Washington Trust Bancorp Inc: Form 10-Q for the period ended Jun 30, 2024

The following discussion should be read in conjunction with the Corporation’s Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2023, and in conjunction with the condensed Unaudited Consolidated Financial Statements and notes thereto included in Item 1 of this report. Operating results for the three and six months ended June 30, 2024 are not necessarily indicative of the results for the full-year ended December 31, 2024 or any future period.

Forward-Looking Statements

This report contains statements that are “forward-looking statements.” We may also make forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors, or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “outlook,” “will,” “should,” and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties, and other factors, some of which are beyond our control. These risks, uncertainties, and other factors may cause our actual results, performance, or achievements to be materially different than the anticipated future results, performance, or achievements expressed or implied by the forward-looking statements.

Some of the factors that might cause these differences include the following:

• changes in general business and economic conditions on a national basis and in the local markets in which we operate;
• changes in customer behavior due to political, business, and economic conditions, including inflation and concerns about liquidity;
• interest rate changes or volatility, as well as changes in the balance and mix of loans and deposits;
• changes in loan demand and collectability;
• the possibility that future credits losses are higher than currently expected due to changes in economic assumptions or adverse economic developments;
• ongoing volatility in national and international financial markets;
• reductions in the market value or outflows of wealth management AUA;
• decreases in the value of securities and other assets;
• increases in defaults and charge-off rates;
• changes in the size and nature of our competition;
• changes in legislation or regulation and accounting principles, policies, and guidelines;
• operational risks including, but not limited to, changes in information technology, cybersecurity incidents, fraud, natural disasters, war, terrorism, civil unrest, and future pandemics;
• regulatory, litigation, and reputational risks; and
• changes in the assumptions used in making such forward-looking statements.

In addition, the factors described under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC, may result in these differences. You should carefully review all of these factors and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans, and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

Overview

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.

Our largest source of operating income is net interest income, which is the difference between interest earned on loans and securities and interest paid on deposits and borrowings. In addition, we generate noninterest income from a number of sources, including wealth management services, mortgage banking activities, and deposit services. Our principal noninterest expenses include salaries and employee benefit costs, outsourced services provided by third-party vendors, occupancy and facility-related costs, and other administrative expenses.

We continue to leverage our strong regional brand to build market share and remain steadfast in our commitment to provide superior service. We believe the key to future growth is providing customers with convenient in-person service and digital banking solutions. In January 2024, we opened a new full-service branch in Smithfield, Rhode Island. In addition, we plan to open another branch in the Olneyville section of Providence in the third quarter of 2024.

Risk Management

The Corporation has a comprehensive ERM program through which the Corporation identifies, measures, monitors, and controls current and emerging material risks.

The Board of Directors is responsible for oversight of the ERM program. The ERM program enables the aggregation of risk across the Corporation and ensures the Corporation has the tools, programs, and processes in place to support informed decision making, to anticipate risks before they materialize and to maintain the Corporation’s risk profile consistent with its risk strategy. The Board of Directors has approved an ERM Policy that addresses each category of risk. The risk categories include: credit risk, interest rate risk, liquidity risk, price and market risk, compliance risk, strategic and reputation risk, and operational risk. A description of each risk category is provided below.

Credit risk represents the possibility that borrowers or other counterparties may not repay loans or other contractual obligations according to their terms due to changes in the financial capacity, ability, and willingness of such borrowers or counterparties to meet their obligations. In some cases, the collateral securing payment of the loans may be sufficient to assure repayment, but in other cases the Corporation may experience significant credit losses which could have an adverse effect on its operating results. The Corporation makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of the real estate and other assets serving as collateral for the repayment of loans. Credit risk also exists with respect to investment securities. For further discussion regarding the credit risk and the credit quality of the Corporation’s loan portfolio, see Notes 4 and 5 to the Unaudited Consolidated Financial Statements. For further discussion regarding credit risk associated with unfunded commitments, see Note 16 to the Unaudited Consolidated Financial Statements. For further discussion regarding the Corporation’s securities portfolio, see Note 3 to the Unaudited Consolidated Financial Statements.

