WASHINGTON TRUST BANCORP INC 10-Q

Item 1. Financial Statements Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) (Dollars in thousands, except par value) September 30, 2022 December 31, 2021 Assets: Cash and due from banks $ 130,066 $ 175,259 Short-term investments 2,773 3,234 Mortgage loans held for sale, at fair value 24,054 40,196 Available for sale debt securities, at fair value (amortized cost of $ 1,165,816 , net of allowance for credit losses on securities of $ 0 at September 30, 2022; and amortized cost of $ 1,051,800 ; net of allowance for credit losses on securities of $ 0 at December 31, 2021) 982,573 1,042,859 Federal Home Loan Bank stock, at cost 32,940 13,031 Loans: Total loans 4,848,873 4,272,925 Less: allowance for credit losses on loans 36,863 39,088 Net loans 4,812,010 4,233,837 Premises and equipment, net 30,152 28,908 Operating lease right-of-use assets 27,788 26,692 Investment in bank-owned life insurance 101,491 92,592 Goodwill 63,909 63,909 Identifiable intangible assets, net 4,766 5,414 Other assets 195,529 125,196 Total assets $ 6,408,051 $ 5,851,127 Liabilities: Deposits: Noninterest-bearing deposits $ 938,572 $ 945,229 Interest-bearing deposits 4,131,285 4,034,822 Total deposits 5,069,857 4,980,051 Federal Home Loan Bank advances 700,000 145,000 Junior subordinated debentures 22,681 22,681 Operating lease liabilities 30,189 29,010 Other liabilities 153,050 109,577 Total liabilities 5,975,777 5,286,319 Commitments and contingencies (Note 17) Shareholders’ Equity: Common stock of $ .0625 par value; authorized 60,000,000 shares; 17,363,457 shares issued and 17,171,147 shares outstanding at September 30, 2022 and 17,363,457 shares issued and 17,330,818 shares outstanding at December 31, 2021 1,085 1,085 Paid-in capital 127,055 126,511 Retained earnings 485,163 458,310 Accumulated other comprehensive loss ( 171,755 ) ( 19,981 ) Treasury stock, at cost; 192,310 shares at September 30, 2022 and 32,639 shares at December 31, 2021 ( 9,274 ) ( 1,117 ) Total shareholders’ equity 432,274 564,808 Total liabilities and shareholders’ equity $ 6,408,051 $ 5,851,127 The accompanying notes are an integral part of these unaudited consolidated financial statements. -4- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Income (unaudited) (Dollars and shares in thousands, except per share amounts) Three Months Nine Months Periods ended September 30, 2022 2021 2022 2021 Interest income: Interest and fees on loans $ 45,125 $ 35,691 $ 115,657 $ 104,670 Interest on mortgage loans held for sale 361 298 851 1,144 Taxable interest on debt securities 6,061 3,683 15,209 10,366 Dividends on Federal Home Loan Bank stock 88 95 218 338 Other interest income 503 56 769 121 Total interest and dividend income 52,138 39,823 132,704 116,639 Interest expense: Deposits 6,656 2,789 13,722 9,413 Federal Home Loan Bank advances 3,234 872 3,891 3,253 Junior subordinated debentures 206 92 443 278 Total interest expense 10,096 3,753 18,056 12,944 Net interest income 42,042 36,070 114,648 103,695 Provision for credit losses 800 — ( 2,100 ) ( 2,000 ) Net interest income after provision for credit losses 41,242 36,070 116,748 105,695 Noninterest income: Wealth management revenues 9,525 10,455 30,122 30,778 Mortgage banking revenues 2,047 6,373 7,630 24,294 Card interchange fees 1,287 1,265 3,754 3,714 Service charges on deposit accounts 819 673 2,250 1,917 Loan related derivative income 1,041 728 2,011 2,370 Income from bank-owned life insurance 684 618 1,900 1,781 Other income 400 408 1,147 2,233 Total noninterest income 15,803 20,520 48,814 67,087 Noninterest expense: Salaries and employee benefits 21,609 22,162 62,992 65,771 Outsourced services 3,552 3,294 10,169 9,711 Net occupancy 2,234 2,134 6,708 6,304 Equipment 939 977 2,795 2,946 Legal, audit and professional fees 693 767 2,140 2,042 FDIC deposit insurance costs 430 482 1,198 1,201 Advertising and promotion 799 559 1,874 1,341 Amortization of intangibles 215 223 648 674 Debt prepayment penalties — — — 4,230 Other expenses 2,596 1,922 6,839 6,025 Total noninterest expense 33,067 32,520 95,363 100,245 Income before income taxes 23,978 24,070 70,199 72,537 Income tax expense 5,310 5,319 15,091 15,855 Net income $ 18,668 $ 18,751 $ 55,108 $ 56,682 Net income available to common shareholders $ 18,615 $ 18,697 $ 54,944 $ 56,520 Weighted average common shares outstanding - basic 17,174 17,320 17,269 17,303 Weighted average common shares outstanding - diluted 17,298 17,444 17,389 17,451 Per share information: Basic earnings per common share $ 1.08 $ 1.08 $ 3.18 $ 3.27 Diluted earnings per common share $ 1.08 $ 1.07 $ 3.16 $ 3.24 The accompanying notes are an integral part of these unaudited consolidated financial statements. -5- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (unaudited) (Dollars in thousands) Three Months Nine Months Periods ended September 30, 2022 2021 2022 2021 Net income $ 18,668 $ 18,751 $ 55,108 $ 56,682 Other comprehensive (loss) income, net of tax: Net change in fair value of available for sale debt securities ( 47,067 ) ( 3,137 ) ( 132,469 ) ( 12,322 ) Net change in fair value of cash flow hedges ( 6,973 ) ( 403 ) ( 20,281 ) ( 36 ) Net change in defined benefit plan obligations 326 540 976 1,621 Total other comprehensive loss, net of tax ( 53,714 ) ( 3,000 ) ( 151,774 ) ( 10,737 ) Total comprehensive (loss) income ($ 35,046 ) $ 15,751 ($ 96,666 ) $ 45,945 The accompanying notes are an integral part of these unaudited consolidated financial statements. -6- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (unaudited) (Dollars and shares in thousands, except per share amounts) For the three months ended September 30, 2022 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at June 30, 2022 17,190 $ 1,085 $ 126,079 $ 475,889 ($ 118,041 ) ($ 8,378 ) $ 476,634 Net income — — — 18,668 — — 18,668 Total other comprehensive loss, net of tax — — — — ( 53,714 ) — ( 53,714 ) Cash dividends declared ($ 0.54 per share) — — — ( 9,394 ) — — ( 9,394 ) Share-based compensation — — 976 — — — 976 Treasury stock purchased under 2021 Repurchase Program ( 19 ) — — — — ( 896 ) ( 896 ) Balance at September 30, 2022 17,171 $ 1,085 $ 127,055 $ 485,163 ($ 171,755 ) ($ 9,274 ) $ 432,274 For the nine months ended September 30, 2022 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at December 31, 2021 17,331 $ 1,085 $ 126,511 $ 458,310 ($ 19,981 ) ($ 1,117 ) $ 564,808 Net income — — — 55,108 — — 55,108 Total other comprehensive loss, net of tax — — — — ( 151,774 ) — ( 151,774 ) Cash dividends declared ($ 1.62 per share) — — — ( 28,255 ) — — ( 28,255 ) Share-based compensation — — 2,589 — — — 2,589 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 34 — ( 2,045 ) — — 1,322 ( 723 ) Treasury stock purchased under 2021 Repurchase Program ( 194 ) — — — — ( 9,479 ) ( 9,479 ) Balance at September 30, 2022 17,171 $ 1,085 $ 127,055 $ 485,163 ($ 171,755 ) ($ 9,274 ) $ 432,274 The accompanying notes are an integral part of these unaudited consolidated financial statements. -7- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (unaudited) (Dollars and shares in thousands, except per share amounts) For the three months ended September 30, 2021 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at June 30, 2021 17,320 $ 1,085 $ 125,442 $ 437,927 ($ 15,128 ) ($ 1,470 ) $ 547,856 Net income — — — 18,751 — — 18,751 Total other comprehensive loss, net of tax — — — — ( 3,000 ) — ( 3,000 ) Cash dividends declared ($ 0.52 per share) — — — ( 9,112 ) — — ( 9,112 ) Share-based compensation — — 823 — — — 823 Balance at September 30, 2021 17,320 $ 1,085 $ 126,265 $ 447,566 ($ 18,128 ) ($ 1,470 ) $ 555,318 For the nine months ended September 30, 2021 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at December 31, 2020 17,265 $ 1,085 $ 125,610 $ 418,246 ($ 7,391 ) ($ 3,355 ) $ 534,195 Net income — — — 56,682 — — 56,682 Total other comprehensive loss, net of tax — — — — ( 10,737 ) — ( 10,737 ) Cash dividends declared ($ 1.56 per share) — — — ( 27,362 ) — — ( 27,362 ) Share-based compensation — — 2,705 — — — 2,705 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 55 — ( 2,050 ) — — 1,885 ( 165 ) Balance at September 30, 2021 17,320 $ 1,085 $ 126,265 $ 447,566 ($ 18,128 ) ($ 1,470 ) $ 555,318 The accompanying notes are an integral part of these unaudited consolidated financial statements. -8- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statement of Cash Flows (unaudited) (Dollars in thousands) Nine months ended September 30, 2022 2021 Cash flows from operating activities: Net income $ 55,108 $ 56,682 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses ( 2,100 ) ( 2,000 ) Depreciation of premises and equipment 2,554 2,549 Net amortization of premiums and discounts on debt securities and loans 2,485 2,742 Amortization of intangibles 648 674 Share-based compensation 2,589 2,705 Tax benefit from stock option exercises and other equity awards 71 135 Income from bank-owned life insurance ( 1,900 ) ( 1,781 ) Net gains on loan sales, including changes in fair value ( 6,164 ) ( 24,093 ) Proceeds from sales of loans, net 262,907 706,253 Loans originated for sale ( 242,153 ) ( 634,451 ) (Increase) decrease in operating lease right-of-use assets ( 1,096 ) 2,003 Increase (decrease) in operating lease liabilities 1,179 ( 1,907 ) (Increase) decrease in other assets ( 27,734 ) 34,107 Increase (decrease) in other liabilities 25,451 ( 36,698 ) Net cash provided by operating activities 71,845 106,920 Cash flows from investing activities: Purchases of: Available for sale debt securities: Mortgage-backed ( 203,826 ) ( 297,810 ) Available for sale debt securities: Other ( 10,747 ) ( 221,166 ) Maturities, calls and principal payments of: Available for sale debt securities: Mortgage-backed 97,495 274,169 Available for sale debt securities: Other — 70,500 Net (purchases) redemption of Federal Home Loan Bank stock ( 19,909 ) 15,191 Purchases of other equity investments ( 375 ) — Net increase in loans ( 571,950 ) ( 80,021 ) Purchases of loans ( 1,764 ) ( 41,546 ) Purchases of premises and equipment ( 3,824 ) ( 2,166 ) Purchases of bank-owned life insurance ( 7,000 ) ( 7,000 ) Equity investment in real estate limited partnership ( 1,861 ) — Net cash used in investing activities ( 723,761 ) ( 289,849 ) Cash flows from financing activities: Net increase in deposits 89,806 679,789 Proceeds from Federal Home Loan Bank advances 1,946,112 1,173,000 Repayment of Federal Home Loan Bank advances ( 1,391,112 ) ( 1,544,267 ) Treasury stock purchased ( 9,479 ) — Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered ( 723 ) ( 165 ) Cash dividends paid ( 28,342 ) ( 27,308 ) Net cash provided by financing activities 606,262 281,049 Net (decrease) increase in cash and cash equivalents ( 45,654 ) 98,120 Cash and cash equivalents at beginning of period 178,493 202,268 Cash and cash equivalents at end of period $ 132,839 $ 300,388 Noncash Activities: Loans charged off $ 122 $ 630 Commitment for equity investment in real estate limited partnership 8,360 — Supplemental Disclosures: Interest payments $ 15,677 $ 14,675 Income tax payments 13,021 15,551 The accompanying notes are an integral part of these unaudited consolidated financial statements. -9- Condensed Notes to Unaudited Consolidated Financial Statements Note 1 - Basis of Presentation The Bancorp is a publicly-owned registered bank holding company that has elected to be a financial holding company. The Bancorp’s subsidiaries include the Bank, a Rhode Island chartered financial institution founded in 1800, and Weston Securities Corporation. Through its subsidiaries, the Bancorp offers a complete product line of financial services, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut. The Unaudited Consolidated Financial Statements include the accounts of the Bancorp and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain previously reported amounts have been reclassified to conform to the current year’s presentation. The accounting and reporting policies of the Corporation conform to GAAP and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Management considers the ACL on loans to be a material estimate that is particularly susceptible to change. The Unaudited Consolidated Financial Statements of the Corporation presented herein have been prepared pursuant to the rules of the SEC for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying Unaudited Consolidated Financial Statements have been included. Interim results are not necessarily indicative of the results of the entire year. The accompanying Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Note 2 - Recently Issued Accounting Pronouncements Accounting Standards Pending Adoption Business Combinations - ASC 805 ASU No. 