchase residential real estate loans we originate.
Residential real estate loan origination, refinancing and sales activity decreased in 2023 in response to increases in market interest rates and changes in the housing markets. We have active relationships with various secondary market investors that purchase residential real estate loans we originate.
BOLI provides a means to mitigate increasing employee benefit costs. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time.
The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time.
The following discussion presents net interest income on an FTE basis by adjusting income and yields on tax-exempt loans and securities to be comparable to taxable loans and securities. The analysis of net interest income, NIM and the yield on loans may be impacted by the periodic recognition of prepayment penalty fee income associated with commercial loan payoffs.
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.
FHLB advances totaled $980.0 million at December 31, 2022, up by $835.0 million from the balance at the end of 2021, as higher levels of wholesale funding were utilized to fund balance sheet growth. For additional information regarding FHLB advances see Note 13 to the Consolidated Financial Statements.
FHLB advances totaled $1.2 billion at December 31, 2023, up by $210.0 million from the balance at the end of 2022, as higher levels of wholesale funding were utilized to fund balance sheet growth. For additional information regarding FHLB advances see Note 13 to the Consolidated Financial Statements.
The change in asset-based revenues correlated with the decrease in average AUA balances in 2022. The average balance of AUA in 2022 decreased by 6% from the average balance in 2021.
The change in asset-based revenues correlated with the decrease in average AUA balances in 2023. The average balance of AUA in 2023 decreased by 9% from the average balance in 2022.
For additional information on these arrangements and the expected timing of applicable payments as of December 31, 2022 , see the following notes to the Consolidated Financial Statements: Note 7 for leases, Note 12 for time deposits and Note 13 for borrowings.
For additional information on these arrangements and the expected timing of applicable payments as of December 31, 2023 , see the following notes to the Consolidated Financial Statements: Note 7 for leases, Note 12 for time deposits, Note 13 for borrowings and Note 16 for defined benefit pension plans.
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.
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.
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.
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.
Given the concentration of ACL allocation to the total commercial portfolio and the significant judgments made by management in deriving the qualitative loss factors, management analyzed the impact that changes in judgments could have. The range of impact was an ACL allocated to the total commercial loan portfolio between $18.4 million and $51.7 million at December 31, 2022.
Given the concentration of ACL allocation to the total commercial portfolio and the significant judgments made by management in deriving the qualitative loss factors, management analyzed the impact that changes in qualitative judgments could have. The range of impact was an ACL allocated to the total commercial loan portfolio between $23.3 million and $53.3 million at December 31, 2023.
Home equity lines of credit and home equity loans represented 95% of the total consumer portfolio at December 31, 2022. Our home equity line and home equity loan origination activities are conducted primarily in southern New England.
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 December 31, 2023. 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 $301.4 million at December 31, 2022, up by $36.1 million, or 14%, from December 31, 2021, reflecting increases in home equity lines and loans.
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 $331.8 million at December 31, 2023, up by $30.4 million, or 10%, from December 31, 2022, largely reflecting increases in home equity lines and loans.
As of December 31, 2022, the carrying amount of available for sale debt securities included net unrealized losses of $172.4 million, compared to net unrealized losses of $8.9 million as of December 31, 2021.
As of December 31, 2023, the carrying amount of available for sale debt securities included net unrealized losses of $152.2 million, compared to net unrealized losses of $172.4 million as of December 31, 2022.
Book value per share was $26.40 at December 31, 2022, compared to $32.59 at December 31, 2021. The Bancorp and the Bank are subject to various regulatory capital requirements and are considered “well capitalized,” with a total risk-based capital ratio of 12.37% at December 31, 2022, compared to 14.01% at December 31, 2021.
Book value per share was $27.75 at December 31, 2023, compared to $26.40 at December 31, 2022. 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 11.58% at December 31, 2023, compared to 12.37% at December 31, 2022.
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 76% of total average assets in 2022.
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 67% of total average assets in the twelve months ended December 31, 2023.
The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities of December 31, 2022 and 2021 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) $8,532 ($19,395) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 55,204 (105,720) Trust preferred debt and other corporate debt securities (24) 36 Total change in market value as of December 31, 2022 $63,712 ($125,079) Total change in market value as of December 31, 2021 $10,166 ($119,505) Impact of Inflation on Changing Prices The Corporation’s consolidated financial statements and related notes have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical U.S. dollars without considering changes in the relative purchasing power of money over time due to inflation.
