WASHINGTON TRUST BANCORP INC 10-K

ITEM 8. Financial Statements and Supplementary Data. Description Page Management’s Annual Report on Internal Control Over Financial Reporting 66 Reports of Independent Registered Public Accounting Firm (PCAOB ID: 173 ) 67 Consolidated Balance Sheets at December 31, 2022 and 2021 70 Consolidated Statements of Income f or the Years Ended December 31, 2022, 2021 and 2020 71 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2022, 2021 and 2020 72 Consolidated Statements of Changes in Shareholders’ Equity f or the Years Ended December 31, 2022, 2021 and 2020 73 Consolidated Statements of Cash Flows f or the Years Ended December 31, 2022, 2021 and 2020 74 Notes to Consolidated Financial Statements: 76 Note 1 - Summary of Significant Accounting Policies 76 Note 2 - Recently Issued Accounting Pronouncements 86 Note 3 - Securities 87 Note 4 - Loans 90 Note 5 - Allowance for Credit Losses on Loans 99 Note 6 - Premises and Equipment 100 Note 7 - Leases 100 Note 8 - Goodwill and Intangible Assets 101 Note 9 - Derivative Financial Instruments 102 Note 10 - Fair Value Measurements 104 Note 11 - Income Taxes 108 Note 1 2 - Deposits 110 Note 1 3 - Borrowings 110 Note 1 4 - Shareholders’ Equity 112 Note 15 - Revenue from Contracts with Customers 114 Note 16 - Employee Benefits 115 Note 17 - Share-Based Compensation Arrangements 119 Note 18 - Business Segments 122 Note 19 - Other Comprehensive Income (Loss) 124 Note 20 - Earnings Per Common Share 126 Note 21 - Commitments and Contingencies 127 Note 22 - Parent Company Financial Statements 129 -65- Management’s Annual Report on Internal Control Over Financial Reporting The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation’s internal control over financial reporting is a process designed under the supervision of the Corporation’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Corporation’s Consolidated Financial Statements for external reporting purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. As of December 31, 2022, management assessed the effectiveness of the Corporation’s internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013) issued by COSO. Based on this assessment, management concluded that the Corporation’s internal control over financial reporting as of December 31, 2022 was effective. The Corporation’s internal control over financial reporting as of December 31, 2022 has been audited by Crowe LLP, an independent registered public accounting firm, as stated in their report, which follows. This report expresses an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2022. /s/ Edward O. Handy III /s/ Ronald S. Ohsberg Edward O. Handy III Chairman and Chief Executive Officer Ronald S. Ohsberg Senior Executive Vice President, Chief Financial Officer and Treasurer February 23, 2023 -66- Report of Independent Registered Public Accounting Firm Shareholders and the Board of Directors Washington Trust Bancorp, Inc. Westerly, Rhode Island Opinion on Internal Control over Financial Reporting We have audited Washington Trust Bancorp, Inc. and Subsidiaries’ (the “Corporation”) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Corporation as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”) and our report dated February 23, 2023 expressed an unqualified opinion. Basis for Opinion The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A corporation’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate . /s/ Crowe LLP Grand Rapids, Michigan February 23, 2023 -67- Report of Independent Registered Public Accounting Firm Shareholders and the Board of Directors Washington Trust Bancorp, Inc. Westerly, Rhode Island Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Washington Trust Bancorp, Inc. and Subsidiaries (the “Corporation”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Corporation’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 23, 2023 expressed an unqualified opinion. Basis for Opinion These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the Corporation’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Audit Committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses – Qualitative Factors on Total Commercial Loans As described in Note 1 to the consolidated financial statements, the Corporation accounts for credit losses under ASC 326, Financial Instruments – Credit Losses. ASC 326 requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost at the reporting date. As of December 31, 2022, the balance of the allowance for credit losses on loans (“ACL”) was $38.0 million. Management employs a process and methodology to estimate the ACL that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors involves pooling loans into portfolio segments for loans that share similar risk characteristics. Pooled loan portfolio segments include commercial real estate, commercial and industrial, residential real estate, home equity and other consumer loans. For pooled loans, the Corporation utilizes a discounted cash flow (“DCF”) methodology to estimate credit losses over the expected life of the loan. The DCF methodology combines the probability of default, the loss given default, remaining life of the loan and prepayment speed assumptions to estimate a reserve for each loan. The loss rates are adjusted by current and forecasted econometric assumptions and return to the mean after the forecasted periods. These quantitative loss factors are -68- Report of Independent Registered Public Accounting Firm also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. Qualitative loss factors are applied to each portfolio segment with the amounts determined by historical loan charge-offs of a peer group of similar-sized regional banks. Changes in these assumptions could have a material effect on the Corporation’s financial conditions or results of operations. We identified auditing the qualitative component of the ACL on pooled loans in the commercial real estate and commercial and industrial portfolios (total commercial loans) as a critical audit matter because the methodology to determine the estimate of credit losses uses subjective judgments by management and is subject to material variability. Performing audit procedures to evaluate the qualitative factors on the commercial loans involved a high degree of auditor judgment and required significant effort, including the need to involve more experienced audit personnel. The primary procedures we performed to address this critical audit matter included: • Testing the effectiveness of controls over the evaluation of the ACL on pooled loans, including controls addressing: ◦ Methodology and accounting policies. ◦ Data inputs, judgments and calculations used to determine the qualitative loss factors. ◦ Information technology general controls and application controls. ◦ Management’s review of the qualitative factors. • Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the ACL on commercial loans collectively evaluated for impairment, which included: ◦ Evaluation of the appropriateness of the Corporation’s accounting policies and assumptions involved in the application of ASC 326. ◦ Testing the mathematical accuracy of the calculation. ◦ Testing the completeness and accuracy of data used in the calculation. ◦ Evaluation of the reasonableness of management’s judgments related to qualitative factors to determine if they are calculated to conform with management’s policies and were consistently applied period over period. Our evaluation considered the weight of evidence from internal and external sources and loan portfolio composition and performance. /s/ Crowe LLP We have served as the Corporation’s auditor since 2019. Grand Rapids, Michigan February 23, 2023 -69- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands, except par value) December 31, 2022 2021 Assets: Cash and due from banks $ 115,492 $ 175,259 Short-term investments 2,930 3,234 Mortgage loans held for sale, at fair value 8,987 40,196 Available for sale debt securities, at fair value (amortized cost $ 1,166,340 ; net of allowance for credit losses on securities of $ 0 at December 31, 2022; and amortized cost of $ 1,051,800 ; net of allowance for credit losses on securities of $ 0 at December 31, 2021) 993,928 1,042,859 Federal Home Loan Bank stock, at cost 43,463 13,031 Loans: Total loans 5,110,139 4,272,925 Less: allowance for credit losses on loans 38,027 39,088 Net loans 5,072,112 4,233,837 Premises and equipment, net 31,550 28,908 Operating lease right-of-use assets 27,156 26,692 Investment in bank-owned life insurance 102,182 92,592 Goodwill 63,909 63,909 Identifiable intangible assets, net 4,554 5,414 Other assets 193,788 125,196 Total assets $ 6,660,051 $ 5,851,127 Liabilities: Deposits: Noninterest-bearing deposits $ 858,953 $ 945,229 Interest-bearing deposits 4,160,009 4,034,822 Total deposits 5,018,962 4,980,051 Federal Home Loan Bank advances 980,000 145,000 Junior subordinated debentures 22,681 22,681 Operating lease liabilities 29,558 29,010 Other liabilities 155,181 109,577 Total liabilities 6,206,382 5,286,319 Commitments and contingencies (Note 21) Shareholders’ Equity: Common stock of $ .0625 par value; authorized 60,000,000 shares; 17,363,457 shares issued and 17,182,753 shares outstanding at December 31, 2022 and 17,363,457 shares issued and 17,330,818 shares outstanding at December 31, 2021 1,085 1,085 Paid-in capital 127,056 126,511 Retained earnings 492,043 458,310 Accumulated other comprehensive loss ( 157,800 ) ( 19,981 ) Treasury stock, at cost; 180,704 shares at December 31, 2022 and 32,639 shares at December 31, 2021 ( 8,715 ) ( 1,117 ) Total shareholders’ equity 453,669 564,808 Total liabilities and shareholders’ equity $ 6,660,051 $ 5,851,127 The accompanying notes are an integral part of these consolidated financial statements. -70- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Income (Dollars and shares in thousands, except per share amounts) Years ended December 31, 2022 2021 2020 Interest income: Interest and fees on loans $ 169,301 $ 141,552 $ 145,425 Interest on mortgage loans held for sale 1,165 1,531 1,762 Taxable interest on debt securities 21,827 14,295 20,050 Dividends on Federal Home Loan Bank stock 548 436 2,240 Other interest income 1,624 181 459 Total interest and dividend income 194,465 157,995 169,936 Interest expense: Deposits 26,023 12,390 25,812 Federal Home Loan Bank advances 11,713 3,800 15,806 Junior subordinated debentures 739 370 641 Other interest expense — — 233 Total interest expense 38,475 16,560 42,492 Net interest income 155,990 141,435 127,444 Provision for credit losses ( 1,300 ) ( 4,822 ) 12,342 Net interest income after provision for credit losses 157,290 146,257 115,102 Noninterest income: Wealth management revenues 38,746 41,282 35,454 Mortgage banking revenues 8,733 28,626 47,377 Card interchange fees 4,996 4,996 4,287 Service charges on deposit accounts 3,192 2,683 2,742 Loan related derivative income 2,756 4,342 3,991 Income from bank-owned life insurance 2,591 2,925 2,491 Other income 1,588 2,540 3,100 Total noninterest income 62,602 87,394 99,442 Noninterest expense: Salaries and employee benefits 83,804 87,295 82,899 Outsourced services 13,737 13,296 11,894 Net occupancy 9,126 8,449 8,023 Equipment 3,797 3,905 3,831 Legal, audit and professional fees 3,127 2,859 3,747 FDIC deposit insurance costs 1,687 1,592 1,818 Advertising and promotion 2,587 1,843 1,469 Amortization of intangibles 860 890 914 Debt prepayment penalties — 6,930 1,413 Other expenses 9,997 8,405 9,376 Total noninterest expense 128,722 135,464 125,384 Income before income taxes 91,170 98,187 89,160 Income tax expense 19,489 21,317 19,331 Net income $ 71,681 $ 76,870 $ 69,829 Net income available to common shareholders $ 71,479 $ 76,648 $ 69,678 Weighted average common shares outstanding - basic 17,246 17,310 17,282 Weighted average common shares outstanding - diluted 17,381 17,455 17,402 Per share information: Basic earnings per common share $ 4.14 $ 4.43 $ 4.03 Diluted earnings per common share $ 4.11 $ 4.39 $ 4.00 The accompanying notes are an integral part of these consolidated financial statements. -71- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (Dollars in thousands) Years ended December 31, 2022 2021 2020 Net income $ 71,681 $ 76,870 $ 69,829 Other comprehensive (loss) income, net of tax: Net change in fair value of available for sale debt securities ( 124,238 ) ( 16,676 ) 6,655 Net change in fair value of cash flow hedges ( 18,632 ) ( 2,566 ) ( 654 ) Net change in defined benefit plan obligations 5,051 6,652 ( 2,155 ) Total other comprehensive (loss) income, net of tax ( 137,819 ) ( 12,590 ) 3,846 Total comprehensive (loss) income ($ 66,138 ) $ 64,280 $ 73,675 The accompanying notes are an integral part of these consolidated financial statements. -72- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (Dollars and shares in thousands) Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Treasury Stock Total Balance at December 31, 2019 17,363 $ 1,085 $ 123,281 $ 390,363 ($ 11,237 ) $ — $ 503,492 Cumulative effect of change in accounting principle - ASC 326 — — — ( 6,108 ) — — ( 6,108 ) Net income — — — 69,829 — — 69,829 Total other comprehensive income, net of tax — — — — 3,846 — 3,846 Cash dividends declared ($ 2.05 per share) — — — ( 35,838 ) — — ( 35,838 ) Share-based compensation — — 3,766 — — — 3,766 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 27 — ( 1,437 ) — — 967 ( 470 ) Treasury stock purchased under the 2019 Repurchase Program ( 125 ) — — — — ( 4,322 ) ( 4,322 ) Balance at December 31, 2020 17,265 $ 1,085 $ 125,610 $ 418,246 ($ 7,391 ) ($ 3,355 ) $ 534,195 Net income — — — 76,870 — — 76,870 Total other comprehensive loss, net of tax — — — — ( 12,590 ) — ( 12,590 ) Cash dividends declared ($ 2.10 per share) — — — ( 36,806 ) — — ( 36,806 ) Share-based compensation — — 3,316 — — — 3,316 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 66 — ( 2,415 ) — — 2,238 ( 177 ) Balance at December 31, 2021 17,331 $ 1,085 $ 126,511 $ 458,310 ($ 19,981 ) ($ 1,117 ) $ 564,808 Net income — — — 71,681 — — 71,681 Total other comprehensive loss, net of tax — — — — ( 137,819 ) — ( 137,819 ) Cash dividends declared ($ 2.18 per share) — — — ( 37,948 ) — — ( 37,948 ) Share-based compensation — — 3,247 — — — 3,247 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 46 — ( 2,702 ) — — 1,881 ( 821 ) Treasury stock purchased under the 2021 Stock Repurchase Program ( 194 ) — — — — ( 9,479 ) ( 9,479 ) Balance at December 31, 2022 17,183 $ 1,085 $ 127,056 $ 492,043 ($ 157,800 ) ($ 8,715 ) $ 453,669 The accompanying notes are an integral part of these consolidated financial statements. -73- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands) Years ended December 31, 2022 2021 2020 Cash flows from operating activities: Net income $ 71,681 $ 76,870 $ 69,829 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses ( 1,300 ) ( 4,822 ) 12,342 Depreciation of premises and equipment 3,465 3,411 3,176 Net amortization of premiums and discounts on securities and loans 2,893 3,446 5,720 Amortization of intangibles 860 890 914 Share–based compensation 3,247 3,316 3,766 Tax benefit (expense) from stock option exercises and other equity awards 78 182 ( 103 ) Deferred income tax expense (benefit) 1,160 2,155 ( 3,130 ) Income from bank-owned life insurance ( 2,591 ) ( 2,925 ) ( 2,491 ) Net gains on loan sales, including changes in fair value ( 6,730 ) ( 28,195 ) ( 48,005 ) Proceeds from sales of loans, net 309,749 934,516 1,117,188 Loans originated for sale ( 272,855 ) ( 887,341 ) ( 1,114,448 ) (Increase) decrease in operating lease right-of-use assets ( 464 ) 2,829 ( 2,729 ) Increase (decrease) in operating lease liabilities 547 ( 2,708 ) 2,856 (Increase) decrease in other assets ( 30,804 ) 38,935 ( 57,730 ) Increase (decrease) in other liabilities 34,070 ( 39,747 ) 49,323 Net cash provided by operating activities 113,006 100,812 36,478 Cash flows from investing activities: Purchases of: Available for sale debt securities: Mortgage-backed ( 223,380 ) ( 347,913 ) ( 369,166 ) Available for sale debt securities: Other ( 10,747 ) ( 251,443 ) ( 149,899 ) Maturities, calls and principal payments of: Available for sale debt securities: Mortgage-backed 116,116 337,751 351,161 Available for sale debt securities: Other — 82,800 176,000 Net (purchases) redemptions of Federal Home Loan Bank stock ( 30,432 ) 17,254 20,568 Purchases of other equity investments, net ( 375 ) ( 650 ) — Net increase in loans ( 832,450 ) ( 27,921 ) ( 241,418 ) Purchases of loans ( 2,773 ) ( 41,863 ) ( 51,659 ) Proceeds from the sale of property acquired through foreclosure or repossession — — 1,392 Purchases of premises and equipment ( 6,139 ) ( 3,490 ) ( 3,406 ) Purchases of bank-owned life insurance ( 7,000 ) ( 7,000 ) — Proceeds from surrender of bank-owned life insurance — 1,526 787 Proceeds from sale of equity investments in real estate limited partnerships — 50 1,400 Equity investments in real estate limited partnerships ( 1,861 ) — — Net cash used in investing activities ( 999,041 ) ( 240,899 ) ( 264,240 ) The accompanying notes are an integral part of these consolidated financial statements. -74- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows – (continued) (Dollars in thousands) Years ended December 31, 2022 2021 2020 Cash flows from financing activities: Net increase in deposits 38,911 601,698 879,471 Proceeds from Federal Home Loan Bank advances 3,156,112 1,294,176 1,988,500 Repayment of Federal Home Loan Bank advances ( 2,321,112 ) ( 1,743,036 ) ( 2,536,105 ) Proceeds