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”), was issued in October 2021 to clarify the accounting for contract cost assets and contract liabilities acquired in a business combination. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination at fair value on the acquisition date. The provisions of ASU 2021-08 clarify that contract cost assets and contract liabilities acquired in a business combination should be accounted for in accordance with ASC 606 as if the acquirer had originated the contracts. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The provisions under ASU 2021-08 are required to be applied prospectively. The adoption of ASU 2021-08 is not expected to have a material impact on the Corporation’s consolidated financial statements. Financial Instruments - Credit Losses - ASC 326 ASU No. 2022-02, “Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), was issued in March 2022 to provide updates on the accounting treatment for TDRs and related disclosures requirements, as well as modifying the disclosure requirement associated with the existing credit quality indicators “vintage” disclosure. With respect to TDRs, ASU 2022-02 eliminates the recognition and measurement guidance for TDRs under current GAAP and instead requires that the Corporation evaluate whether the modification represents a new loan or a continuation of existing loan, consistent with the current GAAP treatment for other loan modifications. In addition, ASU 2022-02 eliminates existing disclosure requirements on TDRs and replaces with enhanced disclosure requirements related to loan modifications made to borrowers, including those experiencing financial difficulty. ASU 2022-02 also provides an update to the existing tabular vintage disclosure of credit quality indicators by requiring current period gross write-offs to be disclosed by year of origination for each loan segment. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The provisions under ASU 2022-02 should be applied on a prospective basis. However, the Corporation has the option to use a modified retrospective transition method related to the change in accounting treatment for TDRs with a cumulative effect of the change in accounting principle recognized in the opening balance of retained earnings as of the adoption date. The Corporation is currently evaluating this ASU and has not yet determined the impact that the adoption of ASU 2022-02 will have on its consolidated financial statements. -10- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 3 - Securities Available for Sale Debt Securities The following tables present the amortized cost, gross unrealized holding gains, gross unrealized holding losses, ACL on securities and fair value of securities by major security type and class of security: (Dollars in thousands) September 30, 2022 Amortized Cost Unrealized Gains Unrealized Losses ACL Fair Value Available for Sale Debt Securities: Obligations of U.S. government-sponsored enterprises $ 231,204 $ 5 ($ 33,354 ) $ — $ 197,855 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 912,063 120 ( 147,919 ) — 764,264 Individual name issuer trust preferred debt securities 9,384 — ( 584 ) — 8,800 Corporate bonds 13,165 — ( 1,511 ) — 11,654 Total available for sale debt securities $ 1,165,816 $ 125 ($ 183,368 ) $ — $ 982,573 (Dollars in thousands) December 31, 2021 Amortized Cost Unrealized Gains Unrealized Losses ACL Fair Value Available for Sale Debt Securities: Obligations of U.S. government-sponsored enterprises $ 200,953 $ 12 ($ 4,511 ) $ — $ 196,454 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 828,319 6,850 ( 10,207 ) — 824,962 Individual name issuer trust preferred debt securities 9,373 — ( 235 ) — 9,138 Corporate bonds 13,155 — ( 850 ) — 12,305 Total available for sale debt securities $ 1,051,800 $ 6,862 ($ 15,803 ) $ — $ 1,042,859 The Corporation excludes accrued interest from the amortized cost basis of debt securities and reports accrued interest in other assets in the Unaudited Consolidated Balance Sheets. Accrued interest receivable on available for sale debt securities totaled $ 2.7 million and $ 2.3 million, respectively, as of September 30, 2022 and December 31, 2021. As of September 30, 2022 and December 31, 2021, securities with a fair value of $ 302.7 million and $ 332.0 million, respectively, were pledged as collateral for FHLB borrowings, potential borrowings with the FRBB, certain public deposits and for other purposes. See Note 7 for additional disclosure on FHLB borrowings. The schedule of maturities of available for sale debt securities is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments. All other debt securities are included based on contractual maturities. Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. (Dollars in thousands) September 30, 2022 Amortized Cost Fair Value Due in one year or less $ 122,305 $ 102,490 Due after one year to five years 407,912 343,570 Due after five years to ten years 418,836 354,503 Due after ten years 216,763 182,010 Total debt securities $ 1,165,816 $ 982,573 -11- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Included in the above table are debt securities with an amortized cost balance of $ 253.0 million and a fair value of $ 217.6 million at September 30, 2022 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 2 years to 14 years, with call features ranging from 1 month to 1 year. Assessment of Available for Sale Debt Securities for Impairment Management assesses the decline in fair value of investment securities on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates both qualitative and quantitative factors to assess whether an impairment exists. A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a debt security placed on nonaccrual is reversed against interest income. There were no debt securities on nonaccrual status at September 30, 2022 and 2021 and, therefore there was no accrued interest related to debt securities reversed against interest income for the three and nine months ended September 30, 2022 and 2021. The following tables summarize available for sale debt securities in an unrealized loss position, for which an ACL on securities has not been recorded, segregated by length of time that the securities have been in a continuous unrealized loss position: (Dollars in thousands) Less than 12 Months 12 Months or Longer Total September 30, 2022 # Fair Value Unrealized Losses # Fair Value Unrealized Losses # Fair Value Unrealized Losses Obligations of U.S. government-sponsored enterprises 7 $ 45,972 ($ 4,983 ) 15 $ 141,878 ($ 28,371 ) 22 $ 187,850 ($ 33,354 ) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 122 395,493 ( 52,363 ) 47 363,645 ( 95,556 ) 169 759,138 ( 147,919 ) Individual name issuer trust preferred debt securities — — — 3 8,800 ( 584 ) 3 8,800 ( 584 ) Corporate bonds — — — 4 11,654 ( 1,511 ) 4 11,654 ( 1,511 ) Total 129 $ 441,465 ($ 57,346 ) 69 $ 525,977 ($ 126,022 ) 198 $ 967,442 ($ 183,368 ) (Dollars in thousands) Less than 12 Months 12 Months or Longer Total December 31, 2021 # Fair Value Unrealized Losses # Fair Value Unrealized Losses # Fair Value Unrealized Losses Obligations of U.S. government-sponsored enterprises 12 $ 152,733 ($ 3,313 ) 6 $ 43,202 ($ 1,198 ) 18 $ 195,935 ($ 4,511 ) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 41 514,419 ( 7,270 ) 21 108,983 ( 2,937 ) 62 623,402 ( 10,207 ) Individual name issuer trust preferred debt securities — — — 3 9,138 ( 235 ) 3 9,138 ( 235 ) Corporate bonds — — — 4 12,305 ( 850 ) 4 12,305 ( 850 ) Total 53 $ 667,152 ($ 10,583 ) 34 $ 173,628 ($ 5,220 ) 87 $ 840,780 ($ 15,803 ) Deterioration in credit quality of the underlying issuers of the securities, deterioration in the condition of the financial services industry, worsening of the current economic environment, or declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as credit losses. Obligations of U.S. Government Agency and U.S. Government-Sponsored Enterprise Securities, including Mortgage-Backed Securities The gross unrealized losses on U.S. government agency and U.S. government-sponsored debt securities, including mortgage- -12- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) backed securities, were primarily attributable to relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at September 30, 2022. Management believes that the unrealized losses on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no allowance for credits losses on securities was recorded at September 30, 2022. Individual Name Issuer Trust Preferred Debt Securities Included in debt securities in an unrealized loss position at September 30, 2022 were three trust preferred securities issued by three individual companies in the banking sector. Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date, as well as credit rating changes between the reporting period date and the filing date of this report, and other information. As of September 30, 2022, there was one individual name issuer trust preferred debt security with an amortized cost of $ 2.0 million and unrealized losses of $ 132 thousand that was rated below investment grade by S&P. We noted no downgrades to below investment grade between September 30, 2022 and the filing date of this report. Based on the information available through the filing date of this report, all individual name issuer trust preferred debt securities held in our portfolio continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates and not changes in the credit quality of the issuers of the debt securities. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no ACL on securities was recorded at September 30, 2022. Corporate Bonds Included in debt securities in an unrealized loss position at September 30, 2022 were four corporate bond holdings issued by three individual companies in the financial services industry. Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date, as well as credit rating changes between the reporting period date and the filing date of this report, and other information. As of September 30, 2022, there was one corporate bond debt security with an amortized cost of $ 2.0 million and unrealized losses of $ 121 thousand that was rated below investment grade by S&P. We noted no downgrades to below investment grade between September 30, 2022 and the filing date of this report. Based on the information available through the filing date of this report, all corporate bond debt securities held in our portfolio continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates and not changes in the credit quality of the issuers of the debt securities. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no ACL was recorded at September 30, 2022. -13- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 4 - Loans The following table presents a summary of loans: (Dollars in thousands) September 30, 2022 December 31, 2021 Commercial: Commercial real estate (1) $ 1,762,687 $ 1,639,062 Commercial & industrial (2) 652,758 641,555 Total commercial 2,415,445 2,280,617 Residential Real Estate: Residential real estate (3) 2,144,098 1,726,975 Consumer: Home equity 273,742 247,697 Other (4) 15,588 17,636 Total consumer 289,330 265,333 Total loans (5) $ 4,848,873 $ 4,272,925 (1) CRE consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. (2) C&I consists of loans to businesses and individuals, a portion of which are fully or partially collateralized by real estate. C&I also includes $ 1.4 million and $ 38.0 million, respectively, of PPP loans as of September 30, 2022 and December 31, 2021. (3) Residential real estate consists of mortgage and homeowner construction loans secured by one- to four-family residential properties. (4) Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans. (5) Includes net unamortized loan origination costs of $ 10.7 million and $ 6.7 million, respectively, at September 30, 2022 and December 31, 2021 and net unamortized premiums on purchased loans of $ 329 thousand and $ 414 thousand, respectively, at September 30, 2022 and December 31, 2021. Loan balances exclude accrued interest receivable of $ 14.6 million and $ 10.3 million, respectively, as of September 30, 2022 and December 31, 2021. As of September 30, 2022 and December 31, 2021, loans amounting to $ 2.3 billion and $ 2.2 billion, respectively, were pledged as collateral to the FHLB under a blanket pledge agreement and to the FRBB for the discount window. See Note 7 for additional disclosure regarding borrowings. The Corporation elected to account for eligible loan modifications under Section 4013 of the CARES Act, as amended by the CRRSA Act. Eligible loan modifications from March 1, 2020 through January 1, 2022 made in response to the COVID-19 pandemic were not required to be classified as TDRs. The vast majority of the loan payment deferral modifications, or “deferments,” qualified as eligible loan modifications and were not classified as TDRs. All of these loans with qualified deferments exited their payment deferral period prior to March 31, 2022. Concentrations of Credit Risk A significant portion of our loan portfolio is concentrated among borrowers in southern New England and a substantial portion of the portfolio is collateralized by real estate in this area. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy, as well as the health of the real estate economic sector in the Corporation’s market area. -14- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Past Due Loans Past due status is based on the contractual payment terms of the loan. The following tables present an aging analysis of past due loans, segregated by class of loans: (Dollars in thousands) Days Past Due September 30, 2022 30-59 60-89 Over 90 Total Past Due Current Total Loans Commercial: Commercial real estate $ — $ — $ — $ — $ 1,762,687 $ 1,762,687 Commercial & industrial 4 — — 4 652,754 652,758 Total commercial 4 — — 4 2,415,441 2,415,445 Residential Real Estate: Residential real estate 1,607 219 5,430 7,256 2,136,842 2,144,098 Consumer: Home equity 202 — 50 252 273,490 273,742 Other 17 — — 17 15,571 15,588 Total consumer 219 — 50 269 289,061 289,330 Total loans $ 1,830 $ 219 $ 5,480 $ 7,529 $ 4,841,344 $ 4,848,873 (Dollars in thousands) Days Past Due December 31, 2021 30-59 60-89 Over 90 Total Past Due Current Total Loans Commercial: Commercial real estate $ — $ — $ — $ — $ 1,639,062 $ 1,639,062 Commercial & industrial 3 — — 3 641,552 641,555 Total commercial 3 — — 3 2,280,614 2,280,617 Residential Real Estate: Residential real estate 1,784 3,176 4,662 9,622 1,717,353 1,726,975 Consumer: Home equity 580 77 108 765 246,932 247,697 Other 21 — — 21 17,615 17,636 Total consumer 601 77 108 786 264,547 265,333 Total loans $ 2,388 $ 3,253 $ 4,770 $ 10,411 $ 4,262,514 $ 4,272,925 Included in past due loans as of September 30, 2022 and December 31, 2021, were nonaccrual loans of $ 7.1 million and $ 9.4 million, respectively. In addition, all loans 90 days or more past due at September 30, 2022 and December 31, 2021 were classified as nonaccrual. Nonaccrual Loans Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. When loans are placed on nonaccrual status, interest previously accrued but not collected is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible. -15- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table is a summary of nonaccrual loans, segregated by class of loans: (Dollars in thousands) Sep 30, 2022 Dec 31, 2021 Commercial: Commercial real estate $ — $ — Commercial & industrial — — Total commercial — — Residential Real Estate: Residential real estate 11,700 13,576 Consumer: Home equity 422 627 Other — — Total consumer 422 627 Total nonaccrual loans $ 12,122 $ 14,203 Accruing loans 90 days or more past due $ — $ — No ACL was deemed necessary on nonaccrual loans with carrying values of $ 4.3 million and $ 4.2 million, respectively, as of September 30, 2022 and December 31, 2021. Nonaccrual loans of $ 5.1 million and $ 4.8 million, respectively, at September 30, 2022 and December 31, 2021 were current as to the payment of principal and interest. As of September 30, 2022 and December 31, 2021, nonaccrual loans secured by one- to four-family residential property amounting to $ 4.4 million and $ 1.5 million, respectively, were in process of foreclosure. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2022. The following table presents interest income recognized on nonaccrual loans: (Dollars in thousands) Three Months Nine Months Periods ended September 30, 2022 2021 2022 2021 Commercial: Commercial real estate $ — $ — $ — $ — Commercial & industrial — — — — Total commercial — — — — Residential Real Estate: Residential real estate 77 131 242 288 Consumer: Home equity 9 9 21 44 Other — — 3 — Total consumer 9 9 24 44 Total $ 86 $ 140 $ 266 $ 332 Troubled Debt Restructurings A loan that has been modified or renewed is considered to be a TDR when two conditions are met: (1) the borrower is experiencing financial difficulty and (2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or a transaction with similar credit risk characteristics. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, -16- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring of a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection. The Corporation's ACL reflects the effects of a TDR when management reasonably expects at the reporting date that a TDR will be executed with an individual borrower. A TDR is considered reasonably expected no later than the point when management concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession to avoid a default. Reasonably expected TDRs and executed TDRs are evaluated individually to determine the required ACL. TDRs that did not involve a below-market rate concession and perform in accordance with their modified contractual terms for a reasonable period of time may be included in the Corporation’s existing pools based on the underlying risk characteristics of the loan to measure the ACL. TDRs are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term and full collection of principal and interest is in doubt. TDRs are reported as such for at least one year from the date of the restructuring. In years after the restructuring, TDRs are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is performing in accordance with their modified contractual terms for a reasonable period of time. The recorded investment in TDRs consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. For accruing TDRs, the recorded investment also includes accrued interest. The following table presents the recorded investment in TDRs and other pertinent information: (Dollars in thousands) Sep 30, 2022 Dec 31, 2021 Accruing TDRs $ 7,275 $ 16,564 Nonaccrual TDRs 2,890 2,819 Total TDRs $ 10,165 $ 19,383 Specific reserves on TDRs included in the ACL on loans $ 132 $ 148 Additional commitments to lend to borrowers with TDRs $ — $ — The following tables present TDRs occurring during the period indicated and the recorded investment pre- and post-modification: (Dollars in thousands) Outstanding Recorded Investment # of Loans Pre-Modifications Post-Modifications Three months ended September 30, 2022 2021 2022 2021 2022 2021 Commercial: Commercial real estate — — $ — $ — $ — $ — Commercial & industrial 2 — 844 — 844 — Total commercial 2 — 844 — 844 — Total 2 — $ 844 $ — $ 844 $ — -17- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (Dollars in thousands) Outstanding Recorded Investment # of Loans Pre-Modifications Post-Modifications Nine months ended September 30, 2022 2021 2022 2021 2022 2021 Commercial: Commercial real estate — — $ — $ — $ — $ — Commercial & industrial 2 — 844 — 844 — Total commercial 2 — 844 — 844 — Total 2 — $ 844 $ — $ 844 $ — The following table presents TDRs occurring during the period indicated by type of modification: (Dollars in thousands) Three Months Nine Months Periods ended September 30, 2022 2021 2022 2021 Below-market interest rate concession $ — $ — $ — $ — Payment deferral — — — — Maturity / amortization concession — — — — Interest only payments — — — — Combination (1) 844 — 844 — Total $ 844 $ — $ 844 $ — (1) Loans included in this classification were modified with a combination of any two of the concessions listed in this table. The following table presents information on TDRs modified within the previous 12 months for which there was a payment default: (Dollars in thousands) Three Months Nine Months # of Loans Recorded Investment # of Loans Recorded Investment Periods ended September 30, 2022 2021 2022 2021 2022 2021 2022 2021 TDRs with a Payment Default: Residential real estate — 1 $ — $ 330 — 1 $ — $ 330 Individually Analyzed Loans Individually analyzed loans include nonaccrual commercial loans, reasonably expected TDRs and executed TDRs, as well as certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans. As of September 30, 2022, the carrying value of individually analyzed loans amounted to $ 12.0 million, of which $ 8.3 million were considered collateral dependent. As of December 31, 2021, the carrying value of individually analyzed loans amounted to $ 21.1 million, of which $ 14.4 million were considered collateral dependent. For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. See Note 10 for additional disclosure regarding fair value of individually analyzed collateral dependent loans. -18- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the carrying value of collateral dependent individually analyzed loans: (Dollars in thousands) September 30, 2022 December 31, 2021 Carrying Value Related Allowance Carrying Value Related Allowance Commercial: Commercial real estate (1) $ 3,609 $ — $ 10,603 $ — Commercial & industrial — — — — Total commercial 3,609 — 10,603 — Residential Real Estate: Residential real estate (2) 4,612 520 3,803 534 Consumer: Home equity (2) 71 — — — Other — — — — Total consumer 71 — — — Total $ 8,292 $ 520 $ 14,406 $ 534 (1) Secured by income-producing property. (2) Secured by one- to four-family residential properties. Credit Quality Indicators Commercial The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan risk rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. The Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for loan losses. See Note 5 for additional information. A description of the commercial loan categories is as follows: Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality, but may exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, performance or may be in an industry or of a loan type known to have a higher degree of risk. These weaknesses may be mitigated by secondary sources of repayment, including SBA guarantees. Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies. Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectability. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be -19- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) determined. “Loss” is not intended to imply that the loan has no recovery value, but rather, it is not practical or desirable to continue to carry the asset. The Corporation’s procedures call for loan risk ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. On a quarterly basis, management reviews a watched asset list, which generally consists of commercial loans that are risk-rated 6 or worse, highly leveraged transaction loans, high-volatility commercial real estate and other selected loans. Management’s review focuses on the current status of the loans, the appropriateness of risk ratings and strategies to improve the credit. An annual credit review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio. Residential and Consumer Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type. In addition, other techniques are utilized to monitor indicators of credit deterioration in the residential real estate loans and home equity consumer loans. Among these techniques is the periodic tracking of loans with an updated FICO score and an updated estimated LTV ratio. LTV is estimated based on such factors as geographic location, the original appraised value and changes in median home prices, and takes into consideration the age of the loan. The results of these analyses and other credit review procedures, including selected targeted internal reviews, are taken into account in the determination of qualitative loss factors for residential real estate and home equity consumer credits. -20- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment as of September 30, 2022: (Dollars in thousands) Term Loans Amortized Cost by Origination Year 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Revolving Loans Converted to Term Loans Total Commercial: CRE: Pass $ 461,435 $ 354,011 $ 175,390 $ 193,425 $ 175,084 $ 316,290 $ 3,579 $ 1,466 $ 1,680,680 Special Mention 14,142 22,345 406 13,115 17,567 10,633 190 — 78,398 Classified — — 510 — 2,685 414 — — 3,609 Total CRE 475,577 376,356 176,306 206,540 195,336 327,337 3,769 1,466 1,762,687 C&I: Pass 86,981 63,805 76,341 88,235 94,240 121,837 103,130 798 635,367 Special Mention 1,605 — — — 1,444 12,123 1,497 — 16,669 Classified — — — 26 — — 696 — 722 Total C&I 88,586 63,805 76,341 88,261 95,684 133,960 105,323 798 652,758 Residential Real Estate: Residential real estate: Current 622,899 718,371 283,621 127,157 74,789 310,005 — — 2,136,842 Past Due — — 1,397 1,156 2,107 2,596 — — 7,256 Total residential real estate 622,899 718,371 285,018 128,313 76,896 312,601 — — 2,144,098 Consumer: Home equity: Current 15,354 8,709 3,842 2,643 2,106 3,428 229,083 8,326 273,491 Past Due — — — — — 81 95 75 251 Total home equity 15,354 8,709 3,842 2,643 2,106 3,509 229,178 8,401 273,742 Other: Current 3,182 4,400 1,742 736 258 4,987 266 — 15,571 Past Due 17 — — — — — — — 17 Total other 3,199 4,400 1,742 736 258 4,987 266 — 15,588 Total Loans $ 1,205,615 $ 1,171,641 $ 543,249 $ 426,493 $ 370,280 $ 782,394 $ 338,536 $ 10,665 $ 4,848,873 -21- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment as of December 31, 2021: (Dollars in thousands) Term Loans Amortized Cost by Origination Year 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Revolving Loans Converted to Term Loans Total Commercial: CRE: Pass $ 417,705 $ 212,649 $ 260,940 $ 206,164 $ 163,132 $ 266,067 $ 7,015 $ 2,202 $ 1,535,874 Special Mention 9,089 489 33,982 28,432 — 20,273 320 — 92,585 Classified — 958 — 2,685 6,959 1 — — 10,603 Total CRE 426,794 214,096 294,922 237,281 170,091 286,341 7,335 2,202 1,639,062 C&I: Pass 116,959 78,601 104,827 87,619 51,579 83,182 89,686 911 613,364 Special Mention — — 606 4,599 6,195 15,605 1,186 — 28,191 Classified — — — — — — — — — Total C&I 116,959 78,601 105,433 92,218 57,774 98,787 90,872 911 641,555 Residential Real Estate: Residential real estate: Current 733,658 353,742 158,140 85,656 88,365 297,792 — — 1,717,353 Past Due — 1,402 1,167 2,379 763 3,911 — — 9,622 Total residential real estate 733,658 355,144 159,307 88,035 89,128 301,703 — — 1,726,975 Consumer: Home equity: Current 10,434 5,850 3,703 2,380 1,064 3,592 211,488 8,421 246,932 Past Due — — 185 — — 245 115 220 765 Total home equity 10,434 5,850 3,888 2,380 1,064 3,837 211,603 8,641 247,697 Other: Current 5,536 3,264 1,313 407 747 6,090 258 — 17,615 Past Due 21 — — — — — — — 21 Total other 5,557 3,264 1,313 407 747 6,090 258 — 17,636 Total Loans $ 1,293,402 $ 656,955 $ 564,863 $ 420,321 $ 318,804 $ 696,758 $ 310,068 $ 11,754 $ 4,272,925 Consistent with industry practice, Washington Trust may renew commercial loans at or immediately prior to their maturity. In the tables above, renewals subject to full credit evaluation before being granted are reported as originations in the period renewed. -22- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 5 - Allowance for Credit Losses on Loans The ACL on loans is management’s estimate, at the reporting date, of expected credit losses over the expected life of the loans. The level of the ACL on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. In accordance with the Corporation’s ACL policy, the methodology is reviewed no less than annually. The methodology incorporates a probability of default and loss given default framework. Loss given default is estimated based on historical credit loss experience. Probability of default is estimated using a regression model that incorporates econometric factors. Econometric factors are selected based on the correlation of the factor to historical credit losses for each portfolio segment. The following table summarizes the econometric factors utilized for each loan portfolio segment as of the dates indicated: Econometric Factors Loan portfolio segment At September 30, 2022 At December 31, 2021 CRE NUR & GDP NUR & GDP C&I NUR & GDP NUR Residential real estate NUR & HPI NUR & HPI Home equity NUR & HPI NUR & HPI Other consumer GDP NUR & GDP The following table presents the activity in the ACL on loans for the three months ended September 30, 2022: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 17,197 $ 10,332 $ 27,529 $ 7,308 $ 1,040 $ 440 $ 1,480 $ 36,317 Charge-offs — ( 10 ) ( 10 ) — — ( 53 ) ( 53 ) ( 63 ) Recoveries — 1 1 — — 8 8 9 Provision 414 24 438 139 31 ( 8 ) 23 600 Ending Balance $ 17,611 $ 10,347 $ 27,958 $ 7,447 $ 1,071 $ 387 $ 1,458 $ 36,863 The following table presents the activity in the ACL on loans for the nine months ended September 30, 2022: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 18,933 $ 10,832 $ 29,765 $ 7,860 $ 1,069 $ 394 $ 1,463 $ 39,088 Charge-offs — ( 19 ) ( 19 ) — — ( 103 ) ( 103 ) ( 122 ) Recoveries 145 22 167 21 4 34 38 226 Provision ( 1,467 ) ( 488 ) ( 1,955 ) ( 434 ) ( 2 ) 62 60 ( 2,329 ) Ending Balance $ 17,611 $ 10,347 $ 27,958 $ 7,447 $ 1,071 $ 387 $ 1,458 $ 36,863 -23- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the activity in the ACL on loans for the three months ended September 30, 2021: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 21,450 $ 11,717 $ 33,167 $ 6,877 $ 1,340 $ 495 $ 1,835 $ 41,879 Charge-offs — 2 2 ( 57 ) ( 183 ) ( 11 ) ( 194 ) ( 249 ) Recoveries — — — 5 73 3 76 81 Provision ( 613 ) ( 392 ) ( 1,005 ) 1,131 ( 112 ) ( 14 ) ( 126 ) — Ending Balance $ 20,837 $ 11,327 $ 32,164 $ 7,956 $ 1,118 $ 473 $ 1,591 $ 41,711 The following table presents the activity in the ACL on loans for the nine months ended September 30, 2021: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 22,065 $ 12,228 $ 34,293 $ 8,042 $ 1,300 $ 471 $ 1,771 $ 44,106 Charge-offs — ( 304 ) ( 304 ) ( 107 ) ( 183 ) ( 36 ) ( 219 ) ( 630 ) Recoveries — 3 3 85 79 19 98 186 Provision ( 1,228 ) ( 600 ) ( 1,828 ) ( 64 ) ( 78 ) 19 ( 59 ) ( 1,951 ) Ending Balance $ 20,837 $ 11,327 $ 32,164 $ 7,956 $ 1,118 $ 473 $ 1,591 $ 41,711 Note 6 - Deposits The following table presents a summary of deposits: (Dollars in thousands) Sep 30, 2022 Dec 31, 2021 Noninterest-bearing demand deposits $ 938,572 $ 945,229 Interest-bearing demand deposits (1) 304,275 251,032 NOW accounts 869,984 867,138 Money market accounts 1,146,826 1,072,864 Savings accounts 600,568 555,177 Time deposits (2) 1,209,632 1,288,611 Total deposits $ 5,069,857 $ 4,980,051 (1) Includes wholesale brokered demand deposit balances of $ 31,044 and $ 0 , respectively, as of September 30, 2022 and December 31, 2021. (2) Includes wholesale brokered time deposit balances of $ 412,127 and $ 515,228 , respectively, as of September 30, 2022 and December 31, 2021. Note 7 - Borrowings Advances payable to the FHLB amounted to $ 700.0 million and $ 145.0 million, respectively, at September 30, 2022 and December 31, 2021. As of September 30, 2022 and December 31, 2021, the Bank had access to a $ 40.0 million unused line of credit with the FHLB. Additionally, the Bank had a $ 102.0 million standby letter of credit with the FHLB at September 30, 2022. The Bank had remaining available borrowing capacity of $ 967.1 million and $ 1.6 billion, respectively, with the FHLB at September 30, 2022 and December 31, 2021. The Bank pledges certain qualified investment securities and loans as collateral to the FHLB. -24- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents maturities and weighted average interest rates on FHLB advances outstanding as of September 30, 2022: (Dollars in thousands) Scheduled Maturity Weighted Average Rate October 1, 2022 to December 31, 2022 $ 625,000 2.96 % 2023 55,000 1.92 2024 20,000 4.48 2025 — — 2026 — — 2027 and thereafter — — Balance at September 30, 2022 $ 700,000 2.92 % Note 8 - Shareholders' Equity Stock Repurchase Program The 2021 Repurchase Program authorizes the repurchase of up to 850,000 shares, or approximately 5 %, of the Corporation’s outstanding common stock. This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The 2021 Repurchase Program expires on December 31, 2022, and may be modified, suspended, or discontinued at any time. In the nine months ended September 30, 2022, the Corporation has repurchased 194,162 shares, at an average price of $ 48.82 and a total cost of $ 9.5 million, under its 2021 Repurchase Program. Regulatory Capital Requirements Capital levels at September 30, 2022 exceeded the regulatory minimum levels to be considered “well capitalized.” -25- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios, as well as the corresponding minimum and