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) June 30, 2024 December 31, 2023 Assets: Cash and due from banks $ 103,877 $ 86,824 Short-term investments 3,654 3,360 Mortgage loans held for sale, at fair value 26,116 20,077 Available for sale debt securities, at fair value (amortized cost of $ 1,117,819 , net of allowance for credit losses on securities of $ 0 at June 30, 2024; and amortized cost of $ 1,152,629 ; net of allowance for credit losses on securities of $ 0 at December 31, 2023) 951,828 1,000,380 Federal Home Loan Bank stock, at cost 66,166 51,893 Loans: Total loans 5,629,102 5,647,706 Less: allowance for credit losses on loans 42,378 41,057 Net loans 5,586,724 5,606,649 Premises and equipment, net 31,866 32,291 Operating lease right-of-use assets 28,387 29,364 Investment in bank-owned life insurance 105,228 103,736 Goodwill 63,909 63,909 Identifiable intangible assets, net 3,295 3,711 Other assets 213,310 200,653 Total assets $ 7,184,360 $ 7,202,847 Liabilities: Deposits: Noninterest-bearing deposits $ 645,661 $ 693,746 Interest-bearing deposits 4,330,465 4,654,414 Total deposits 4,976,126 5,348,160 Federal Home Loan Bank advances 1,550,000 1,190,000 Junior subordinated debentures 22,681 22,681 Operating lease liabilities 31,012 32,027 Other liabilities 133,584 137,293 Total liabilities 6,713,403 6,730,161 Commitments and contingencies (Note 16) Shareholders’ Equity: Common stock of $ .0625 par value; authorized 60,000,000 shares; 17,363,457 shares issued and 17,058,411 shares outstanding at June 30, 2024 and 17,363,457 shares issued and 17,030,987 shares outstanding at December 31, 2023 1,085 1,085 Paid-in capital 125,898 126,150 Retained earnings 504,350 501,917 Accumulated other comprehensive loss ( 146,326 ) ( 141,153 ) Treasury stock, at cost; 305,046 shares at June 30, 2024 and 332,470 shares at December 31, 2023 ( 14,050 ) ( 15,313 ) Total shareholders’ equity 470,957 472,686 Total liabilities and shareholders’ equity $ 7,184,360 $ 7,202,847 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 Six Months Periods ended June 30, 2024 2023 2024 2023 Interest income: Interest and fees on loans $ 76,240 $ 65,449 $ 151,876 $ 125,198 Interest on mortgage loans held for sale 392 241 647 393 Taxable interest on debt securities 6,944 7,403 14,040 14,597 Dividends on Federal Home Loan Bank stock 1,124 858 2,197 1,455 Other interest income 1,297 1,279 2,493 2,349 Total interest and dividend income 85,997 75,230 171,253 143,992 Interest expense: Deposits 36,713 29,704 74,760 49,293 Federal Home Loan Bank advances 17,296 11,652 32,434 23,278 Junior subordinated debentures 403 374 809 728 Total interest expense 54,412 41,730 108,003 73,299 Net interest income 31,585 33,500 63,250 70,693 Provision for credit losses 500 700 1,200 1,500 Net interest income after provision for credit losses 31,085 32,800 62,050 69,193 Noninterest income: Wealth management revenues 9,678 9,048 19,016 17,711 Mortgage banking revenues 2,761 1,753 5,267 2,998 Card interchange fees 1,275 1,268 2,420 2,400 Service charges on deposit accounts 769 667 1,454 1,444 Loan related derivative income 49 247 333 196 Income from bank-owned life insurance 753 879 1,492 2,044 Other income 1,375 463 3,841 815 Total noninterest income 16,660 14,325 33,823 27,608 Noninterest expense: Salaries and employee benefits 21,260 20,588 43,035 42,372 Outsourced services 4,096 3,621 7,876 7,117 Net occupancy 2,397 2,416 4,958 4,853 Equipment 958 1,050 1,978 2,078 Legal, audit, and professional fees 741 978 1,447 1,874 FDIC deposit insurance costs 1,404 1,371 2,845 2,243 Advertising and promotion 661 427 1,209 835 Amortization of intangibles 208 212 416 424 Other expenses 2,185 2,353 4,509 4,784 Total noninterest expense 33,910 33,016 68,273 66,580 Income before income taxes 13,835 14,109 27,600 30,221 Income tax expense 3,020 2,853 5,849 6,153 Net income $ 10,815 $ 11,256 $ 21,751 $ 24,068 Net income available to common shareholders $ 10,807 $ 11,237 $ 21,731 $ 24,020 Weighted average common shares outstanding - basic 17,052 17,011 17,042 17,042 Weighted average common shares outstanding - diluted 17,110 17,030 17,082 17,085 Per share information: Basic earnings per common share $ 0.63 $ 0.66 $ 1.28 $ 1.41 Diluted earnings per common share $ 0.63 $ 0.66 $ 1.27 $ 1.41 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 (unaudited) (Dollars in thousands) Three Months Six Months Periods ended June 30, 2024 2023 2024 2023 Net income $ 10,815 $ 11,256 $ 21,751 $ 24,068 Other comprehensive income (loss), net of tax: Net change in fair value of available for sale debt securities 749 ( 9,827 ) ( 10,239 ) 3,371 Net change in fair value of cash flow hedges 1,815 2,715 5,020 5,512 Net change in defined benefit plan obligations 23 45 46 90 Total other comprehensive income (loss), net of tax 2,587 ( 7,067 ) ( 5,173 ) 8,973 Total comprehensive income $ 13,402 $ 4,189 $ 16,578 $ 33,041 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 June 30, 2024 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at March 31, 2024 17,033 $ 1,085 $ 126,785 $ 503,175 ($ 148,913 ) ($ 15,212 ) $ 466,920 Net income — — — 10,815 — — 10,815 Total other comprehensive income, net of tax — — — — 2,587 — 2,587 Cash dividends declared ($ 0.56 per share) — — — ( 9,640 ) — — ( 9,640 ) Share-based compensation — — 524 — — — 524 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 25 — ( 1,411 ) — — 1,162 ( 249 ) Balance at June 30, 2024 17,058 $ 1,085 $ 125,898 $ 504,350 ($ 146,326 ) ($ 14,050 ) $ 470,957 For the six months ended June 30, 2024 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at December 31, 2023 17,031 $ 1,085 $ 126,150 $ 501,917 ($ 141,153 ) ($ 15,313 ) $ 472,686 Net income — — — 21,751 — — 21,751 Total other comprehensive loss, net of tax — — — — ( 5,173 ) — ( 5,173 ) Cash dividends declared ($ 1.12 per share) — — — ( 19,318 ) — — ( 19,318 ) Share-based compensation — — 1,278 — — — 1,278 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 27 — ( 1,530 ) — — 1,263 ( 267 ) Balance at June 30, 2024 17,058 $ 1,085 $ 125,898 $ 504,350 ($ 146,326 ) ($ 14,050 ) $ 470,957 The accompanying notes are an integral part of these unaudited consolidated financial statements. -7- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (unaudited) (Dollars and shares in thousands, except per share amounts) For the three months ended June 30, 2023 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at March 31, 2023 16,986 $ 1,085 $ 127,734 $ 495,231 ($ 141,760 ) ($ 17,307 ) $ 464,983 Net income — — — 11,256 — — 11,256 Total other comprehensive loss, net of tax — — — — ( 7,067 ) — ( 7,067 ) Cash dividends declared ($ 0.56 per share) — — — ( 9,491 ) — — ( 9,491 ) Share-based compensation — — 87 — — — 87 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 33 — ( 2,136 ) — — 1,529 ( 607 ) Balance at June 30, 2023 17,019 $ 1,085 $ 125,685 $ 496,996 ($ 148,827 ) ($ 15,778 ) $ 459,161 For the six months ended June 30, 2023 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at December 31, 2022 17,183 $ 1,085 $ 127,056 $ 492,043 ($ 157,800 ) ($ 8,715 ) $ 453,669 Net income — — — 24,068 — — 24,068 Total other comprehensive income, net of tax — — — — 8,973 — 8,973 Cash dividends declared ($ 1.12 per share) — — — ( 19,115 ) — — ( 19,115 ) Share-based compensation — — 945 — — — 945 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 36 — ( 2,316 ) — — 1,678 ( 638 ) Treasury stock purchased under 2023 Repurchase Program ( 200 ) — — — — ( 8,741 ) ( 8,741 ) Balance at June 30, 2023 17,019 $ 1,085 $ 125,685 $ 496,996 ($ 148,827 ) ($ 15,778 ) $ 459,161 The accompanying notes are an integral part of these unaudited consolidated financial statements. -8- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statement of Cash Flows (unaudited) (Dollars in thousands) Six months ended June 30, 2024 2023 Cash flows from operating activities: Net income $ 21,751 $ 24,068 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 1,200 1,500 Net gain on sale of bank-owned property ( 988 ) — Depreciation of premises and equipment 1,998 1,979 Net amortization of premiums and discounts on debt securities and loans 573 707 Amortization of intangibles 416 424 Share-based compensation 1,278 945 Tax expense from stock option exercises and other equity awards ( 135 ) ( 5 ) Income from bank-owned life insurance ( 1,492 ) ( 2,044 ) Net gains on loan sales, including changes in fair value ( 4,135 ) ( 1,871 ) Proceeds from sales of loans, net 178,728 86,762 Loans originated for sale ( 181,608 ) ( 97,701 ) Decrease (increase) in operating lease right-of-use assets 977 ( 1,477 ) (Decrease) increase in operating lease liabilities ( 1,015 ) 1,744 Increase in other assets ( 746 ) ( 23,820 ) Decrease in other liabilities ( 3,673 ) ( 1,113 ) Net cash provided by (used in) operating activities 13,129 ( 9,902 ) Cash flows from investing activities: Purchases of: Available for sale debt securities: Mortgage-backed — ( 39,967 ) Available for sale debt securities: Other ( 400 ) ( 20,221 ) Maturities, calls, and principal payments of: Available for sale debt securities: Mortgage-backed 34,073 35,133 Available for sale debt securities: Other 500 250 Net purchases of Federal Home Loan Bank stock ( 14,273 ) ( 2,405 ) Net decrease (increase) in loans 20,162 ( 267,157 ) Purchases of loans ( 597 ) ( 3,653 ) Purchases of premises and equipment ( 2,246 ) ( 3,020 ) Net proceeds from the sale of bank-owned property 1,669 — Proceeds from bank-owned life insurance — 1,566 Equity investments in real estate limited partnerships ( 2,841 ) ( 7,167 ) Purchases of other equity investments ( 250 ) ( 188 ) Net cash provided by (used in) investing activities 35,797 ( 306,829 ) Cash flows from financing activities: Net (decrease) increase in deposits ( 372,034 ) 295,516 Proceeds from Federal Home Loan Bank advances 1,770,000 1,985,000 Repayments of Federal Home Loan Bank advances ( 1,410,000 ) ( 1,925,000 ) Treasury stock purchased — ( 8,741 ) Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered ( 267 ) ( 638 ) Cash dividends paid ( 19,278 ) ( 19,512 ) Net cash (used in) provided by financing activities ( 31,579 ) 326,625 Net increase in cash and cash equivalents 17,347 9,894 Cash and cash equivalents at beginning of period 90,184 118,422 Cash and cash equivalents at end of period $ 107,531 $ 128,316 Noncash Activities: Loans charged-off $ 123 $ 113 Loans transferred to property acquired through foreclosure or repossession — 683 Commitment for equity investments in real estate limited partnerships 178 3,967 Supplemental Disclosures: Interest payments $ 114,441 $ 64,691 Income tax payments 4,646 4,446 The accompanying notes are an integral part of these unaudited consolidated financial statements. -9- Condensed Notes to Unaudited Consolidated Financial Statements Note 1 - Basis of Presentation 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 include the accounts of the Bancorp and its wholly-owned subsidiaries, except subsidiaries that are not deemed necessary to be consolidated. Through consolidation, intercompany balances and transactions have been eliminated. 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, 2023. 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 Pending Adoption Segment Reporting - Topic 280 Accounting Standards Update No. 2023-07, “Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures” (“ASU 2023-07”), was issued in November 2023 to enhance and provide additional transparency on segment disclosures, including disclosure of significant segment expense provided to the chief operating decision maker (“CODM”), as well as disclosing the title and position of the CODM and how they use reported results in assessing segment performance and allocation of resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The provisions under ASU 2023-07 should be applied on a retrospective basis. ASU 2023-07 is not expected to have a material impact on the Corporation’s financial statements. Income Taxes - Topic 740 Accounting Standards Update No. 2023-09, “Income Taxes (Topic 740) - Improvements to Income Tax Disclosures” (“ASU 2023-09”), was issued in December 2023 to enhance and provide additional transparency on income tax disclosures. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The provisions under ASU 2023-09 should be applied on a prospective basis; however, retrospective application is also permitted. ASU 2023-09 is not expected to have a material impact on the Corporation’s financial statements. -10- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 3 - Securities Available for Sale Debt Securities The following tables present the amortized cost, gross unrealized holding gains, gross unrealized holding losses, ACL on securities, and fair value of securities by major security type and class of security: (Dollars in thousands) June 30, 2024 Amortized Cost Unrealized Gains Unrealized Losses ACL Fair Value Available for Sale Debt Securities: Obligations of U.S. government-sponsored enterprises $ 250,350 $ 13 ($ 25,481 ) $ — $ 224,882 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 844,872 80 ( 139,563 ) — 705,389 Individual name issuer trust preferred debt securities 9,407 — ( 306 ) — 9,101 Corporate bonds 13,190 — ( 734 ) — 12,456 Total available for sale debt securities $ 1,117,819 $ 93 ($ 166,084 ) $ — $ 951,828 (Dollars in thousands) December 31, 2023 Amortized Cost Unrealized Gains Unrealized Losses ACL Fair Value Available for Sale Debt Securities: Obligations of U.S. government-sponsored enterprises $ 250,450 $ 15 ($ 24,723 ) $ — $ 225,742 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 879,597 246 ( 125,887 ) — 753,956 Individual name issuer trust preferred debt securities 9,400 — ( 607 ) — 8,793 Corporate bonds 13,182 — ( 1,293 ) — 11,889 Total available for sale debt securities $ 1,152,629 $ 261 ($ 152,510 ) $ — $ 1,000,380 Available for sale debt securities balances exclude accrued interest receivable of $ 3.6 million and $ 3.7 million, respectively, as of June 30, 2024 and December 31, 2023. At June 30, 2024 and December 31, 2023, securities with a fair value of $ 298.9 million and $ 311.9 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 prepay obligations with or without call or prepayment penalties. (Dollars in thousands) June 30, 2024 Amortized Cost Fair Value Due in one year or less $ 84,131 $ 70,242 Due after one year to five years 508,742 440,513 Due after five years to ten years 260,869 219,727 Due after ten years 264,077 221,346 Total debt securities $ 1,117,819 $ 951,828 -11- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Included in the above table are debt securities with an amortized cost balance of $ 252.9 million and a fair value of $ 226.7 million at June 30, 2024 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 1 year to 13 years, with call features ranging from 1 month to 5 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 June 30, 2024 # Fair Value Unrealized Losses # Fair Value Unrealized Losses # Fair Value Unrealized Losses Obligations of U.S. government-sponsored enterprises 2 $ 10,354 ($ 46 ) 19 $ 194,516 ($ 25,435 ) 21 $ 204,870 ($ 25,481 ) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 8 871 ( 1 ) 159 693,787 ( 139,562 ) 167 694,658 ( 139,563 ) Individual name issuer trust preferred debt securities — — — 3 9,101 ( 306 ) 3 9,101 ( 306 ) Corporate bonds — — — 4 12,456 ( 734 ) 4 12,456 ( 734 ) Total 10 $ 11,225 ($ 47 ) 185 $ 909,860 ($ 166,037 ) 195 $ 921,085 ($ 166,084 ) (Dollars in thousands) Less than 12 Months 12 Months