from Payment Protection Program Lending Facility — — 200,628 Repayment of Payment Protection Program Lending Facility — — ( 200,628 ) Treasury stock purchased ( 9,479 ) — ( 4,322 ) Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered ( 821 ) ( 177 ) ( 470 ) Cash dividends paid ( 37,647 ) ( 36,349 ) ( 35,499 ) Net cash provided by financing activities 825,964 116,312 291,575 Net (decrease) increase in cash and cash equivalents ( 60,071 ) ( 23,775 ) 63,813 Cash and cash equivalents at beginning of year 178,493 202,268 138,455 Cash and cash equivalents at end of year $ 118,422 $ 178,493 $ 202,268 Noncash Activities: Loans charged-off $ 184 $ 663 $ 1,317 Loans transferred to property acquired through foreclosure or repossession — — 313 Commitment for equity investments in real estate limited partnerships 8,360 — — Supplemental Disclosures: Interest payments $ 32,096 $ 18,313 $ 45,294 Income tax payments 17,706 19,641 21,094 The accompanying notes are an integral part of these consolidated financial statements. -75- Notes to Consolidated Financial Statements Note 1 - Summary of Significant Accounting Policies Nature of Operations The Bancorp is a publicly-owned registered bank holding company that has elected to be a financial holding company. The Bancorp’s principal subsidiary is the Bank, a Rhode Island chartered financial institution founded in 1800. The Bank is the oldest community bank in the nation and the largest state-chartered bank headquartered in Rhode Island. Washington Trust offers a full range of financial services, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management and trust services through its offices in Rhode Island, Massachusetts and Connecticut. Basis of Presentation The accounting and reporting policies of Washington Trust conform to GAAP and to general practices of the banking industry. The consolidated financial statements include the accounts of the Bancorp and its wholly-owned subsidiaries, except subsidiaries that are not deemed necessary to be consolidated. Intercompany balances and transactions have been eliminated in consolidation. The Bancorp owns the common stock of two capital trusts, which have issued trust preferred securities. These capital trusts are variable interest entities in which the Bancorp is not the primary beneficiary and, therefore, are not consolidated. The capital trust’s only assets are junior subordinated debentures issued by the Bancorp, which were acquired by the capital trusts using the proceeds from the issuance of the trust preferred securities and common stock. The Bancorp’s equity interest in the capital trusts, which is classified in other assets, and the junior subordinated debentures are included in the Consolidated Balance Sheets. Interest expense on the junior subordinated debentures is included in the Consolidated Statements of Income. Reclassification Certain previously reported amounts have been reclassified to conform to the current year’s presentation. Use of Estimates In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Management considers the ACL on loans to be a material estimate that is particularly susceptible to change. Cash and Cash Equivalents Cash and cash equivalents, as referenced in the accompanying Consolidated Statements of Cash Flows, consists of cash and due from banks and short-term investments. Cash and due from Banks Cash and due from banks includes cash on hand, cash items in process of collection, cash on deposit at the FRBB and other correspondent banks, as well as cash pledged to derivative counterparties. Cash on deposit includes interest-bearing deposits held at correspondent banks of $ 65.8 million and $ 128.3 million, respectively, at December 31, 2022 and 2021. Cash collateral pledged to derivative counterparties represents restricted cash balances. See Note 9 for additional disclosure regarding cash collateral pledged to derivative counterparties. Short-term Investments Short-term investments consist of highly liquid investments with a maturity date of three months or less when purchased and are considered to be cash equivalents. The Corporation’s short-term investments may be composed of overnight federal funds sold, securities purchased under resale agreements, money market mutual funds and U.S. Treasury bills. Securities Management determines the appropriate classification of securities at the time of purchase. Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. Securities not classified as held to maturity are classified as available for sale. Securities available for sale -76- Notes to Consolidated Financial Statements – (continued) consist of debt securities that are available for sale to respond to changes in market interest rates, liquidity needs, changes in funding sources and other similar factors. These assets are specifically identified and are carried at fair value. Changes in fair value of available for sale securities, net of applicable income taxes, are reported as a separate component of shareholders’ equity. Washington Trust does not currently have securities designated as held to maturity and also does not maintain a trading portfolio. Premiums and discounts are amortized and accreted over the term of the securities on a method that approximates the level yield method. The amortization and accretion is included in interest income on securities. Interest income is recognized when earned. Realized gains or losses from sales of securities are recorded on the trade date and are determined using the specific identification method. The fair values of securities may be based on either quoted market prices or third-party pricing services. The Corporation excludes accrued interest from the amortized cost basis of debt securities and reports accrued interest in other assets in the Consolidated Balance Sheets. The Corporation also excludes accrued interest from the estimate of credit losses on debt securities. 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 as of December 31, 2022 and 2021 and, therefore there was no accrued interest related to debt securities reversed against interest income for 2022 and 2021. Allowance for Credit Losses on Securities For available for sale debt securities in an unrealized loss position, management first assesses whether the Corporation intends to sell, or if it is likely that the Corporation will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit losses charge to earnings. For debt securities available for sale that do not meet either of these criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers both quantitative and qualitative factors. A substantial portion of available for sale debt securities held by the Corporation are obligations issued by U.S. government agency and U.S. government-sponsored enterprises, including mortgage-backed securities. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies and have a long history of no credit losses. For these securities, management takes into consideration the long history of no credit losses and other factors to assess the risk of nonpayment even if the U.S. government were to default. As such, the Corporation utilized a zero credit loss estimate for these securities. For available for sale debt securities that are not guaranteed by U.S. government agencies and U.S. government-sponsored enterprises, such as individual name issuer trust preferred debt securities and corporate bonds, management utilizes a third-party credit modeling tool based on observable market data, which assists management in identifying any potential credit risk associated with these available for sale debt securities. This model estimates probability of default, loss given default and exposure at default for each security. In addition, qualitative factors are also considered, including the extent to which fair value is less than amortized cost, changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If a credit loss exists based on the results of this assessment, an ACL (contra asset) is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is considered market-related and is recognized in other comprehensive income, net of taxes. Changes in the ACL on available for sale debt securities are recorded as provision for credit losses. Losses are charged against the ACL when management believes the uncollectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Federal Home Loan Bank Stock The Bank is a member of the FHLB. The FHLB is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of -77- Notes to Consolidated Financial Statements – (continued) FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. No market exists for shares of FHLB stock and therefore, it is carried at cost. FHLB stock may be redeemed at par value five years following termination of FHLB membership, subject to limitations which may be imposed by the FHLB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLB. While the Bank currently has no intentions to terminate its FHLB membership, the ability to redeem its investment in FHLB stock would be subject to the conditions imposed by the FHLB. The Bank monitors its investment to determine if impairment exists. Based on the capital adequacy and the liquidity position of the FHLB, management believes there is no impairment related to the carrying amount of FHLB stock included in the Consolidated Balance Sheet as of December 31, 2022. Mortgage Banking Activities Mortgage Loans Held for Sale Residential real estate mortgage loans originated and intended for sale in the secondary market are classified as held for sale. ASC 825, “Financial Instruments” allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis that may otherwise not be required to be measured at fair value under other accounting standards. The Corporation has elected the fair value option for mortgage loans held for sale in order to better match changes in fair values of the loans with changes in the fair value of the derivative forward sale commitment contracts used to economically hedge them. Changes in the fair value of mortgage loans held for sale accounted for under the fair value option are included in mortgage banking revenues. Gains and losses on residential loan sales are recognized at the time of sale and are included in mortgage banking revenues. Upfront fees and costs related to mortgage loans held for sale for which the fair value option was elected are recognized in mortgage banking revenues as received / incurred and are not deferred. Commissions received on mortgage loans brokered to various investors are recognized when received and included in mortgage banking revenues. Loan Servicing Rights When residential real estate mortgage loans held for sale are sold with servicing retained, mortgage servicing right assets are recognized as separate assets. Mortgage servicing rights are originally recorded at fair value. Fair value is based on a valuation model that incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, ancillary income, prepayment speeds, and default rates and losses. Mortgage servicing rights are included in other assets and are amortized as an offset to mortgage banking revenues over the period of estimated net servicing income. Mortgage servicing rights are periodically evaluated for impairment based on their fair value. Impairment is measured on an aggregated basis by stratifying the rights based on homogeneous characteristics such as note rate and loan type. The fair value is estimated based on the present value of expected cash flows, incorporating assumptions for discount rate, prepayment speed and servicing cost. Any impairment is recognized through a valuation allowance and as a reduction to mortgage banking revenues. Loans Portfolio Loans Loans are carried at the principal amount outstanding, adjusted by partial charge-offs and net of unamortized deferred loan origination fees and costs. Interest income is accrued on a level yield basis based upon principal amounts outstanding, except for loans on nonaccrual status. Deferred loan origination fees and costs are amortized as an adjustment to yield over the term of the related loans. For purchased loans, which did not show signs of credit deterioration at the time of purchase, interest income is also accrued on a level yield basis based upon principal amounts outstanding and is then further adjusted by accretion of any discount or amortization of any premium associated with the loans. 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 -78- Notes to Consolidated Financial Statements – (continued) 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. Troubled Debt Restructured Loans A loan that has been modified or renewed is considered to be a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or a transaction with similar credit risk characteristics. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring of a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection. 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 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” made qualified as eligible loans modifications and were not classified as TDRs. All of these loans with qualified deferments exited their payment deferral period prior to March 31, 2022. Individually Analyzed Loans Individually analyzed loans are individually assessed for credit impairment and include nonaccrual commercial loans, reasonably expected TDRs, executed TDRs, and certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans. A TDR is considered reasonably expected to occur 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. Allowance for Credit Losses on Loans The ACL on loans is established through a provision for credit losses recognized in the Consolidated Statements of Income. The ACL on loans is also increased by recoveries of amounts previously charged-off and is reduced by charge-offs on loans. Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely. Full or partial charge-offs on collateral dependent individually analyzed loans are generally recognized when the collateral is deemed to be insufficient to support the carrying value of the loan. The ACL on loans is management’s estimate of expected lifetime credit losses on loans carried at amortized cost. The Corporation made an accounting policy election to exclude accrued interest from the amortized cost basis of loans and reports accrued interest in other assets in the Consolidated Balance Sheets. The Corporation also excludes accrued interest from the estimate of credit losses on 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. Historical credit loss experience provides the basis for the calculation of loss given default and the estimation of expected credit losses. As discussed further below, adjustments to historical information are made for differences in specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, that may not be reflected in historical loss rates. -79- Notes to Consolidated Financial Statements – (continued) Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. In accordance with the Corporation’s ACL policy, the methodology is reviewed no less than annually. The methodology for evaluating quantitative factors consists of two basic components. The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics. Pooled loan portfolio segments include CRE (including a commercial construction sub-segment), C&I (including a PPP sub-segment), residential real estate, home equity and other consumer loans. The second component involves identifying individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments. 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. For loans that are individually analyzed, the ACL is measured using a DCF method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan is collateral dependent, at the fair value of the collateral. Factors management considers when measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due. For collateral dependent loans for which repayment is to be provided substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral dependent loans for which repayment is to be provided substantially through the operation of the collateral, such as accruing TDRs, estimated costs to sell are not incorporated into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the collateral. For pooled loans, the Corporation utilizes a DCF methodology to estimate credit losses over the expected life of the loan. The life of the loan excludes expected extensions, renewals and modifications, unless the extension or renewal options are included in the original or modified contract terms and not unconditionally cancellable by the Corporation. The methodology incorporates a probability of default and loss given default framework. Default triggers include the loan has become past due by 90 or more days, a charge-off has occurred, the loan has been placed on nonaccrual status, the loan has been modified in a TDR or the loan is risk-rated as special mention or classified. Loss given default is estimated based on historical credit loss experience. Probability of default is estimated utilizing 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 December 31, 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 To estimate the probability of default, the model utilizes forecasted econometric factors over a one-year reasonable and supportable forecast period. After the forecast period, the model reverts to the historical mean of the respective econometric factor and the associated probability of default on a straight-line basis over a one-year reversion period. The DCF methodology combines the probability of default, the loss given default, prepayment speeds and the remaining life of the loan to estimate a reserve for each loan. The sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived. Quantitative loss factors are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. These qualitative risk factors include: 1) changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; 2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; 3) changes in the nature and volume of the portfolio and in the terms of loans; 4) changes in the experience, ability, and depth of lending management and other relevant staff; 5) changes in the volume and severity of past due loans, the -80- Notes to Consolidated Financial Statements – (continued) volume of nonaccrual loans, and the volume and severity of adversely classified or rated loans; 6) changes in the quality of the institution’s credit review system; 7) changes in the value of underlying collateral for collateral dependent loans; 8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and 9) the effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. Qualitative loss factors are applied to each portfolio segment with the range of amounts determined by historical loan charge-offs of a peer group of similar-sized regional banks. Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans, conversely improving conditions or assumptions could lead to further reductions in the ACL on loans. In addition, various regulatory agencies periodically review the ACL on loans. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. The ACL on loans is an estimate, and ultimate losses may vary from management’s estimate. Allowance for Credit Losses on Unfunded Commitments The ACL on unfunded commitments is management’s estimate of expected lifetime credit losses over the expected contractual term in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. 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. 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 Consolidated Balance Sheets. The ACL on unfunded commitments is adjusted through a provision for credit losses recognized in the Consolidated Statements of Income. Premises and Equipment Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. Depreciation for financial reporting purposes is calculated on the straight-line method over the estimated useful lives of assets. For leasehold improvements, the estimated useful life is the shorter of the expected lease term or the estimated useful life of the improvement. Expected lease terms include lease renewal options to the extent that the exercise of such renewals is reasonably assured. The estimated useful lives of premises and improvements range from 5 to 40 years. For furniture, fixtures and equipment, the estimated useful lives range from 3 to 20 years. Repairs and maintenance costs are charged to noninterest expense as incurred. Leases The Corporation has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception. Operating leases are recorded on the balance sheet, through the recognition of an operating lease ROU asset and an operating lease liability at the commencement date of the new lease. ROU assets represent a right to use an underlying asset for the contractual lease term. Operating lease liabilities represent an obligation to make lease payments arising from the lease. The Corporation’s leases do not provide an implicit interest rate, therefore the Corporation uses its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine the present value of operating lease liabilities. The Corporation’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Corporation’s lease agreements do not contain any residual value guarantees. Operating leases with terms of 12 months or less are included in ROU assets and operating lease liabilities recorded in the Consolidated Balance Sheets. Operating lease terms include options to extend when it is reasonably certain that the Corporation will exercise such options, determined on a lease-by-lease basis. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease components, such -81- Notes to Consolidated Financial Statements – (continued) as consumer price index adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities. Bank-Owned Life Insurance The investment in BOLI represents the cash surrender value of life insurance policies on the lives of certain employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income taxes. The financial strength of the insurance carrier is reviewed prior to the purchase of BOLI and annually thereafter. Goodwill and Identifiable Intangible Assets Goodwill represents the excess of the purchase price over the net fair value of the acquired businesses. Goodwill is not amortized, but is tested for impairment at the reporting unit level (defined as the segment level), at least annually in the fourth quarter or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that an impairment loss has occurred. In assessing impairment, the Corporation has the option to perform a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of such events or circumstances, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then we would not be required to perform an impairment test. The quantitative impairment analysis requires a comparison of each reporting unit’s fair value to its carrying value to identify potential impairment. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes, but may not be limited to, the selection of appropriate discount rates, the identification of relevant market comparables and the development of cash flow projections. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value. Intangible assets identified in acquisitions consist of advisory contracts. The value attributed to intangible assets was based on the time period over which they are expected to generate economic benefits. Intangible assets are amortized over their estimated lives using a method that approximates the amount of economic benefits that are realized by the Corporation. Intangible assets with definite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. If applicable, the Corporation tests each of the intangibles by comparing the carrying value of the intangible asset to the sum of undiscounted cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its undiscounted cash flows, then an impairment loss would be recognized for the amount by which the carrying amount exceeds its fair value. Impairment would result in a write-down to the estimated fair value based on the anticipated discounted future cash flows. The remaining useful life of the intangible assets that are being amortized is also evaluated to determine whether events and circumstances warrant a revision to the remaining period of amortization. Property Acquired through Foreclosure or Repossession Property acquired through foreclosure or repossession is carried at the lower of cost or fair value less estimated costs to sell. Fair value of such assets is determined based on independent appraisals and other relevant factors. Any write-down to fair value at the time of foreclosure or repossession is charged to the ACL on loans. Subsequent to foreclosure or repossession, a valuation allowance is maintained for declines in market value and for estimated selling expenses. Upon sale of foreclosed property, any excess of the carrying value over the sales proceeds is recognized as a loss on sale. Any excess of sales proceeds over the carrying value of the foreclosed property is first applied as a recovery to the valuation allowance, if any, with the remainder being recognized as a gain on sale. Changes to the valuation allowance, expenses associated with ownership of these properties, and gains and losses from their sale are included in other noninterest expense. Loans that are substantively repossessed include only those loans for which the Corporation has obtained control of the collateral, but has not completed legal foreclosure proceedings. Investments in Real Estate Limited Partnerships The Bank invests in real estate limited partnerships that renovate, own and operate low-income housing complexes. The Bank neither actively participates in the management of nor has a controlling interest in the real estate limited partnerships. The carrying value of such investments is recorded in other assets on the Consolidated Balance Sheets. -82- Notes to Consolidated Financial Statements – (continued) Investments in real estate limited partnerships are accounted for using the proportional amortization method. Unfunded commitments for future capital contributions are recognized and recorded in other liabilities on the Consolidated Balance Sheets. Under the proportional amortization method, the investment is amortized over the same tax period and in proportion to the total tax benefits expected to be allocated to the Bank. The amortization is recognized as a component of income tax expense in the Consolidated Statements of Income. In addition, operating losses and tax credits generated by the partnership are also recorded as a reduction to income tax expense. Other Equity Investments The Corporation invests in equity investments without readily determinable fair value. Such equity investments are classified within other assets in the Consolidated Balance Sheet. The Corporation has elected to carry equity investments without readily determinable fair value at cost, less impairment, if any, plus or minus changes in observable prices. A qualitative impairment analysis for equity investments without readily determinable fair value is performed quarterly. If the equity investment is deemed to be impaired, an impairment loss is recognized in the amount by which the carrying value of the equity investment exceeds its estimated fair value. The impairment loss is recognized as a reduction of other noninterest income in the Consolidated Statement of Income. An impairment loss can be reversed in a subsequent period if there are observable transactions for the identical or similar investment of the same issuer at an amount that is greater than the carrying value of the investment that was established when the impairment loss was recognized. The reversal of any impairment loss or other changes resulting from observable transactions are recognized in other noninterest income in the Consolidated Statement of Income. Impairment of Long - Lived Assets Other than Goodwill Long-lived assets, including premises and equipment, operating lease ROU assets and investments in real estate limited partnerships, are tested for impairment whenever events or changes in business circumstances indicate that the carrying amount may not be fully recoverable. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. An impairment loss is recognized within noninterest expense in the Consolidated Statement of Income. A previously recognized impairment loss cannot be reversed in a subsequent period. Transfers and Servicing of Assets and Extinguishments of Liabilities The accounting for transfers and servicing of financial assets and extinguishments of liabilities is based on consistent application of a financial components approach that focuses on control. This approach distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right to pledge or exchange the transferred assets with no conditions that constrain the transferee and provide more than a trivial benefit to the Corporation, and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with a pledge of collateral. Wealth Management AUA AUA represents assets held in a fiduciary or agency capacity for wealth management clients and are not included in the Consolidated Balance Sheets, as these are not assets of the Corporation. Revenue from Contracts with Customers ASC 606, Revenue from Contracts with Customers, provides a revenue recognition framework for contracts with customers unless those contracts are within the scope of other accounting standards. The Corporation recognizes revenue from contracts with customers by identifying the performance obligations in its contracts, determining the transaction price in the contract, allocating the transaction price to each performance obligation contained within the contract, as applicable, and then recognizing revenue from its contracts with customers when it satisfies its performance obligations . The performance obligations are generally satisfied as services are rendered and can either be satisfied at a point in time or over time. Revenue that is earned at a point in time 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. This includes card interchange fees (fee income related to debit card transactions), certain service charges on deposits accounts such as overdraft -83- Notes to Consolidated Financial Statements – (continued) charges, ATM fees for customers, stop-payment fees, and certain other income such as wire transfer fees and ATM fees for non-customers. Revenue that is earned over time is generally recognized over the term of the contract as services are performed and performance obligations are satisfied. Such revenue includes wealth management revenues, monthly service charges on deposit accounts and certain other income such as safe deposit box rental fees. In certain cases, other parties are involved with providing services to our customers. If the Corporation is a principal in the transaction (providing services itself or through a third party on its behalf), revenues are reported based on the gross consideration received from the customer and any related expenses are reported gross in noninterest expense. If the Corporation is an agent in the transaction (referring customers to another party to provide services), the Corporation reports its net fee or commission retained as revenue. For certain commissions and incentives, 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. Contract cost assets are included in other assets in the Consolidated Balance Sheets. The amortization of contract cost assets is recorded within salaries and employee benefits expense in the Consolidated Statements of Income. Pension Costs Pension benefits are accounted for using the net periodic benefit cost method, which recognizes the compensation cost of an employee’s pension benefit over that employee’s approximate service period. Pension benefit costs and benefit obligations incorporate various actuarial and other assumptions, including discount rates, mortality, rates of return on plan assets and compensation increases. Management evaluates these assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate to so do. The effect of modifications to those assumptions is recorded in other comprehensive income (loss) and amortized to net periodic cost over future periods. The service cost component of net periodic benefit cost is recognized within salaries and employee benefits expense in the Consolidated Statements of Income. All other components of net periodic benefit cost are recognized in other noninterest expense in the Consolidated Statements of Income. The funded status of defined benefit pension plans, measured as the difference between the fair value of plan assets and the projected benefit obligation, is recognized in the Consolidated Balance Sheet. The changes in the funded status of the defined benefit plans, including actuarial gains and losses and prior service costs and credits, are recognized in comprehensive income in the year in which the changes occur. Share-Based Compensation Share-based compensation plans provide for awards of stock options and other equity incentives, including restricted stock units and performance share units. Compensation expense for awards is recognized over the service period based on the fair value at the date of grant and is included in salaries and employee benefits expense in the Corporation’s Consolidated Statements of Income. Grant date fair value for stock options is estimated using the Black-Scholes option-pricing model. Awards of restricted stock units and performance share units are valued at the fair market value of the Bancorp’s common stock as of the award date. Performance share unit compensation expense is based on the most recent performance assumption available and is adjusted as assumptions change. Forfeitures are recognized when they occur. Vesting of the awards may accelerate or may be subject to proportional vesting if there is a change in control, disability, retirement or death. Vested equity awards are issued from treasury stock, when available, or from authorized but unissued stock. Excess tax benefits (expenses) result when tax return deductions differ from recognized share-based compensation cost that are determined using the grant-date fair value approach for financial statement purposes. Excess tax benefits (expenses) related to the settlement of share-based awards are recorded as a decrease (increase) to income tax expense in the Corporation’s Consolidated Income Statements and are classified in the Consolidated Statements of Cash Flows as an operating activity. -84- Notes to Consolidated Financial Statements – (continued) Dividends declared on restricted stock units issued under the 2013 Stock Option and Incentive Plan are nonforfeitable and paid quarterly in conjunction with dividends declared and paid to common shareholders. Dividends declared on restricted stock units issued under the 2022 Long Term Incentive Plan are accrued at each dividend declaration date and paid upon the issuance of the shares after the award vests. Dividends on performance share units are accrued at each dividend declaration date based on the most recent performance assumptions available and paid upon the issuance of the shares after the award vest. Income Taxes Income tax expense is determined based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to an amount, which is more-likely-than-not to be realizable. Additionally, a liability for unrecognized tax benefits is recorded for uncertain tax positions taken by the Corporation on its tax returns for which there is less than a 50% likelihood of being recognized upon a tax examination. The Corporation records interest related to unrecognized tax benefits in income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense. Segment Reporting The Corporation manages its operations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services. Additional information on the segments is presented in Note 18. 