well capitalized regulatory amounts and ratios that were in effect during the respective periods: (Dollars in thousands) Actual For Capital Adequacy Purposes To Be “Well Capitalized” Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio September 30, 2022 Total Capital (to Risk-Weighted Assets): Corporation $ 596,341 12.65 % $ 377,111 8.00 % N/A N/A Bank 579,854 12.30 376,991 8.00 $ 471,238 10.00 % Tier 1 Capital (to Risk-Weighted Assets): Corporation 564,194 11.97 282,833 6.00 N/A N/A Bank 547,707 11.62 282,743 6.00 376,991 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets): Corporation 542,197 11.50 212,125 4.50 N/A N/A Bank 547,707 11.62 212,057 4.50 306,305 6.50 Tier 1 Capital (to Average Assets): (1) Corporation 564,194 8.99 251,121 4.00 N/A N/A Bank 547,707 8.73 250,995 4.00 313,743 5.00 December 31, 2021 Total Capital (to Risk-Weighted Assets): Corporation 578,137 14.01 330,105 8.00 N/A N/A Bank 565,087 13.70 330,025 8.00 412,532 10.00 Tier 1 Capital (to Risk-Weighted Assets): Corporation 546,362 13.24 247,578 6.00 N/A N/A Bank 533,312 12.93 247,519 6.00 330,025 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets): Corporation 524,363 12.71 185,684 4.50 N/A N/A Bank 533,312 12.93 185,639 4.50 268,146 6.50 Tier 1 Capital (to Average Assets): (1) Corporation 546,362 9.36 233,534 4.00 N/A N/A Bank 533,312 9.14 233,434 4.00 291,793 5.00 (1) Leverage ratio. In addition to the minimum regulatory capital required for capital adequacy purposes outlined in the table above, the Corporation is required to maintain a minimum capital conservation buffer, in the form of common equity, of 2.50% in order to avoid restrictions on capital distributions and discretionary bonuses. The Corporation’s capital levels exceeded the minimum regulatory capital requirements plus the capital conservation buffer at September 30, 2022 and December 31, 2021. The Bancorp owns the common stock of two capital trusts, which have issued trust preferred securities. In accordance with GAAP, the capital trusts are treated as unconsolidated subsidiaries. At both September 30, 2022 and December 31, 2021, $ 22.0 million in trust preferred securities were included in the Tier 1 capital of the Corporation for regulatory capital reporting purposes pursuant to the capital adequacy guidelines of the Federal Reserve. In accordance with regulatory capital rules, the Corporation elected the option to delay the estimated impact of ASC 326 on its regulatory capital over a two-year deferral and subsequent three-year transition period ending December 31, 2024. As a result, capital ratios exclude the full impact of the increased ACL on loans and unfunded loan commitments attributed to the adoption of ASC 326, adjusted for an approximation of the after-tax provision for credit losses attributable to ASC 326 relative to the incurred loss methodology during the two-year deferral period. The cumulative difference at the end of the deferral period is being phased-in to regulatory capital over the three-year transition period, which began January 1, 2022. -26- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 9 - Derivative Financial Instruments The Corporation’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Corporation’s known or expected cash receipts and its known or expected cash payments principally to manage the Corporation’s interest rate risk. Additionally, the Corporation enters into interest rate derivatives to accommodate the business requirements of its customers. All derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and resulting designation. Interest Rate Risk Management Agreements Interest rate risk management agreements, such as caps, swaps and floors, are used from time to time as part of the Corporation’s interest rate risk management strategy. Interest rate swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g., fixed-rate for variable-rate payments) computed on a notional principal amount. Interest rate caps and floors represent options purchased by the Corporation to manage the interest rate paid throughout the term of the option contract. The credit risk associated with these transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure. Cash Flow Hedging Instruments As of September 30, 2022 and December 31, 2021, the Corporation had an interest rate swap contract with a total notional amount of $ 20.0 million that was designated as a cash flow hedge to hedge the interest rate risk associated with short-term variable rate FHLB advances. The interest rate swap on borrowings matures in December 2023. As of September 30, 2022 and December 31, 2021, the Corporation had an interest rate swap contract with a total notional amount of $ 300.0 million that was designated as a cash flow hedge to hedge the interest rate risk associated with a pool of variable rate commercial loans. The interest rate swap on loans matures in May 2026. The changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) and subsequently reclassified to earnings when gains or losses are realized. Loan Related Derivative Contracts Interest Rate Derivative Contracts with Customers The Corporation enters into interest rate swap and interest rate cap contracts to help commercial loan borrowers manage their interest rate risk. These interest rate swap contracts allow borrowers to convert variable-rate loan payments to fixed-rate loan payments, while interest rate cap contracts allow borrowers to limit their interest rate exposure in a rising rate environment. When the Corporation enters into an interest rate derivative contract with a commercial loan borrower, it simultaneously enters into a “mirror” interest rate contract with a third party. For interest rate swaps, the third party exchanges the client’s fixed-rate loan payments for variable-rate loan payments. The Corporation retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans. As of September 30, 2022 and December 31, 2021, Washington Trust had interest rate derivative contracts with commercial loan borrowers (predominantly interest rate swap contracts) with notional amounts of $ 962.4 million and $ 1.0 billion, respectively, and equal amounts of “mirror” contracts with third party financial institutions. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Risk Participation Agreements The Corporation has entered into risk participation agreements with other banks in commercial loan arrangements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Under a risk participation-out agreement, a derivative asset, the Corporation participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Corporation assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower for a fee received from the other bank. -27- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) As of September 30, 2022, the notional amounts of risk participation-out agreements and risk participation-in agreements were $ 66.9 million and $ 177.0 million, respectively, compared to $ 74.2 million and $ 163.2 million, respectively, as of December 31, 2021. Mortgage Loan Commitments Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Forward sale commitments are contracts for delayed delivery or net settlement of the underlying instrument, such as a residential real estate mortgage loan, where the seller agrees to deliver on a specified future date, either a specified instrument at a specified price or yield or the net cash equivalent of an underlying instrument. Both interest rate lock commitments and forward sale commitments are derivative financial instruments, but do not meet criteria for hedge accounting and therefore, the changes in fair value of these commitments are reflected in earnings. As of September 30, 2022, the notional amounts of interest rate lock commitments and forward sale commitments were $ 27.4 million and $ 64.1 million, respectively, compared to $ 49.8 million and $ 103.6 million, respectively, as of December 31, 2021. The following table presents the fair values of derivative instruments in the Unaudited Consolidated Balance Sheets: (Dollars in thousands) Derivative Assets Derivative Liabilities Fair Value Fair Value Balance Sheet Location Sep 30, 2022 Dec 31, 2021 Balance Sheet Location Sep 30, 2022 Dec 31, 2021 Derivatives Designated as Cash Flow Hedging Instruments: Interest rate risk management contracts: Interest rate swaps Other assets $ 540 $ 182 Other liabilities $ 32,936 $ 5,301 Derivatives not Designated as Hedging Instruments: Loan related derivative contracts: Interest rate contracts with customers Other assets 122 32,361 Other liabilities 71,028 2,015 Mirror contracts with counterparties Other assets 70,679 2,001 Other liabilities 122 32,480 Risk participation agreements Other assets — 1 Other liabilities — 2 Mortgage loan commitments: Interest rate lock commitments Other assets 204 1,256 Other liabilities 186 — Forward sale commitments Other assets 1,069 54 Other liabilities 211 905 Gross amounts 72,614 35,855 104,483 40,703 Less: amounts offset (1) 24,516 2,167 24,516 2,167 Derivative balances, net of offset 48,098 33,688 79,967 38,536 Less: collateral pledged (2) — — 8,542 34,539 Net amounts $ 48,098 $ 33,688 $ 71,425 $ 3,997 (1) Interest rate risk management contracts and loan related derivative contracts with counterparties are subject to master netting arrangements. (2) Collateral pledged to derivative counterparties is in the form of cash. Washington Trust may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions. -28- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the effect of derivative instruments in the Unaudited Consolidated Statements of Changes in Shareholders’ Equity and Unaudited Consolidated Statements of Income: (Dollars in thousands) Gain (Loss) Recognized in Other Comprehensive Income (Loss), Net of Tax Three Months Nine Months Periods ended September 30, 2022 2021 2022 2021 Derivatives Designated as Cash Flow Hedging Instruments: Interest rate risk management contracts: Interest rate swaps ($ 6,973 ) ($ 403 ) ($ 20,281 ) ($ 36 ) Total ($ 6,973 ) ($ 403 ) ($ 20,281 ) ($ 36 ) For derivatives designated as cash flow hedging instruments, see Note 15 for additional disclosure pertaining to the amounts and location of reclassifications from AOCL into earnings. (Dollars in thousands) Amount of Gain (Loss) Recognized in Income on Derivatives Three Months Nine Months Periods ended September 30, Statement of Income Location 2022 2021 2022 2021 Derivatives not Designated as Hedging Instruments: Loan related derivative contracts: Interest rate contracts with customers Loan related derivative income ($ 33,605 ) ($ 2,715 ) ($ 93,227 ) ($ 21,281 ) Mirror contracts with counterparties Loan related derivative income 34,646 3,558 95,189 23,173 Risk participation agreements Loan related derivative income — ( 115 ) 49 478 Mortgage loan commitments: Interest rate lock commitments Mortgage banking revenues ( 516 ) ( 17 ) ( 1,238 ) ( 4,859 ) Forward sale commitments Mortgage banking revenues 998 ( 361 ) 4,729 4,994 Total $ 1,523 $ 350 $ 5,502 $ 2,505 Note 10 - Fair Value Measurements The Corporation uses fair value measurements to record fair value adjustments on certain assets and liabilities and to determine fair value disclosures. Items recorded at fair value on a recurring basis include securities available for sale, mortgage loans held for sale and derivatives. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent individually analyzed loans, OREO and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets. Fair value is a market-based measurement, not an entity-specific measurement. Fair value measurements are determined based on the assumptions the market participants would use in pricing the asset or liability. In addition, GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information, or “inputs”, are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Corporation’s market assumptions. These two types of inputs have created the following fair value hierarchy: • Level 1 – Quoted prices for identical assets or liabilities in active markets. • Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. • Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in the markets and which reflect the Corporation’s market assumptions. Fair Value Option Election GAAP allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain -29- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) financial assets and liabilities on a contract-by-contract basis. The Corporation has elected the fair value option for mortgage loans held for sale to better match changes in fair value of the loans with changes in the fair value of the forward sale commitment contracts used to economically hedge them. The following table presents a summary of mortgage loans held for sale accounted for under the fair value option: (Dollars in thousands) September 30, 2022 December 31, 2021 Aggregate fair value $ 24,054 $ 40,196 Aggregate principal balance 24,328 39,201 Difference between fair value and principal balance ($ 274 ) $ 995 Changes in fair value of mortgage loans held for sale accounted for under the fair value option election are included in mortgage banking revenues in the Unaudited Consolidated Statements of Income. Changes in fair value amounted to decreases to mortgage banking revenues of $ 521 thousand for the three months ended September 30, 2022 and $ 1.3 million for the nine months ended September 30, 2022. This compared to an increase to mortgage banking revenues of $ 372 thousand for the three months ended September 30, 2021 and a decrease of $ 1.1 million for the nine months ended September 30, 2021. There were no mortgage loans held for sale 90 days or more past due as of September 30, 2022 and December 31, 2021. Valuation Techniques Debt Securities Available for sale debt securities are recorded at fair value on a recurring basis. When available, the Corporation uses quoted market prices to determine the fair value of debt securities; such items are classified as Level 1. There were no Level 1 debt securities held at September 30, 2022 and December 31, 2021. Level 2 debt securities are traded less frequently than exchange-traded instruments. The fair value of these securities is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category includes obligations of U.S. government-sponsored enterprises, including mortgage-backed securities, individual name issuer trust preferred debt securities and corporate bonds. Debt securities not actively traded whose fair value is determined through the use of cash flows utilizing inputs that are unobservable are classified as Level 3. There were no Level 3 debt securities held at September 30, 2022 and December 31, 2021. Mortgage Loans Held for Sale The fair value of mortgage loans held for sale is estimated based on current market prices for similar loans in the secondary market and therefore are classified as Level 2 assets. Collateral Dependent Individually Analyzed Loans The fair value of collateral dependent individually analyzed loans is determined based upon the appraised fair value of the underlying collateral. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For collateral dependent loans that are expected to be repaid substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the collateral. Internal valuations may be utilized to determine the fair value of other business assets. Collateral dependent individually analyzed loans are categorized as Level 3. Derivatives Interest rate derivative contracts are traded in over-the-counter markets where quoted market prices are not readily available. Fair value measurements are determined using independent valuation software, which utilizes the present value of future cash flows discounted using market observable inputs such as forward rate assumptions. The Corporation evaluates the credit risk of its counterparties, as well as that of the Corporation. Accordingly, factors such as the likelihood of default by the Corporation and its counterparties, its net exposures and remaining contractual life are considered in determining if -30- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) any fair value adjustments related to credit risk are required. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position, if any. The Corporation has determined that the majority of the inputs used to value its derivative positions fall within Level 2 of the fair value hierarchy. However, the credit valuation adjustments utilize Level 3 inputs. As of September 30, 2022 and December 31, 2021, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Corporation has classified its derivative valuations in their entirety as Level 2. Fair value measurements of forward loan commitments (interest rate lock commitments and forward sale commitments) are primarily based on current market prices for similar assets in the secondary market for mortgage loans and therefore are classified as Level 2 assets. The fair value of interest rate lock commitments is also dependent on the ultimate closing of the loans. Pull-through rates are based on the Corporation’s historical data and reflect the Corporation’s best estimate of the likelihood that a commitment will result in a closed loan. Although the pull-through rates are Level 3 inputs, the Corporation has assessed the significance of the impact of pull-through rates on the overall valuation of its interest rate lock commitments and has determined that they are not significant to the overall valuation. As a result, the Corporation has classified its interest rate lock commitments as Level 2. Items Recorded at Fair Value on a Recurring Basis The following tables present the balances of assets and liabilities reported at fair value on a recurring basis: (Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2022 Assets: Available for sale debt securities: Obligations of U.S. government-sponsored enterprises $ 197,855 $ — $ 197,855 $ — Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 764,264 — 764,264 — Individual name issuer trust preferred debt securities 8,800 — 8,800 — Corporate bonds 11,654 — 11,654 — Mortgage loans held for sale 24,054 — 24,054 — Derivative assets 48,098 — 48,098 — Total assets at fair value on a recurring basis $ 1,054,725 $ — $ 1,054,725 $ — Liabilities: Derivative liabilities $ 79,967 $ — $ 79,967 $ — Total liabilities at fair value on a recurring basis $ 79,967 $ — $ 79,967 $ — -31- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2021 Assets: Available for sale debt securities: Obligations of U.S. government-sponsored enterprises $ 196,454 $ — $ 196,454 $ — Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 824,962 — 824,962 — Individual name issuer trust preferred debt securities 9,138 — 9,138 — Corporate bonds 12,305 — 12,305 — Mortgage loans held for sale 40,196 — 40,196 — Derivative assets 33,688 — 33,688 — Total assets at fair value on a recurring basis $ 1,116,743 $ — $ 1,116,743 $ — Liabilities: Derivative liabilities $ 38,536 $ — $ 38,536 $ — Total liabilities at fair value on a recurring basis $ 38,536 $ — $ 38,536 $ — Items Recorded at Fair Value on a Nonrecurring Basis There were no assets written down to fair value during the nine months ended September 30, 2022. During 2021, two collateral dependent individually analyzed loans were written down to fair value. One loan with a carrying value of $ 3.1 million was paid in full in the fourth quarter of 2021. The second loan with a carrying value of $ 533 thousand was fully reserved for as of December 31, 2021. The following table presents valuation techniques and unobservable inputs for assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value: (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Inputs Utilized (Weighted Average) December 31, 2021 Collateral dependent individually analyzed loans $— Appraisals of collateral Discount for costs to sell 14 % Appraisal adjustments 100 % -32- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Valuation of Financial Instruments The estimated fair values and related carrying amounts for financial instruments for which fair value is only disclosed are presented below as of the periods indicated. The tables exclude financial instruments for which the carrying value approximates fair value such as cash and cash equivalents, FHLB stock, accrued interest receivable, BOLI, non-maturity deposits and accrued interest payable. The Corporation considers cash and cash equivalents, accrued interest receivable and accrued interest payable as level 1 measurements within the fair value hierarchy. The Corporation considers FHLB stock, BOLI and non-maturity deposits as level 2 measurements. (Dollars in thousands) September 30, 2022 Carrying Amount Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets: Loans, net of allowance for credit losses on loans $ 4,812,010 $ 4,778,506 $ — $ — $ 4,778,506 Financial Liabilities: Time deposits $ 1,209,632 $ 1,212,810 $ — $ 1,212,810 $ — FHLB advances 700,000 699,221 — 699,221 — Junior subordinated debentures 22,681 18,763 — 18,763 — (Dollars in thousands) December 31, 2021 Carrying Amount Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets: Loans, net of allowance for credit losses on loans $ 4,233,837 $ 4,145,516 $ — $ — $ 4,145,516 Financial Liabilities: Time deposits $ 1,288,611 $ 1,294,053 $ — $ 1,294,053 $ — FHLB advances 145,000 144,862 — 144,862 — Junior subordinated debentures 22,681 20,181 — 20,181 — -33- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 11 - Revenue from Contracts with Customers The following tables summarize total revenues as presented in the Unaudited Consolidated Statements of Income and the related amounts that are from contracts with customers within the scope of ASC 606. As shown below, a substantial portion of our revenues are specifically excluded from the scope of ASC 606. For the three months ended September 30, 2022 2021 (Dollars in thousands) Revenue (1) ASC 606 Revenue (2) Revenue (1) ASC 606 Revenue (2) Net interest income $ 42,042 $ — $ 36,070 $ — Noninterest income: Asset-based wealth management revenues 9,302 9,302 10,224 10,224 Transaction-based wealth management revenues 223 223 231 231 Total wealth management revenues 9,525 9,525 10,455 10,455 Mortgage banking revenues 2,047 — 6,373 — Card interchange fees 1,287 1,287 1,265 1,265 Service charges on deposit accounts 819 819 673 673 Loan related derivative income 1,041 — 728 — Income from bank-owned life insurance 684 — 618 — Other income 400 316 408 310 Total noninterest income 15,803 11,947 20,520 12,703 Total revenues $ 57,845 $ 11,947 $ 56,590 $ 12,703 (1) As reported in the Unaudited Consolidated Statements of Income. (2) Revenue from contracts with customers in scope of ASC 606. For the nine months ended September 30, 2022 2021 (Dollars in thousands) Revenue (1) ASC 606 Revenue (2) Revenue (1) ASC 606 Revenue (2) Net interest income $ 114,648 $ — $ 103,695 $ — Noninterest income: Asset-based wealth management revenues 29,154 