or Longer Total December 31, 2023 # Fair Value Unrealized Losses # Fair Value Unrealized Losses # Fair Value Unrealized Losses Obligations of U.S. government-sponsored enterprises 1 $ 19,824 ($ 176 ) 20 $ 195,903 ($ 24,547 ) 21 $ 215,727 ($ 24,723 ) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 8 43,887 ( 262 ) 154 698,115 ( 125,625 ) 162 742,002 ( 125,887 ) Individual name issuer trust preferred debt securities — — — 3 8,793 ( 607 ) 3 8,793 ( 607 ) Corporate bonds — — — 4 11,889 ( 1,293 ) 4 11,889 ( 1,293 ) Total 9 $ 63,711 ($ 438 ) 181 $ 914,700 ($ 152,072 ) 190 $ 978,411 ($ 152,510 ) There were no debt securities on nonaccrual status at June 30, 2024 and 2023 and, therefore there was no accrued interest related to debt securities reversed against interest income for the three and six months ended June 30, 2024 and 2023. As of June 30, 2024, the Corporation does not intend to sell the debt securities in an unrealized loss position and has determined that it is more-likely-than-not that the Corporation will not be required to sell each security before the recovery of its amortized cost basis. In addition, management does not believe that any of the 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. Therefore, no ACL was recorded at both June 30, 2024 and December 31, 2023. 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 -12- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) continue to make timely principal and interest payments, and none of these securities were past due at June 30, 2024. 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 June 30, 2024 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 June 30, 2024, there was one individual name issuer trust preferred debt security with an amortized cost of $ 2.0 million and unrealized losses of $ 176 thousand that was rated below investment grade by S&P. We noted no downgrades to below investment grade between June 30, 2024 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 June 30, 2024 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 June 30, 2024, there was one corporate bond debt security with an amortized cost of $ 2.0 million and unrealized losses of $ 35 thousand that was rated below investment grade by S&P. We noted no downgrades to below investment grade between June 30, 2024 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. Note 4 - Loans The following table presents a summary of loans: (Dollars in thousands) June 30, 2024 December 31, 2023 Commercial: Commercial real estate (1) $ 2,191,996 $ 2,106,359 Commercial & industrial (2) 558,075 605,072 Total commercial 2,750,071 2,711,431 Residential Real Estate: Residential real estate (3) 2,558,533 2,604,478 Consumer: Home equity 302,027 312,594 Other (4) 18,471 19,203 Total consumer 320,498 331,797 Total loans (5) $ 5,629,102 $ 5,647,706 (1) CRE consists of commercial mortgages primarily secured by non-owner occupied 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 owner occupied 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 $ 13.3 million and $ 13.0 million, respectively, at June 30, 2024 and December 31, 2023 and net unamortized premiums on loans purchased from and serviced by other financial institutions of $ 262 thousand and $ 286 thousand, respectively, at June 30, 2024 and December 31, 2023. Loan balances exclude accrued interest receivable of $ 23.5 million and $ 22.9 million, respectively, as of June 30, 2024 and December 31, 2023. -13- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) As of June 30, 2024 and December 31, 2023, loans amounting to $ 3.6 billion and $ 3.4 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. 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 June 30, 2024 Current 30-59 60-89 90 or More Total Past Due Total Loans Commercial: Commercial real estate $ 2,191,996 $ — $ — $ — $ — $ 2,191,996 Commercial & industrial 558,073 2 — — 2 558,075 Total commercial 2,750,069 2 — — 2 2,750,071 Residential Real Estate: Residential real estate 2,549,999 3,803 829 3,902 8,534 2,558,533 Consumer: Home equity 298,703 1,545 1,242 537 3,324 302,027 Other 18,451 18 2 — 20 18,471 Total consumer 317,154 1,563 1,244 537 3,344 320,498 Total loans $ 5,617,222 $ 5,368 $ 2,073 $ 4,439 $ 11,880 $ 5,629,102 (Dollars in thousands) Days Past Due December 31, 2023 Current 30-59 60-89 90 or More Total Past Due Total Loans Commercial: Commercial real estate $ 2,106,359 $ — $ — $ — $ — $ 2,106,359 Commercial & industrial 605,062 10 — — 10 605,072 Total commercial 2,711,421 10 — — 10 2,711,431 Residential Real Estate: Residential real estate 2,596,362 4,369 1,738 2,009 8,116 2,604,478 Consumer: Home equity 309,398 2,349 112 735 3,196 312,594 Other 19,180 20 3 — 23 19,203 Total consumer 328,578 2,369 115 735 3,219 331,797 Total loans $ 5,636,361 $ 6,748 $ 1,853 $ 2,744 $ 11,345 $ 5,647,706 Included in past due loans as of June 30, 2024 and December 31, 2023, were nonaccrual loans of $ 8.4 million and $ 6.9 million, respectively. In addition, all loans 90 days or more past due at June 30, 2024 and December 31, 2023 were classified as nonaccrual. -14- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) 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 (generally for six months), the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible. The following table is a summary of nonaccrual loans, segregated by class of loans: (Dollars in thousands) June 30, 2024 December 31, 2023 Nonaccrual Loans Nonaccrual Loans With an ACL Without an ACL Total With an ACL Without an ACL Total Commercial: Commercial real estate $ — $ 18,390 $ 18,390 $ 10,997 $ 21,830 $ 32,827 Commercial & industrial — 642 642 — 682 682 Total commercial — 19,032 19,032 10,997 22,512 33,509 Residential Real Estate: Residential real estate 8,345 1,399 9,744 8,495 1,131 9,626 Consumer: Home equity 1,703 — 1,703 1,483 — 1,483 Other — — — — — — Total consumer 1,703 — 1,703 1,483 — 1,483 Total nonaccrual loans $ 10,048 $ 20,431 $ 30,479 $ 20,975 $ 23,643 $ 44,618 Accruing loans 90 days or more past due $ — $ — Nonaccrual loans of $ 22.1 million and $ 37.7 million, respectively, at June 30, 2024 and December 31, 2023 were current as to the payment of principal and interest. As of June 30, 2024 and December 31, 2023, nonaccrual loans secured by one- to four-family residential property amounting to $ 3.7 million and $ 960 thousand, respectively, were in process of foreclosure. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2024. -15- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents interest income recognized on nonaccrual loans: (Dollars in thousands) Three Months Six Months Periods ended June 30, 2024 2023 2024 2023 Commercial: Commercial real estate $ — $ — $ — $ — Commercial & industrial — 21 — 33 Total commercial — 21 — 33 Residential Real Estate: Residential real estate 71 89 186 182 Consumer: Home equity 32 20 69 42 Other — 1 — 2 Total consumer 32 21 69 44 Total $ 103 $ 131 $ 255 $ 259 Troubled Loan Modifications In the course of resolving problem loans, the Corporation may choose to modify the contractual terms of certain loans. A loan that has been modified is considered a TLM when the modification is made to a borrower experiencing financial difficulty and the modification has a direct impact to the contractual cash flows. The decision to modify a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection. Modifications to borrowers experiencing financial difficulty may include modified contractual terms that have a direct impact to contractual cash flows, including principal forgiveness, interest rate reductions, maturity extensions, other-than-insignificant payment delays, or any combination thereof. Nonaccrual loans that become TLMs generally remain on nonaccrual status for six months, subsequent to