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. Segment reporting results may be restated, when necessary, to reflect changes in organizational structure or allocation methodology. Any changes in estimates and allocations that may affect the reported results of any business segment will not affect the consolidated financial position or results of operations of the Corporation as a whole. Earnings Per Common Share EPS is calculated utilizing the two-class method. The two-class method is an earnings allocation formula that determines earnings per share of each class of stock according to dividends and participation rights in undistributed earnings. Share‑based awards that entitle holders to receive nonforfeitable dividends before vesting are considered participating securities (i.e., restricted stock units awarded under the 2013 Stock Option and Incentive Plan), not subject to performance-based measures. These participating securities are included in the earnings allocation for computing basic earnings per share under this method. Undistributed income is allocated to common shareholders and participating securities under the two-class method based upon the proportion of each to the total weighted average shares available. Under the two-class method, basic EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding. Diluted EPS is computed using the weighted-average number of shares determined for the basic EPS computation plus the dilutive effect on common shares outstanding, using the treasury stock method. Comprehensive Income Comprehensive income is defined as all changes in equity, except for those resulting from transactions with shareholders. Net income is a component of comprehensive income. All other components are referred to in the aggregate as other comprehensive income (loss). Other comprehensive income (loss) includes the after-tax effect of net changes in the fair value of securities available for sale, net changes in fair value of cash flow hedges and net changes in defined benefit pension plan obligations. Guarantees Standby letters of credit are considered a guarantee of the Corporation. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit -85- Notes to Consolidated Financial Statements – (continued) is essentially the same as that involved in extending loan facilities to customers. Under the standby letters of credit, the Corporation is required to make payments to the beneficiary of the letters of credit upon request by the beneficiary contingent upon the customer’s failure to perform under the terms of the underlying contract with the beneficiary. Derivative Instruments and Hedging Activities 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. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and subsequently reclassified to earnings when gains or losses are realized. For derivatives not designated as hedges, changes in fair value of the derivative instruments are recognized in earnings, in noninterest income. Net accrued interest receivable or payable on derivatives that qualify for hedge accounting are recorded in interest income or interest expense based on the item being hedged. Net accrued interest receivable or payable on derivatives that do not qualify for hedge accounting are reported in noninterest income. When a cash flow hedge is discontinued, but the hedged cash flows or forecasted transaction is still expected to occur, changes in value that were accumulated in other comprehensive income (loss) are amortized or accreted into earnings over the same periods that the hedged transactions will affect earnings. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820, “Fair Value Measurements and Disclosures”, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The required disclosures about fair value measurements have been included in Note 10. Note 2 - Recently Issued Accounting Pronouncements Accounting Standards Adopted in 2022 There were no recently issued accounting pronouncements, applicable to the Corporation, that were adopted in 2022. 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 -86- Notes to Consolidated Financial Statements – (continued) 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 adoption of this ASU is not expected to have a material impact on the consolidated financial statements. Reference Rate Reform - ASC 848 ASU No. 2022-06, “Deferral of the Sunset Date of Topic 848” (“ASU 2022-06”), was issued in December 2022 and defers the date for which accounting relief can be applied under Topic 848. ASU 2022-06 applies to entities that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The objective of the guidance in Topic 848 is to ease the burden in accounting for recognizing the effects of reference rate reform on financial reporting. A sunset provision was included within Topic 848 based on expectations of when LIBOR would cease being published. The Corporation had adopted the accounting relief provisions of Topic 848 effective October 1, 2020. The amendments in ASU 2022-06 defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be able to apply the accounting relief in Topic 848. ASU 2022-06 was effective for all entities upon its issuance. The adoption of the provisions of Topic 848, as amended, did not have a material impact on the Corporation’s consolidated financial statements. 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) December 31, 2022 Amortized Cost Unrealized Gains Unrealized Losses ACL Fair Value Available for Sale Debt Securities: Obligations of U.S. government-sponsored enterprises $ 231,203 $ 1 ($ 31,622 ) $ — $ 199,582 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 912,581 269 ( 138,748 ) — 774,102 Individual name issuer trust preferred debt securities 9,387 — ( 627 ) — 8,760 Corporate bonds 13,169 — ( 1,685 ) — 11,484 Total available for sale debt securities $ 1,166,340 $ 270 ($ 172,682 ) $ — $ 993,928 (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 Accrued interest receivable on available for sale debt securities totaled $ 3.1 million and $ 2.3 million, respectively, as of December 31, 2022 and 2021. At December 31, 2022 and 2021, securities with a fair value of $ 294.8 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 13 for additional discussion of FHLB borrowings. -87- Notes to Consolidated Financial Statements – (continued) 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) December 31, 2022 Amortized Cost Fair Value Due in one year or less $ 104,500 $ 88,655 Due after one year to five years 415,763 354,646 Due after five years to ten years 395,026 337,484 Due after ten years 251,051 213,143 Total securities $ 1,166,340 $ 993,928 Included in the above table are debt securities with an amortized cost balance of $ 253.0 million and a fair value of $ 219.1 million at December 31, 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 11 months. Assessment of Available for Sale Debt Securities for Impairment Management assesses the decline in fair value of investment securities on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates both qualitative and quantitative factors to assess whether an impairment exists. The following tables summarize temporarily impaired securities, segregated by length of time the securities have been in a continuous unrealized loss position: (Dollars in thousands) Less than 12 Months 12 Months or Longer Total December 31, 2022 # Fair Value Unrealized Losses # Fair Value Unrealized Losses # Fair Value Unrealized Losses Obligations of U.S. government-sponsored enterprises 4 $ 20,115 ($ 638 ) 18 $ 169,466 ($ 30,984 ) 22 $ 189,581 ($ 31,622 ) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 95 288,777 ( 24,960 ) 66 471,355 ( 113,788 ) 161 760,132 ( 138,748 ) Individual name issuer trust preferred debt securities — — — 3 8,760 ( 627 ) 3 8,760 ( 627 ) Corporate bonds — — — 4 11,484 ( 1,685 ) 4 11,484 ( 1,685 ) Total temporarily impaired securities 99 $ 308,892 ($ 25,598 ) 91 $ 661,065 ($ 147,084 ) 190 $ 969,957 ($ 172,682 ) (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 temporarily impaired securities 53 $ 667,152 ($ 10,583 ) 34 $ 173,628 ($ 5,220 ) 87 $ 840,780 ($ 15,803 ) -88- Notes to Consolidated Financial Statements – (continued) The Corporation does not intend to sell these debt securities and has determined, based upon available evidence, that it is more likely than not that the Corporation will not be required to sell each security before the recovery of its amortized cost basis and management does not believe that any of the securities are impaired due to reasons of credit quality. As a result, the Corporation did not recognize a provision for credit losses on these securities for the years ended December 31, 2022 and 2021. As a result of the Corporation’s review of these qualitative and quantitative factors mentioned below, 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. Obligations of U.S. Government Agency and U.S. Government-Sponsored Enterprise Securities, including Mortgage-Backed Securities The contractual cash flows for these securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies and have a long history of no credit losses. The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at December 31, 2022. As disclosed in Note 1, the Corporation utilizes a zero credit loss estimate for these securities. Individual Name Issuer Trust Preferred Debt Securities These securities in an unrealized loss position at December 31, 2022 included three trust preferred securities issued by three individual companies in the banking sector. Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date, as well as credit rating changes between the reporting period date and the filing date of this report, and other information. As of December 31, 2022, there was one individual name issuer trust preferred debt security with an amortized cost of $ 2.0 million and unrealized losses of $ 134 thousand that was rated below investment grade by S&P. We noted no downgrades to below investment grade between December 31, 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 continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. Corporate Bonds These securities in an unrealized loss position at December 31, 2022 included four corporate bond holdings issued by three individual companies in the financial services industry. Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date, as well as credit rating changes between the reporting period date and the filing date of this report, and other information. As of December 31, 2022, there was one corporate bond debt security with an amortized cost of $ 2.0 million and unrealized losses of $ 136 thousand that was rated below investment grade by S&P. We noted no downgrades to below investment grade between December 31, 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 continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. -89- Notes to Consolidated Financial Statements – (continued) Note 4 - Loans The following table presents a summary of loans: (Dollars in thousands) December 31, 2022 2021 Commercial: Commercial real estate (1) $ 1,829,304 $ 1,639,062 Commercial & industrial (2) 656,397 641,555 Total commercial 2,485,701 2,280,617 Residential Real Estate: Residential real estate (3) 2,323,002 1,726,975 Consumer: Home equity 285,715 247,697 Other (4) 15,721 17,636 Total consumer 301,436 265,333 Total loans (5) $ 5,110,139 $ 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 $ 1.1 million and $ 38.0 million, respectively, of PPP loans as of December 31, 2022 and 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 $ 11.6 million and $ 6.7 million, respectively, at December 31, 2022 and 2021 and net unamortized premiums on loans purchased from and serviced by other financial institutions of $ 318 thousand and $ 414 thousand, respectively, at December 31, 2022 and 2021. Loan balances exclude accrued interest receivable of $ 17.6 million and $ 10.3 million, respectively, as of December 31, 2022 and 2021. As of December 31, 2022 and 2021, loans amounting to $ 2.4 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 13 for additional disclosure regarding borrowings. 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. -90- Notes to 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 December 31, 2022 30-59 60-89 Over 90 Total Past Due Current Total Loans Commercial: Commercial real estate $ 1,187 $ — $ — $ 1,187 $ 1,828,117 $ 1,829,304 Commercial & industrial 265 — — 265 656,132 656,397 Total commercial 1,452 — — 1,452 2,484,249 2,485,701 Residential Real Estate: Residential real estate 4,793 303 3,779 8,875 2,314,127 2,323,002 Consumer: Home equity 1,103 132 — 1,235 284,480 285,715 Other 16 — — 16 15,705 15,721 Total consumer 1,119 132 — 1,251 300,185 301,436 Total loans $ 7,364 $ 435 $ 3,779 $ 11,578 $ 5,098,561 $ 5,110,139 (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 December 31, 2022 and 2021, were nonaccrual loans of $ 7.2 million and $ 9.4 million, respectively. In addition, all loans 90 days or more past due at December 31, 2022 and 2021 were classified as nonaccrual. -91- Notes to Consolidated Financial Statements – (continued) Nonaccrual Loans The following is a summary of nonaccrual loans, segregated by class of loans: (Dollars in thousands) December 31, 2022 2021 Commercial: Commercial real estate $ — $ — Commercial & industrial — — Total commercial — — Residential Real Estate: Residential real estate 11,894 13,576 Consumer: Home equity 952 627 Other — — Total consumer 952 627 Total nonaccrual loans $ 12,846 $ 14,203 Accruing loans 90 days or more past due $ — $ — No ACL was deemed necessary on nonaccrual loans with a carrying value of $ 6.5 million and $ 4.2 million, respectively, as of December 31, 2022 and 2021. Nonaccrual loans of $ 5.7 million and $ 4.8 million, respectively, at December 31, 2022 and 2021 were current as to the payment of principal and interest. As of December 31, 2022 and 2021, nonaccrual loans secured by one- to four-family residential property amounting to $ 2.9 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 December 31, 2022. The following table presents interest income recognized on nonaccrual loans: (Dollars in thousands) Interest Income Recognized Years Ended December 31, 2022 2021 Commercial: Commercial real estate $ — $ — Commercial & industrial — — Total commercial — — Residential Real Estate: Residential real estate 398 459 Consumer: Home equity 62 52 Other 3 1 Total consumer 65 53 Total $ 463 $ 512 Troubled Debt Restructurings 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. -92- Notes to Consolidated Financial Statements – (continued) The following table presents the recorded investment in TDRs and other pertinent information: (Dollars in thousands) December 31, 2022 2021 Accruing TDRs $ 3,571 $ 16,564 Nonaccrual TDRs 5,073 2,819 Total TDRs $ 8,644 $ 19,383 Specific reserves on TDRs included in the ACL on loans $ 115 $ 148 Additional commitments to lend to borrowers with TDRs $ — $ — The following table presents 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 Years ended December 31, 2022 2021 2022 2021 2022 2021 Commercial: Commercial real estate — 2 $ — $ 9,859 $ — $ 9,859 Commercial & industrial 3 — 1,687 — 1,687 — Total commercial 3 2 1,687 9,859 1,687 9,859 Total 3 2 $ 1,687 $ 9,859 $ 1,687 $ 9,859 The following table presents TDRs occurring during the period indicated by type of modification: (Dollars in thousands) Years ended December 31, 2022 2021 Below-market interest rate concession $ — $ — Payment deferral — — Maturity / amortization concession — — Interest only payments — 9,859 Combination (1) 1,687 — Total $ 1,687 $ 9,859 (1) Loans included in this classification were modified with a combination of any two of the concessions listed in this table. In 2022 and 2021, there were no TDRs modified within the previous 12 months for which there was a payment default. Individually Analyzed Loans Individually analyzed loans include nonaccrual commercial loans, reasonably expected TDRs, executed TDRs, and certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans. As of December 31, 2022, the carrying value of individually analyzed loans amounted to $ 10.0 million, of which $ 8.5 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. -93- Notes to Consolidated Financial Statements – (continued) The following table presents the carrying value of collateral dependent individually analyzed loans: (Dollars in thousands) December 31, 2022 December 31, 2021 Carrying Value Related Allowance Carrying Value Related Allowance Commercial: Commercial real estate (1) $ 2,103 $ — $ 10,603 $ — Commercial & industrial (2) — — — — Total commercial 2,103 — 10,603 — Residential Real Estate: Residential real estate (3) 5,760 — 3,803 534 Consumer: Home equity (3) 592 — — — Other — — — — Total consumer 592 — — — Total $ 8,455 $ — $ 14,406 $ 534 (1) Secured by income-producing property. (2) Secured by business assets. (3) Secured by one- to four-family residential properties. Credit Quality Indicators Commercial The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan risk rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. The takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate ACL on loans. See Note 5 for additional information. A description of the commercial loan categories is as follows: Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality, but may exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, performance or may be in an industry or of a loan type known to have a higher degree of risk. These weaknesses may be mitigated by secondary sources of repayment, including SBA guarantees. Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies. Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectability. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined. “Loss” is not intended to imply that the loan has no recovery value, but rather, it is not practical or desirable to continue to carry the asset. -94- Notes to Consolidated Financial Statements – (continued) 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 Fair Isaac Corporation (commonly known as “FICO”) score and an updated estimated LTV ratio. LTV is estimated based on such factors as geographic location, the original appraised value and changes in median home prices, and takes into consideration the age of the loan. The results of these analyses and other credit review procedures, including selected targeted internal reviews, are taken into account in the determination of qualitative loss factors for residential real estate and home equity consumer credits. -95- Notes to 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, 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 $ 591,596 $ 383,062 $ 177,286 $ 170,259 $ 148,371 $ 242,061 $ 6,243 $ 1,437 $ 1,720,315 Special Mention 20,579 22,324 328 24,270 28,676 10,564 146 — 106,887 Classified — — 503 — 1,187 412 — — 2,102 Total CRE 612,175 405,386 178,117 194,529 178,234 253,037 6,389 1,437 1,829,304 C&I: Pass 127,152 63,180 71,265 86,470 85,011 114,241 90,987 745 639,051 Special Mention 13,566 — — — 1,427 — 1,426 — 16,419 Classified — 225 — 7 — — 695 — 927 Total C&I 140,718 63,405 71,265 86,477 86,438 114,241 93,108 745 656,397 Residential Real Estate: Residential real estate: Current 838,566 707,760 277,613 123,098 72,541 294,549 — — 2,314,127 Past Due — 600 — 266 2,315 5,694 — — 8,875 Total residential real estate 838,566 708,360 277,613 123,364 74,856 300,243 — — 2,323,002 Consumer: Home equity: Current 20,665 8,308 3,742 2,406 1,947 3,139 235,004 9,268 284,479 Past Due — — — — 68 98 548 522 1,236 Total home equity 20,665 8,308 3,742 2,406 2,015 3,237 235,552 9,790 285,715 Other: Current 4,231 4,287 1,676 299 235 4,726 251 — 15,705 Past Due 16 — — — — — — — 16 Total other 4,247 4,287 1,676 299 235 4,726 251 — 15,721 Total Loans $ 1,616,371 $ 1,189,746 $ 532,413 $ 407,075 $ 341,778 $ 675,484 $ 335,300 $ 11,972 $ 5,110,139 -96- Notes to 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. -97- Notes to Consolidated Financial Statements – (continued) Loan Servicing Activities Loans sold with servicing retained result in the capitalization of loan servicing rights. The following table presents an analysis of loan servicing rights: (Dollars in thousands) Loan Servicing Rights Valuation Allowance Total Balance at December 31, 2019 $ 3,526 $ — $ 3,526 Loan servicing rights capitalized 6,569 — 6,569 Amortization ( 2,507 ) — ( 2,507 ) Increase in impairment reserve — ( 154 ) ( 154 ) Balance at December 31, 2020 7,588 ( 154 ) 7,434 Loan servicing rights capitalized 5,671 — 5,671 Amortization ( 3,438 ) — ( 3,438 ) Decrease in impairment reserve — 154 154 Balance at December 31, 2021 9,821 — 9,821 Loan servicing rights capitalized 957 — 957 Amortization ( 1,763 ) — ( 1,763 ) Balance at December 31, 2022 $ 9,015 $ — $ 9,015 The following table presents estimated aggregate amortization expense related to loan servicing assets: (Dollars in thousands) Years ending December 31: 2023 $ 1,300 2024 1,112 2025 952 2026 815 2027 697 2028 and thereafter 4,139 Total estimated amortization expense $ 9,015 Loans sold to others may be serviced by the Corporation on a fee basis under various agreements. Loans serviced for others are not included in the Consolidated Balance Sheets. The following table presents the balance of loans serviced for others by loan portfolio: (Dollars in thousands) December 31, 2022 2021 Residential real estate $ 1,457,896 $ 1,509,319 Commercial 107,762 119,873 Total $ 1,565,658 $ 1,629,192 -98- Notes to Consolidated Financial Statements – (continued) Note 5 - Allowance for Credit Losses on Loans The ACL on loans is management’s estimate of expected lifetime credit losses on loans carried at amortized cost. The level of the ACL on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The following table presents the activity in the ACL on loans for the year ended December 31, 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 — ( 36 ) ( 36 ) — — ( 148 ) ( 148 ) ( 184 ) Recoveries 445 29 474 21 12 45 57 552 Provision ( 943 ) ( 469 ) ( 1,412 ) ( 141 ) 34 90 124 ( 1,429 ) Ending Balance $ 18,435 $ 10,356 $ 28,791 $ 7,740 $ 1,115 $ 381 $ 1,496 $ 38,027 The following table presents the activity in the ACL on loans for the year ended December 31, 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 — ( 307 ) ( 307 ) ( 107 ) ( 183 ) ( 66 ) ( 249 ) ( 663 ) Recoveries — 41 41 89 91 25 116 246 Provision ( 3,132 ) ( 1,130 ) ( 4,262 ) ( 164 ) ( 139 ) ( 36 ) ( 175 ) ( 4,601 ) Ending Balance $ 18,933 $ 10,832 $ 29,765 $ 7,860 $ 1,069 $ 394 $ 1,463 $ 39,088 The following table presents the activity in the ACL on loans for the year ended December 31, 2020: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 14,741 $ 3,921 $ 18,662 $ 6,615 $ 1,390 $ 347 $ 1,737 $ 27,014 Adoption of ASC 326 3,405 3,029 6,434 221 ( 106 ) ( 48 ) ( 154 ) 6,501 Charge-offs ( 356 ) ( 586 ) ( 942 ) ( 99 ) ( 224 ) ( 52 ) ( 276 ) ( 1,317 ) Recoveries 51 24 75 20 52 25 77 172 Provision 4,224 5,840 10,064 1,285 188 199 387 11,736 Ending Balance $ 22,065 $ 12,228 $ 34,293 $ 8,042 $ 1,300 $ 471 $ 1,771 $ 44,106 -99- Notes to Consolidated Financial Statements – (continued) Note 6 - Premises and Equipment The following presents a summary of premises and equipment: (Dollars in thousands) December 31, 2022 2021 Land $ 6,042 $ 5,921 Premises and improvements 47,029 44,956 Furniture, fixtures and equipment 24,463 23,706 Total premises and equipment 77,534 74,583 Less: accumulated depreciation 45,984 45,675 Total premises and equipment, net $ 31,550 $ 28,908 Depreciation of premises and equipment amounted to $ 3.5 million, $ 3.4 million and $ 3.2 million, respectively, for the years ended December 31, 2022, 2021, and 2020. Note 7 - Leases The Corporation has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception. Operating lease ROU assets amounted to $ 27.2 million and $ 26.7 million, respectively, as of December 31, 2022 and 2021. Operating lease liabilities totaled $ 29.6 million and $ 29.0 million, respectively, as of December 31, 2022 and 2021. As of December 31, 2022, there were three operating leases that had not yet commenced. As of December 31, 2021, there were two operating leases that had not yet commenced. The following table presents information regarding the Corporation’s operating leases: At December 31, 2022 2021 Weighted average discount rate 3.34 % 3.36 % Range of lease expiration dates 7 months - 25 years 7 months - 19 years Range of lease renewal options 3 years - 5 years 3 years - 5 years Weighted average remaining lease term 13.3 years 12.9 years The following table presents the undiscounted annual lease payments under the terms of the Corporation’s operating leases at December 31, 2022, including a reconciliation to the present value of operating lease liabilities recognized in the Consolidated Balance Sheets: (Dollars in thousands) Years ending December 31: 2023 $ 4,178 2024 4,045 2025 3,331 2026 2,719 2027 2,159 2028 and thereafter 20,816 Total operating lease payments (1) 37,248 Less: interest 7,690 Present value of operating lease liabilities (2) $ 29,558 (1) Includes $ 439 thousand related to options to extend lease terms that are reasonably certain of being exercised. (2) Includes short-term operating lease liabilities of $ 3.3 million. -100- Notes to Consolidated Financial Statements – (continued) The following table presents the components of total lease expense and operating cash flows: (Dollars in thousands) Year ended December 31, 2022 2021 2020 Lease Expense: Operating lease expense $ 4,159 $ 4,015 $ 3,921 Variable lease expense 104 69 56 Total lease expense (1) $ 4,263 $ 4,084 $ 3,977 Cash Paid: Cash paid reducing operating lease liabilities $ 4,076 $ 3,888 $ 3,791 (1) Included in net occupancy expenses in the Consolidated Statements of Income. Note 8 - Goodwill and Intangible Assets The following table presents the carrying value of goodwill at the reporting unit (or business segment) level: (Dollars in thousands) December 31, 2022 2021 Commercial Banking Segment $ 22,591 $ 22,591 Wealth Management Services Segment 41,318 41,318 Total goodwill $ 63,909 $ 63,909 The balance of goodwill in the Commercial Banking segment arose from the acquisition of First Financial Corp. in 2002. The balance of goodwill in the Wealth Management Services segment arose from the 2005 acquisition of Weston and the 2015 acquisition of Halsey. The following table presents the components of intangible assets: (Dollars in thousands) December 31, 2022 2021 Gross carrying amount $ 20,803 $ 20,803 Accumulated amortization 16,249 15,389 Net amount $ 4,554 $ 5,414 The balance of intangible assets at December 31, 2022 includes wealth management advisory contracts resulting from the 2005 acquisition of Weston and the 2015 acquisition of Halsey. The wealth management advisory contracts resulting from the Weston acquisition are being amortized over a 20 -year life using a declining balance method, based on expected attrition for the current customer base derived from historical runoff data. The wealth management advisory contracts resulting from the acquisition of Halsey are being amortized on a straight-line basis over a 15 -year life. Amortization expense for the years ended December 31, 2022, 2021, and 2020, amounted to $ 860 thousand, $ 890 thousand and $ 914 thousand, respectively. -101- Notes to Consolidated Financial Statements – (continued) The following table presents estimated annual amortization expense for intangible assets at December 31, 2022: (Dollars in thousands) Years ending December 31, 2023 $ 843 2024 826 2025 702 2026 476 2027 476 2028 and thereafter 1,231 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. Derivative assets are included in other assets and derivative liabilities are included in other liabilities in the Consolidated Balance Sheets. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and resulting designation. Interest Rate Risk Management Agreements Interest rate risk management agreements, such as caps, swaps and floors, are used from time to time as part of the Corporation’s interest rate risk management strategy. Interest rate swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g., fixed-rate for variable-rate payments) computed on a notional principal amount. Interest rate caps and floors represent options purchased by the Corporation to manage the interest rate paid throughout the term of the option contract. The credit risk associated with these transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure. Cash Flow Hedging Instruments As of December 31, 2022 and 2021, the Corporation had an interest rate swap contract that was designated as a cash flow hedge to hedge the interest rate risk associated with short-term variable rate FHLB advances. The interest rate swap on borrowings matures in December 2023. In addition, at December 31, 2022, and 2021, the Corporation had an interest rate swap contract that was designated as a cash flow hedge to hedge the interest rate risk associated with a pool of variable rate commercial loans. The interest rate swap on loans matures in May 2026. The changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) and subsequently reclassified to earnings when gains or losses are realized. Loan Related Derivative Contracts Interest Rate Derivative Contracts with Customers The Corporation enters into interest rate swap and interest rate cap contracts to help commercial loan borrowers manage their interest rate risk. These interest rate swap contracts allow borrowers to convert variable-rate loan payments to fixed-rate loan payments, while interest rate cap contracts allow borrowers to limit their interest rate exposure in a rising rate environment. When the Corporation enters into an interest rate derivative contract with a commercial loan borrower, it simultaneously enters into a “mirror” interest rate contract with a third party. For interest rate swaps, the third party exchanges the client’s fixed-rate loan payments for variable-rate loan payments. The Corporation retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Risk Participation Agreements The Corporation has entered into risk participation agreements with other banks in commercial loan arrangements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. -102- Notes to Consolidated Financial Statements – (continued) Under a risk participation-out agreement, a derivative asset, the Corporation participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Corporation assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower for a fee received from the other bank. Mortgage Loan Commitments Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Forward sale commitments are contracts for delayed delivery or net settlement of the underlying instrument, such as a residential real estate mortgage loan, where the seller agrees to deliver on a specified future date, either a specified instrument at a specified price or yield or the net cash equivalent of an underlying instrument. Both interest rate lock commitments and forward sale commitments are derivative financial instruments, but do not meet criteria for hedge accounting and therefore, the changes in fair value of these commitments are recognized in earnings. The following table presents the notional amounts and fair values of derivative instruments in the Consolidated Balance Sheets: (Dollars in thousands) December 31, 2022 December 31, 2021 Fair Value Fair Value Notional Amounts Derivative Assets Derivative Liabilities Notional Amounts Derivative Assets Derivative Liabilities Derivatives Designated as Cash Flow Hedging Instruments: Interest rate risk management contracts: Interest rate swaps (1) $ 320,000 $ 548 $ 31,178 $ 320,000 $ 182 $ 5,301 Derivatives not Designated as Hedging Instruments: Loan related derivative contracts: Interest rate contracts with customers 935,099 32 68,137 1,022,388 32,361 2,015 Mirror contracts with counterparties 935,099 67,797 61 1,022,388 2,001 32,480 Risk participation agreements 282,191 — 2 237,446 1 2 Mortgage loan commitments: Interest rate lock commitments 12,201 144 4 49,800 1,256 — Forward sale commitments 23,150 58 150 103,626 54 905 Gross amounts 68,579 99,532 35,855 40,703 Less: amounts offset (2) 23,524 23,524 2,167 2,167 Derivative balances, net of offset 45,055 76,008 33,688 38,536 Less: collateral pledged (3) — 7,716 — 34,539 Net amounts $ 45,055 $ 68,292 $ 33,688 $ 3,997 (1) The fair value of derivative assets includes accrued interest receivable of $ 24 thousand and $ 182 thousand, respectively, at December 31, 2022 and 2021. The fair value of derivative liabilities includes accrued interest payable of $ 856 thousand and $ 19 thousand, respectively, at December 31, 2022 and 2021. (2) Interest rate risk management contracts and loan related derivative contracts with counterparties are subject to master netting arrangements. (3) Collateral pledged to derivative counterparties is in the form of cash. Washington Trust may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions. -103- Notes to Consolidated Financial Statements – (continued) The following table presents the effect of derivative instruments in the Consolidated Statements of Changes in Shareholders’ Equity: (Dollars in thousands) Gain (Loss) Recognized in Other Comprehensive Income, Net of Tax Years ended December 31, 2022 2021 2020 Derivatives Designated as Cash Flow Hedging Instruments: Interest rate risk management contracts: Interest rate caps $ — $ — $ 89 Interest rate swaps ( 18,632 ) ( 2,566 ) ( 893 ) Interest rate floors — — 150 Total ($ 18,632 ) ($ 2,566 ) ($ 654 ) Interest rate cap and interest rate floor contracts designated as cash flow hedges matured in 2020. For derivatives designated as cash flow hedging instruments, see Note 19 for additional disclosure pertaining to the amounts and location of reclassifications from AOCL into earnings. The following table presents the effect of derivative instruments in the Consolidated Statements of Income: (Dollars in thousands) Amount of Gain (Loss) Recognized in Noninterest Income Years ended December 31, Statement of Income Location 2022 2021 2020 Derivatives not Designated as Hedging Instruments: Loan related derivative contracts: Interest rate contracts with customers Loan related derivative income ($ 92,730 ) ($ 27,846 ) $ 60,938 Mirror contracts with counterparties Loan related derivative income 94,759 31,547 ( 57,067 ) Risk participation agreements Loan related derivative income 727 641 120 Mortgage loan commitments: Interest rate lock commitments Mortgage banking revenues ( 1,116 ) ( 5,947 ) 6,106 Forward sale commitments Mortgage banking revenues 4,530 5,383 ( 10,769 ) Total $ 6,170 $ 3,778 ($ 672 ) 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. -104- Notes to Consolidated Financial Statements – (continued) Fair Value Option Election GAAP allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation has elected the fair value option for mortgage loans held for sale to better match changes in fair value of the loans with changes in the fair value of the forward sale commitment contracts used to economically hedge them. The following table presents a summary of mortgage loans held for sale accounted for under the fair value option: (Dollars in thousands) December 31, 2022 2021 Aggregate fair value $ 8,987 $ 40,196 Aggregate principal balance 8,860 39,201 Difference between fair value and principal balance $ 127 $ 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 Consolidated Statements of Income. Changes in fair value amounted to a decrease to mortgage banking revenues of $ 868 thousand in 2022, compared to a decrease to mortgage banking revenues of $ 1.3 million in 2021. There were no mortgage loans held for sale 90 days or more past due as of December 31, 2022 and 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 securities held at December 31, 2022 and 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 securities held at December 31, 2022 and 2021. Mortgage Loans Held for Sale The Corporation has elected the fair value option for mortgage loans held for sale. The fair value is estimated based on current market prices for similar loans in the secondary market and therefore are classified as Level 2 assets. Collateral Dependent Individually Analyzed Loans Collateral dependent individually analyzed loans are valued based upon the lower of amortized cost or fair value. Fair value is determined based on the appraised value of the underlying collateral. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For collateral dependent loans that are expected to be repaid substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the collateral. Internal valuations may be utilized to determine the fair value of other business assets. Collateral dependent individually analyzed loans are categorized as Level 3. Derivatives Interest rate derivative contracts are traded in over-the-counter markets where quoted market prices are not readily available. Fair value measurements are determined using independent valuation software, which utilizes the present value of future cash flows discounted using market observable inputs such as forward rate assumptions. The Corporation evaluates the credit risk of its counterparties, as well as that of the Corporation. Accordingly, factors such as the likelihood of default -105- Notes to Consolidated Financial Statements – (continued) by the Corporation and its counterparties, its net exposures and remaining contractual life are considered in determining if any fair value adjustments related to credit risk are required. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position, if any. The Corporation has determined that the majority of the inputs used to value its derivative positions fall within Level 2 of the fair value hierarchy. However, the credit valuation adjustments utilize Level 3 inputs. As of December 31, 2022 and 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) December 31, 2022 Assets: Available for sale debt securities: Obligations of U.S. government-sponsored enterprises $ 199,582 $ — $ 199,582 $ — Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 774,102 — 774,102 — Individual name issuer trust preferred debt securities 8,760 — 8,760 — Corporate bonds 11,484 — 11,484 — Mortgage loans held for sale 8,987 — 8,987 — Derivative assets 45,055 — 45,055 — Total assets at fair value on a recurring basis $ 1,047,970 $ — $ 1,047,970 $ — Liabilities: Derivative liabilities $ 76,008 $ — $ 76,008 $ — Total liabilities at fair value on a recurring basis $ 76,008 $ — $ 76,008 $ — -106- Notes to 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 twelve months ended December 31, 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 % 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 -107- Notes to Consolidated Financial Statements – (continued) 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) 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) December 31, 2022 Financial Assets: Loans, net of allowance for credit losses on loans $ 5,072,112 $ 4,929,449 $ — $ — $ 4,929,449 Financial Liabilities: Time deposits $ 1,122,882 $ 1,137,219 $ — $ 1,137,219 $ — FHLB advances 980,000 978,590 — 978,590 — Junior subordinated debentures 22,681 18,963 — 18,963 — (Dollars in thousands) 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) December 31, 2021 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 — Note 11 - Income Taxes The following table presents the components of income tax expense (benefit): (Dollars in thousands) Years ended December 31, 2022 2021 2020 Current Tax Expense: Federal $ 16,127 $ 17,032 $ 19,248 State 2,202 2,130 3,213 Total current tax expense 18,329 19,162 22,461 Deferred Tax Expense (Benefit): Federal 1,012 1,822 ( 2,375 ) State 148 333 ( 755 ) Total deferred tax expense (benefit) 1,160 2,155 ( 3,130 ) Total income tax expense $ 19,489 $ 21,317 $ 19,331 -108- Notes to Consolidated Financial Statements – (continued) Total income tax expense varies from the amount determined by applying the Federal income tax rate to income before income taxes. The following table presents the reasons for the differences: Years ended December 31, 2022 2021 2020 (Dollars in thousands) Amount Rate Amount Rate Amount Rate Tax expense at Federal statutory rate $ 19,146 21.0 % $ 20,619 21.0 % $ 18,724 21.0 % Increase (decrease) in taxes resulting from: State income tax expense, net of federal tax benefit 1,856 2.1 1,943 2.0 1,995 2.2 Tax-exempt income, net ( 721 ) ( 0.8 ) ( 772 ) ( 0.8 ) ( 803 ) ( 0.9 ) BOLI ( 544 ) ( 0.6 ) ( 614 ) ( 0.6 ) ( 523 ) ( 0.6 ) Investments in low-income housing limited partnerships ( 261 ) ( 0.3 ) ( 117 ) ( 0.1 ) ( 118 ) ( 0.1 ) Share-based compensation ( 68 ) ( 0.1 ) ( 159 ) ( 0.2 ) 92 0.1 Other 81 0.1 417 0.4 ( 36 ) — Total income tax expense $ 19,489 21.4 % $ 21,317 21.7 % $ 19,331 21.7 % The following table presents the approximate tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities: (Dollars in thousands) December 31, 2022 2021 Deferred Tax Assets: Net unrealized losses on available for sale debt securities $ 41,379 $ 2,146 Allowance for credit losses on loans 9,127 9,381 Cash flow hedges 7,151 1,268 Operating lease liabilities 7,094 6,962 Deferred compensation 4,486 5,091 Deferred loan origination fees 2,106 2,044 Share-based compensation 1,884 1,859 Defined benefit pension obligations — 966 Other 1,809 2,002 Deferred tax assets 75,036 31,719 Deferred Tax Liabilities: Operating lease ROU assets ( 6,518 ) ( 6,406 ) Deferred loan origination costs ( 6,394 ) ( 4,982 ) Loan servicing rights ( 2,163 ) ( 2,357 ) Depreciation of premises and equipment ( 1,494 ) ( 1,237 ) Amortization of intangibles ( 1,093 ) ( 1,299 ) Defined benefit pension obligations ( 333 ) — Other ( 669 ) ( 1,427 ) Deferred tax liabilities ( 18,664 ) ( 17,708 ) Net deferred tax asset $ 56,372 $ 14,011 The Corporation’s net deferred tax asset is included in other assets in the Consolidated Balance Sheets. Management has determined that a valuation allowance is not required for any of the deferred tax assets since it is more-likely-than-not that these assets will be realized primarily through future reversals of existing taxable temporary differences or by offsetting projected future taxable income. The Corporation had no unrecognized tax benefits as of December 31, 2022 and 2021. -109- Notes to Consolidated Financial Statements – (continued) The Corporation files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Generally, the Corporation is no longer subject to U.S. federal income and state tax examinations by tax authorities for years before 2019. Note 12 - Deposits The following table presents a summary of deposits: (Dollars in thousands) December 31, 2022 2021 Noninterest-bearing demand deposits $ 858,953 $ 945,229 Interest-bearing demand deposits (1) 333,197 251,032 NOW accounts 871,875 867,138 Money market accounts 1,255,805 1,072,864 Savings accounts 576,250 555,177 Time deposits (2) 1,122,882 1,288,611 Total deposits $ 5,018,962 $ 4,980,051 (1) Includes wholesale brokered demand deposit balances of $ 31,153 and $ 0 , respectively, as of December 31, 2022 and 2021. (2) Includes wholesale brokered time deposit balances of $ 327,044 and $ 515,228 , respectively, as of December 31, 2022 and 2021. The following table presents scheduled maturities of time certificates of deposit: (Dollars in thousands) Scheduled Maturity Weighted Average Rate Years ending December 31: 2023 $ 844,830 1.97 % 2024 163,668 2.88 2025 41,869 1.74 2026 36,428 1.36 2027 36,087 2.45 2028 and thereafter — — Balance at December 31, 2022 $ 1,122,882 2.09 % Time certificates of deposit in denominations of $250 thousand or more totaled $ 200.9 million and $ 184.3 million, respectively, at December 31, 2022 and 2021. Note 13 - Borrowings Federal Home Loan Bank Advances Advances payable to the FHLB amounted to $ 980.0 million and $ 145.0 million, respectively, at December 31, 2022 and 2021. As of December 31, 2022 and 2021, the Bank had access to a $ 40.0 million unused line of credit with the FHLB. Additionally, the Bank had a $ 215.0 million standby letter of credit with the FHLB at December 31, 2022. This standby letter of credit was executed in 2022 to collateralize an institutional deposit. The Bank had remaining available borrowing capacity of $ 668.3 million and $ 1.6 billion, respectively with the FHLB at December 31, 2022 and 2021. The Bank pledges certain qualified investment securities and loans as collateral to the FHLB. -110- Notes to Consolidated Financial Statements – (continued) The following table presents maturities and weighted average interest rates on FHLB advances outstanding as of December 31, 2022: (Dollars in thousands) Scheduled Maturity Weighted Average Rate 2023 $ 895,000 4.29 % 2024 20,000 4.48 2025 45,000 4.21 2026 20,000 4.13 2027 — — 2028 and thereafter — — Total $ 980,000 4.29 % Junior Subordinated Debentures Junior subordinated debentures amounted to $ 22.7 million at December 31, 2022 and 2021. The Bancorp sponsored the creation of Trust I and Trust II, Delaware statutory trusts created for the sole purpose of issuing trust preferred securities and investing the proceeds in junior subordinated debentures of the Bancorp. The Bancorp is the owner of all of the common securities of the trusts. In accordance with GAAP, the trusts are treated as unconsolidated subsidiaries. The $ 8.3 million of junior subordinated debentures associated with Trust I bear interest at a rate equal to the three-month LIBOR rate plus 1.45 % and mature on September 15, 2035. The $ 14.4 million of junior subordinated debentures associated with Trust II bear interest at a rate equal to the three-month LIBOR rate plus 1.45 % and mature on November 23, 2035. The debentures may be redeemed at par at the Bancorp’s option, subject to the approval of the applicable banking regulator to the extent required under applicable guidelines or policies. See Note 14 for additional discussion of the regulatory capital treatment of trust preferred securities. -111- Notes to Consolidated Financial Statements – (continued) Note 14 - Shareholders' Equity Stock Repurchase Program On December 12, 2022, the Corporation announced that its Board of Directors adopted the 2023 Repurchase Program, which authorizes the repurchase of up to 850,000 shares, or approximately 5 %, of the Corporation’s outstanding common stock. This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The timing and actual numbers of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The 2023 Repurchase Program commenced on January 1, 2023 and expires on December 31, 2023 and may be modified, suspended, or discontinued at any time. The 2021 Repurchase Program expired on December 31, 2022. For the year ended December 31, 2022, the Corporation repurchased 194,162 shares at an average price of $ 48.82 and a total cost of $ 9.5 million, under its 2021 Repurchase Program. Dividends The primary source of liquidity for the Bancorp is dividends received from the Bank. The Bancorp and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans, and advances from the Bank to the Bancorp. Generally, the Bank has the ability to pay dividends to the Bancorp subject to minimum regulatory capital requirements. The FDIC and the FRBB have the authority to use their enforcement powers to prohibit a bank or bank holding company, respectively, from paying dividends if, in their opinion, the payment of dividends would constitute an unsafe or unsound practice. Dividends paid by the Bank to the Bancorp amounted to $ 53.2 million and $ 45.7 million, respectively, for the years ended December 31, 2022 and 2021. Regulatory Capital Requirements The Bancorp and the Bank are subject to various regulatory capital requirements administered by the FRBB and the FDIC, respectively. Regulatory authorities can initiate certain mandatory actions if the Bancorp or the Bank fail to meet minimum capital requirements, which could have a direct material effect on the Corporation’s financial statements. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. These quantitative measures, to ensure capital adequacy, require minimum amounts and ratios. Capital levels at December 31, 2022 exceeded the regulatory minimum levels to be considered “well capitalized.” -112- Notes to 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 Regulations Amount Ratio Amount Ratio Amount Ratio December 31, 2022 Total Capital (to Risk-Weighted Assets): Corporation $ 605,005 12.37 % $ 391,363 8.00 % N/A N/A Bank 588,090 12.02 391,260 8.00 $ 489,074 10.00 % Tier 1 Capital (to Risk-Weighted Assets): Corporation 571,794 11.69 293,522 6.00 N/A N/A Bank 554,879 11.35 293,445 6.00 391,260 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets): Corporation 549,798 11.24 220,142 4.50 N/A N/A Bank 554,879 11.35 220,083 4.50 317,898 6.50 Tier 1 Capital (to Average Assets): (1) Corporation 571,794 8.65 264,295 4.00 N/A N/A Bank 554,879 8.40 264,177 4.00 330,222 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 December 31, 2022 and 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 December 31, 2022 and 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 -113- Notes to Consolidated Financial Statements – (continued) relative to the incurred loss methodology during the two-year deferral period. The cumulative difference at the end of the deferral period is being phased-in to regulatory capital over the three-year transition period, which began January 1, 2022. Note 15 - Revenue from Contracts with Customers The following table summarizes total revenues as presented in the 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. Years ended December 31, 2022 2021 2020 (Dollars in thousands) Revenue (1) ASC 606 Revenue (2) Revenue (1) ASC 606 Revenue (2) Revenue (1) ASC 606 Revenue (2) Net interest income $ 155,990 $ — $ 141,435 $ — $ 127,444 $ — Noninterest income: Wealth management revenues 38,746 38,746 41,282 41,282 35,454 35,454 Mortgage banking revenues 8,733 — 28,626 — 47,377 — Card interchange fees 4,996 4,996 4,996 4,996 4,287 4,287 Service charges on deposit accounts 3,192 3,192 2,683 2,683 2,742 2,742 Loan related derivative income 2,756 — 4,342 — 3,991 — Income from bank-owned life insurance 2,591 — 2,925 — 2,491 — Other income 1,588 1,219 2,540 2,148 3,100 2,669 Total noninterest income 62,602 48,153 87,394 51,109 99,442 45,152 Total revenues $ 218,592 $ 48,153 $ 228,829 $ 51,109 $ 226,886 $ 45,152 (1) As reported in the Consolidated Statements of Income. (2) Revenue from contracts with customers in scope of ASC 606. The following table presents revenue from contracts with customers based on the timing of revenue recognition: (Dollars in thousands) Years ended December 31, 2022 2021 2020 Revenue recognized at a point in time: Card interchange fees $ 4,996 $ 4,996 $ 4,287 Service charges on deposit accounts 2,512 2,136 2,103 Other income 967 1,931 2,494 Revenue recognized over time: Wealth management revenues 38,746 41,282 35,454 Service charges on deposit accounts 680 547 639 Other income 252 217 175 Total revenues from contracts with customers in scope of ASC 606 $ 48,153 $ 51,109 $ 45,152 Receivables for revenue from contracts with customers consist primarily of amounts due for wealth management services performed for which the Corporation’s performance obligations have been fully satisfied. Receivables amounted to $ 5.1 million and $ 6.6 million, respectively, at December 31, 2022 and 2021 and were included in other assets in the 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 December 31, 2022 and 2021 and were included in other liabilities in the 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 -114- Notes to Consolidated Financial Statements – (continued) 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 $ 2.1 million and $ 1.9 million, respectively, at December 31, 2022 and 2021 and were included in other assets in the Consolidated Balance Sheets. The amortization of contract cost assets is recorded within salaries and employee benefits expense Consolidated Statements of Income. Note 16 - Employee Benefits 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 qualified pension plan is funded on a current basis, in compliance with the requirements of ERISA. Pension benefit costs and benefit obligations incorporate various actuarial and other assumptions, including discount rates, mortality, rates of return on plan assets and compensation increases. Washington Trust evaluates these assumptions annually. The following table presents the plans’ projected benefit obligations, fair value of plan assets and funded (unfunded) status: (Dollars in thousands) Qualified Pension Plan Non-Qualified Retirement Plans At December 31, 2022 2021 2022 2021 Change in Benefit Obligation: Benefit obligation at beginning of period $ 89,408 $ 94,742 $ 17,717 $ 17,973 Service cost 2,062 2,369 218 208 Interest cost 2,368 2,004 423 337 Actuarial (gain) loss ( 23,658 ) ( 4,011 ) ( 3,880 ) 102 Benefits paid ( 3,422 ) ( 5,556 ) ( 916 ) ( 903 ) Administrative expenses ( 102 ) ( 140 ) — — Benefit obligation at end of period 66,656 89,408 13,562 17,717 Change in Plan Assets: Fair value of plan assets at beginning of period 103,047 101,929 — — Actual return on plan assets ( 17,970 ) 6,814 — — Employer contributions — — 916 903 Benefits paid ( 3,422 ) ( 5,556 ) ( 916 ) ( 903 ) Administrative expenses ( 102 ) ( 140 ) — — Fair value of plan assets at end of period 81,553 103,047 — — Funded (unfunded) status at end of period (1) $ 14,897 $ 13,639 ($ 13,562 ) ($ 17,717 ) (1) Funded status of the qualified pension plan is included in other assets in the Consolidated Balance Sheets. Unfunded status of the non-qualified retirement plans is included in other liabilities in the Consolidated Balance Sheets. The non-qualified retirement plans provide for the designation of assets in rabbi trusts. Securities available for sale and other short-term investments designated for this purpose, with the carrying value of $ 14.0 million and $ 16.7 million are included in the Consolidated Balance Sheets at December 31, 2022 and 2021, respectively. The following table presents the amounts included in AOCI (AOCL) related to the qualified pension plan and non-qualified retirement plans: (Dollars in thousands) Qualified Pension Plan Non-Qualified Retirement Plans At December 31, 2022 2021 2022 2021 Net actuarial loss included in AOCI (AOCL), pre-tax $ 1,846 $ 3,920 $ 3,455 $ 8,027 -115- Notes to Consolidated Financial Statements – (continued) The accumulated benefit obligation for the qualified pension plan was $ 64.8 million and $ 85.2 million, respectively, at December 31, 2022 and 2021. The accumulated benefit obligation for the non-qualified retirement plans amounted to $ 13.1 million and $ 16.4 million, respectively, at December 31, 2022 and 2021. 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 Years ended December 31, 2022 2021 2020 2022 2021 2020 Net Periodic Benefit Cost: Service cost (1) $ 2,062 $ 2,369 $ 2,164 $ 218 $ 208 $ 170 Interest cost (2) 2,368 2,004 2,505 423 337 465 Expected return on plan assets (2) ( 4,634 ) ( 4,815 ) ( 4,538 ) — — — Recognized net actuarial loss (2) 1,020 2,121 1,582 692 723 560 Net periodic benefit cost 816 1,679 1,713 1,333 1,268 1,195 Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (on a pre-tax basis): Net (gain) loss ( 2,074 ) ( 8,132 ) 1,708 ( 4,572 ) ( 621 ) 1,244 Recognized in other comprehensive income (loss) ( 2,074 ) ( 8,132 ) 1,708 ( 4,572 ) ( 621 ) 1,244 Total recognized in net periodic benefit cost and other comprehensive income (loss) ($ 1,258 ) ($ 6,453 ) $ 3,421 ($ 3,239 ) $ 647 $ 2,439 (1) Included in salaries and employee benefits expense in the Consolidated Statements of Income. (2) Included in other expenses in the Consolidated Statements of Income. Assumptions The following table presents the measurement date and weighted-average assumptions used to determine benefit obligations at December 31, 2022 and 2021: Qualified Pension Plan Non-Qualified Retirement Plans 2022 2021 2022 2021 Measurement date Dec 31, 2022 Dec 31, 2021 Dec 31, 2022 Dec 31, 2021 Discount rate 5.54 % 3.00 % 5.50 % 2.90 % Rate of compensation increase 5.00 3.75 5.00 3.75 The following table presents the measurement date and weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31, 2022, 2021 and 2020: Qualified Pension Plan Non-Qualified Retirement Plans 2022 2021 2020 2022 2021 2020 Measurement date Dec 31, 2021 Dec 31, 2020 Dec 31, 2019 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019 Equivalent single discount rate for benefit obligations 3.00 % 2.71 % 3.42 % 2.89 % 2.51 % 3.30 % Equivalent single discount rate for service cost 3.11 2.86 3.54 3.16 2.94 3.62 Equivalent single discount rate for interest cost 2.67 2.16 3.07 2.48 1.97 2.93 Expected long-term return on plan assets 5.25 5.75 5.75 N/A N/A N/A Rate of compensation increase 3.75 3.75 3.75 3.75 3.75 3.75 The expected long-term rate of return on plan assets is based on what the Corporation believes is realistically achievable based on the types of assets held by the plan and the plan’s investment practices. The assumption is updated annually, taking -116- Notes to Consolidated Financial Statements – (continued) into account the asset allocation, historical asset return trends on the types of assets held and the current and expected economic conditions. Decreases in the long-term rate of return assumption on plan assets increase pension costs and, in general, may increase the requirement to make funding contributions to the plans. Increases in the long-term rate of return on plan assets have the opposite effect. The discount rate assumption for defined benefit pension plans is reset on the measurement date. Discount rates are selected for each plan by matching expected future benefit payments stream to a yield curve based on a selection of high-quality fixed-income debt securities. Decreases in discount rates increase the present value of pension obligations and increase our pension costs, while increases in discount rates have the opposite effect. The "spot rate approach" was utilized in the calculation of interest and service cost. The spot rate approach applies separate discount rates for each projected benefit payment in the calculation of interest and service cost. This approach provides a more precise measurement of service and interest cost by improving the correlation between projected benefit cash flows and their corresponding spot rates. Plan Assets The following tables present the fair values of the qualified pension plan’s assets: (Dollars in thousands) Fair Value Measurements Using Fair Value December 31, 2022 Level 1 Level 2 Level 3 Assets: Cash and cash equivalents $ 8,438 $ — $ — $ 8,438 Obligations of U.S. government-sponsored enterprises — 42,601 — 42,601 Obligations of states and political subdivisions — 1,728 — 1,728 Corporate bonds — 4,854 — 4,854 Mutual funds 23,932 — — 23,932 Total plan assets $ 32,370 $ 49,183 $ — $ 81,553 (Dollars in thousands) Fair Value Measurements Using Fair Value December 31, 2021 Level 1 Level 2 Level 3 Assets: Cash and cash equivalents $ 7,532 $ — $ — $ 7,532 Obligations of U.S. government-sponsored enterprises — 47,485 — 47,485 Obligations of states and political subdivisions — 2,233 — 2,233 Corporate bonds — 6,636 — 6,636 Common stocks 16,565 — — 16,565 Mutual funds 22,596 — — 22,596 Total plan assets $ 46,693 $ 56,354 $ — $ 103,047 The qualified pension plan uses fair value measurements to record fair value adjustments to the securities held in its investment portfolio. When available, the qualified pension plan uses quoted market prices to determine the fair value of securities; such items are classified as Level 1. This category includes cash and cash equivalents, as well as common stocks and mutual funds which are exchange-traded. Level 2 securities in the qualified pension plan include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose values are 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, obligations of states and political subdivisions and corporate bonds. -117- Notes to Consolidated Financial Statements – (continued) In certain cases where there is limited activity or less transparency around inputs to the valuation, securities may be classified as Level 3. As of December 31, 2022 and 2021, the qualified pension plan did not have any securities in the Level 3 category. The following table presents the asset allocations of the qualified pension plan, by asset category: December 31, 2022 2021 Asset Category: Cash and cash equivalents 10.3 % 7.3 % Fixed income securities (1) 60.3 54.7 Equity securities (2) 29.4 38.0 Total 100.0 % 100.0 % (1) Includes obligations of U.S. government agencies and U.S. government-sponsored enterprises, obligations of states and political subdivisions and corporate bonds. (2) Includes mutual funds at December 31, 2022 and common stocks and mutual funds at December 31, 2021. The assets of the qualified defined benefit pension plan trust are managed to ensure that all present and future benefit obligations are met as they come due. It seeks to achieve this goal while trying to mitigate volatility in plan funded status, contributions and expense by aligning the characteristics of the plan assets to that of the plan liabilities. The qualified pension plan is well-funded and will become frozen at December 31, 2023, at which point all future benefit accruals will cease. Our investment approach takes these factors into consideration, and as such we have been increasing our allocation to lower-risk fixed income securities and reducing our allocation to higher-risk equity securities. Cash inflow is typically composed of investment income from portfolio holdings and employer contributions, while cash outflow is for the purpose of paying plan benefits and certain plan expenses. As early as possible each year, the trustee is advised of the projected schedule of employer contributions and estimations of benefit payments. Cash Flows Contributions The Code permits flexibility in plan contributions so that normally a range of contributions is possible. The Corporation does not expect to make a contribution to the qualified pension plan in 2023. In addition, the Corporation expects to contribute $ 904 thousand in benefit payments to the non-qualified retirement plans in 2023. Estimated Future Benefit Payments The following table presents the benefit payments, which reflect expected future service, as appropriate, expected to be paid: (Dollars in thousands) Qualified Pension Plan Non-Qualified Retirement Plans Years ending December 31, 2023 $ 2,870 $ 904 2024 3,243 892 2025 3,553 899 2026 3,888 935 2027 4,169 951 2028 and thereafter 23,832 4,870 401(k) Plan The Corporation’s 401(k) Plan provides a match up to a maximum of 3 % of employee contributions for substantially all employees. In addition, substantially all employees hired after September 30, 2007, who are ineligible for participation in the qualified defined benefit pension plan, receive a non-elective employer contribution of 4 % of compensation. Total employer matching contributions under this plan amounted to $ 3.2 million, $ 3.0 million and $ 2.8 million in 2022, 2021 and 2020, respectively. -118- Notes to Consolidated Financial Statements – (continued) Deferred Compensation Plan The Amended and Restated Nonqualified Deferred Compensation Plan provides supplemental retirement and tax benefits to directors and certain officers. The plan is funded primarily through pre-tax contributions made by the participants. The assets and liabilities of the Deferred Compensation Plan are recorded at fair value in the Consolidated Balance Sheets. The participants in the plan bear the risk of market fluctuations of the underlying assets. The accrued liability related to this plan amounted to $ 18.7 million and $ 21.2 million, respectively, at December 31, 2022 and 2021, and is included in other liabilities on the accompanying Consolidated Balance Sheets. The corresponding invested assets are reported in other assets in the Consolidated Balance Sheets. Note 17 - Share-Based Compensation Arrangements The Corporation’s equity compensation plans include the 2003 Stock Incentive Plan, the 2013 Stock Option and Incentive Plan and the 2022 Long Term Incentive Plan, which have been approved by the Corporation’s Board of Directors and shareholders. Following shareholder approval of the 2022 Long Term Incentive Plan on April 26, 2022, awards are being granted only from the 2022 Long Term Incentive Plan. 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 in accordance with the terms of this plan. The types 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. See Item 12 for additional information regarding the equity compensation plans. Reserved Shares As of December 31, 2022, a total of 1,438,109 common stock shares were reserved for issuance under the 2003 Stock Incentive Plan, 2013 Stock Option and Incentive Plan and 2022 Long Term Incentive Plan. Share-based Compensation Expense The following table presents share-based compensation expense and the related income tax benefits recognized in the Consolidated Statements of Income for stock options, restricted stock units and performance share units: (Dollars in thousands) Years ended December 31, 2022 2021 2020 Share-based compensation expense $ 3,247 $ 3,316 $ 3,766 Related income tax benefits (1) $ 857 $ 978 $ 801 (1) Includes $ 78 thousand and $ 182 thousand, respectively, of excess tax benefits recognized upon the settlement of share-based compensation awards in 2022 and 2021. Includes $ 103 thousand of excess tax expenses recognized upon the settlement of share-based compensation awards in 2020. As of December 31, 2022, there was $ 5.1 million of total unrecognized compensation cost related to share-based compensation arrangements, including stock options, restricted stock units and performance share units granted under the Plans. That cost is expected to be recognized over a weighted average period of 1.9 years. Stock Options The exercise price of each stock option may not be less than the fair market value of the Bancorp’s common stock on the date of grant, and options shall have a term of no more than ten years. Stock options are designated as either non-qualified or incentive stock options. For the years ended 2022, 2021 and 2020, all stock options granted by the Corporation were designated as non-qualified stock options. Washington Trust uses historical data to estimate stock option exercise and employee departure behavior in the option-pricing model. The expected term of options granted was derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. Expected volatility was based on historical volatility of Washington Trust shares. The risk-free rate for periods within the contractual life of the stock option was based on the U.S. Treasury yield curve in effect at the date of grant. -119- Notes to Consolidated Financial Statements – (continued) The following presents the assumptions used in determining the grant date fair value of the stock option awards granted to certain key employees: 2022 2021 2020 Options granted 57,700 53,700 81,530 Cliff vesting period (years) 3 3 3 Expected term (years) 6.5 6.5 6.5 Expected dividend yield 3.90 % 3.80 % 3.69 % Weighted average expected volatility 31.67 % 31.50 % 29.89 % Weighted average risk-free interest rate 4.15 % 1.41 % 0.46 % Weighted average grant-date fair value $ 12.01 $ 11.10 $ 5.75 The following table presents a summary of stock options outstanding as of and for the year ended December 31, 2022: Number of Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (000’s) Beginning of period 322,140 $ 45.95 Granted 57,700 48.50 Exercised ( 7,950 ) 30.67 Forfeited or expired — — End of period 371,890 $ 46.67 6.95 $ 1,514 Options exercisable at end of period 186,640 $ 49.54 5.20 $ 410 The total intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date. The following table presents additional information concerning options outstanding and options exercisable at December 31, 2022: Options Outstanding Options Exercisable Exercise Price Ranges Number of Shares Weighted Average Remaining Life (Years) Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price $ 30.01 to $ 40.00 98,998 6.32 33.17 25,148 35.92 $ 40.01 to $ 50.00 135,006 7.68 47.45 77,306 46.67 $ 50.01 to $ 60.00 137,886 6.69 55.60 84,186 56.24 Total 371,890 6.95 $ 46.67 186,640 $ 49.54 The total intrinsic value of stock options exercised during the years ended December 31, 2022, 2021 and 2020 was $ 142 thousand, $ 897 thousand and $ 46 thousand, respectively. Restricted Stock Units In 2022, 2021 and 2020, the Corporation granted to directors and certain key employees 21,467 , 19,185 and 27,385 restricted stock units, respectively, with 3 -year cliff vesting. -120- Notes to Consolidated Financial Statements – (continued) The following table presents a summary of restricted stock units as of and for the year ended December 31, 2022: Number of Shares Weighted Average Grant Date Fair Value Beginning of period 66,285 $ 45.41 Granted 21,467 50.03 Vested ( 22,416 ) 49.52 Forfeited ( 24 ) 52.18 End of period 65,312 $ 45.51 Performance Share Units The Corporation granted performance share units to certain key employees providing the opportunity to earn shares of common stock over a 3 -year to 5 -year performance period. 