29,154 29,798 29,798 Transaction-based wealth management revenues 968 968 980 980 Total wealth management revenues 30,122 30,122 30,778 30,778 Mortgage banking revenues 7,630 — 24,294 — Card interchange fees 3,754 3,754 3,714 3,714 Service charges on deposit accounts 2,250 2,250 1,917 1,917 Loan related derivative income 2,011 — 2,370 — Income from bank-owned life insurance 1,900 — 1,781 — Other income 1,147 880 2,233 1,834 Total noninterest income 48,814 37,006 67,087 38,243 Total revenues $ 163,462 $ 37,006 $ 170,782 $ 38,243 (1) As reported in the Unaudited Consolidated Statements of Income. (2) Revenue from contracts with customers in scope of ASC 606. The Corporation recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), ATM fees, wire transfer fees, overdraft charge fees, and stop-payment and returned check fees. Such revenue is derived from transactional information and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction. -34- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The Corporation recognizes revenue over a period of time, generally monthly, as services are performed and performance obligations are satisfied. Such revenue includes wealth management revenues and service charges on deposit accounts. Wealth management revenues are categorized as either asset-based revenues or transaction-based revenues. Asset-based revenues include trust and investment management fees that are earned based upon a percentage of asset values under administration. Transaction-based revenues include tax preparation fees, commissions and other service fees. Fee revenue from service charges on deposit accounts represent service charges assessed to customers who hold deposit accounts at the Bank. The following table presents revenue from contracts with customers based on the timing of revenue recognition: (Dollars in thousands) Three Months Nine Months Periods ended September 30, 2022 2021 2022 2021 Revenue recognized at a point in time: Card interchange fees $ 1,287 $ 1,265 $ 3,754 $ 3,714 Service charges on deposit accounts 628 531 1,782 1,516 Other income 249 247 692 1,678 Revenue recognized over time: Wealth management revenues 9,525 10,455 30,122 30,778 Service charges on deposit accounts 191 142 468 401 Other income 67 63 188 156 Total revenues from contracts in scope of Topic 606 $ 11,947 $ 12,703 $ 37,006 $ 38,243 Receivables for revenue from contracts with customers primarily consist of amounts due for wealth management services performed for which the Corporation’s performance obligations have been fully satisfied. Receivables amounted to $ 5.6 million and $ 6.6 million, respectively, at September 30, 2022 and December 31, 2021 and were included in other assets in the Unaudited Consolidated Balance Sheets. Deferred revenues, which are considered contract liabilities under ASC 606, represent advance consideration received from customers for which the Corporation has a remaining performance obligation to fulfill. Contract liabilities are recognized as revenue over the life of the contract as the performance obligations are satisfied. The balances of contract liabilities were insignificant at both September 30, 2022 and December 31, 2021 and were included in other liabilities in the Unaudited Consolidated Balance Sheets. For commissions and incentives that are in scope of ASC 606, such as those paid to employees in our wealth management services and commercial banking segments in order to obtain customer contracts, contract cost assets are established. The contract cost assets are capitalized and amortized over the estimated useful life that the asset is expected to generate benefits. The carrying value of contract cost assets amounted to $ 2.0 million and $ 1.9 million, respectively, at September 30, 2022 and December 31, 2021 and were included in other assets in the Unaudited Consolidated Balance Sheets. The amortization of contract cost assets is recorded within salaries and employee benefits expense in the Unaudited Consolidated Statements of Income. -35- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 12 - Defined Benefit Pension Plans Washington Trust maintains a qualified pension plan for the benefit of certain eligible employees who were hired prior to October 1, 2007. Washington Trust also has non-qualified retirement plans to provide supplemental retirement benefits to certain employees, as defined in the plans. The defined benefit pension plans were previously amended to freeze benefit accruals after a 10-year transition period ending in December 2023. The following table presents components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss), on a pre-tax basis: (Dollars in thousands) Qualified Pension Plan Non-Qualified Retirement Plans Three Months Nine Months Three Months Nine Months Periods ended September 30, 2022 2021 2022 2021 2022 2021 2022 2021 Net Periodic Benefit Cost: Service cost (1) $ 516 $ 592 $ 1,547 $ 1,777 $ 54 $ 52 $ 163 $ 156 Interest cost (2) 592 500 1,776 1,502 105 84 317 253 Expected return on plan assets (2) ( 1,159 ) ( 1,203 ) ( 3,476 ) ( 3,611 ) — — — — Recognized net actuarial loss (2) 255 531 765 1,591 173 180 519 542 Net periodic benefit cost $ 204 $ 420 $ 612 $ 1,259 $ 332 $ 316 $ 999 $ 951 (1) Included in salaries and employee benefits expense in the Unaudited Consolidated Statements of Income. (2) Included in other expenses in the Unaudited Consolidated Statements of Income. The following table presents the measurement date and weighted-average assumptions used to determine net periodic benefit cost: Qualified Pension Plan Non-Qualified Retirement Plans For the nine months ended September 30, 2022 2021 2022 2021 Measurement date Dec 31, 2021 Dec 31, 2020 Dec 31, 2021 Dec 31, 2020 Equivalent single discount rate for benefit obligations 3.00 % 2.71 % 2.89 % 2.51 % Equivalent single discount rate for service cost 3.11 2.86 3.16 2.94 Equivalent single discount rate for interest cost 2.67 2.16 2.48 1.97 Expected long-term return on plan assets 5.25 5.75 N/A N/A Rate of compensation increase 3.75 3.75 3.75 3.75 Note 13 - Share-Based Compensation Arrangements The 2022 Long Term Incentive Plan was approved by the shareholders on April 26, 2022. The maximum number of shares of common stock that may be issued under the 2022 Long Term Incentive Plan is 600,000 and is subject to adjustment. The type of permitted equity awards under the 2022 Long Term Incentive Plan include stock options (both incentive and non-qualified options), stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, cash-based awards, and dividend equivalent rights. On February 18, 2022, the Corporation’s Board of Directors voted that no further awards would be granted under the 2013 Plan following shareholder approval of the 2022 Long Term Incentive Plan. During the nine months ended September 30, 2022, the Corporation granted performance share unit and restricted stock unit awards. Performance share units were granted to certain key employees providing them the opportunity to earn shares of common stock over a 3 -year performance period. The weighted average fair value of the performance share units was $ 59.31 . The number of shares to be vested will be contingent upon the Corporation’s attainment of certain performance measures as detailed in the performance share unit award agreements. Based on the most recent performance assumption available, it is estimated that 42,728 shares will be earned. In addition, the Corporation granted to certain key employees and non-executive directors 10,717 restricted stock units with 3 -year cliff vesting. The weighted average grant date fair value of the restricted stock units was $ 51.57 . -36- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 14 - Business Segments The Corporation manages its operations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services. Management uses an allocation methodology to allocate income and expenses to the business lines. Direct activities are assigned to the appropriate business segment to which the activity relates. Indirect activities, such as corporate, technology and other support functions, are allocated to business segments primarily based upon full-time equivalent employee computations. Commercial Banking The Commercial Banking segment includes commercial, residential and consumer lending activities; mortgage banking activities; deposit generation; cash management activities; banking activities, including customer support and the operation of ATMs, telephone banking, internet banking and mobile banking services; as well as investment portfolio and wholesale funding activities. Wealth Management Services The Wealth Management Services segment includes investment management; holistic financial planning services; personal trust and estate services, including services as trustee, personal representative, custodian and guardian; settlement of decedents’ estates; and institutional trust services, including custody and fiduciary services. The following table presents the statement of operations and total assets for Washington Trust’s reportable segments: (Dollars in thousands) Commercial Banking Wealth Management Services Consolidated Total Three months ended September 30, 2022 2021 2022 2021 2022 2021 Net interest income (expense) $ 42,038 $ 36,085 $ 4 ($ 15 ) $ 42,042 $ 36,070 Provision for credit losses 800 — — — 800 — Net interest income (expense) after provision for credit losses 41,238 36,085 4 ( 15 ) 41,242 36,070 Noninterest income 6,043 9,962 9,760 10,558 15,803 20,520 Noninterest expenses: Depreciation and amortization expense 751 740 348 365 1,099 1,105 Other noninterest expenses 23,995 23,538 7,973 7,877 31,968 31,415 Total noninterest expenses 24,746 24,278 8,321 8,242 33,067 32,520 Income before income taxes 22,535 21,769 1,443 2,301 23,978 24,070 Income tax expense 4,878 4,725 432 594 5,310 5,319 Net income $ 17,657 $ 17,044 $ 1,011 $ 1,707 $ 18,668 $ 18,751 Total assets at period end $ 6,332,986 $ 5,929,230 $ 75,065 $ 73,413 $ 6,408,051 $ 6,002,643 Expenditures for long-lived assets 1,206 310 137 28 1,343 338 -37- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (Dollars in thousands) Commercial Banking Wealth Management Services Consolidated Total Nine months ended September 30, 2022 2021 2022 2021 2022 2021 Net interest income (expense) $ 114,709 $ 103,737 ($ 61 ) ($ 42 ) $ 114,648 $ 103,695 Provision for credit losses ( 2,100 ) ( 2,000 ) — — ( 2,100 ) ( 2,000 ) Net interest income (expense) after provision for credit losses 116,809 105,737 ( 61 ) ( 42 ) 116,748 105,695 Noninterest income 18,174 35,032 30,640 32,055 48,814 67,087 Noninterest expenses: Depreciation and amortization expense 2,168 2,105 1,034 1,118 3,202 3,223 Other noninterest expenses 69,110 74,425 23,051 22,597 92,161 97,022 Total noninterest expenses 71,278 76,530 24,085 23,715 95,363 100,245 Income before income taxes 63,705 64,239 6,494 8,298 70,199 72,537 Income tax expense 13,423 13,810 1,668 2,045 15,091 15,855 Net income $ 50,282 $ 50,429 $ 4,826 $ 6,253 $ 55,108 $ 56,682 Total assets at period end $ 6,332,986 $ 5,929,230 $ 75,065 $ 73,413 $ 6,408,051 $ 6,002,643 Expenditures for long-lived assets 3,494 2,027 330 139 3,824 2,166 Note 15 - Other Comprehensive Income (Loss) The following tables present the activity in other comprehensive income (loss): Three months ended September 30, 2022 2021 (Dollars in thousands) Pre-tax Amounts Income Taxes Net of Tax Pre-tax Amounts Income Taxes Net of Tax Securities