The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities of December 31, 2023 and 2022 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) $8,656 ($17,242) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 51,000 (100,072) Trust preferred debt and other corporate debt securities 3 (20) Total change in market value as of December 31, 2023 $59,659 ($117,334) Total change in market value as of December 31, 2022 $63,712 ($125,079) Impact of Inflation on Changing Prices The Corporation’s consolidated financial statements and related notes have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical U.S. dollars without considering changes in the relative purchasing power of money over time due to inflation.
We also originate residential real estate loans for various investors in a broker capacity, including conventional mortgages and reverse mortgages. -48- Management's Discussion and Analysis The table below presents residential real estate loan origination activity: (Dollars in thousands) Years ended December 31, 2022 2021 Amount % of Total Amount % of Total Originations for retention in portfolio (1) $881,874 74 % $756,343 45 % Originations for sale to the secondary market (2) 309,407 26 933,324 55 Total $1,191,281 100 % $1,689,667 100 % (1) Includes the full commitment amount of homeowner construction loans.
We also originate residential real estate loans for various investors in a broker capacity, including conventional mortgages and reverse mortgages. -48- Management's Discussion and Analysis The table below presents residential real estate loan origination activity: (Dollars in thousands) Years ended December 31, 2023 2022 Amount % of Total Amount % of Total Originations for retention in portfolio (1) $459,892 64 % $881,874 74 % Originations for sale to the secondary market (2) 260,592 36 309,407 26 Total $720,484 100 % $1,191,281 100 % (1) Includes the full commitment amount of homeowner construction loans.
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2022. As of both December 31, 2022 and December 31, 2021, the composition of nonaccrual loans was 100% residential and consumer.
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2023. As of December 31, 2023, the composition of nonaccrual loans was 75% commercial and 25% residential and consumer. This compared to 100% residential and consumer as of December 31, 2022.
For additional information on derivative financial instruments and financial instruments with off-balance sheet risk see Notes 9 and 21 to the Consolidated Financial Statements. Capital Resources Total shareholders’ equity amounted to $453.7 million at December 31, 2022, down by $111.1 million from December 31, 2021.
For additional information on derivative financial instruments and financial instruments with off-balance sheet risk see Notes 9 and 21 to the Consolidated Financial Statements. Capital Resources Total shareholders’ equity amounted to $472.7 million at December 31, 2023, up by $19.0 million from December 31, 2022.
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, -50- Management's Discussion and Analysis and when, in management’s opinion, the loans are considered to be fully collectible.
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 average balance of noninterest-bearing demand deposits for 2022 decreased by $11.2 million, or 1%, from the average balance for 2021. -37- Management's Discussion and Analysis 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 average balance of noninterest-bearing demand deposits for 2023 decreased by $145.3 million, or 16%, from the average balance in 2022. 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.
In other circumstances, a loan, or a portion of a loan, may not be repaid due to the borrower’s inability to satisfy the contractual terms of the loan. Commercial Loans The commercial loan portfolio represented 49% of total loans at December 31, 2022. In making commercial loans, we may occasionally solicit the participation of other banks.
In other circumstances, a loan, or a portion of a loan, may not be repaid due to the borrower’s inability to satisfy the contractual terms of the loan. Commercial Loans The commercial loan portfolio represented 48% of total loans at December 31, 2023, compared to 49% of total loans at December 31, 2022.
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 $48.9 million, or 5%, from the end of 2021.
The largest component of the securities portfolio is mortgage-backed securities, all of which are issued by U.S. government agencies or U.S. government-sponsored enterprises. The securities portfolio increased by $6.5 million, or 1%, from the end of 2022.
The dividend payout ratio (dividends declared per share to diluted earnings per share) was 53.0% in 2022, compared to 47.8% in 2021. The ratio of total equity to total assets amounted to 6.81% at December 31, 2022, compared to a ratio of 9.65% at December 31, 2021.
The dividend payout ratio (dividends declared per share to diluted earnings per share) was 79.4% in 2023, compared to 53.0% in 2022. The ratio of total equity to total assets amounted to 6.56% at December 31, 2023, compared to a ratio of 6.81% at December 31, 2022.