being modified, before management considers their return to accrual status. If a TLM is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. TLMs are reported as such for at least one year from the date of the modification. If the TLM performs in accordance with the modified contractual terms for that period of time, it would be removed from this classification. The following tables present the carrying value at June 30, 2024, of TLMs made during the periods indicated, segregated by class of loans and type of concession granted: (Dollars in thousands) Three months ended June 30, 2024 Other-than-Insignificant Payment Delay Total % of Loan Class (1) Residential Real Estate: Residential real estate $ 267 $ 267 — Total $ 267 $ 267 — % (1) Percentage of TLMs to the total loans outstanding within the respective loan class. -16- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (Dollars in thousands) Six months ended June 30, 2024 Maturity Extension Other-than-Insignificant Payment Delay Total % of Loan Class (1) Commercial: Commercial real estate $ — $ — $ — — % Commercial & industrial 642 — 642 — Total commercial 642 — 642 — Residential Real Estate: Residential real estate — 267 267 — Total $ 642 $ 267 $ 909 — % (1) Percentage of TLMs to the total loans outstanding within the respective loan class. During the three and six months ended June 30, 2023, there were no TLMs. The following tables describe the financial effect of TLMs made during the periods indicated, segregated by class of loans: Three months ended June 30, 2024 Financial Effect Other-than-Insignificant Payment Delay: Residential real estate Provided payment delay for a weighted average period of 6 months Six months ended June 30, 2024 Financial Effect Maturity Extension: Commercial & industrial Extended maturity by a weighted average of 120 months Other-than-Insignificant Payment Delay: Residential real estate Provided payment delay for a weighted average period of 6 months Management closely monitors the performance of TLMs to understand the effectiveness of the modifications. The following table presents an aging analysis, as of the date indicated, of TLMs that have been modified in the past 12 months: (Dollars in thousands) Days Past Due June 30, 2024 Current 30-59 60-89 90 or More Total Past Due Total Loans Commercial: Commercial real estate $ 7,612 $ — $ — $ — $ — $ 7,612 Commercial & industrial 910 — — — — 910 Total commercial 8,522 — — — — 8,522 Residential Real Estate: Residential real estate 267 — — — — 267 Total loans $ 8,789 $ — $ — $ — $ — $ 8,789 There were no TLMs made in the previous 12 months for which there was a subsequent payment default. There were no significant commitments to lend additional funds to borrowers experiencing financial difficulty whose loans were TLMs at June 30, 2024. Individually Analyzed Loans Individually analyzed loans are individually assessed for credit impairment and include nonaccrual commercial loans, TLMs, as well as certain other loans based on the underlying risk characteristics and the discretion of management to individually -17- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) analyze such loans. As of June 30, 2024 and December 31, 2023, individually analyzed loans amounted to $ 20.4 million and $ 34.6 million, respectively, all of which 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) June 30, 2024 December 31, 2023 Carrying Value Related Allowance Carrying Value Related Allowance Commercial: Commercial real estate (1) $ 18,390 $ — $ 32,827 $ 97 Commercial & industrial (2) 642 — 682 — Total commercial 19,032 — 33,509 97 Residential Real Estate: Residential real estate (3) 1,399 — 1,131 — Total $ 20,431 $ — $ 34,640 $ 97 (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. 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 -18- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) 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. -19- 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 June 30, 2024: (Dollars in thousands) Term Loans Amortized Cost by Origination Year 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Revolving Loans Converted to Term Loans Total Commercial: CRE: Pass $ 89,158 $ 390,442 $ 625,220 $ 397,167 $ 160,985 $ 466,860 $ 13,234 $ 1,009 $ 2,144,075 Special Mention — — — — — 6,312 — — 6,312 Classified — 7,880 — 19,767 — 13,962 — — 41,609 Total CRE 89,158 398,322 625,220 416,934 160,985 487,134 13,234 1,009 2,191,996 Gross charge-offs — — — — — — — — — C&I: Pass 20,415 52,570 120,234 37,713 48,225 178,164 98,414 528 556,263 Special Mention — — — — — 178 — — 178 Classified — — 817 175 — 642 — — 1,634 Total C&I 20,415 52,570 121,051 37,888 48,225 178,984 98,414 528 558,075 Gross charge-offs 20 — — — — — — — 20 Residential Real Estate: Residential real estate: Current 41,093 419,268 792,516 643,854 244,486 408,782 — — 2,549,999 Past Due — — — — 880 7,654 — — 8,534 Total residential real estate 41,093 419,268 792,516 643,854 245,366 416,436 — — 2,558,533 Gross charge-offs — — — — — — — — — Consumer: Home equity: Current 7,107 20,104 13,958 6,519 2,414 5,104 232,243 11,254 298,703 Past Due — — — — 142 795 818 1,569 3,324 Total home equity 7,107 20,104 13,958 6,519 2,556 5,899 233,061 12,823 302,027 Gross charge-offs — — — — — — — — — Other: Current 2,874 5,424 3,196 2,324 903 3,474 256 — 18,451 Past Due 19 — — — — 1 — — 20 Total other 2,893 5,424 3,196 2,324 903 3,475 256 — 18,471 Gross charge-offs 98 — — — 2 3 — — 103 Total loans $ 160,666 $ 895,688 $ 1,555,941 $ 1,107,519 $ 458,035 $ 1,091,928 $ 344,965 $ 14,360 $ 5,629,102 Total gross charge-offs $ 118 $ — $ — $ — $ 2 $ 3 $ — $ — $ 123 -20- 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 December 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 $ 327,139 $ 598,946 $ 396,468 $ 168,451 $ 167,484 $ 333,356 $ 42,095 $ 1,032 $ 2,034,971 Special Mention — — — — — 16,630 — — 16,630 Classified 21,830 — 18,430 — 14,498 — — — 54,758 Total CRE 348,969 598,946 414,898 168,451 181,982 349,986 42,095 1,032 2,106,359 Gross charge-offs — — — — — 373 — — 373 C&I: Pass 55,607 124,894 52,282 49,812 72,876 145,361 90,664 587 592,083 Special Mention 11,119 — — — 181 — — — 11,300 Classified — 818 189 — 682 — — — 1,689 Total C&I 66,726 125,712 52,471 49,812 73,739 145,361 90,664 587 605,072 Gross charge-offs 37 — — — — — — — 37 Residential Real Estate: Residential real estate: Current 431,563 808,442 666,447 255,554 113,462 320,894 — — 2,596,362 Past Due — — — 886 594 6,636 — — 8,116 Total residential real estate 431,563 808,442 666,447 256,440 114,056 327,530 — — 2,604,478 Gross charge-offs — — — — — — — — — Consumer: Home equity: Current 24,925 14,997 6,829 2,919 1,982 3,696 241,459 12,591 309,398 Past Due — — — — 130 829 1,301 936 3,196 Total home equity 24,925 14,997 6,829 2,919 2,112 4,525 242,760 13,527 312,594 Gross charge-offs — — — — — — — — — Other: Current 6,777 3,530 3,685 1,001 120 3,824 243 — 19,180 Past Due 21 — — — — — 2 — 23 Total other 6,798 3,530 3,685 1,001 120 3,824 245 — 19,203 Gross charge-offs 159 — 8 — — — — — 167 Total Loans $ 878,981 $ 1,551,627 $ 1,144,330 $ 478,623 $ 372,009 $ 831,226 $ 375,764 $ 15,146 $ 5,647,706 Total gross charge-offs $ 196 $ — $ 8 $ — $ — $ 373 $ — $ — $ 577 -21- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) 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. In addition, loans with extensions of maturity dates of more than three months are reported as originations in the period extended. 