Interest rate risk is the risk of loss to earnings due to movements in interest rates. Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows. It exists because the repricing frequency and magnitude of interest-earning assets and interest-bearing liabilities are not identical. See the “Asset/Liability Management and Interest Rate Risk” section below for additional disclosure.

Liquidity risk is the risk that the Corporation will not have the ability to generate adequate amounts of cash in the most economical way for it to meet its maturing liability obligations and customer loan demand. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources. For detailed disclosure regarding liquidity management, see the “Liquidity and Capital Resources” section below.

Price and market risk refers to the risk of loss arising from adverse changes in interest rates and other relevant market rates and prices, such as equity prices. Interest rate risk, discussed above, is the most significant market risk to which the Corporation is exposed. The Corporation is also exposed to financial market risk and housing market risk.

Compliance risk represents the risk of regulatory sanctions or financial loss resulting from the failure to comply with laws, rules, and regulations and standards of good banking practice. Activities which may expose the Corporation to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, adherence to all applicable laws and regulations, and employment and tax matters.

Strategic and reputation risk represent the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, and failure to assess existing and new opportunities and threats in business, markets, and products.

Operational risk is the risk of loss due to human behavior, inadequate or failed internal processes, systems and controls, information technology changes or failures, and external influences such as market conditions, fraudulent activities, cybersecurity incidents, natural disasters, and security risks.

ERM is an overarching program that includes all areas of the Corporation. A framework approach is utilized to assign responsibility and to ensure that the various business units and activities involved in the risk management life-cycle are effectively integrated. The Corporation has adopted the “three lines of defense” strategy that is an industry best practice for ERM. Business units are the first line of defense in managing risk. They are responsible for identifying, measuring, monitoring, and controlling current and emerging risks. They must report on and escalate their concerns. Corporate functions such as Credit Risk Management, Financial Administration, Information Assurance, and Compliance represent the second line of defense. They are responsible for policy setting and for reviewing and challenging the risk management activities of the business units. They collaborate closely with business units on planning and resource allocation with respect to risk management. Internal Audit is a third line of defense. They provide independent assurance to the Board of Directors of the effectiveness of the first and second lines in fulfilling their risk management responsibilities.

For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see Part II, Item 1A below and the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC.

Results of Operations

Summary

The following table presents a summarized consolidated statement of operations:

(Dollars in thousands)

The following table presents a summary of performance metrics and ratios:

Net income totaled $10.8 million and $21.8 million, respectively, for the three and six months ended June 30, 2024, compared to $11.3 million and $24.1 million, respectively, reported for the same periods in 2023. Results in 2024 largely reflected lower net interest income, higher noninterest income, stable asset and credit quality metrics, and modestly higher total noninterest expenses.

The decline in net interest income in 2024 was driven by higher rates paid on, and increases in, average interest-bearing liability balances, which offset the benefit of higher yields on, and growth in, average interest-earning asset balances. Noninterest income benefited from a $2.1 litigation settlement received in the first quarter of 2024, a net gain of $988 thousand recognized on the sale of a bank-owned operations facility in the second quarter of 2024, as well as higher mortgage banking revenues and wealth management revenues.

Average Balances / Net Interest Margin - Fully Taxable Equivalent Basis

The following tables present daily average balance, interest, and yield/rate information, as well as net interest margin on an FTE basis. Tax-exempt income is converted to an FTE basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. Unrealized gains (losses) on available for sale securities and changes in fair value on mortgage loans held for sale are excluded from the average balance and yield calculations. Nonaccrual loans, as well as interest recognized on these loans, are included in amounts presented for loans.