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. The following table presents a summary of outstanding performance share units as of December 31, 2022: Grant Date Fair Value per Share Weighted Average Current Performance Assumption Expected Number of Shares Performance share units awarded in: 2022 $ 59.31 130 % 39,676 2021 46.15 120 % 43,848 2020 34.22 120 % 56,256 2018 54.25 124 % 5,158 Total 144,938 The following table presents a summary of performance share units as of and for the year ended December 31, 2022: Number of Shares Weighted Average Grant Date Fair Value Beginning of period 159,572 $ 43.09 Granted (1) 21,379 59.31 Vested ( 34,573 ) 52.87 Forfeited ( 1,440 ) 52.18 End of period 144,938 $ 45.41 (1) The number of shares include adjustments made to performance measure estimates on outstanding awards that have not yet vested. The weighted average grant date fair value pertains only to awards granted during the year. -121- Notes to Consolidated Financial Statements – (continued) Note 18 - 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 tables present the statement of operations and total assets for Washington Trust’s reportable business segments. (Dollars in thousands) Year ended December 31, 2022 Commercial Banking Wealth Management Services Consolidated Total Net interest income (expense) $ 156,040 ($ 50 ) $ 155,990 Provision for credit losses ( 1,300 ) — ( 1,300 ) Net interest income (expense) after provision for credit losses 157,340 ( 50 ) 157,290 Noninterest income 23,088 39,514 62,602 Noninterest expenses: Depreciation and amortization expense 2,948 1,377 4,325 Other noninterest expenses 94,025 30,372 124,397 Total noninterest expenses 96,973 31,749 128,722 Income before income taxes 83,455 7,715 91,170 Income tax expense 17,557 1,932 19,489 Net income $ 65,898 $ 5,783 $ 71,681 Total assets at period end $ 6,585,310 $ 74,741 $ 6,660,051 Expenditures for long-lived assets 5,475 664 6,139 -122- Notes to Consolidated Financial Statements – (continued) (Dollars in thousands) Year ended December 31, 2021 Commercial Banking Wealth Management Services Consolidated Total Net interest income (expense) $ 141,493 ($ 58 ) $ 141,435 Provision for credit losses ( 4,822 ) — ( 4,822 ) Net interest income (expense) after provision for credit losses 146,315 ( 58 ) 146,257 Noninterest income 44,748 42,646 87,394 Noninterest expenses: Depreciation and amortization expense 2,827 1,474 4,301 Other noninterest expenses 101,029 30,134 131,163 Total noninterest expenses 103,856 31,608 135,464 Income before income taxes 87,207 10,980 98,187 Income tax expense 18,575 2,742 21,317 Net income $ 68,632 $ 8,238 $ 76,870 Total assets at period end $ 5,776,754 $ 74,373 $ 5,851,127 Expenditures for long-lived assets 3,246 244 3,490 (Dollars in thousands) Year ended December 31, 2020 Commercial Banking Wealth Management Services Consolidated Total Net interest income (expense) $ 127,545 ($ 101 ) $ 127,444 Provision for credit losses 12,342 — 12,342 Net interest income (expense) after provision for credit losses 115,203 ( 101 ) 115,102 Noninterest income 63,612 35,830 99,442 Noninterest expenses: Depreciation and amortization expense 2,573 1,517 4,090 Other noninterest expenses 91,555 29,739 121,294 Total noninterest expenses 94,128 31,256 125,384 Income before income taxes 84,687 4,473 89,160 Income tax expense 17,989 1,342 19,331 Net income $ 66,698 $ 3,131 $ 69,829 Total assets at period end $ 5,639,669 $ 73,500 $ 5,713,169 Expenditures for long-lived assets 3,125 281 3,406 -123- Notes to Consolidated Financial Statements – (continued) Note 19 - Other Comprehensive Income (Loss) The following tables present the activity in other comprehensive income (loss): (Dollars in thousands) Year ended December 31, 2022 Pre-tax Amounts Income Tax Benefit (Expense) Net of Tax Available for Sale Debt Securities: Changes in fair value of available for sale debt securities ($ 163,471 ) $ 39,233 ($ 124,238 ) Cash Flow Hedges: Changes in fair value of cash flow hedges ( 27,344 ) 6,563 ( 20,781 ) Net cash flow hedge losses reclassified into earnings (1) 2,828 ( 679 ) 2,149 Net change in the fair value of cash flow hedges ( 24,516 ) 5,884 ( 18,632 ) Defined Benefit Plan Obligations: Defined benefit plan obligation adjustment 4,934 ( 1,184 ) 3,750 Amortization of net actuarial losses (2) 1,712 ( 411 ) 1,301 Net change in defined benefit plan obligations 6,646 ( 1,595 ) 5,051 Total other comprehensive loss ($ 181,341 ) $ 43,522 ($ 137,819 ) (1) The pre-tax amounts reclassified into earnings in the Consolidated Statements of Income include a $ 2.8 million reduction in interest and fees on loans and a $ 70 thousand increase in FHLB interest expense. (2) The pre-tax amount presented above is included in other expenses in the Consolidated Statements of Income. (Dollars in thousands) Year ended December 31, 2021 Pre-tax Amounts Income Tax Benefit (Expense) Net of Tax Available for Sale Debt Securities: Changes in fair value of available for sale debt securities ($ 21,942 ) $ 5,266 ($ 16,676 ) Cash Flow Hedges: Changes in fair value of cash flow hedges ( 3,067 ) 736 ( 2,331 ) Net cash flow hedge gains reclassified into earnings (1) ( 310 ) 75 ( 235 ) Net change in the fair value of cash flow hedges ( 3,377 ) 811 ( 2,566 ) Defined Benefit Plan Obligations: Defined benefit plan obligation adjustment 5,908 ( 1,417 ) 4,491 Amortization of net actuarial losses (2) 2,844 ( 683 ) 2,161 Net change in defined benefit plan obligations 8,752 ( 2,100 ) 6,652 Total other comprehensive loss ($ 16,567 ) $ 3,977 ($ 12,590 ) (1) The pre-tax amounts reclassified into earnings in the Consolidated Statements of Income include a $ 1.5 million increase in interest and fees on loans and a $ 1.1 million increase in FHLB interest expense. (2) The pre-tax amount presented above is included in other expenses in the Consolidated Statements of Income. -124- Notes to Consolidated Financial Statements – (continued) (Dollars in thousands) Year ended December 31, 2020 Pre-tax Amounts Income Tax (Expense)Benefit Net of Tax Available for Sale Debt Securities: Changes in fair value of available for sale debt securities $ 8,784 ($ 2,129 ) $ 6,655 Cash Flow Hedges: Changes in fair value of cash flow hedges ( 2,003 ) 482 ( 1,521 ) Net cash flow hedge losses reclassified into earnings (1) 1,136 ( 269 ) 867 Net change in the fair value of cash flow hedges ( 867 ) 213 ( 654 ) Defined Benefit Plan Obligations: Defined benefit plan obligation adjustment ( 5,093 ) 1,197 ( 3,896 ) Amortization of net actuarial losses (2) 2,141 ( 400 ) 1,741 Net change in defined benefit plan obligations ( 2,952 ) 797 ( 2,155 ) Total other comprehensive income $ 4,965 ($ 1,119 ) $ 3,846 (1) The pre-tax amounts reclassified into earnings in the Consolidated Statements of Income include a $ 203 thousand reduction in interest and fees on loans, $ 817 thousand increase in FHLB interest expense and a $ 116 thousand increase in junior subordinated debentures interest expense. (2) The pre-tax amount presented above is included in other expenses in the Consolidated Statements of Income. The following tables present the changes in AOCI (AOCL) by component, net of tax: (Dollars in thousands) Net Unrealized Losses on Available for Sale Debt Securities Net Unrealized Losses on Cash Flow Hedges Net Unrealized Losses on Defined Benefit Plan Obligations Total Balance at December 31, 2021 ($ 6,795 ) ($ 4,013 ) ($ 9,173 ) ($ 19,981 ) Other comprehensive (loss) income before reclassifications ( 124,238 ) ( 20,781 ) 3,750 ( 141,269 ) Amounts reclassified from accumulated other comprehensive income — 2,149 1,301 3,450 Net other comprehensive (loss) income ( 124,238 ) ( 18,632 ) 5,051 ( 137,819 ) Balance at December 31, 2022 ($ 131,033 ) ($ 22,645 ) ($ 4,122 ) ($ 157,800 ) (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 Balance at December 31, 2020 $ 9,881 ($ 1,447 ) ($ 15,825 ) ($ 7,391 ) Other comprehensive (loss) income before reclassifications ( 16,676 ) ( 2,331 ) 4,491 ( 14,516 ) Amounts reclassified from accumulated other comprehensive income — ( 235 ) 2,161 1,926 Net other comprehensive (loss) income ( 16,676 ) ( 2,566 ) 6,652 ( 12,590 ) Balance at December 31, 2021 ($ 6,795 ) ($ 4,013 ) ($ 9,173 ) ($ 19,981 ) -125- Notes to Consolidated Financial Statements – (continued) (Dollars in thousands) Net Unrealized Gains on Available for Sale Debt Securities Net Unrealized Losses on Cash Flow Hedges Net Unrealized Losses on Defined Benefit Plan Obligations Total Balance at December 31, 2019 $ 3,226 ($ 793 ) ($ 13,670 ) ($ 11,237 ) Other comprehensive income (loss) before reclassifications 6,655 ( 1,521 ) ( 3,896 ) 1,238 Amounts reclassified from accumulated other comprehensive income — 867 1,741 2,608 Net other comprehensive income (loss) 6,655 ( 654 ) ( 2,155 ) 3,846 Balance at December 31, 2020 $ 9,881 ($ 1,447 ) ($ 15,825 ) ($ 7,391 ) Note 20 - Earnings per Common Share The following table presents the calculation of EPS: (Dollars and shares in thousands, except per share amounts) Years ended December 31, 2022 2021 2020 Earnings per basic and diluted earnings per common share: Net income $ 71,681 $ 76,870 $ 69,829 Less: dividends and undistributed earnings allocated to participating securities ( 202 ) ( 223 ) ( 152 ) Net income available to common shareholders $ 71,479 $ 76,647 $ 69,677 Shares: Weighted average common shares outstanding 17,246 17,310 17,282 Dilutive effect of common stock equivalents 135 145 120 Weighted average diluted common shares outstanding 17,381 17,455 17,402 Earnings per common share: Basic earnings per common share $ 4.14 $ 4.43 $ 4.03 Diluted earnings per common share $ 4.11 $ 4.39 $ 4.00 Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 149,742 , 100,150 and 223,506 , respectively, for the years ended December 31, 2022, 2021 and 2020. -126- Notes to Consolidated Financial Statements – (continued) Note 21 - Commitments and Contingencies Financial Instruments with Off-Balance 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, mortgage loan commitments, loan related derivative contracts and interest rate risk management contracts. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the 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. At December 31, 2022 and 2021, there were no liabilities to beneficiaries resulting from standby letters of credit. Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required. 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. Interest Rate Risk Management Contracts The Corporation’s interest rate risk management contracts consist of interest rate swap 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. 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. -127- Notes to Consolidated Financial Statements – (continued) The following table presents the contractual and notional amounts of financial instruments with off-balance sheet risk: (Dollars in thousands) December 31, 2022 2021 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 1,308,873 $ 1,006,620 Standby letters of credit 9,028 11,844 Financial instruments whose notional amounts exceed the amount of credit risk: Mortgage loan commitments: Interest rate lock commitments 12,201 49,800 Forward sale commitments 23,150 103,626 Loan related derivative contracts: Interest rate contracts with customers 935,099 1,022,388 Mirror interest rate contracts with counterparties 935,099 1,022,388 Risk participation-in agreements 221,247 163,207 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 lifetime credit losses over the expected contractual term in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. 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. 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 activity in the ACL on unfunded commitments for the year ended December 31, 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 ( 31 ) 172 141 ( 12 ) — — — 129 Ending Balance $ 1,236 $ 988 $ 2,224 $ 50 $ — $ 16 $ 16 $ 2,290 The activity in the ACL on unfunded commitments for the year ended December 31, 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 360 ( 586 ) ( 226 ) 8 — ( 3 ) ( 3 ) ( 221 ) Ending Balance $ 1,267 $ 816 $ 2,083 $ 62 $ — $ 16 $ 16 $ 2,161 -128- Notes to Consolidated Financial Statements – (continued) 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. Other When selling a residential real estate mortgage loan or acting as originating agent on behalf of a third party, Washington Trust generally makes various representations and warranties. The specific representations and warranties depend on the nature of the transaction and the requirements of the buyer. Contractual liability may arise when the representations and warranties are breached. In the event of a breach of these representations and warranties, Washington Trust may be required to either repurchase the residential real estate mortgage loan (generally at unpaid principal balance plus accrued interest) with the identified defects or indemnify (“make-whole”) the investor for its losses. In the case of a repurchase, the Corporation will bear any subsequent credit loss on the residential real estate mortgage loan. Washington Trust has experienced an insignificant number of repurchase demands over a period of many years. As of December 31, 2022 and 2021, the carrying value of loans repurchased due to representation and warranty claims was $ 1.0 million and $ 1.4 million, respectively. Washington Trust has recorded a reserve for its exposure to losses for premium recapture and the obligation to indemnify or repurchase previously sold residential real estate mortgage loans. The reserve balance amounted to $ 265 thousand and $ 275 thousand at December 31, 2022 and 2021, respectively, and is included in other liabilities in the Consolidated Balance Sheets. Any change in the estimate is recorded in mortgage banking revenues in the Consolidated Statements of Income. Note 22 - Parent Company Financial Statements The following tables present parent company only financial statements of the Bancorp, reflecting the investment in the Bank on the equity basis of accounting. The Statements of Changes in Shareholders’ Equity for the parent company only are identical to the Consolidated Statements of Changes in Shareholders’ Equity and are therefore not presented. Balance Sheets (Dollars in thousands, except par value) December 31, 2022 2021 Assets: Cash on deposit with bank subsidiary $ 15,557 $ 8,290 Investment in subsidiaries at equity value: Bank 458,750 573,757 Non-bank 685 1,850 Dividends receivable from bank subsidiary 10,578 12,964 Other assets 1,293 747 Total assets $ 486,863 $ 597,608 Liabilities: Junior subordinated debentures $ 22,681 $ 22,681 Dividends payable 10,349 10,048 Other liabilities 164 71 Total liabilities 33,194 32,800 Shareholders’ Equity: Common stock of $ .0625 par value; authorized 60,000,000 shares; 17,363,457 shares issued and 17,182,753 shares outstanding at December 31, 2022 and 17,363,457 shares issued and 17,330,818 shares outstanding at December 31, 2021 1,085 1,085 Paid-in capital 127,056 126,511 Retained earnings 492,043 458,310 Accumulated other comprehensive loss ( 157,800 ) ( 19,981 ) Treasury stock, at cost; 180,704 shares at December 31, 2022 and 32,639 shares at December 31, 2021 ( 8,715 ) ( 1,117 ) Total shareholders’ equity 453,669 564,808 Total liabilities and shareholders’ equity $ 486,863 $ 597,608 -129- Notes to Consolidated Financial Statements – (continued) Statements of Income (Dollars in thousands) Years ended December 31, 2022 2021 2020 Income: Dividends from subsidiaries: Bank $ 53,240 $ 45,732 $ 43,139 Non-bank 20 11 17 Other income (losses) — ( 102 ) — Total income 53,260 45,641 43,156 Expenses: Interest on junior subordinated debentures 739 370 641 Other expenses 591 622 559 Total expenses 1,330 992 1,200 Income before income taxes 51,930 44,649 41,956 Income tax benefit 273 230 248 Income before equity in undistributed earnings (losses) of subsidiaries 52,203 44,879 42,204 Equity in undistributed earnings (losses) of subsidiaries: Bank 19,565 32,045 27,603 Non-bank ( 87 ) ( 54 ) 22 Net income $ 71,681 $ 76,870 $ 69,829 Statements of Cash Flows (Dollars in thousands) Years ended December 31, 2022 2021 2020 Cash flows from operating activities: Net income $ 71,681 $ 76,870 $ 69,829 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed (earnings) losses of subsidiaries: Bank ( 19,565 ) ( 32,045 ) ( 27,603 ) Non-bank 87 54 ( 22 ) Tax benefit (expense) from stock option exercises and other equity awards 78 182 ( 103 ) Deferred income tax benefit 5 ( 24 ) — Increase in dividend receivable 2,386 ( 1,128 ) ( 2,261 ) (Increase) decrease in other assets ( 175 ) 50 109 Increase (decrease) in accrued expenses and other liabilities 93 31 ( 31 ) Other, net ( 97 ) ( 182 ) 193 Net cash provided by operating activities 54,493 43,808 40,111 Cash flows from investing activities: Repayment of equity investment in subsidiary 1,096 — — Purchases of other equity investments, net ( 375 ) ( 650 ) — Net cash used in investing activities 721 ( 650 ) — Cash flows from financing activities: Treasury stock purchased ( 9,479 ) — ( 4,322 ) Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered ( 821 ) ( 177 ) ( 470 ) Cash dividends paid ( 37,647 ) ( 36,349 ) ( 35,499 ) Net cash used in financing activities ( 47,947 ) ( 36,526 ) ( 40,291 ) Net increase (decrease) in cash 7,267 6,632 ( 180 ) Cash at beginning of year 8,290 1,658 1,838 Cash at end of year $ 15,557 $ 8,290 $ 1,658 -130- ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.