As of December 31, 2022 and 2021, the ACL allocated to the total commercial portfolio was $28.8 million and $29.8 million, respectively. Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors.
As of December 31, 2023 and 2022, the ACL allocated to the total commercial portfolio was $32.2 million and $28.8 million, respectively. 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.
(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). Mortgage banking revenues in 2022 decreased by $19.9 million, or 69%, from 2021.
(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). -39- Management's Discussion and Analysis Mortgage banking revenues decreased by $2.1 million, or 24%, in 2023.
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.
Quarterly, the ALCO reports on the status of liquidity and interest rate risk matters to the 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.
This included a decline of $163.5 million (pretax) in the fair value of available for sale securities and $116.1 million of routine pay-downs on mortgage-backed securities. These were partially offset by purchases of U.S. government agency and U.S. government-sponsored debt securities, including mortgage-backed securities, totaling $234.1 million, with a weighted average yield of 3.58%.
This included purchases of U.S. government agency and U.S. government-sponsored debt securities, including mortgage-backed securities, totaling $60.2 million, with a weighted average yield of 4.98% and an increase of $20.2 million (pretax) in the fair value of available for sale securities. These were partially offset by $72.5 million of routine pay-downs on mortgage-backed securities.
Net recoveries totaled $368 thousand, or 0.01% of average loans, in 2022, compared to net charge-offs of $417 thousand, or 0.01% of average loans, in 2021. -38- Management's Discussion and Analysis The ACL on loans was $38.0 million, or 0.74% of total loans, at December 31, 2022, compared to $39.1 million, or 0.91% of total loans, at December 31, 2021.
Net charge-offs totaled $520 thousand, or 0.01% of average loans, in 2023, compared to net recoveries of $368 thousand, or 0.01% of average loans, in 2022. The ACL on loans was $41.1 million, or 0.73% of total loans, at December 31, 2023, compared to $38.0 million, or 0.74% of total loans, at December 31, 2022.
The table below presents residential real estate loan sales activity: (Dollars in thousands) Years ended December 31, 2022 2021 Amount % of Total Amount % of Total Loans sold with servicing rights retained $99,849 29 % $591,550 62 % Loans sold with servicing rights released (1) 239,899 71 361,886 38 Total $339,748 100 % $953,436 100 % (1) Includes brokered loans (loans originated for others).
The table below presents residential real estate loan sales activity: (Dollars in thousands) Years ended December 31, 2023 2022 Amount % of Total Amount % of Total Loans sold with servicing rights retained $108,177 43 % $99,849 29 % Loans sold with servicing rights released (1) 141,795 57 239,899 71 Total $249,972 100 % $339,748 100 % (1) Includes brokered loans (loans originated for others).
As of December 31, 2022, the composition of past due loans (loans past due 30 days or more) was 87% residential and consumer and 13% commercial, compared to essentially 100% for residential and consumer at December 31, 2021.
As of December 31, 2023, the composition of past due loans (loans past due 30 days or more) was 100% residential and consumer and 0% commercial, compared to 87% for residential and consumer and 13% commercial at December 31, 2022. Total past due loans decreased by $233 thousand from the end of 2022.
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.
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) December 31, 2022 December 31, 2021 Allocated ACL ACL to Loans Loans to Total Portfolio (1) Allocated ACL ACL to Loans Loans to Total Portfolio (1) Commercial: Commercial real estate $18,435 1.01 % 36 % $18,933 1.16 % 38 % Commercial & industrial 10,356 1.58 13 10,832 1.69 15 Total commercial 28,791 1.16 49 29,765 1.31 53 Residential Real Estate: Residential real estate 7,740 0.33 45 7,860 0.46 40 Consumer: Home equity 1,115 0.39 6 1,069 0.43 6 Other 381 2.42 — 394 2.23 1 Total consumer 1,496 0.50 6 1,463 0.55 7 Total ACL on loans at end of period $38,027 0.74 % 100 % $39,088 0.91 % 100 % (1) Percentage of loans outstanding in respective category to total loans outstanding. -56- Management's Discussion and Analysis The following table reflects the activity in the ACL on loans during the years presented: (Dollars in thousands) December 31, 2022 2021 2020 Balance at beginning of period $39,088 $44,106 $27,014 Adoption of ASC 326 — — 6,501 Charge-offs: Commercial: Commercial real estate — — 356 Commercial & industrial 36 307 586 Total commercial 36 307 942 Residential real estate: Residential real estate — 107 99 Consumer: Home equity — 183 224 Other 148 66 52 Total consumer 148 249 276 Total charge-offs 184 663 1,317 Recoveries: Commercial: Commercial real estate 445 — 51 Commercial & industrial 29 41 24 Total commercial 474 41 75 Residential real estate: Residential real estate 21 89 20 Consumer: Home equity 12 91 52 Other 45 25 25 Total consumer 57 116 77 Total recoveries 552 246 172 Net (recoveries) charge-offs (368) 417 1,145 Provision charged to earnings (1,429) (4,601) 11,736 Balance at end of period $38,027 $39,088 $44,106 Net (recoveries) charge-offs to average loans (0.01 %) 0.01 % 0.03 % 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.