(Dollars in thousands)

(1) Interest income includes adjustments for taxable equivalency of $227 and $235, respectively, for the three months ended June 30, 2024 and 2023.

Management's Discussion and Analysis

(Dollars in thousands)

(1) Interest income includes adjustments for taxable equivalency of $449 and $463, respectively, for the six months ended June 30, 2024 and 2023.

Net Interest Income

Net interest income, the primary source of our operating income, totaled $31.6 million and $63.3 million, respectively, for the three and six months ended June 30, 2024, compared to $33.5 million and $70.7 million, respectively, for the same periods in 2023. Net interest income is affected by the level of and changes in interest rates, and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Prepayment penalty income associated with loan payoffs is included in net interest income.

The following discussion presents net interest income on an FTE basis by adjusting income and yields on tax-exempt loans to be comparable to taxable loans.

Net interest income includes the periodic recognition of prepayment penalty fee income associated with commercial loan payoffs. Prepayment penalty fee income amounted to $46 thousand and $66 thousand, respectively, for the three and six months ended June 30, 2024, and had essentially no benefit to NIM in either period. This compared to $50 thousand and $174 thousand, respectively, for the same periods in 2023, which had a 1 basis point benefit to NIM in each of those periods.

The analysis of net interest income, NIM, and the yield on loans is also impacted by changes in the level of net amortization of premiums and discounts on securities and loans, which is included in interest income. Changes in market interest rates affect the level of loan prepayments and the receipt of payments on mortgage-backed securities. Prepayment speeds generally increase as market interest rates decline and decrease as market interest rates rise. Changes in prepayment speeds could increase or decrease the level of net amortization of premiums and discounts, thereby affecting interest income. As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to net interest income) amounted to $573 thousand for the six months ended June 30, 2024, compared to $707 thousand for the same period in 2023.

FTE net interest income for the three and six months ended June 30, 2024 amounted to $31.8 million and $63.7 million, respectively, down by $1.9 million and $7.5 million, respectively, from the same periods in 2023. For the three and six months ended June 30, 2024, increases in average interest-bearing liability balances, net of increased average interest-earning assets, reduced net income by $1.0 million, and $3.9 million, respectively. Increases in funding costs outpaced increases in asset yields, reducing net interest income by $916 thousand and $3.6 million, respectively, for the three and six months ended June 30, 2024.

NIM was 1.83% and 1.84%, respectively, for the three and six months ended June 30, 2024, compared to 2.03% and 2.18%, respectively, for the same periods in 2023. While NIM benefited from higher market interest rates on loans, it was adversely impacted by a higher cost of funds.

Total average securities for the three and six months ended June 30, 2024 decreased by $72.4 million and $59.9 million, respectively, from the average balances for the same periods a year earlier primarily due to routine pay-downs. The FTE rate of return on the securities portfolio for the three and six months ended June 30, 2024 was 2.47% and 2.48%, respectively, compared to 2.47% and 2.46% respectively, for the same periods in 2023.

Total average loan balances for the three and six months ended June 30, 2024 increased by $363.8 million and $445.3 million, respectively, from the average loan balances for the comparable 2023 periods, largely reflecting growth in average balances of CRE and residential real estate loans. The yield on total loans for the three and six months ended June 30, 2024 was 5.43% and 5.40%, respectively, compared to 4.97% and 4.85%, respectively, in the corresponding periods in 2023, reflecting higher market interest rates.

Higher levels of wholesale funding were used to fund balance sheet growth. The average balance of FHLB advances for the three and six months ended June 30, 2024 increased by $417.3 million and $306.8 million, respectively, compared to the average balances for the same periods in 2023. Due to increases in market interest rates, the average rate paid on such advances for the three and six months ended June 30, 2024 was 4.98% and 4.95%, respectively, up from 4.77% and 4.64%, respectively, for the same periods in 2023. Included in total average interest-bearing deposits were wholesale brokered deposits, which decreased by $133.0 million and increased by $61.1 million, respectively, from the same periods in 2023. The average rate paid on wholesale brokered deposits for the three and six months ended June 30, 2024 was 5.23% and 5.22%, respectively, up from 4.71% and 4.33%, respectively, for the same periods in 2023.