available for sale: Change in fair value of available for sale debt securities ($ 61,931 ) ($ 14,864 ) ($ 47,067 ) ($ 4,127 ) ($ 990 ) ($ 3,137 ) Cash flow hedges: Change in fair value of cash flow hedges ( 10,250 ) ( 2,460 ) ( 7,790 ) ( 288 ) ( 69 ) ( 219 ) Net cash flow hedge losses (gains) reclassified into earnings (1) 1,075 258 817 ( 243 ) ( 59 ) ( 184 ) Net change in fair value of cash flow hedges ( 9,175 ) ( 2,202 ) ( 6,973 ) ( 531 ) ( 128 ) ( 403 ) Defined benefit plan obligations: Amortization of net actuarial losses (2) 428 102 326 711 171 540 Total other comprehensive loss ($ 70,678 ) ($ 16,964 ) ($ 53,714 ) ($ 3,947 ) ($ 947 ) ($ 3,000 ) (1) The pre-tax amounts are included in interest and fees on loans and FHLB interest expense in the Unaudited Consolidated Statements of Income. (2) The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income. -38- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Nine months ended September 30, 2022 2021 (Dollars in thousands) Pre-tax Amounts Income Taxes Net of Tax Pre-tax Amounts Income Taxes Net of Tax Securities available for sale: Change in fair value of available for sale debt securities ($ 174,302 ) ($ 41,833 ) ($ 132,469 ) ($ 16,212 ) ($ 3,890 ) ($ 12,322 ) Cash flow hedges: Change in fair value of cash flow hedges ( 27,394 ) ( 6,574 ) ( 20,820 ) ( 21 ) ( 5 ) ( 16 ) Net cash flow hedge losses (gains) reclassified into earnings (1) 709 170 539 ( 27 ) ( 7 ) ( 20 ) Net change in fair value of cash flow hedges ( 26,685 ) ( 6,404 ) ( 20,281 ) ( 48 ) ( 12 ) ( 36 ) Defined benefit plan obligations: Amortization of net actuarial losses (2) 1,284 308 976 2,133 512 1,621 Total other comprehensive loss ($ 199,703 ) ($ 47,929 ) ($ 151,774 ) ($ 14,127 ) ($ 3,390 ) ($ 10,737 ) (1) The pre-tax amounts are included in interest and fees on loans and FHLB interest expense in the Unaudited Consolidated Statements of Income. (2) The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income. The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax: (Dollars in thousands) Net Unrealized Losses on Available For Sale Debt Securities Net Unrealized Losses on Cash Flow Hedges Net Unrealized Losses on Defined Benefit Plan Obligations Total For the three months ended September 30, 2022 Balance at June 30, 2022 ($ 92,197 ) ($ 17,321 ) ($ 8,523 ) ($ 118,041 ) Other comprehensive loss before reclassifications ( 47,067 ) ( 7,790 ) — ( 54,857 ) Amounts reclassified from accumulated other comprehensive loss — 817 326 1,143 Net other comprehensive (loss) income ( 47,067 ) ( 6,973 ) 326 ( 53,714 ) Balance at September 30, 2022 ($ 139,264 ) ($ 24,294 ) ($ 8,197 ) ($ 171,755 ) (Dollars in thousands) Net Unrealized Losses on Available For Sale Debt Securities Net Unrealized Losses on Cash Flow Hedges Net Unrealized Losses on Defined Benefit Plan Obligations Total For the nine months ended September 30, 2022 Balance at December 31, 2021 ($ 6,795 ) ($ 4,013 ) ($ 9,173 ) ($ 19,981 ) Other comprehensive loss before reclassifications ( 132,469 ) ( 20,820 ) — ( 153,289 ) Amounts reclassified from accumulated other comprehensive loss — 539 976 1,515 Net other comprehensive (loss) income ( 132,469 ) ( 20,281 ) 976 ( 151,774 ) Balance at September 30, 2022 ($ 139,264 ) ($ 24,294 ) ($ 8,197 ) ($ 171,755 ) -39- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (Dollars in thousands) Net Unrealized Gains (Losses) on Available For Sale Debt Securities Net Unrealized Losses on Cash Flow Hedges Net Unrealized Losses on Defined Benefit Plan Obligations Total For the three months ended September 30, 2021 Balance at June 30, 2021 $ 696 ($ 1,080 ) ($ 14,744 ) ($ 15,128 ) Other comprehensive income before reclassifications ( 3,137 ) ( 219 ) — ( 3,356 ) Amounts reclassified from accumulated other comprehensive income (loss) — ( 184 ) 540 356 Net other comprehensive income ( 3,137 ) ( 403 ) 540 ( 3,000 ) Balance at September 30, 2021 ($ 2,441 ) ($ 1,483 ) ($ 14,204 ) ($ 18,128 ) (Dollars in thousands) Net Unrealized Gains (Losses) on Available For Sale Debt Securities Net Unrealized Losses on Cash Flow Hedges Net Unrealized Losses on Defined Benefit Plan Obligations Total For the nine months ended September 30, 2021 Balance at December 31, 2020 $ 9,881 ($ 1,447 ) ($ 15,825 ) ($ 7,391 ) Other comprehensive income (loss) before reclassifications ( 12,322 ) ( 16 ) — ( 12,338 ) Amounts reclassified from accumulated other comprehensive income (loss) — ( 20 ) 1,621 1,601 Net other comprehensive (loss) income ( 12,322 ) ( 36 ) 1,621 ( 10,737 ) Balance at September 30, 2021 ($ 2,441 ) ($ 1,483 ) ($ 14,204 ) ($ 18,128 ) Note 16 - Earnings per Common Share The following table presents the calculation of earnings per common share: (Dollars and shares in thousands, except per share amounts) Three Months Nine Months Periods ended September 30, 2022 2021 2022 2021 Earnings for basic and diluted earnings per common share: Net income $ 18,668 $ 18,751 $ 55,108 $ 56,682 Less: dividends and undistributed earnings allocated to participating securities ( 53 ) ( 55 ) ( 164 ) ( 163 ) Net income available to common shareholders $ 18,615 $ 18,696 $ 54,944 $ 56,519 Shares: Weighted average common shares 17,174 17,320 17,269 17,303 Dilutive effect of common stock equivalents 124 124 120 148 Weighted average diluted common shares 17,298 17,444 17,389 17,451 Earnings per common share: Basic earnings per common share $ 1.08 $ 1.08 $ 3.18 $ 3.27 Diluted earnings per common share $ 1.08 $ 1.07 $ 3.16 $ 3.24 Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 137,886 and 140,777 , respectively, for the three and nine months ended September 30, 2022, compared to 148,542 and 149,675 , respectively, for the same periods in 2021. -40- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 17 - Commitments and Contingencies Financial Instruments with Off-Balance Sheet Risk The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Unaudited Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. Financial Instruments Whose Contract Amounts Represent Credit Risk (Unfunded Commitments) Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements. Each borrower’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the borrower. Standby Letters of Credit Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support the financing needs of the Bank’s commercial customers. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The collateral supporting those commitments is essentially the same as for other commitments. Most standby letters of credit extend for one year. The maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered, totaled $ 9.9 million and $ 11.8 million, respectively, as of September 30, 2022 and December 31, 2021. At September 30, 2022 and December 31, 2021, there were no liabilities to beneficiaries resulting from standby letters of credit. Fee income on standby letters of credit was insignificant for the three and nine months ended September 30, 2022 and 2021. A substantial portion of the standby letters of credit were supported by pledged collateral. The collateral obtained is determined based on management’s credit evaluation of the customer. Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required. Financial Instruments Whose Notional Amounts Exceed the Amount of Credit Risk Mortgage Loan Commitments Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with these rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Both interest rate lock commitments and forward sale commitments are derivative financial instruments. Loan Related Derivative Contracts The Corporation’s credit policies with respect to interest rate contracts with commercial borrowers are similar to those used for loans. The interest rate contracts with other counterparties are generally subject to bilateral collateralization terms. -41- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the contractual and notional amounts of financial instruments with off-balance sheet risk: (Dollars in thousands) Sep 30, 2022 Dec 31, 2021 Financial instruments whose contract amounts represent credit risk (unfunded commitments): Commitments to extend credit: Commercial loans $ 678,907 $ 516,344 Home equity lines 418,413 367,784 Other loans 144,584 122,492 Standby letters of credit 9,898 11,844 Financial instruments whose notional amounts exceed the amounts of credit risk: Mortgage loan commitments: Interest rate lock commitments 27,370 49,800 Forward sale commitments 64,148 103,626 Loan related derivative contracts: Interest rate contracts with customers 962,381 1,022,388 Mirror contracts with counterparties 962,381 1,022,388 Risk participation-in agreements 176,992 163,207 Interest rate risk management contracts: Interest rate swaps 320,000 320,000 See Note 9 for additional disclosure pertaining to derivative financial instruments. ACL on Unfunded Commitments The ACL on unfunded commitments is management’s estimate of expected credit losses over the expected contractual term (or life) in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. Unfunded commitments for home equity lines of credit and commercial demand loans are considered unconditionally cancellable for regulatory capital purposes and, therefore, are excluded from the calculation to estimate the ACL on unfunded commitments. For each portfolio, estimated loss rates and funding factors are applied to the corresponding balance of unfunded commitments. For each portfolio, the estimated loss rates applied to unfunded commitments are the same quantitative and qualitative loss rates applied to the corresponding on-balance sheet amounts in determining the ACL on loans. The estimated funding factor applied to unfunded commitments represents the likelihood that the funding will occur and is based upon the Corporation’s average historical utilization rate for each portfolio. The ACL on unfunded commitments is included in other liabilities in the Unaudited Consolidated Balance Sheets. The ACL on unfunded commitments is adjusted through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income. The activity in the ACL on unfunded commitments for the three months ended September 30, 2022 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 1,279 $ 834 $ 2,113 $ 58 $ — $ 19 $ 19 $ 2,190 Provision 185 25 210 ( 8 ) — ( 2 ) ( 2 ) 200 Ending Balance $ 1,464 $ 859 $ 2,323 $ 50 $ — $ 17 $ 17 $ 2,390 -42- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The activity in the ACL on unfunded commitments for the nine months ended September 30, 2022 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 1,267 $ 816 $ 2,083 $ 62 $ — $ 16 $ 16 $ 2,161 Provision 197 43 240 ( 12 ) — 1 1 229 Ending Balance $ 1,464 $ 859 $ 2,323 $ 50 $ — $ 17 $ 17 $ 2,390 The activity in the ACL on unfunded commitments for the three months ended September 30, 2021 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 1,214 $ 1,045 $ 2,259 $ 56 $ — $ 18 $ 18 $ 2,333 Provision 4 ( 8 ) ( 4 ) 4 — — — — Ending Balance $ 1,218 $ 1,037 $ 2,255 $ 60 $ — $ 18 $ 18 $ 2,333 The activity in the ACL on unfunded commitments for the nine months ended September 30, 2021 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 907 $ 1,402 $ 2,309 $ 54 $ — $ 19 $ 19 $ 2,382 Provision 311 ( 365 ) ( 54 ) 6 — ( 1 ) ( 1 ) ( 49 ) Ending Balance $ 1,218 $ 1,037 $ 2,255 $ 60 $ — $ 18 $ 18 $ 2,333 Other Contingencies Litigation The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated balance sheets or statements of income of the Corporation. -43- Management's Discussion and Analysis