WASHINGTON TRUST BANCORP INC 10-Q

Item 1. Financial Statements Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) (Dollars in thousands, except par value) March 31, 2023 December 31, 2022 Assets: Cash and due from banks $ 134,989 $ 115,492 Short-term investments 3,291 2,930 Mortgage loans held for sale, at fair value 7,445 8,987 Available for sale debt securities, at fair value (amortized cost of $ 1,209,794 , net of allowance for credit losses on securities of $ 0 at March 31, 2023; and amortized cost of $ 1,166,340 ; net of allowance for credit losses on securities of $ 0 at December 31, 2022) 1,054,747 993,928 Federal Home Loan Bank stock, at cost 42,501 43,463 Loans: Total loans 5,227,969 5,110,139 Less: allowance for credit losses on loans 38,780 38,027 Net loans 5,189,189 5,072,112 Premises and equipment, net 31,719 31,550 Operating lease right-of-use assets 26,170 27,156 Investment in bank-owned life insurance 101,782 102,182 Goodwill 63,909 63,909 Identifiable intangible assets, net 4,342 4,554 Other assets 199,098 193,788 Total assets $ 6,859,182 $ 6,660,051 Liabilities: Deposits: Noninterest-bearing deposits $ 829,763 $ 858,953 Interest-bearing deposits 4,438,751 4,160,009 Total deposits 5,268,514 5,018,962 Federal Home Loan Bank advances 925,000 980,000 Junior subordinated debentures 22,681 22,681 Operating lease liabilities 28,622 29,558 Other liabilities 149,382 155,181 Total liabilities 6,394,199 6,206,382 Commitments and contingencies (Note 16) Shareholders’ Equity: Common stock of $ .0625 par value; authorized 60,000,000 shares; 17,363,457 shares issued and 16,985,872 shares outstanding at March 31, 2023 and 17,363,457 shares issued and 17,182,753 shares outstanding at December 31, 2022 1,085 1,085 Paid-in capital 127,734 127,056 Retained earnings 495,231 492,043 Accumulated other comprehensive loss ( 141,760 ) ( 157,800 ) Treasury stock, at cost; 377,585 shares at March 31, 2023 and 180,704 shares at December 31, 2022 ( 17,307 ) ( 8,715 ) Total shareholders’ equity 464,983 453,669 Total liabilities and shareholders’ equity $ 6,859,182 $ 6,660,051 The accompanying notes are an integral part of these unaudited consolidated financial statements. -4- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Income (unaudited) (Dollars and shares in thousands, except per share amounts) Three months ended March 31, 2023 2022 Interest income: Interest and fees on loans $ 59,749 $ 33,930 Interest on mortgage loans held for sale 152 232 Taxable interest on debt securities 7,194 4,230 Dividends on Federal Home Loan Bank stock 597 67 Other interest income 1,070 78 Total interest and dividend income 68,762 38,537 Interest expense: Deposits 19,589 3,103 Federal Home Loan Bank advances 11,626 244 Junior subordinated debentures 354 99 Total interest expense 31,569 3,446 Net interest income 37,193 35,091 Provision for credit losses 800 100 Net interest income after provision for credit losses 36,393 34,991 Noninterest income: Wealth management revenues 8,663 10,531 Mortgage banking revenues 1,245 3,501 Card interchange fees 1,132 1,164 Service charges on deposit accounts 777 668 Loan related derivative income ( 51 ) 301 Income from bank-owned life insurance 1,165 601 Other income 352 393 Total noninterest income 13,283 17,159 Noninterest expense: Salaries and employee benefits 21,784 21,002 Outsourced services 3,496 3,242 Net occupancy 2,437 2,300 Equipment 1,028 918 Legal, audit and professional fees 896 770 FDIC deposit insurance costs 872 366 Advertising and promotion 408 351 Amortization of intangibles 212 217 Other expenses 2,431 2,053 Total noninterest expense 33,564 31,219 Income before income taxes 16,112 20,931 Income tax expense 3,300 4,448 Net income $ 12,812 $ 16,483 Net income available to common shareholders $ 12,783 $ 16,429 Weighted average common shares outstanding - basic 17,074 17,331 Weighted average common shares outstanding - diluted 17,170 17,482 Per share information: Basic earnings per common share $ 0.75 $ 0.95 Diluted earnings per common share $ 0.74 $ 0.94 The accompanying notes are an integral part of these unaudited consolidated financial statements. -5- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (unaudited) (Dollars in thousands) Three months ended March 31, 2023 2022 Net income $ 12,812 $ 16,483 Other comprehensive income (loss), net of tax: Net change in fair value of available for sale debt securities 13,198 ( 49,460 ) Net change in fair value of cash flow hedges 2,797 ( 10,335 ) Net change in defined benefit plan obligations 45 325 Total other comprehensive income (loss), net of tax 16,040 ( 59,470 ) Total comprehensive income (loss) $ 28,852 ($ 42,987 ) The accompanying notes are an integral part of these unaudited consolidated financial statements. -6- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (unaudited) (Dollars and shares in thousands, except per share amounts) For the three months ended March 31, 2023 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Treasury Stock Total Balance at December 31, 2022 17,183 $ 1,085 $ 127,056 $ 492,043 ($ 157,800 ) ($ 8,715 ) $ 453,669 Net income — — — 12,812 — — 12,812 Total other comprehensive income, net of tax — — — — 16,040 — 16,040 Cash dividends declared ($ 0.56 per share) — — — ( 9,624 ) — — ( 9,624 ) Share-based compensation — — 858 — — — 858 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 3 — ( 180 ) — — 149 ( 31 ) Treasury stock purchased under 2023 Repurchase Program ( 200 ) — — — — ( 8,741 ) ( 8,741 ) Balance at March 31, 2023 16,986 $ 1,085 $ 127,734 $ 495,231 ($ 141,760 ) ($ 17,307 ) $ 464,983 For the three months ended March 31, 2022 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at December 31, 2021 17,331 $ 1,085 $ 126,511 $ 458,310 ($ 19,981 ) ($ 1,117 ) $ 564,808 Net income — — — 16,483 — — 16,483 Total other comprehensive loss, net of tax — — — — ( 59,470 ) — ( 59,470 ) Cash dividends declared ($ 0.54 per share) — — — ( 9,498 ) — — ( 9,498 ) Share-based compensation — — 888 — — — 888 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 1 — ( 44 ) — — 25 ( 19 ) Balance at March 31, 2022 17,332 $ 1,085 $ 127,355 $ 465,295 ($ 79,451 ) ($ 1,092 ) $ 513,192 The accompanying notes are an integral part of these unaudited consolidated financial statements. -7- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statement of Cash Flows (unaudited) (Dollars in thousands) Three months ended March 31, 2023 2022 Cash flows from operating activities: Net income $ 12,812 $ 16,483 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 800 100 Depreciation of premises and equipment 975 838 Net amortization of premiums and discounts on debt securities and loans 324 966 Amortization of intangibles 212 217 Share-based compensation 858 888 Tax (expense) benefit from stock option exercises and other equity awards ( 1 ) 10 Income from bank-owned life insurance ( 1,165 ) ( 601 ) Net gains on loan sales, including changes in fair value ( 662 ) ( 3,085 ) Proceeds from sales of loans, net 25,378 122,165 Loans originated for sale ( 23,394 ) ( 95,644 ) Decrease (increase) in operating lease right-of-use assets 986 ( 2,124 ) (Decrease) increase in operating lease liabilities ( 936 ) 2,160 (Increase) decrease in other assets ( 4,917 ) 21,289 Decrease in other