As market interest rates rose, deposit balances shifted from lower-cost deposits to higher-cost deposits. Average in-market interest-bearing deposits, which excludes wholesale brokered deposits, for the three and six months ended June 30, 2024 increased by $113.2 million and $158.6 million, respectively, from the average balances for the same periods in 2023, with increases in time deposits and interest-bearing demand deposits. The average rate paid on in-market interest-bearing deposits for the three and six months ended June 30, 2024 was 3.01% and 2.97%, respectively, up from 2.27% and 1.97%, respectively, for the same periods in 2023. The average balance of noninterest-bearing demand deposits for the three and six months ended June 30, 2024 decreased by $117.9 million and $144.1 million, respectively, from the average balances for the same periods in 2023.

Volume / Rate Analysis - Interest Income and Expense (FTE Basis)

The following table presents certain information on an FTE basis regarding changes in our interest income and interest expense for the period indicated. The net change attributable to both volume and rate has been allocated proportionately.

(Dollars in thousands)

Provision for Credit Losses

The provision for credit losses results from management’s review of the adequacy of the ACL. The ACL is management’s estimate, at the reporting date, of expected lifetime credit losses and includes consideration of current forecasted economic conditions. Estimating an appropriate level of ACL necessarily involves a high degree of judgment.

The following table presents the provision for credit losses:

(Dollars in thousands)

The provision for credit losses recognized in 2024 reflected continued, yet subsiding, slowdown of loan prepayment speeds, modest commercial loan growth and was partially offset by improvements in our estimate of forecasted economic conditions. Additionally, as discussed further in the section labeled “Financial Condition,” the modest commercial loan growth was offset by reductions in residential real estate and consumer loans. The reduction in the provision for credit losses in 2024 includes a decline in the provision for credit losses on unfunded commitments reflecting lower unfunded commitments to extend credit.

Net charge-offs totaled $27 thousand for the three months ended June 30, 2024, compared to net charge-offs of $37 thousand for the same period in 2023. For the six months ended June 30, 2024, net charge-offs totaled $79 thousand, compared to net charge-offs of $84 thousand for the same period in 2023.

The ACL on loans was $42.4 million, or 0.75% of total loans, at June 30, 2024, compared to $41.1 million, or 0.73% of total loans, at December 31, 2023.

See additional discussion under the caption “Asset Quality” for further information on asset quality metrics and the ACL on loans.

Noninterest Income

Noninterest income is an important source of revenue for Washington Trust. The principal categories of noninterest income are shown in the following table:

(Dollars in thousands)

Noninterest Income Analysis

Revenue from wealth management services represented 56% of total noninterest income for the six months ended June 30, 2024, compared to 64% for the same period in 2023. A substantial portion of wealth management revenues is dependent on the value of wealth management AUA and is closely tied to the performance of the financial markets. This portion of wealth management revenues is referred to as “asset-based” and includes trust and investment management fees. Wealth management revenues also include “transaction-based” revenues that are not primarily derived from the value of assets.

The categories of wealth management revenues are shown in the following table:

(Dollars in thousands)

Wealth management revenues for the three and six months ended June 30, 2024 increased by $630 thousand and $1.3 million, respectively, from the same periods in 2023, reflecting an increase in asset-based revenues. The change in asset-based revenues correlated with the change in average AUA balances. The average balance of AUA for the three and six months ended June 30, 2024 increased by 9%, from the average balance for both the same periods in 2023.