(Dollars in thousands) December 31, 2023 December 31, 2022 Allocated ACL ACL to Loans Loans to Total Portfolio (1) Allocated ACL ACL to Loans Loans to Total Portfolio (1) Commercial: Commercial real estate $24,144 1.15 % 37 % $18,435 1.01 % 36 % Commercial & industrial 8,088 1.34 11 10,356 1.58 13 Total commercial 32,232 1.19 48 28,791 1.16 49 Residential Real Estate: Residential real estate 7,403 0.28 46 7,740 0.33 45 Consumer: Home equity 1,048 0.34 6 1,115 0.39 6 Other 374 1.95 — 381 2.42 — Total consumer 1,422 0.43 6 1,496 0.50 6 Total ACL on loans at end of period $41,057 0.73 % 100 % $38,027 0.74 % 100 % (1) Percentage of loans outstanding in respective class to total loans outstanding. -55- Management's Discussion and Analysis The following table reflects the activity in the ACL on loans during the years presented: (Dollars in thousands) December 31, 2023 2022 2021 Balance at beginning of period $38,027 $39,088 $44,106 Charge-offs: Commercial: Commercial real estate 373 — — Commercial & industrial 37 36 307 Total commercial 410 36 307 Residential real estate: Residential real estate — — 107 Consumer: Home equity — — 183 Other 167 148 66 Total consumer 167 148 249 Total charge-offs 577 184 663 Recoveries: Commercial: Commercial real estate — 445 — Commercial & industrial 12 29 41 Total commercial 12 474 41 Residential real estate: Residential real estate 3 21 89 Consumer: Home equity 10 12 91 Other 32 45 25 Total consumer 42 57 116 Total recoveries 57 552 246 Net charge-offs (recoveries) 520 (368) 417 Provision charged to earnings 3,550 (1,429) (4,601) Balance at end of period $41,057 $38,027 $39,088 Net charge-offs (recoveries) to average loans 0.01 % (0.01 %) 0.01 % 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.
Growth in average interest-earning assets, net of increased average interest-bearing liability balances, contributed $7.8 million of net interest income in 2022. Increases in asset yields outpaced increases in funding costs, contributing $7.1 million of net interest income.
Growth in average interest-earning assets, net of increased average interest-bearing liability balances, contributed $544 thousand of net interest income in 2023. Increases in funding costs outpaced increases in asset yields, reducing net interest income by $19.7 million.
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 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.
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.
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.
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.
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.
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 December 31, 2022 and 2021.
At December 31, 2022 all of the balances were included in the pass-rated category. All of the shared national credit balances included in CRE loans were current with respect to payment terms at both December 31, 2023 and 2022.
Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require increased allowance coverage and provision for credit losses on loans. Management has identified three loans associated with two C&I relationships with carrying values totaling $927 thousand as potential problem loans at December 31, 2022.
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 increased allowance coverage and provision for credit losses on loans. Management has identified $22.9 million in potential problem loans at December 31, 2023, compared to $927 thousand at December 31, 2022.
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.
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.
The ACL is management’s 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 ACL is management’s estimate, at the reporting date, of expected lifetime credit losses and includes consideration of current forecasted economic conditions.