liabilities ( 176 ) ( 25,100 ) Net cash provided by operating activities 11,094 38,562 Cash flows from investing activities: Purchases of: Available for sale debt securities: Mortgage-backed ( 39,966 ) ( 74,919 ) Available for sale debt securities: Other ( 20,221 ) ( 250 ) Maturities, calls and principal payments of: Available for sale debt securities: Mortgage-backed 16,136 43,334 Available for sale debt securities: Other 250 — Net redemptions of Federal Home Loan Bank stock 962 4,579 Purchases of other equity investments, net — ( 188 ) Net increase in loans ( 116,609 ) ( 8,700 ) Purchases of loans ( 1,709 ) ( 465 ) Purchases of premises and equipment ( 1,144 ) ( 834 ) Proceeds from bank-owned life insurance 1,566 — Equity investments in real estate limited partnerships ( 6,632 ) — Net cash used in investing activities ( 167,367 ) ( 37,443 ) Cash flows from financing activities: Net increase in deposits 249,552 147,899 Proceeds from Federal Home Loan Bank advances 1,005,000 197,000 Repayments of Federal Home Loan Bank advances ( 1,060,000 ) ( 287,000 ) Purchases of treasury stock ( 8,741 ) — Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered ( 31 ) ( 19 ) Cash dividends paid ( 9,649 ) ( 9,396 ) Net cash provided by financing activities 176,131 48,484 Net increase in cash and cash equivalents 19,858 49,603 Cash and cash equivalents at beginning of period 118,422 178,493 Cash and cash equivalents at end of period $ 138,280 $ 228,096 Noncash Activities: Loans charged-off $ 61 $ 36 Loans transferred to property acquired through foreclosure or repossession 683 — Commitment for equity investments in real estate limited partnerships 1,728 — Supplemental Disclosures: Interest payments $ 27,585 $ 3,458 Income tax payments 936 931 The accompanying notes are an integral part of these unaudited consolidated financial statements. -8- Condensed Notes to Unaudited Consolidated Financial Statements Note 1 - Basis of Presentation 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 the Washington Trust conform to GAAP and to general practices of the banking industry. The Unaudited Consolidated Financial Statements of the Corporation presented herein have been prepared pursuant to the rules of the SEC for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying Unaudited Consolidated Financial Statements have been included. Interim results are not necessarily indicative of the results of the entire year. The accompanying Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The Unaudited 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 trusts’ 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 Unaudited Consolidated Balance Sheets. Interest expense on the junior subordinated debentures is included in the Unaudited Consolidated Statements of Income. 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. Note 2 - Recently Issued Accounting Pronouncements Accounting Standards Adopted in 2023 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 an 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 certain loan modifications made to borrowers experiencing financial difficulty. ASU 2022-02 also provides an update to the existing credit quality indicators “vintage” tabular disclosure requiring current period gross write-offs to be disclosed by year of origination for each loan segment. The provisions of ASU 2022-02 were effective January 1, 2023 and the Corporation adopted the provisions on a prospective basis. Historical disclosures on TDRs were removed from this report in accordance with the provisions of this ASU. The adoption of this ASU did not have a material impact on the consolidated financial statements. -9- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) 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. The provisions of ASU 2021-08 were effective January 1, 2023 and the Corporation adopted the provisions on a prospective basis. The adoption of ASU 2021-08 did not have a material impact on the Corporation’s consolidated financial statements. Accounting Standards Pending Adoption There were no new accounting standards issued in 2023 that are applicable to the Corporation and pending adoption. 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) March 31, 2023 Amortized Cost Unrealized Gains Unrealized Losses ACL Fair Value Available for Sale Debt Securities: Obligations of U.S. government-sponsored enterprises $ 250,952 $ — ($ 28,288 ) $ — $ 222,664 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 936,280 352 ( 124,762 ) — 811,870 Individual name issuer trust preferred debt securities 9,390 — ( 690 ) — 8,700 Corporate bonds 13,172 — ( 1,659 ) — 11,513 Total available for sale debt securities $ 1,209,794 $ 352 ($ 155,399 ) $ — $ 1,054,747 (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 Accrued interest receivable on available for sale debt securities totaled $ 3.1 million as of both March 31, 2023 and December 31, 2022. As of March 31, 2023 and December 31, 2022, securities with a fair value of $ 306.6 million and $ 294.8 million, respectively, were pledged as collateral for FHLB borrowings, potential borrowings with the FRBB, certain public deposits and for other purposes. See Note 9 for additional disclosure on FHLB borrowings. The schedule of maturities of available for sale debt securities is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments. All other debt securities are included based on contractual maturities. Actual maturities may differ from amounts presented because certain issuers have the right to call or -10- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) prepay obligations with or without call or prepayment penalties. (Dollars in thousands) March 31, 2023 Amortized Cost Fair Value Due in one year or less $ 106,939 $ 92,740 Due after one year to five years 464,167 405,495 Due after five years to ten years 381,590 333,522 Due after ten years 257,098 222,990 Total debt securities $ 1,209,794 $ 1,054,747 Included in the above table are debt securities with an amortized cost balance of $ 273.0 million and a fair value of $ 242.4 million at March 31, 2023 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 1 year to 14 years, with call features ranging from 1 month to 16 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 available for sale debt securities in an unrealized loss position, for which an ACL on securities has not been recorded, segregated by length of time that the securities have been in a continuous unrealized loss position: (Dollars in thousands) Less than 12 Months 12 Months or Longer Total March 31, 2023 # Fair Value Unrealized Losses # Fair Value Unrealized Losses # Fair Value Unrealized Losses Obligations of U.S. government-sponsored enterprises 4 $ 49,449 ($ 551 ) 19 $ 173,215 ($ 27,737 ) 23 $ 222,664 ($ 28,288 ) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 44 180,541 ( 5,539 ) 121 618,269 ( 119,223 ) 165 798,810 ( 124,762 ) Individual name issuer trust preferred debt securities — — — 3 8,700 ( 690 ) 3 8,700 ( 690 ) Corporate bonds — — — 4 11,513 ( 1,659 ) 4 11,513 ( 1,659 ) Total 48 $ 229,990 ($ 6,090 ) 147 $ 811,697 ($ 149,309 ) 195 $ 1,041,687 ($ 155,399 ) (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 99 $ 308,892 ($ 25,598 ) 91 $ 661,065 ($ 147,084 ) 190 $ 969,957 ($ 172,682 ) There were no debt securities on nonaccrual status at March 31, 2023 and 2022 and, therefore there was no accrued interest related to debt securities reversed against interest income for the three months ended March 31, 2023 and 2022. -11- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) As of March 31, 2023, the Corporation does not intend to sell these debt securities and has determined that it is more-likely-than-not that the Corporation would not be required to sell each security before the recovery of its amortized cost basis. In addition, management does not believe that any of these debt securities are impaired due to reasons of credit quality. As further described below, management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates. As a result, there was no ACL recorded at both March 31, 2023 and December 31, 2022. 