The end of period AUA balance amounted to $6.8 billion at June 30, 2024. The following table presents the changes in wealth management AUA balances:

(Dollars in thousands)

Mortgage banking revenues represented 16% of total noninterest income for six months ended June 30, 2024, compared to 11% for the same period in 2023. These revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets. While loan origination and refinancing activities decreased in response to increases in market interest rates, a larger proportion of loans were originated for sale in 2024. The composition of mortgage banking revenues and the volume of loans sold to the secondary market are shown in the following table:

(Dollars in thousands)

(1) Includes gains on loan sales, commission income on loans originated for others, servicing right gains, and gains (losses) on forward loan commitments.

(2) Represents fair value changes on mortgage loans held for sale and forward loan commitments.

(3) Represents loan servicing fee income, net of servicing right amortization and valuation adjustments.

(4) Includes brokered loans (loans originated for others).

For the three and six months ended June 30, 2024, mortgage banking revenues were up by $1.0 million and $2.3 million, respectively, compared to the same periods in 2023. The increase in mortgage banking revenues was mainly attributable to increases in both sales volume and sales yield. Mortgage banking revenues are also impacted by changes in the fair value of mortgage loans held for sale and forward loan commitments, which are primarily based on current market prices in the secondary market and correlate to changes in the size of the mortgage pipeline.

Income from BOLI for the six months ended June 30, 2024, was down by $552 thousand, from the same period in 2023, reflecting the recognition of $658 thousand in non-taxable income in 2023 associated with the receipt of life insurance proceeds.

Other income for the three and six months ended June 30, 2024 was up by $912 thousand and $3.0 million, respectively, from the same periods in 2023. Included in other income in 2024 was a net gain of $988 thousand recognized on the sale of a bank-owned operations facility in the second quarter and $2.1 million associated with a litigation settlement in the first quarter. Excluding the impact of these items, other income for the three and six months ended June 30, 2024 was down modestly by $76 thousand and $62 thousand, respectively, from the same periods in 2023.

Noninterest Expense

The following table presents noninterest expense comparisons:

(Dollars in thousands)

Noninterest Expense Analysis

Salaries and employee benefits expense, the largest component of noninterest expense, for the three and six months ended June 30, 2024 increased by $672 thousand and $663 thousand, respectively, compared to the same periods in 2023. This largely reflected timing of adjustments to performance-based compensation accruals. The year-to-date increase also includes merit increases, partially offset by lower staffing levels.

Outsourced services expense for the three and six months ended June 30, 2024 increased by $475 thousand and $759 thousand, respectively, compared to the same periods in the prior year, reflecting changes to and expansion of services provided by third-party vendors.

Legal, audit and professional fees for the three and six months ended June 30, 2024 decreased by $237 thousand and $427 thousand, respectively, compared to the same periods in 2023, reflecting lower legal fees.

FDIC deposit insurance costs for the six months ended June 30, 2024 increased by $602 thousand compared to the same period in 2023, reflecting the impact of growth in assets from a year ago and a higher FDIC deposit assessment rate.

Advertising and promotion expense for the three and six months ended June 30, 2024 increased by $234 thousand and $374 thousand, respectively, due to timing of such activities.

Income Taxes

The following table presents the Corporation’s income tax provision and applicable tax rates for the periods indicated:

(Dollars in thousands)

The effective income tax rates in the table above differed from the federal rate of 21%, primarily due to state income tax expense and tax benefits related to income from BOLI, federal tax credits, and tax-exempt income.

The effective income tax rates for the three and six months ended June 30, 2024 were higher as compared to the same periods in 2023, primarily due to discrete tax items associated with the settlement of equity compensation awards and BOLI.

The Corporation’s net deferred tax assets amounted to $55.9 million at June 30, 2024, compared to $53.8 million at December 31, 2023.

Segment Reporting

The Corporation manages its operations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services. See Note 13 to the Unaudited Consolidated Financial Statements for additional disclosure related to business segments.