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 June 30, 2024: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 24,856 $ 7,620 $ 32,476 $ 8,035 $ 1,057 $ 337 $ 1,394 $ 41,905 Charge-offs — ( 12 ) ( 12 ) — — ( 41 ) ( 41 ) ( 53 ) Recoveries — 8 8 — 6 12 18 26 Provision 910 ( 519 ) 391 67 17 25 42 500 Ending Balance $ 25,766 $ 7,097 $ 32,863 $ 8,102 $ 1,080 $ 333 $ 1,413 $ 42,378 The following table presents the activity in the ACL on loans for the six months ended June 30, 2024: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 24,144 $ 8,088 $ 32,232 $ 7,403 $ 1,048 $ 374 $ 1,422 $ 41,057 Charge-offs — ( 20 ) ( 20 ) — — ( 103 ) ( 103 ) ( 123 ) Recoveries — 17 17 — 7 20 27 44 Provision 1,622 ( 988 ) 634 699 25 42 67 1,400 Ending Balance $ 25,766 $ 7,097 $ 32,863 $ 8,102 $ 1,080 $ 333 $ 1,413 $ 42,378 The following table presents the activity in the ACL on loans for the three months ended June 30, 2023: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 21,374 $ 9,833 $ 31,207 $ 6,239 $ 978 $ 356 $ 1,334 $ 38,780 Charge-offs — ( 9 ) ( 9 ) — — ( 43 ) ( 43 ) ( 52 ) Recoveries — 4 4 — 2 9 11 15 Provision 652 ( 400 ) 252 203 59 86 145 600 Ending Balance $ 22,026 $ 9,428 $ 31,454 $ 6,442 $ 1,039 $ 408 $ 1,447 $ 39,343 -22- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the activity in the ACL on loans for the six months ended June 30, 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 — ( 20 ) ( 20 ) — — ( 93 ) ( 93 ) ( 113 ) Recoveries — 9 9 — 3 17 20 29 Provision 3,591 ( 917 ) 2,674 ( 1,298 ) ( 79 ) 103 24 1,400 Ending Balance $ 22,026 $ 9,428 $ 31,454 $ 6,442 $ 1,039 $ 408 $ 1,447 $ 39,343 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 swaps, caps, floors, and collars, 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. An interest rate collar is a derivative instrument that represents simultaneously buying an interest rate cap and selling an interest rate floor. 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 June 30, 2024 and December 31, 2023, the Corporation had interest rate swap contracts that were designated as cash flow hedges. In addition, at June 30, 2024, the Corporation had an interest rate collar that was designated as a cash flow hedge. These cash flow hedges were executed to hedge the interest rate risk associated with short-term borrowings. See Note 9 for additional disclosure on borrowings. The Corporation also had an interest rate swap contract that was designated as a cash flow hedge to hedge the interest rate risk associated with a pool of variable rate commercial loans. 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 is being 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. At June 30, 2024, the remaining unamortized balance of the loss included in the AOCL component of shareholders’ equity was $ 15.8 million, or $ 11.7 million after tax. 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 -23- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) exchanges the client’s fixed-rate loan payments for variable-rate loan payments. The Corporation’s credit policies with respect to interest rate contracts with commercial borrowers are similar to those used for loans. The Corporation retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans. The interest rate contracts with counterparties are generally subject to bilateral collateralization terms. 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. -24- 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) June 30, 2024 December 31, 2023 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) $ 120,000 $ 2,176 $ — $ 120,000 $ 802 $ 1,119 Interest rate collar 50,000 — 41 — — — Derivatives not Designated as Hedging Instruments: Loan related derivative contracts: Interest rate contracts with customers 933,015 2,967 60,648 938,872 6,594 52,102 Mirror contracts with counterparties 933,015 60,443 3,052 938,872 51,859 6,757 Risk participation agreements 327,948 41 — 321,055 66 1 Mortgage loan commitments: Interest rate lock commitments 40,026 704 — 20,980 504 1 Forward sale commitments 81,062 134 592 50,117 18 711 Gross amounts 66,465 64,333 59,843 60,691 Less: amounts offset (2) 3,093 3,093 7,877 7,877 Derivative balances, net of offset 63,372 61,240 51,966 52,814 Less: collateral pledged (3) — — — — Net amounts $ 63,372 $ 61,240 $ 51,966 $ 52,814 (1) The fair value of derivative assets includes accrued interest receivable of $ 232 thousand and $ 239 thousand, respectively, at June 30, 2024 and December 31, 2023. There was no accrued interest payable included in the fair value of derivative liabilities at June 30, 2024 or at December 31, 2023. (2) Interest rate risk management contracts and loan related derivative contracts with counterparties are subject to master netting arrangements. (3) Collateral contractually required to be 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) Amounts Recognized in Other Comprehensive Income (Loss), Net of Tax Three Months Six Months Periods ended June 30, 2024 2023 2024 2023 Derivatives Designated as Cash Flow Hedging Instruments: Interest rate risk management contracts: Interest rate swaps $ 1,846 $ 2,715 $ 5,051 $ 5,512 Interest rate collar ( 31 ) — ( 31 ) — Total $ 1,815 $ 2,715 $ 5,020 $ 5,512 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. -25- 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 Six Months Periods ended June 30, Statement of Income Location 2024 2023 2024 2023 Derivatives not Designated as Hedging Instruments: Loan related derivative contracts: Interest rate contracts with customers Loan related derivative income ($ 6,348 ) ($ 20,492 ) ($ 25,357 ) ($ 9,360 ) Mirror interest rate contracts with counterparties Loan related derivative income 6,404 20,696 25,714 9,524 Risk participation agreements Loan related derivative income ( 7 ) 43 ( 24 ) 32 Mortgage loan commitments: Interest rate lock commitments Mortgage banking revenues ( 48 ) ( 72 ) 200 191 Forward sale commitments Mortgage banking revenues 177 482 243 358 Total $ 178 $ 657 $ 776 $ 745 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 other assets at fair value on a nonrecurring basis, such as collateral dependent individually analyzed loans. 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) June 30, 2024 December 31, 2023 Aggregate fair value $ 26,116 $ 20,077 Aggregate principal balance 25,610 19,480 Difference between fair value and principal balance $ 506 $ 597 Changes in fair value of mortgage loans held for sale accounted for under the fair value option election are included in mortgage banking revenues in the Unaudited Consolidated Statements of Income. Changes in fair value amounted to decreases in mortgage banking revenues of $ 22 thousand and $ 91 thousand, respectively, for the three and six months ended June 30, 2024. This compared to a decrease in mortgage banking revenues of $ 6 thousand for the three months ended -26- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) June 30, 2023 and an increase of $ 18 thousand for the six months ended June 30, 2023. There were no mortgage loans held for sale 90 days or more past due as of June 30, 2024 and December 31, 2023. 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 June 30, 2024 and December 31, 2023. 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 June 30, 2024 and December 31, 2023. 