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 March 31, 2023. Additionally, 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 March 31, 2023 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 March 31, 2023, there was one individual name issuer trust preferred debt security with an amortized cost of $ 2.0 million and unrealized losses of $ 135 thousand that was rated below investment grade by S&P. We noted no downgrades to below investment grade between March 31, 2023 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 March 31, 2023 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 March 31, 2023, there was one corporate bond debt security with an amortized cost of $ 2.0 million and unrealized losses of $ 160 thousand that was rated below investment grade by S&P. We noted no downgrades to below investment grade between March 31, 2023 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. -12- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 4 - Loans The following table presents a summary of loans: (Dollars in thousands) March 31, 2023 December 31, 2022 Commercial: Commercial real estate (1) $ 1,909,136 $ 1,829,304 Commercial & industrial (2) 609,720 656,397 Total commercial 2,518,856 2,485,701 Residential Real Estate: Residential real estate (3) 2,403,255 2,323,002 Consumer: Home equity 288,878 285,715 Other (4) 16,980 15,721 Total consumer 305,858 301,436 Total loans (5) $ 5,227,969 $ 5,110,139 (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. (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 $ 11.9 million and $ 11.6 million, respectively, at March 31, 2023 and December 31, 2022 and net unamortized premiums on loans purchased from and serviced by other financial institutions of $ 310 thousand and $ 318 thousand, respectively, at March 31, 2023 and December 31, 2022. Loan balances exclude accrued interest receivable of $ 19.0 million and $ 17.6 million, respectively, as of March 31, 2023 and December 31, 2022. As of March 31, 2023 and December 31, 2022, loans amounting to $ 2.6 billion and $ 2.4 billion, respectively, were pledged as collateral to the FHLB under a blanket pledge agreement and to the FRBB for the discount window. See Note 9 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. -13- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Past Due Loans Past due status is based on the contractual payment terms of the loan. The following tables present an aging analysis of past due loans, segregated by class of loans: (Dollars in thousands) Days Past Due March 31, 2023 30-59 60-89 Over 90 Total Past Due Current Total Loans Commercial: Commercial real estate $ 1,188 $ — $ — $ 1,188 $ 1,907,948 $ 1,909,136 Commercial & industrial 5 — 224 229 609,491 609,720 Total commercial 1,193 — 224 1,417 2,517,439 2,518,856 Residential Real Estate: Residential real estate 2,581 643 2,506 5,730 2,397,525 2,403,255 Consumer: Home equity 770 63 — 833 288,045 288,878 Other 15 — — 15 16,965 16,980 Total consumer 785 63 — 848 305,010 305,858 Total loans $ 4,559 $ 706 $ 2,730 $ 7,995 $ 5,219,974 $ 5,227,969 (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 Included in past due loans as of March 31, 2023 and December 31, 2022, were nonaccrual loans of $ 5.6 million and $ 7.2 million, respectively. In addition, all loans 90 days or more past due at March 31, 2023 and December 31, 2022 were classified as nonaccrual. Nonaccrual Loans Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. When loans are placed on nonaccrual status, interest previously accrued but not collected is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible. -14- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table is a summary of nonaccrual loans, segregated by class of loans: (Dollars in thousands) Mar 31, 2023 Dec 31, 2022 Commercial: Commercial real estate $ 1,601 $ — Commercial & industrial 920 — Total commercial 2,521 — Residential Real Estate: Residential real estate 10,470 11,894 Consumer: Home equity 989 952 Other — — Total consumer 989 952 Total nonaccrual loans $ 13,980 $ 12,846 Accruing loans 90 days or more past due $ — $ — No ACL was deemed necessary on nonaccrual loans with carrying values of $ 7.1 million and $ 6.5 million, respectively, as of March 31, 2023 and December 31, 2022. Nonaccrual loans of $ 8.3 million and $ 5.7 million, respectively, at March 31, 2023 and December 31, 2022 were current as to the payment of principal and interest. As of March 31, 2023 and December 31, 2022, nonaccrual loans secured by one- to four-family residential property amounting to $ 763 thousand and $ 2.9 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 March 31, 2023. The following table presents interest income recognized on nonaccrual loans: (Dollars in thousands) Three months ended March 31, 2023 2022 Commercial: Commercial real estate $ 27 $ — Commercial & industrial 13 — Total commercial 40 — Residential Real Estate: Residential real estate 173 101 Consumer: Home equity 22 7 Other 1 — Total consumer 23 7 Total $ 236 $ 108 Troubled Loan Modifications As disclosed in Note 2, the Corporation adopted ASU 2022-02, which eliminated the accounting guidance for TDRs and added enhanced disclosures with respect to certain modifications for borrowers experiencing financial difficulty. Effective January 1, 2023, a loan that has been modified is considered a troubled loan modification, or TLM, when the following conditions are met: (1) the modification is considered a continuation of an existing loan and not a new loan in accordance -15- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) with GAAP, (2) the modification is made to a borrower experiencing financial difficulty and (3) the modification has a direct impact to the contractual cash flows. Modifications with direct impact to contractual cash flows are defined as: principal forgiveness, interest rate reductions, maturity extensions, other-than-insignificant payment delays, or any combination thereof. If each of the aforementioned criteria are met, then the modification is considered a TLM and subject to the enhanced disclosure requirements. During the three months ended March 31, 2023, there were no TLMs. Individually Analyzed Loans Individually analyzed loans include nonaccrual commercial loans, as well as certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans. Prior to January 1, 2023, individually analyzed loans also included TDRs. As