Commercial Banking

The following table presents a summarized statement of operations for the Commercial Banking business segment:

(Dollars in thousands)

Net interest income for the Commercial Banking segment for the three and six months ended June 30, 2024 decreased by $1.9 million and $7.4 million, respectively, from the same periods in 2023. Net interest income was adversely impacted by higher rates paid on, and increases in, average interest-bearing liability balances, which offset the benefit of higher yields on, and growth in, average interest-earning asset balances.

The provision for credit losses for the three and six months ended June 30, 2024 decreased by $200 thousand and $300 thousand, respectively from the same periods in 2023.

Noninterest income derived from the Commercial Banking segment for the three and six months ended June 30, 2024 was up by $1.5 million and $2.7 million, respectively, from the comparable periods in 2023. The increase in Commercial Banking noninterest income reflected higher mortgage banking revenues and a net gain recognized on the sale of a bank-owned operations facility. The year-to-date increase was partially offset by lower BOLI income. See additional discussion under the caption “Noninterest Income” above.

Commercial Banking noninterest expenses for the three and six months ended June 30, 2024 were up by $1.6 million and $3.2 million, respectively, from the same periods in 2023, with increases in salaries and employee benefits expense, outsourced services, and advertising and promotion, partially offset by lower legal fees. The year-to-date increase also reflected an increase in FDIC deposit insurance costs. See additional discussion under the caption “Noninterest Expense” above.

Wealth Management Services

The following table presents a summarized statement of operations for the Wealth Management Services business segment:

(Dollars in thousands)

For the three and six months ended June 30, 2024, noninterest income derived from the Wealth Management Services segment increased by $826 thousand and $3.6 million, respectively, from the same periods in 2023, reflecting income of $2.1 million associated with a litigation settlement in the first quarter of 2024, as well as an increase in asset-based revenues. See further discussion under the caption “Noninterest Income” above.

For the three and six months ended June 30, 2024, noninterest expenses for the Wealth Management Services segment decreased by $718 thousand and $1.5 million, respectively, from the comparable periods in 2023, with decreases in salaries and employee benefits expense and legal fees.

Financial Condition

Summary

The following table presents selected financial condition data:

(Dollars in thousands)

Total assets amounted to $7.2 billion at June 30, 2024, down modestly by $18.5 million from the end of 2023.

Cash and due from banks increased by $17.1 million, or 20%, from December 31, 2023, reflecting higher cash balances on deposit at correspondent banks.

The securities portfolio decreased by $48.6 million, or 5%, from the end of 2023, reflecting routine pay-downs on mortgage-backed securities and a decrease in fair value of available for sale securities due to changes in market interest rates.

Total loans decreased by $18.6 million, or 0.3%, from the end of 2023. Residential real estate and consumer loan balances declined, while total commercial loans increased modestly.

Total deposit balances decreased by $372.0 million from the end of 2023 with the decrease concentrated in wholesale brokered time deposits. FHLB advances increased by $360.0 million, or 30%, from December 31, 2023.

Shareholders’ equity decreased by $1.7 million, or 0.4%. Net income was offset by dividend declarations and a decrease in the AOCL component of shareholders' equity that reflected a decline in the fair value of available for sale securities as noted above.

Securities

Investment security activity is monitored by the Investment Committee, the members of which also sit on the ALCO. Asset and liability management objectives are the primary influence on the Corporation’s investment activities. However, the Corporation also recognizes that there are certain specific risks inherent in investment activities. The securities portfolio is managed in accordance with regulatory guidelines and established internal corporate investment policies that provide limitations on specific risk factors such as market risk, credit risk and concentration, liquidity risk, and operational risk to help monitor risks associated with investing in securities. Reports on the activities conducted by the Investment Committee and the ALCO are presented to the Board of Directors on a regular basis.

The Corporation’s securities portfolio is managed to generate interest income, to implement interest rate risk management strategies, and to provide a readily available source of liquidity for balance sheet management. Securities are designated as either available for sale, held to maturity or trading at the time of purchase. The Corporation does not maintain a portfolio of trading securities and does not have securities designated as held to maturity. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Debt securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized.