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 June 30, 2024 and December 31, 2023, 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. -27- 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) June 30, 2024 Assets: Available for sale debt securities: Obligations of U.S. government-sponsored enterprises $ 224,882 $ — $ 224,882 $ — Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 705,389 — 705,389 — Individual name issuer trust preferred debt securities 9,101 — 9,101 — Corporate bonds 12,456 — 12,456 — Mortgage loans held for sale 26,116 — 26,116 — Derivative assets 63,372 — 63,372 — Total assets at fair value on a recurring basis $ 1,041,316 $ — $ 1,041,316 $ — Liabilities: Derivative liabilities $ 61,240 $ — $ 61,240 $ — Total liabilities at fair value on a recurring basis $ 61,240 $ — $ 61,240 $ — (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, 2023 Assets: Available for sale debt securities: Obligations of U.S. government-sponsored enterprises $ 225,742 $ — $ 225,742 $ — Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 753,956 — 753,956 — Individual name issuer trust preferred debt securities 8,793 — 8,793 — Corporate bonds 11,889 — 11,889 — Mortgage loans held for sale 20,077 — 20,077 — Derivative assets 51,966 — 51,966 — Total assets at fair value on a recurring basis $ 1,072,423 $ — $ 1,072,423 $ — Liabilities: Derivative liabilities $ 52,814 $ — $ 52,814 $ — Total liabilities at fair value on a recurring basis $ 52,814 $ — $ 52,814 $ — Items Recorded at Fair Value on a Nonrecurring Basis There were no assets written down to fair value during the six months ended June 30, 2024. -28- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the carrying value of assets held at December 31, 2023, which were written down to fair value during the year ended December 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 $ 8,050 $ — $ — $ 8,050 Loan servicing rights 8,512 — — 8,512 Total assets at fair value on a nonrecurring basis $ 16,562 $ — $ — $ 16,562 The following table presents valuation techniques and unobservable inputs for assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value: (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Inputs Utilized (Weighted Average) December 31, 2023 Collateral dependent individually analyzed loans $ 8,050 Appraisals of collateral Discount for costs to sell 0 % Appraisal adjustments 0 % Loan servicing rights 8,512 Discounted cash flow Discount rates 10 % - 14 % ( 10 %) Prepayment rates 6 % - 53 % ( 9 %) Items for which Fair Value is Only Disclosed The estimated fair values and related carrying amounts for financial instruments for which fair value is only disclosed are presented in the tables below: (Dollars in thousands) June 30, 2024 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: Cash and cash equivalents $ 107,531 $ 107,531 $ 107,531 $ — $ — Loans, net of allowance for credit losses on loans 5,586,724 5,363,291 — — 5,363,291 FHLB stock 66,166 66,166 — 66,166 — Investment in BOLI 105,228 105,228 — 105,228 — Financial Liabilities: Non-maturity deposits $ 3,472,070 $ 3,472,070 $ — $ 3,472,070 $ — Time deposits 1,504,056 1,489,117 — 1,489,117 — FHLB advances 1,550,000 1,548,116 — 1,548,116 — Junior subordinated debentures 22,681 19,312 — 19,312 — -29- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (Dollars in thousands) December 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: Cash and cash equivalents $ 90,184 $ 90,184 $ 90,184 $ — $ — Loans, net of allowance for credit losses on loans 5,606,649 5,365,396 — — 5,365,396 FHLB stock 51,893 51,893 — 51,893 — Investment in BOLI 103,736 103,736 — 103,736 — Financial Liabilities: Non-maturity deposits $ 3,559,923 $ 3,559,923 $ — $ 3,559,923 $ — Time deposits 1,788,237 1,773,643 — 1,773,643 — FHLB advances 1,190,000 1,192,262 — 1,192,262 — Junior subordinated debentures 22,681 19,228 — 19,228 — Note 8 - Deposits The following table presents a summary of deposits: (Dollars in thousands) June 30, 2024 December 31, 2023 Noninterest-bearing: Noninterest-bearing demand deposits $ 645,661 $ 693,746 Interest-bearing: Interest-bearing demand deposits 532,316 504,959 NOW accounts 722,797 767,036 Money market accounts 1,086,088 1,096,959 Savings accounts 485,208 497,223 Time deposits (1) 1,504,056 1,788,237 Total interest-bearing deposits 4,330,465 4,654,414 Total deposits $ 4,976,126 $ 5,348,160 (1) Includes wholesale brokered time deposit balances of $ 339.2 million and $ 654.1 million, respectively, as of June 30, 2024 and December 31, 2023. The following table presents scheduled maturities of time certificates of deposit: (Dollars in thousands) Scheduled Maturity Weighted Average Rate July 1, 2024 to December 31, 2024 $ 963,519 4.61 % 2025 427,213 4.10 2026 54,231 2.77 2027 30,424 3.24 2028 25,602 3.68 2029 and thereafter 3,067 2.34 Balance at June 30, 2024 $ 1,504,056 4.35 % Time certificates of deposit in denominations of $250 thousand or more totaled $ 273.3 million and $ 271.2 million, respectively, at June 30, 2024 and December 31, 2023. -30- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 9 - Borrowings Advances payable to the FHLB amounted to $ 1.6 billion and $ 1.2 billion, respectively, at June 30, 2024 and December 31, 2023. At June 30, 2024, the Corporation has interest rate swaps with a notional amount of $ 120.0 million, as well as an interest rate collar with a notional amount of $ 50.0 million, that were designated as cash flow hedges to hedge the interest rate risk associated with short-term FHLB advances. See Note 6 for additional disclosure on derivatives. As of June 30, 2024 and December 31, 2023, the Bank had access to a $ 40.0 million unused line of credit with the FHLB. Additionally, the Bank had standby letters of credit with the FHLB of $ 66.0 million and $ 65.0 million, respectively, at June 30, 2024 and December 31, 2023. The standby letters of credit collateralize institutional deposits. The Bank had remaining available borrowing capacity of $ 801.5 million and $ 1.1 billion, respectively, with the FHLB at June 30, 2024 and December 31, 2023. 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 June 30, 2024: (Dollars in thousands) Scheduled Maturity Weighted Average Rate July 1, 2024 to December 31, 2024 $ 700,000 5.43 % 2025 475,000 5.06 2026 165,000 4.54 2027 45,000 4.24 2028 85,000 4.35 2029 and thereafter 80,000 3.82 Balance at June 30, 2024 $ 1,550,000 5.05 % Note 10 - Shareholders' Equity Stock Repurchase Program The 2024 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 2024 Repurchase Program commenced on January 1, 2024 and expires on December 31, 2024, and may be modified, suspended, or discontinued at any time. As of June 30, 2024, no shares have been repurchased under the 2024 Repurchase Program. -31- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Regulatory Capital Requirements Capital levels at June 30, 2024 exceeded the regulatory minimum levels to be considered “well capitalized.” 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 June 30, 2024 Total Capital (to Risk-Weighted Assets): Corporation $ 616,564 11.81 % $ 417,809 8.00 % N/A N/A Bank 610,690 11.70 417,648 8.00 $ 522,060 10.00 % Tier 1 Capital (to Risk-Weighted Assets): Corporation 574,815 11.01 313,357 6.00 N/A N/A Bank 568,941 10.90 313,236 6.00 417,648 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets): Corporation 552,819 10.59 235,017 4.50 N/A N/A Bank 568,941 10.90 234,927 4.50 339,339 6.50 Tier 1 Capital (to Average Assets): (1) Corporation 574,815 7.82 294,079 4.00 N/A N/A Bank 568,941 7.74 293,978 4.00 367,473 5.00 December 31, 2023 Total Capital (to Risk-Weighted Assets): Corporation 611,220 11.58 422,259 8.00 N/A N/A Bank 605,289 11.47 422,131 8.00 527,663 10.00 Tier 1 Capital (to Risk-Weighted Assets): Corporation 572,960 10.86 316,694 6.00 N/A N/A Bank 567,029 10.75 316,598 6.00 422,131 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets): Corporation 550,964 10.44 237,521 4.50 N/A N/A Bank 567,029 10.75 237,449 4.50 342,981 6.50 Tier 1 Capital (to Average Assets): (1) Corporation 572,960 7.80 293,837 4.00 N/A N/A Bank 567,029 7.72 293,742 4.00 367,177 5.00 (1) Leverage ratio. In addition to the minimum regulatory capital required for capital adequacy outlined in the table above, the Corporation and the Bank are required to maintain a minimum capital conservation buffer, in the form of common equity, of 2.50%, resulting in a requirement for the Corporation and the Bank to effectively maintain total capital, Tier 1 capital, and common equity Tier 1 capital ratios of 10.50%, 8.50%, and 7.00%, respectively. The Corporation and the Bank must maintain the capital conservation buffer to avoid restrictions on the ability to pay dividends and discretionary bonuses. The Corporation’s and the Bank’s capital levels exceeded the minimum regulatory capital requirements plus the capital conservation buffer at June 30, 2024 and December 31, 2023. 