of March 31, 2023, individually analyzed loans amounted to $ 8.2 million, all of which were considered collateral dependent. As of December 31, 2022, 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 7 for additional disclosure regarding fair value of individually analyzed collateral dependent loans. The following table presents the carrying value of collateral dependent individually analyzed loans: (Dollars in thousands) March 31, 2023 December 31, 2022 Carrying Value Related Allowance Carrying Value Related Allowance Commercial: Commercial real estate (1) $ 2,096 $ 308 $ 2,103 $ — Commercial & industrial (2) 920 224 — — Total commercial 3,016 532 2,103 — Residential Real Estate: Residential real estate (3) 4,614 — 5,760 — Consumer: Home equity (3) 592 — 592 — Other — — — — Total consumer 592 — 592 — Total $ 8,222 $ 532 $ 8,455 $ — (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 Corporation 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. -16- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality, but may exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, performance or may be in an industry or of a loan type known to have a higher degree of risk. These weaknesses may be mitigated by secondary sources of repayment, including SBA guarantees. Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies. Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectability. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined. “Loss” is not intended to imply that the loan has no recovery value, but rather, it is not practical or desirable to continue to carry the asset. The Corporation’s procedures call for loan risk ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. On a quarterly basis, management reviews a watched asset list, which generally consists of commercial loans that are risk-rated 6 or worse, highly leveraged transaction loans, high-volatility commercial real estate and other selected loans. Management’s review focuses on the current status of the loans, the appropriateness of risk ratings and strategies to improve the credit. An annual credit review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio. Residential and Consumer Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type. In addition, other techniques are utilized to monitor indicators of credit deterioration in the residential real estate loans and home equity consumer loans. Among these techniques is the periodic tracking of loans with an updated 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. -17- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table includes information on credit quality indicators and gross charge-offs for the Corporation’s loan portfolio, segregated by class of loans as of March 31, 2023: (Dollars in thousands) Term Loans Amortized Cost by Origination Year 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Revolving Loans Converted to Term Loans Total Commercial: CRE: Pass $ 74,365 $ 556,396 $ 394,005 $ 179,602 $ 168,940 $ 413,854 $ 8,931 $ 1,154 $ 1,797,247 Special Mention 20,487 — 22,302 668 27,761 38,968 102 — 110,288 Classified — — — — — 1,601 — — 1,601 Total CRE 94,852 556,396 416,307 180,270 196,701 454,423 9,033 1,154 1,909,136 CRE gross charge-offs — — — — — — — — — C&I: Pass 4,116 120,221 59,156 67,621 82,807 167,451 91,060 979 593,411 Special Mention 11,529 836 — — 185 1,412 1,427 — 15,389 Classified — — 224 — 696 — — — 920 Total C&I 15,645 121,057 59,380 67,621 83,688 168,863 92,487 979 609,720 C&I gross charge-offs (1) 11 — — — — — — — 11 Residential Real Estate: Residential real estate: Current 108,758 836,112 700,923 272,006 120,896 358,830 — — 2,397,525 Past Due — — 392 530 1,406 3,402 — — 5,730 Total residential real estate 108,758 836,112 701,315 272,536 122,302 362,232 — — 2,403,255 Residential real estate gross charge-offs — — — — — — — — — Consumer: Home equity: Current 5,140 18,965 7,993 3,585 2,319 5,344 234,279 10,420 288,045 Past Due — — — — — 63 317 453 833 Total home equity 5,140 18,965 7,993 3,585 2,319 5,407 234,596 10,873 288,878 Home equity gross charge-offs — — — — — — — — — Other: Current 1,951 4,180 4,204 1,427 217 4,764 222 — 16,965 Past Due 15 — — — — — — — 15 Total other 1,966 4,180 4,204 1,427 217 4,764 222 — 16,980 Other gross charge-offs (1) 42 — 8 — — — — — 50 Total loans $ 226,361 $ 1,536,710 $ 1,189,199 $ 525,439 $ 405,227 $ 995,689 $ 336,338 $ 13,006 $ 5,227,969 Total gross charge-offs $ 53 $ — $ 8 $ — $ — $ — $ — $ — $ 61 (1) Gross charge-offs in 2023 represent charge-offs of business and consumer account overdraft balances. -18- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table includes information on credit quality indicators for the Corporation’s loan portfolio, segregated by class of loans 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 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. -19- Condensed Notes to Unaudited 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 three months ended March 31, 2023: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 18,435 $ 10,356 $ 28,791 $ 7,740 $ 1,115 $ 381 $ 1,496 $ 38,027 Charge-offs — ( 11 ) ( 11 ) — — ( 50 ) ( 50 ) ( 61 ) Recoveries — 5 5 — 1 8 9 14 Provision 2,939 ( 517 ) 2,422 ( 1,501 ) ( 138 ) 17 ( 121 ) 800 Ending Balance $ 21,374 $ 9,833 $ 31,207 $ 6,239 $ 978 $ 356 $ 1,334 $ 38,780 The following table presents the activity in the ACL on loans for the three months ended March 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 — ( 5 ) ( 5 ) — — ( 31 ) ( 31 ) ( 36 ) Recoveries 145 6 151 21 2 10 12 184 Provision ( 618 ) 389 ( 229 ) 185 27 17 44 — Ending Balance $ 18,460 $ 11,222 $ 29,682 $ 8,066 $ 1,098 $ 390 $ 1,488 $ 39,236 Note 6 - 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 Unaudited 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 March 31, 2023 and December 31, 2022, 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, 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 -20- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) commercial loans. On March 31, 2023, the Corporation terminated this interest rate swap contract and the derivative liability was derecognized. The loss on this interest rate swap included in the AOCL component of shareholders’ equity was updated to its termination date fair value of $ 26.5 million, or $ 20.1 million after tax. This loss will be amortized into earnings as a reduction of interest income on a straight-line basis over the remaining life of the original interest rate swap term, or through May 1, 2026. The changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) and subsequently reclassified to earnings when gains or losses are realized. Loan Related Derivative Contracts Interest Rate Derivative Contracts with Customers The Corporation enters into interest rate swap and interest rate cap contracts to help commercial loan borrowers manage their interest rate risk. These interest rate swap contracts allow borrowers to convert variable-rate loan payments to fixed-rate loan payments, while interest rate cap contracts allow borrowers to limit their interest rate exposure in a rising rate environment. When the Corporation enters into an interest rate derivative contract with a commercial loan borrower, it simultaneously enters into a “mirror” interest rate contract with a third party. For interest rate swaps, the third party exchanges the client’s fixed-rate loan payments for variable-rate loan payments. The Corporation retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Risk Participation Agreements The Corporation has entered into risk participation agreements with other banks in commercial loan arrangements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Under a risk participation-out agreement, a derivative asset, the Corporation participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Corporation assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower for a fee received from the other bank. Mortgage Loan Commitments Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Forward sale commitments are contracts for delayed delivery or net settlement of the underlying instrument, such as a residential real estate mortgage loan, where the seller agrees to deliver on a specified future date, either a specified instrument at a specified price or yield or the net cash equivalent of an underlying instrument. Both interest rate lock commitments and forward sale commitments are derivative financial instruments, but do not meet criteria for hedge accounting and therefore, the changes in fair value of these commitments are recognized in earnings. -21- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the notional amounts and fair values of derivative instruments in the Unaudited Consolidated Balance Sheets: (Dollars in thousands) March 31, 2023 December 31, 2022 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) $ 20,000 $ 405 $ — $ 320,000 $ 548 $ 31,178 Derivatives not Designated as Hedging Instruments: Loan related derivative contracts: Interest rate contracts with customers 933,832 1,131 53,185 935,099 32 68,137 Mirror contracts with counterparties 933,832 52,875 1,260 935,099 67,797 61 Risk participation agreements 284,325 — 2 282,191 — 2 Mortgage loan commitments: Interest rate lock commitments 26,489 404 — 12,201 144 4 Forward sale commitments 38,810 12 305 23,150 58 150 Gross amounts 54,827 $ 54,752 68,579 99,532 Less: amounts offset (2) 1,260 1,260 23,524 23,524 Derivative balances, net of offset 53,567 53,492 45,055 76,008 Less: collateral pledged (3) — — — 7,716 Net amounts $ 53,567 $ 53,492 $ 45,055 $ 68,292 (1) The fair value of derivative assets includes accrued interest receivable of $ 25 thousand and $ 24 thousand, respectively, at March 31, 2023 and December 31, 2022. The fair value of derivative liabilities includes accrued interest payable $ 856 thousand at December 31, 2022. (2) Interest rate risk management contracts and loan related derivative contracts with counterparties are subject to master netting arrangements. (3) Collateral pledged to derivative counterparties is in the form of cash. Washington Trust may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions. The following table presents the effect of derivative instruments in the Unaudited Consolidated Statements of Changes in Shareholders’ Equity: (Dollars in thousands) Gain (Loss) Recognized in Other Comprehensive Income (Loss), Net of Tax Three months ended March 31, 2023 2022 Derivatives Designated as Cash Flow Hedging Instruments: Interest rate risk management contracts: Interest rate swaps $ 2,797 ($ 10,335 ) Total $ 2,797 ($ 10,335 ) For derivatives designated as cash flow hedging instruments, see Note 14 for additional disclosure pertaining to the amounts and location of reclassifications from AOCL into earnings. -22- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the effect of derivative instruments in the Unaudited Consolidated Statements of Income: (Dollars in thousands) Amount of Gain (Loss) Recognized in Noninterest Income Three months ended March 31, Statement of Income Location 2023 2022 Derivatives not Designated as Hedging Instruments: Loan related derivative contracts: Interest rate contracts with customers Loan related derivative income $ 11,132 ($ 40,822 ) Mirror interest rate contracts with counterparties Loan related derivative income ( 11,171 ) 41,122 Risk participation agreements Loan related derivative income ( 11 ) 1 Mortgage loan commitments: Interest rate lock commitments Mortgage banking revenues 263 ( 934 ) Forward sale commitments Mortgage banking revenues ( 124 ) 2,991 Total $ 89 $ 2,358 Note 7 - Fair Value Measurements The Corporation uses fair value measurements to record fair value adjustments on certain assets and liabilities and to determine fair value disclosures. Items recorded at fair value on a recurring basis include securities available for sale, mortgage loans held for sale and derivatives. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent individually analyzed loans, OREO and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets. Fair value is a market-based measurement, not an entity-specific measurement. Fair value measurements are determined based on the assumptions the market participants would use in pricing the asset or liability. In addition, GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information, or “inputs”, are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Corporation’s market assumptions. These two types of inputs have created the following fair value hierarchy: • Level 1 – Quoted prices for identical assets or liabilities in active markets. • Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. • Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in the markets and which reflect the Corporation’s market assumptions. Fair Value Option Election GAAP allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain 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) March 31, 2023 December 31, 2022 Aggregate fair value $ 7,445 $ 8,987 Aggregate principal balance 7,295 8,860 Difference between fair value and principal balance $ 150 $ 127 Changes in fair value of mortgage loans held for sale accounted for under the fair value option election are included in mortgage banking revenues in the Unaudited Consolidated Statements of Income. Changes in fair value amounted to an increase to mortgage banking revenues of $ 24 thousand for the three months ended March 31, 2023, compared to a decrease -23- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) to mortgage banking revenues of $ 1.1 million for the same period in 2022. There were no mortgage loans held for sale 90 days or more past due as of March 31, 2023 and December 31, 2022. Valuation Techniques Debt Securities Available for sale debt securities are recorded at fair value on a recurring basis. When available, the Corporation uses quoted market prices to determine the fair value of debt securities; such items are classified as Level 1. There were no Level 1 debt securities held at March 31, 2023 and December 31, 2022. Level 2 debt securities are traded less frequently than exchange-traded instruments. The fair value of these securities is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category includes obligations of U.S. government-sponsored enterprises, including mortgage-backed securities, individual name issuer trust preferred debt securities and corporate bonds. Debt securities not actively traded whose fair value is determined through the use of cash flows utilizing inputs that are unobservable are classified as Level 3. There were no Level 3 debt securities held at March 31, 2023 and December 31, 2022. 