Determination of Fair Value

The Corporation uses an independent pricing service to obtain quoted prices. The prices provided by the independent pricing service are generally based on observable market data in active markets. The determination of whether markets are active or inactive is based upon the level of trading activity for a particular security class. Management reviews the independent pricing service’s documentation to gain an understanding of the appropriateness of the pricing methodologies. Management also reviews the prices provided by the independent pricing service for reasonableness based upon current trading levels for similar securities. If the prices appear unusual, they are re-examined and the value is either confirmed or revised. In addition, management periodically performs independent price tests of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of June 30, 2024 and December 31, 2023, management did not make any adjustments to the prices provided by the pricing service.

Our fair value measurements generally utilize Level 2 inputs, representing 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 input assumptions are observable in active markets.

See Notes 3 and 7 to the Unaudited Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities.

Securities Portfolio

The carrying amounts of securities held are as follows:

(Dollars in thousands)

The securities portfolio represented 13% of total assets at June 30, 2024, compared to 14% of total assets at December 31, 2023. The largest component of the securities portfolio is mortgage-backed securities, all of which are issued by U.S. government agencies or U.S. government-sponsored enterprises.

The securities portfolio decreased by $48.6 million, or 5%, from the end of 2023. This decrease included $34.6 million of routine pay-downs on mortgage-backed securities and a decrease of $13.7 million (pre-tax) in the fair value of available for sale securities.

As of June 30, 2024, the carrying amount of available for sale debt securities included net unrealized losses of $166.0 million, compared to net unrealized losses of $152.2 million as of December 31, 2023. The net unrealized losses were primarily concentrated in obligations of U.S. government agencies and U.S. government-sponsored enterprises, including mortgage-backed securities, and primarily attributable to relative changes in market interest rates since the time of purchase. See Note 3 to the Unaudited Consolidated Financial Statements for additional information.

Loans

Total loans amounted to $5.6 billion at June 30, 2024, down by $18.6 million, or 0.3%, from the end of 2023.

The following is a summary of loans:

(Dollars in thousands)

Commercial Loans

The commercial loan portfolio represented 49% of total loans at June 30, 2024, compared to 48% of total loans at December 31, 2023.

In making commercial loans, we may occasionally solicit the participation of other banks. The Bank also participates in commercial loans originated by other banks. In such cases, these loans are individually underwritten by us using standards similar to those employed for our self-originated loans. Our participation in commercial loans originated by other banks amounted to $690.3 million and $652.7 million, respectively, at June 30, 2024 and December 31, 2023. Our participation in commercial loans originated by other banks also includes shared national credits. Shared national credits are defined as participation in loans or loan commitments of at least $100.0 million that are shared by three or more banks.

Commercial loans fall into two main categories, CRE and C&I loans. CRE loans consist of commercial mortgages secured by non-owner occupied real property where the primary source of repayment is derived from rental income associated with the property or the proceeds of the sale, refinancing or permanent financing of the property. CRE loans also include construction loans made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. C&I loans primarily provide working capital, equipment financing, and financing for other business-related purposes. C&I loans are frequently collateralized by equipment, inventory, accounts receivable, and/or general business assets. A portion of the Bank’s C&I loans is also collateralized by owner occupied real estate. C&I loans also include tax-exempt loans made to states and political subdivisions, as well as industrial development or revenue bonds issued through quasi-public corporations for the benefit of a private or non-profit entity where that entity rather than the governmental entity is obligated to pay the debt service.

Commercial Real Estate Loans

CRE loans totaled $2.2 billion at June 30, 2024, up by $85.6 million, or 4%, from the balance at December 31, 2023.