See additional discussion under the caption “Provision for Credit Losses.” Noninterest income derived from the Commercial Banking segment decreased by $21.7 million, or 48%, from 2021, largely reflecting lower mortgage banking revenues and lower loan related derivative income. See additional discussion under the caption “Noninterest Income” above. Commercial Banking noninterest expenses were down by $6.9 million, or 7%, from 2021.
See additional discussion under the caption “Provision for Credit Losses.” Noninterest income derived from the Commercial Banking segment decreased by $3.1 million, or 13%, from 2022, largely reflecting lower mortgage banking revenues and lower loan related derivative income, partially offset by higher BOLI income. See additional discussion under the caption “Noninterest Income” above.
The balance of residential mortgage loans serviced for others, which are not included in the Consolidated Balance Sheets, amounted to $1.5 billion at both December 31, 2022 and 2021. Consumer Loans Consumer loans include home equity loans and lines of credit and personal installment loans.
The balance of residential mortgage loans serviced for others, which are not included in the Consolidated Balance Sheets, amounted to $1.5 billion at both December 31, 2023 and 2022. Consumer Loans The consumer loan portfolio represented 6% of total loans at both December 31, 2023 and 2022.
The following is a geographic summary of residential real estate loans by property location: (Dollars in thousands) December 31, 2022 December 31, 2021 Amount % of Total Amount % of Total Massachusetts $1,698,240 73 % $1,207,789 70 % Rhode Island 446,010 19 365,831 21 Connecticut 153,323 7 132,430 8 Subtotal 2,297,573 99 1,706,050 99 All other states 25,429 1 20,925 1 Total (1) $2,323,002 100 % $1,726,975 100 % (1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $59.9 million and $78.7 million, respectively, as of December 31, 2022 and 2021.
The following is a geographic summary of residential real estate loans by property location: (Dollars in thousands) December 31, 2023 December 31, 2022 Amount % of Total Amount % of Total Massachusetts $1,928,206 74 % $1,698,240 73 % Rhode Island 481,289 19 446,010 19 Connecticut 165,933 6 153,323 7 Subtotal 2,575,428 99 2,297,573 99 All other states 29,050 1 25,429 1 Total (1) $2,604,478 100 % $2,323,002 100 % (1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $53.4 million and $59.9 million, respectively, as of December 31, 2023 and 2022.
The FTE rate of return on securities was 1.95% in 2022, up by 54 basis points from 1.41% in 2021, reflecting the impact of higher market interest rates in 2022. Total average loan balances increased by $310.7 million, or 7%, from the average balance for 2021.
Total average securities for 2023 increased by $63.7 million, or 6%, from the average balance for 2022, due to purchases of debt securities. The FTE rate of return on securities was 2.45% in 2023, up by 50 basis points from 1.95% in 2022, reflecting the impact of higher market interest rates in 2023.
The ALCO estimates that the positive exposure of net interest income to falling rates in Year 2 as compared to an unchanged rate scenario results from a more rapid projected relative rate of decline in funding costs than asset yields.
As of December 31, 2023, 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.
The following table presents additional detail on the Corporation’s loan portfolio and associated allowance: (Dollars in thousands) December 31, 2022 December 31, 2021 Loans Related Allowance Allowance / Loans Loans Related Allowance Allowance / Loans Individually analyzed loans $9,996 $115 1.15 % $21,080 $682 3.24 % Pooled (collectively evaluated) loans 5,100,143 37,912 0.74 4,251,845 38,406 0.90 Total $5,110,139 $38,027 0.74 % $4,272,925 $39,088 0.91 % Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors.
The following table presents additional detail on the Corporation’s loan portfolio and associated allowance: (Dollars in thousands) December 31, 2023 December 31, 2022 Loans Related Allowance Allowance / Loans Loans Related Allowance Allowance / Loans Individually analyzed loans $34,640 $97 0.28 % $9,996 $115 1.15 % Pooled (collectively evaluated) loans 5,613,066 40,960 0.73 5,100,143 37,912 0.74 Total $5,647,706 $41,057 0.73 % $5,110,139 $38,027 0.74 % Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors.
Asset yields would likely decline more rapidly than deposit costs as current asset holdings mature or reprice, since cash flow from mortgage-related prepayments and redemption of callable securities would increase as market interest rates fall.
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.

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