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 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 March 31, 2023 and December 31, 2022, 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. -24- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) 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) March 31, 2023 Assets: Available for sale debt securities: Obligations of U.S. government-sponsored enterprises $ 222,664 $ — $ 222,664 $ — Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 811,870 — 811,870 — Individual name issuer trust preferred debt securities 8,700 — 8,700 — Corporate bonds 11,513 — 11,513 — Mortgage loans held for sale 7,445 — 7,445 — Derivative assets 53,567 — 53,567 — Total assets at fair value on a recurring basis $ 1,115,759 $ — $ 1,115,759 $ — Liabilities: Derivative liabilities $ 53,492 $ — $ 53,492 $ — Total liabilities at fair value on a recurring basis $ 53,492 $ — $ 53,492 $ — (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 $ — -25- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Items Recorded at Fair Value on a Nonrecurring Basis The following table presents the carrying value of assets held at March 31, 2023, which were written down to fair value during the three months ended March 31, 2023: (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) Assets: Collateral dependent individually analyzed loans $ 1,292 $ — $ — $ 1,292 Total assets at fair value on a nonrecurring basis $ 1,292 $ — $ — $ 1,292 There were no assets written down to fair value during the twelve months ended December 31, 2022. 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 Range of Inputs Utilized (Weighted Average) March 31, 2023 Collateral dependent individually analyzed loans $ 1,292 Appraisals of collateral Discount for costs to sell 0 % - 47 % ( 43 %) Appraisal adjustments 0 % - 100 % ( 9 %) Valuation of Financial Instruments The estimated fair values and related carrying amounts for financial instruments for which fair value is only disclosed are presented below as of the periods indicated. The tables exclude financial instruments for which the carrying value approximates fair value such as cash and cash equivalents, FHLB stock, accrued interest receivable, BOLI, non-maturity deposits and accrued interest payable. The Corporation considers cash and cash equivalents, accrued interest receivable and accrued interest payable as level 1 measurements within the fair value hierarchy. The Corporation considers FHLB stock, BOLI and non-maturity deposits as level 2 measurements. (Dollars in thousands) March 31, 2023 Carrying Amount Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets: Loans, net of allowance for credit losses on loans $ 5,189,189 $ 5,044,231 $ — $ — $ 5,044,231 Financial Liabilities: Time deposits $ 1,531,835 $ 1,558,899 $ — $ 1,558,899 $ — FHLB advances 925,000 925,350 — 925,350 — Junior subordinated debentures 22,681 18,558 — 18,558 — -26- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (Dollars in thousands) December 31, 2022 Carrying Amount Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets: Loans, net of allowance for credit losses on loans $ 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 — Note 8 - Deposits The following table presents a summary of deposits: (Dollars in thousands) Mar 31, 2023 Dec 31, 2022 Noninterest-bearing: Demand deposits $ 829,763 $ 858,953 Interest-bearing: Interest-bearing demand deposits (1) 319,598 333,197 NOW accounts 828,700 871,875 Money market accounts 1,214,014 1,255,805 Savings accounts 544,604 576,250 Time deposits (2) 1,531,835 1,122,882 Total interest-bearing deposits $ 4,438,751 $ 4,160,009 Total deposits $ 5,268,514 $ 5,018,962 (1) Includes wholesale brokered demand deposit balances of $ 1,233 and $ 31,153 , respectively, as of March 31, 2023 and December 31, 2022. (2) Includes wholesale brokered time deposit balances of $ 607,329 and $ 327,044 , respectively, as of March 31, 2023 and December 31, 2022. The following table presents scheduled maturities of time certificates of deposit: (Dollars in thousands) Scheduled Maturity Weighted Average Rate April 1, 2023 to December 31, 2023 $ 945,304 3.44 % 2024 386,027 3.86 2025 112,789 2.99 2026 39,901 1.98 2027 33,817 2.88 2028 and thereafter 13,997 3.68 Balance at December 31, 2023 $ 1,531,835 3.46 % Time certificates of deposit in denominations of $250 thousand or more totaled $ 241.8 million and $ 200.9 million, respectively, at December 31, 2023 and 2022. -27- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 9 - Borrowings Advances payable to the FHLB amounted to $ 925.0 million and $ 980.0 million, respectively, at March 31, 2023 and December 31, 2022. As of March 31, 2023 and December 31, 2022, 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 March 31, 2023 and 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 $ 859.6 million and $ 668.3 million, respectively, with the FHLB at March 31, 2023 and December 31, 2022. The Bank pledges certain qualified investment securities and loans as collateral to the FHLB. The following table presents maturities and weighted average interest rates on FHLB advances outstanding as of March 31, 2023: (Dollars in thousands) Scheduled Maturity Weighted Average Rate April 1, 2023 to December 31, 2023 $ 665,000 4.72 % 2024 40,000 4.56 2025 80,000 4.29 2026 90,000 4.31 2027 20,000 4.13 2028 and thereafter 30,000 4.12 Balance at March 31, 2023 $ 925,000 4.60 % Note 10 - Shareholders' Equity Stock Repurchase Program The 2023 Repurchase Program authorizes the repurchase of up to 850,000 shares, or approximately 5 %, of the Corporation’s outstanding common stock. This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The timing and actual 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. During the three months ended March 31, 2023, the Corporation repurchased 200,000 shares, at an average price of $ 43.70 and a total cost of $ 8.7 million. Regulatory Capital Requirements Capital levels at March 31, 2023 exceeded the regulatory minimum levels to be considered “well capitalized.” -28- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios, as well as the corresponding minimum and well capitalized regulatory amounts and ratios that were in effect during the respective periods: (Dollars in thousands) Actual For Capital Adequacy Purposes To Be “Well Capitalized” Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio March 31, 2023 Total Capital (to Risk-Weighted Assets): Corporation $ 601,662 12.01 % $ 400,831 8.00 % N/A N/A Bank 584,596 11.67 400,723 8.00 $ 500,904 10.00 % Tier 1 Capital (to Risk-Weighted Assets): Corporation 565,329 11.28 300,623 6.00 N/A N/A Bank 548,263 10.95 300,542 6.00 400,723 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets): Corporation 543,333 10.84 225,467 4.50 N/A N/A Bank 548,263 10.95 225,407 4.50 325,587 6.50 Tier 1 Capital (to Average Assets): (1) Corporation 565,329 8.25 273,951 4.00 N/A N/A Bank 548,263 8.01 273,868 4.00 342,336 5.00 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 (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 March 31, 2023 and December 31, 2022. 