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 June 30, 2024 and December 31, 2023, $ 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 -32- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) 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. 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 June 30, 2024 2023 (Dollars in thousands) Revenue (1) ASC 606 Revenue (2) Revenue (1) ASC 606 Revenue (2) Net interest income $ 31,585 $ — $ 33,500 $ — Noninterest income: Wealth management revenues 9,678 9,678 9,048 9,048 Mortgage banking revenues 2,761 — 1,753 — Card interchange fees 1,275 1,275 1,268 1,268 Service charges on deposit accounts 769 769 667 667 Loan related derivative income 49 — 247 — Income from bank-owned life insurance 753 — 879 — Other income 1,375 286 463 344 Total noninterest income 16,660 12,008 14,325 11,327 Total revenues $ 48,245 $ 12,008 $ 47,825 $ 11,327 (1) As reported in the Unaudited Consolidated Statements of Income. (2) Revenue from contracts with customers in scope of ASC 606. For the six months ended June 30, 2024 2023 (Dollars in thousands) Revenue (1) ASC 606 Revenue (2) Revenue (1) ASC 606 Revenue (2) Net interest income $ 63,250 $ — $ 70,693 $ — Noninterest income: Wealth management revenues 19,016 19,016 17,711 17,711 Mortgage banking revenues 5,267 — 2,998 — Card interchange fees 2,420 2,420 2,400 2,400 Service charges on deposit accounts 1,454 1,454 1,444 1,444 Loan related derivative income 333 — 196 — Income from bank-owned life insurance 1,492 — 2,044 — Other income 3,841 556 815 620 Total noninterest income 33,823 23,446 27,608 22,175 Total revenues $ 97,073 $ 23,446 $ 98,301 $ 22,175 (1) As reported in the Unaudited Consolidated Statements of Income. (2) Revenue from contracts with customers in scope of ASC 606. -33- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents revenue from contracts with customers based on the timing of revenue recognition: (Dollars in thousands) Three Months Six Months Periods ended June 30, 2024 2023 2024 2023 Revenue recognized at a point in time: Card interchange fees $ 1,275 $ 1,268 $ 2,420 $ 2,400 Service charges on deposit accounts 490 425 915 983 Other income 227 281 438 497 Revenue recognized over time: Wealth management revenues 9,678 9,048 19,016 17,711 Service charges on deposit accounts 279 242 539 461 Other income 59 63 118 123 Total revenues from contracts with customers in scope of ASC 606 $ 12,008 $ 11,327 $ 23,446 $ 22,175 Receivables for revenue from contracts with customers primarily consist of amounts due for wealth management services performed for which the Corporation’s performance obligations have been fully satisfied. Receivables amounted to $ 5.9 million and $ 5.5 million, respectively, at June 30, 2024 and December 31, 2023 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 June 30, 2024 and December 31, 2023 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 $ 1.9 million and $ 2.0 million, respectively at June 30, 2024 and December 31, 2023 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. These defined benefit pension plans were previously amended to freeze benefit accruals after a 10-year transition period, which ended in December 2023. In the fourth quarter of 2023, the Corporation’s Board of Directors approved a resolution to terminate the qualified pension plan, and participants were notified of the termination. Work on the qualified pension plan termination process has commenced and the qualified pension plan’s assets are expected to be distributed in 2025, pending completion of applicable regulatory approvals. The qualified pension plan liability is expected to be settled in 2025 through a combination of lump sum payments to participants and purchase of a group annuity contract from a highly-rated insurance company. Upon settlement in 2025, the Corporation expects to recognize a pre-tax pension settlement charge that will include a non-cash charge for the recognition of all pre-tax actuarial losses accumulated in AOCL at that time. The actual amount of the settlement charge will depend on various factors, including interest rates, plan asset returns, the lump sum election rate and annuity pricing. -34- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) 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 Six Months Three Months Six Months Periods ended June 30, 2024 2023 2024 2023 2024 2023 2024 2023 Net Periodic Benefit Cost: Service cost (1) $ 125 $ 350 $ 250 $ 701 $ — $ 39 $ — $ 78 Interest cost (2) 833 887 1,666 1,771 163 177 325 353 Expected return on plan assets (2) ( 1,028 ) ( 1,148 ) ( 2,056 ) ( 2,295 ) — — — — Recognized net actuarial loss (2) — — — — 30 60 61 119 Net periodic benefit cost ($ 70 ) $ 89 ($ 140 ) $ 177 $ 193 $ 276 $ 386 $ 550 (1) Included in salaries and employee benefits expense in the Unaudited Consolidated Statements of Income. Service cost for 2024 represents administrative expenses related to the termination of the qualified pension plan. (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 six months ended June 30, 2024 2023 2024 2023 Measurement date Dec 31, 2023 Dec 31, 2022 Dec 31, 2023 Dec 31, 2022 Equivalent single discount rate for benefit obligations 4.51 % 5.54 % 5.15 % 5.50 % Equivalent single discount rate for service cost N/A 5.60 N/A 5.61 Equivalent single discount rate for interest cost 4.51 5.43 5.11 5.40 Expected long-term return on plan assets 4.75 5.25 N/A N/A Rate of compensation increase 0.50 5.00 N/A 5.00 -35- 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, and custodian; settlement of decedents’ estates; and institutional trust services, including custody and fiduciary services. The following tables present the statement of operations and total assets for Washington Trust’s reportable segments: (Dollars in thousands) Commercial Banking Wealth Management Services Consolidated Total Three months ended June 30, 2024 2023 2024 2023 2024 2023 Net interest income $ 31,585 $ 33,486 $ — $ 14 $ 31,585 $ 33,500 Provision for credit losses 500 700 — — 500 700 Net interest income after provision for credit losses 31,085 32,786 — 14 31,085 32,800 Noninterest income 6,651 5,142 10,009 9,183 16,660 14,325 Noninterest expenses: Depreciation and amortization expense 893 858 311 358 1,204 1,216 Other noninterest expenses 26,026 24,449 6,680 7,351 32,706 31,800 Total noninterest expenses 26,919 25,307 6,991 7,709 33,910 33,016 Income before income taxes 10,817 12,621 3,018 1,488 13,835 14,109 Income tax expense 2,342 2,518 678 335 3,020 2,853 Net income $ 8,475 $ 10,103 $ 2,340 $ 1,153 $ 10,815 $ 11,256 Total assets at period end $ 7,125,943 $ 6,938,357 $ 58,417 $ 73,403 $ 7,184,360 $ 7,011,760 Expenditures for long-lived assets 1,598 1,859 22 17 1,620 1,876 -36- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (Dollars in thousands) Commercial Banking Wealth Management Services Consolidated Total Six months ended June 30, 2024 2023 2024 2023 2024 2023 Net interest income $ 63,250 $ 70,666 $ — $ 27 $ 63,250 $ 70,693 Provision for credit losses 1,200 1,500 — — 1,200 1,500 Net interest income after provision for credit losses 62,050 69,166 — 27 62,050 69,193 Noninterest income 12,223 9,573 21,600 18,035 33,823 27,608 Noninterest expenses: Depreciation and amortization expense 1,786 1,690 628 713 2,414 2,403 Other noninterest expenses 52,166 49,082 13,693 15,095 