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 March 31, 2023 and December 31, 2022, $ 22.0 million in trust preferred securities were included in the Tier 1 capital of the Corporation for regulatory capital reporting purposes pursuant to the capital adequacy guidelines of the Federal Reserve. In accordance with regulatory capital rules, the Corporation elected the option to delay the estimated impact of ASC 326 on its regulatory capital over a two-year deferral and subsequent three-year transition period ending December 31, 2024. As a result, capital ratios exclude the full impact of the increased ACL on loans and unfunded loan commitments attributed to the adoption of ASC 326, adjusted for an approximation of the after-tax provision for credit losses attributable to ASC 326 relative to the incurred loss methodology during the two-year deferral period. The cumulative difference at the end of the deferral period is being phased-in to regulatory capital over the three-year transition period, which began January 1, 2022. -29- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 11 - Revenue from Contracts with Customers The following tables summarize total revenues as presented in the Unaudited Consolidated Statements of Income and the related amounts that are from contracts with customers within the scope of ASC 606. As shown below, a substantial portion of our revenues are specifically excluded from the scope of ASC 606. For the three months ended March 31, 2023 2022 (Dollars in thousands) Revenue (1) ASC 606 Revenue (2) Revenue (1) ASC 606 Revenue (2) Net interest income $ 37,193 $ — $ 35,091 $ — Noninterest income: Wealth management revenues 8,663 8,663 10,531 10,531 Mortgage banking revenues 1,245 — 3,501 — Card interchange fees 1,132 1,132 1,164 1,164 Service charges on deposit accounts 777 777 668 668 Loan related derivative income ( 51 ) — 301 — Income from bank-owned life insurance 1,165 — 601 — Other income 352 276 393 286 Total noninterest income 13,283 10,848 17,159 12,649 Total revenues $ 50,476 $ 10,848 $ 52,250 $ 12,649 (1) As reported in the Unaudited 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) Three months ended March 31, 2023 2022 Revenue recognized at a point in time: Card interchange fees $ 1,132 $ 1,164 Service charges on deposit accounts 558 549 Other income 216 229 Revenue recognized over time: Wealth management revenues 8,663 10,531 Service charges on deposit accounts 219 119 Other income 60 57 Total revenues from contracts in scope of Topic 606 $ 10,848 $ 12,649 Receivables for revenue from contracts with customers primarily consist of amounts due for wealth management services performed for which the Corporation’s performance obligations have been fully satisfied. Receivables amounted to $ 6.6 million and $ 5.1 million, respectively, at March 31, 2023 and December 31, 2022 and were included in other assets in the Unaudited Consolidated Balance Sheets. Deferred revenues, which are considered contract liabilities under ASC 606, represent advance consideration received from customers for which the Corporation has a remaining performance obligation to fulfill. Contract liabilities are recognized as revenue over the life of the contract as the performance obligations are satisfied. The balances of contract liabilities were insignificant at both March 31, 2023 and December 31, 2022 and were included in other liabilities in the Unaudited Consolidated Balance Sheets. For commissions and incentives that are in scope of ASC 606, such as those paid to employees in our wealth management services and commercial banking segments in order to obtain customer contracts, contract cost assets are established. The contract cost assets are capitalized and amortized over the estimated useful life that the asset is expected to generate benefits. The carrying value of contract cost assets amounted to $ 2.0 million and $ 2.1 million, respectively, at March 31, 2023 and -30- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) December 31, 2022 and were included in other assets in the Unaudited Consolidated Balance Sheets. The amortization of contract cost assets is recorded within salaries and employee benefits expense in the Unaudited Consolidated Statements of Income. Note 12 - Defined Benefit Pension Plans Washington Trust maintains a qualified pension plan for the benefit of certain eligible employees who were hired prior to October 1, 2007. Washington Trust also has non-qualified retirement plans to provide supplemental retirement benefits to certain employees, as defined in the plans. The defined benefit pension plans were previously amended to freeze benefit accruals after a 10-year transition period ending in December 2023. The following table presents components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss), on a pre-tax basis: (Dollars in thousands) Qualified Pension Plan Non-Qualified Retirement Plans Three months ended March 31, 2023 2022 2023 2022 Net Periodic Benefit Cost: Service cost (1) $ 351 $ 516 $ 39 $ 54 Interest cost (2) 884 592 176 106 Expected return on plan assets (2) ( 1,147 ) ( 1,159 ) — — Recognized net actuarial loss (2) — 255 59 173 Net periodic benefit cost $ 88 $ 204 $ 274 $ 333 (1) Included in salaries and employee benefits expense in the Unaudited Consolidated Statements of Income. (2) Included in other expenses in the Unaudited Consolidated Statements of Income. The following table presents the measurement date and weighted-average assumptions used to determine net periodic benefit cost: Qualified Pension Plan Non-Qualified Retirement Plans For the three months ended March 31, 2023 2022 2023 2022 Measurement date Dec 31, 2022 Dec 31, 2021 Dec 31, 2022 Dec 31, 2021 Equivalent single discount rate for benefit obligations 5.54 % 3.00 % 5.50 % 2.89 % Equivalent single discount rate for service cost 5.60 3.11 5.61 3.16 Equivalent single discount rate for interest cost 5.43 2.67 5.40 2.48 Expected long-term return on plan assets 5.25 5.25 N/A N/A Rate of compensation increase 5.00 3.75 5.00 3.75 -31- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 13 - Business Segments The Corporation manages its operations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services. Management uses an allocation methodology to allocate income and expenses to the business lines. Direct activities are assigned to the appropriate business segment to which the activity relates. Indirect activities, such as corporate, technology and other support functions, are allocated to business segments primarily based upon full-time equivalent employee computations. Commercial Banking The Commercial Banking segment includes commercial, residential and consumer lending activities; mortgage banking activities; deposit generation; cash management activities; banking activities, including customer support and the operation of ATMs, telephone banking, internet banking and mobile banking services; as well as investment portfolio and wholesale funding activities. Wealth Management Services The Wealth Management Services segment includes investment management; holistic financial planning services; personal trust and estate services, including services as trustee, personal representative, custodian and guardian; settlement of decedents’ estates; and institutional trust services, including custody and fiduciary services. The following table presents the statement of operations and total assets for Washington Trust’s reportable segments: (Dollars in thousands) Commercial Banking Wealth Management Services Consolidated Total Three months ended March 31, 2023 2022 2023 2022 2023 2022 Net interest income (expense) $ 37,180 $ 35,108 $ 13 ($ 17 ) $ 37,193 $ 35,091 Provision for credit losses 800 100 — — 800 100 Net interest income (expense) after provision for credit losses 36,380 35,008 13 ( 17 ) 36,393 34,991 Noninterest income 4,431 6,512 8,852 10,647 13,283 17,159 Noninterest expenses: Depreciation and amortization expense 831 711 356 344 1,187 1,055 Other noninterest expenses 24,635 22,611 7,742 7,553 32,377 30,164 Total noninterest expenses 25,466 23,322 8,098 7,897 33,564 31,219 Income before income taxes 15,345 18,198 767 2,733 16,112 20,931 Income tax expense 3,087 3,797 213 651 3,300 4,448 Net income $ 12,258 $ 14,401 $ 554 $ 2,082 $ 12,812 $ 16,483 Total assets at period end $ 6,785,254 $ 5,773,796 $ 73,928 $ 74,203 $ 6,859,182 $ 5,847,999 Expenditures for long-lived assets 1,136 730 8 104 1,144 834 -32- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 14 - Other Comprehensive Income (Loss) The following table presents the activity in other comprehensive income (loss): Three months ended March 31, 2023 2022 (Dollars in thousands) Pre-tax Amounts Income Tax Benefit (Expense) Net of Tax Pre-tax Amounts Income Tax Benefit (Expense) Net of Tax Available for Sale Debt Securities: Change in fair value of available for sale debt securities $ 17,365 ($ 4,167 ) $ 13,198 ($ 65,078 ) $ 15,618 ($ 49,460 ) Cash Flow Hedges: Change in fair value of cash flow hedges 1,046 ( 251 ) 795 ( 13,201 ) 3,168 ( 10,033 ) Net cash flow hedge losses (gains) reclassified into earnings (1) 2,636 ( 634 ) 2,002 ( 399 ) 97 ( 302 ) Net change in fair value of cash flow hedges 3,682 ( 885 ) 2,797 ( 13,600 ) 3,265 ( 10,335 ) Defined Benefit Plan Obligations: Amortization of net actuarial losses (2) 59 ( 14 ) 45 428 ( 103 ) 325 Total other comprehensive income (loss) $ 21,106 ($ 5,066 ) $ 16,040 ($ 78,250 ) $ 18,780 ($ 59,470 ) (1) For the three months ended March 31, 2023 and 2022, the pre-tax amounts reclassified into earnings in the Unaudited Consolidated Statements of Income include a reduction of $ 2.8 million and an increase of $ 493 thousand, respectively, in interest and fees on loans, as well as a reduction of $ 127 thousand and an increase of $ 94 thousand, respectively, in FHLB interest expense. (2) The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income. The following tables present the changes in 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 For the three months ended March 31, 2023 Balance at December 31, 2022 ($ 131,033 ) ($ 22,645 ) ($ 4,122 ) ($ 157,800 ) Other comprehensive income before reclassifications 13,198 795 — 13,993 Amounts reclassified from accumulated other comprehensive loss — 2,002 45 2,047 Net other comprehensive income 13,198 2,797 45 16,040 Balance at March 31, 2023 ($ 117,835 ) ($ 19,848 ) ($ 4,077 ) ($ 141,760 ) (Dollars in thousands) Net Unrealized Losses on Available For Sale Debt Securities Net Unrealized Losses on Cash Flow Hedges Net Unrealized Losses on Defined Benefit Plan Obligations Total For the three months ended March 31, 2022 Balance at December 31, 2021 ($ 6,795 ) ($ 4,013 ) ($ 9,173 ) ($ 19,981 ) Other comprehensive loss before reclassifications ( 49,460 ) ( 10,033 ) — ( 59,493 ) Amounts reclassified from accumulated other comprehensive loss — ( 302 ) 325 23 Net other comprehensive (loss) income ( 49,460 ) ( 10,335 ) 325 ( 59,470 ) Balance at March 31, 2022 ($ 56,255 ) ($ 14,348 ) ($ 8,848 ) ($ 79,451 ) -33- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 15 - Earnings per Common Share The following table presents the calculation of EPS: (Dollars and shares in thousands, except per share amounts) Three months ended March 31, 2023 2022 Earnings for basic and diluted earnings per common share: Net income $ 12,812 $ 16,483 Less: dividends and undistributed earnings allocated to participating securities ( 29 ) ( 54 ) Net income available to common shareholders $ 12,783 $ 16,429 Shares: Weighted average common shares outstanding 17,074 17,331 Dilutive effect of common stock equivalents 96 151 Weighted average diluted common shares outstanding 17,170 17,482 Earnings per common share: Basic earnings per common share $ 0.75 $ 0.95 Diluted earnings per common share $ 0.74 $ 0.94 Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 303,982 for the three months ended March 31, 2023, compared to 94,175 for the same period in 2022. Note 16 - Commitments and Contingencies Financial Instruments with Off-Balance Sheet Risk The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Unaudited Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. Financial Instruments Whose Contract Amounts Represent Credit Risk (Unfunded Commitments) Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements. Each borrower’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the borrower. Standby Letters of Credit Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support the financing needs of the Bank’s commercial customers. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The collateral supporting those commitments is essentially the same as for other commitments. Most standby letters of credit extend for one year. At March 31, 2023 and December 31, 2022, 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 -34- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) 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. The following table presents the contractual and notional amounts of financial instruments with off-balance sheet risk: (Dollars in thousands) Mar 31, 2023 Dec 31, 2022 Financial instruments whose contract amounts represent credit risk (unfunded commitments): Commitments to extend credit: $ 1,409,788 $ 1,308,873 Standby letters of credit 9,696 9,028 Financial instruments whose notional amounts exceed the amounts of credit risk: Mortgage loan commitments: Interest rate lock commitments 26,489 12,201 Forward sale commitments 38,810 23,150 Loan related derivative contracts: Interest rate contracts with customers 933,832 935,099 Mirror interest rate contracts with counterparties 933,832 935,099 Risk participation-in agreements 221,634 221,247 Interest rate risk management contracts: Interest rate swaps 20,000 320,000 See Note 6 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. -35- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The activity in the ACL on unfunded commitments for the three months ended March 31, 2023 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 1,236 $ 988 $ 2,224 $ 50 $ — $ 16 $ 16 $ 2,290 Provision 132 ( 105 ) 27 ( 25 ) — ( 2 ) ( 2 ) — Ending Balance $ 1,368 $ 883 $ 2,251 $ 25 $ — $ 14 $ 14 $ 2,290 The activity in the ACL on unfunded commitments for the three months ended March 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 68 21 89 10 — 1 1 100 Ending Balance $ 1,335 $ 837 $ 2,172 $ 72 $ — $ 17 $ 17 $ 2,261 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. -36- Management's Discussion and Analysis