65,859 64,177 Total noninterest expenses 53,952 50,772 14,321 15,808 68,273 66,580 Income before income taxes 20,321 27,967 7,279 2,254 27,600 30,221 Income tax expense 4,248 5,605 1,601 548 5,849 6,153 Net income $ 16,073 $ 22,362 $ 5,678 $ 1,706 $ 21,751 $ 24,068 Total assets at period end $ 7,125,943 $ 6,938,357 $ 58,417 $ 73,403 $ 7,184,360 $ 7,011,760 Expenditures for long-lived assets 2,156 2,995 90 25 2,246 3,020 Note 14 - Other Comprehensive Income (Loss) The following tables present the activity in other comprehensive income (loss): Three months ended June 30, 2024 2023 (Dollars in thousands) Pre-tax Amounts Income Tax 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 $ 1,006 ($ 257 ) $ 749 ($ 12,929 ) $ 3,102 ($ 9,827 ) Cash Flow Hedges: Change in fair value of cash flow hedges 802 ( 213 ) 589 1,696 ( 407 ) 1,289 Net cash flow hedge losses reclassified into earnings (1) 1,645 ( 419 ) 1,226 1,875 ( 449 ) 1,426 Net change in fair value of cash flow hedges 2,447 ( 632 ) 1,815 3,571 ( 856 ) 2,715 Defined Benefit Plan Obligations: Amortization of net actuarial losses (2) 30 ( 7 ) 23 60 ( 15 ) 45 Total other comprehensive income (loss) $ 3,483 ($ 896 ) $ 2,587 ($ 9,298 ) $ 2,231 ($ 7,067 ) (1) The pre-tax amounts reclassified into earnings in the Unaudited Consolidated Statements of Income included reductions of $ 2.1 million included in interest and fees on loans for both the three months ended June 30, 2024 and 2023, as well as reductions of $ 495 thousand and $ 264 thousand, respectively, included in FHLB interest expense. (2) The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income. -37- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Six months ended June 30, 2024 2023 (Dollars in thousands) Pre-tax Amounts Income Tax Benefit (Expense) Net of Tax Pre-tax Amounts Income Tax Expense Net of Tax Securities available for sale: Change in fair value of available for sale debt securities ($ 13,742 ) $ 3,503 ($ 10,239 ) $ 4,436 ($ 1,065 ) $ 3,371 Cash flow hedges: Change in fair value of cash flow hedges 3,458 ( 890 ) 2,568 2,742 ( 658 ) 2,084 Net cash flow hedge losses reclassified into earnings (1) 3,291 ( 839 ) 2,452 4,510 ( 1,082 ) 3,428 Net change in fair value of cash flow hedges 6,749 ( 1,729 ) 5,020 7,252 ( 1,740 ) 5,512 Defined benefit plan obligations: Amortization of net actuarial losses (2) 61 ( 15 ) 46 119 ( 29 ) 90 Total other comprehensive (loss) income ($ 6,932 ) $ 1,759 ($ 5,173 ) $ 11,807 ($ 2,834 ) $ 8,973 (1) For the six months ended June 30, 2024 and 2023, the pre-tax amounts reclassified into earnings in the Unaudited Consolidated Statements of Income included reductions of $ 4.3 million and $ 4.9 million, respectively, included in interest and fees on loans, as well as reductions of $ 988 thousand and $ 391 thousand, respectively, included 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 June 30, 2024 Balance at March 31, 2024 ($ 127,579 ) ($ 12,414 ) ($ 8,920 ) ($ 148,913 ) Other comprehensive income before reclassifications 749 589 — 1,338 Amounts reclassified from AOCL — 1,226 23 1,249 Net other comprehensive income 749 1,815 23 2,587 Balance at June 30, 2024 ($ 126,830 ) ($ 10,599 ) ($ 8,897 ) ($ 146,326 ) (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 six months ended June 30, 2024 Balance at December 31, 2023 ($ 116,591 ) ($ 15,619 ) ($ 8,943 ) ($ 141,153 ) Other comprehensive (loss) income before reclassifications ( 10,239 ) 2,568 — ( 7,671 ) Amounts reclassified from AOCL — 2,452 46 2,498 Net other comprehensive (loss) income ( 10,239 ) 5,020 46 ( 5,173 ) Balance at June 30, 2024 ($ 126,830 ) ($ 10,599 ) ($ 8,897 ) ($ 146,326 ) -38- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (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 June 30, 2023 Balance at March 31, 2023 ($ 117,835 ) ($ 19,848 ) ($ 4,077 ) ($ 141,760 ) Other comprehensive (loss) income before reclassifications ( 9,827 ) 1,289 — ( 8,538 ) Amounts reclassified from AOCL — 1,426 45 1,471 Net other comprehensive (loss) income ( 9,827 ) 2,715 45 ( 7,067 ) Balance at June 30, 2023 ($ 127,662 ) ($ 17,133 ) ($ 4,032 ) ($ 148,827 ) (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 six months ended June 30, 2023 Balance at December 31, 2022 ($ 131,033 ) ($ 22,645 ) ($ 4,122 ) ($ 157,800 ) Other comprehensive income before reclassifications 3,371 2,084 — 5,455 Amounts reclassified from AOCL — 3,428 90 3,518 Net other comprehensive income 3,371 5,512 90 8,973 Balance at June 30, 2023 ($ 127,662 ) ($ 17,133 ) ($ 4,032 ) ($ 148,827 ) 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 Six Months Periods ended June 30, 2024 2023 2024 2023 Earnings for basic and diluted earnings per common share: Net income $ 10,815 $ 11,256 $ 21,751 $ 24,068 Less: dividends and undistributed earnings allocated to participating securities ( 8 ) ( 19 ) ( 20 ) ( 48 ) Net income available to common shareholders $ 10,807 $ 11,237 $ 21,731 $ 24,020 Shares: Weighted average common shares outstanding for basic EPS 17,052 17,011 17,042 17,042 Dilutive effect of common stock equivalents 58 19 40 43 Weighted average common shares outstanding for diluted EPS 17,110 17,030 17,082 17,085 Earnings per common share: Basic EPS $ 0.63 $ 0.66 $ 1.28 $ 1.41 Diluted EPS $ 0.63 $ 0.66 $ 1.27 $ 1.41 Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 458,539 and 459,100 , respectively, for the three and six months ended June 30, 2024, compared to 478,490 and 377,989 , respectively, for the same periods in 2023. 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 -39- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) instruments include commitments to extend credit and standby letters of credit, as well as derivative financial instruments, such as mortgage loan commitments, loan related derivative contracts and interest rate risk management contracts. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the 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. See Note 6 for additional disclosure pertaining to derivative 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 June 30, 2024 and December 31, 2023, 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. The following table presents the contractual and notional amounts of financial instruments with off-balance sheet risk: (Dollars in thousands) June 30, 2024 December 31, 2023 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 1,099,193 $ 1,185,196 Standby letters of credit 11,545 9,323 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. The activity in the ACL on unfunded commitments for the three months ended June 30, 2024 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 943 $ 771 $ 1,714 $ 15 $ — $ 11 $ 11 $ 1,740 Provision ( 37 ) 28 ( 9 ) 9 — — — — Ending Balance $ 906 $ 799 $ 1,705 $ 24 $ — $ 11 $ 11 $ 1,740 The activity in the ACL on unfunded commitments for the six months ended June 30, 2024 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 1,091 $ 822 $ 1,913 $ 15 $ — $ 12 $ 12 $ 1,940 Provision ( 185 ) ( 23 ) ( 208 ) 9 — ( 1 ) ( 1 ) ( 200 ) Ending Balance $ 906 $ 799 $ 1,705 $ 24 $ — $ 11 $ 11 $ 1,740 -40- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The activity in the ACL on unfunded commitments for the three months ended June 30, 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 $ 1,368 $ 883 $ 2,251 $ 25 $ — $ 14 $ 14 $ 2,290 Provision 115 ( 6 ) 109 ( 10 ) — 1 1 100 Ending Balance $ 1,483 $ 877 $ 2,360 $ 15 $ — $ 15 $ 15 $ 2,390 The activity in the ACL on unfunded commitments for the six months ended June 30, 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 247 ( 111 ) 136 ( 35 ) — ( 1 ) ( 1 ) 100 Ending Balance $ 1,483 $ 877 $ 2,360 $ 15 $ — $ 15 $ 15 $ 2,390 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. -41- Management's Discussion and Analysis