In the first six months of 2024, CRE advances and originations amounted to $137.3 million and were partially offset by payments. The net increase in CRE also included reclassifications of $15.5 million from C&I, largely reflecting an underlying change from owner occupied to non-owner occupied on a loan secured by a medical office building.

Construction and development loans included in the CRE loan portfolio amounted to $172.1 million and $214.6 million, respectively, as of June 30, 2024 and December 31, 2023. Unfunded commitments associated with these construction and development loans were $203.8 million and $304.7 million, respectively, at June 30, 2024 and December 31, 2023. These reductions in the first six months of 2024 reflected loans transitioning to permanent financing within the CRE category, as the construction phase was completed.

Shared national credit balances outstanding included in the CRE loan portfolio at June 30, 2024 and December 31, 2023, totaled $56.5 million and $47.4 million, respectively. At June 30, 2024 and December 31, 2023, balances of $36.7 million and $29.0 million, respectively, were included in the pass-rated category of commercial loan credit quality and balances of $19.8 million and $18.4 million, respectively, were included in the classified category. All of these loans were current with respect to contractual payment terms at both dates.

The following table presents a geographic summary of CRE loans by property location:

(Dollars in thousands)

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Management considers the CRE portfolio to be well-diversified with loans across several property types. The following table presents a summary of CRE loans by property type segmentation:

(Dollars in thousands)

(1) Does not include unfunded commitments of $245.8 million and $351.5 million, respectively, as of June 30, 2024 and December 31, 2023.

(2) Total commitment (outstanding loan balance plus unfunded commitments) divided by number of loans.

Multi-family totaled $592.8 million as of June 30, 2024, and is our largest single CRE segment, representing 27% of the total CRE portfolio. This segment includes non-owner occupied residential properties consisting of four or more units that are rented to tenants. At June 30, 2024, the credit quality of the multi-family segment was 100% pass-rated. Also, there were no nonaccrual loans and all loans were current with respect to payment terms at June 30, 2024.

In 2024, there continues to be heightened focus in the banking industry on the CRE office sector, given the continuation of remote work and an increase in vacancies across the office market. As of June 30, 2024, Washington Trust’s CRE office loan segment totaled $300.9 million, or 5% of total loans and 14% of the total CRE loans. The loans are secured by non-owner occupied office properties, including medical office and lab space, located in our primary lending market area of southern New England - Connecticut, Massachusetts, and Rhode Island. Furthermore, approximately 68% of the CRE office segment balance of $300.9 million is secured by properties located in suburban areas. As of June 30, 2024, all of the CRE office loans were current with respect to payment terms, and 94% of the CRE office segment balance was on accruing status. Additionally, the credit quality of the CRE office loan segment was 84% pass-rated, 2% special mention-rated, and 14% classified as of June 30, 2024.

Commercial and Industrial Loans

C&I loans amounted to $558.1 million at June 30, 2024, down by $47.0 million, or 8%, from the balance at December 31, 2023.

In the first six months of 2024, C&I originations, advances and line utilization amounted to $26.3 million and were more than offset by payments. The net decrease in C&I also reflected reclassifications of $15.5 million to CRE, as noted above.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $65.2 million and $66.3 million, respectively, at June 30, 2024 and December 31, 2023. All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at both dates.

Management considers the C&I portfolio to be well-diversified with loans across several industries. The following table presents a summary of C&I loan by industry segmentation:

(Dollars in thousands)

(1) Does not include unfunded commitments of $348.6 million and $341.9 million, respectively, as of June 30, 2024 and December 31, 2023.

(2) Total commitment (outstanding loan balance plus unfunded commitments) divided by number of loans.

Healthcare and social assistance totaled $139.9 million as of June 30, 2024, and is our largest single C&I segment, representing 25% of the total C&I portfolio. This segment includes specialty medical practices, elder services and community and mental health centers. At June 30, 2024, the credit quality of the healthcare and social assistance segment was 100% pass-rated. Also, there were no nonaccrual loans and all loans were current with respect to payment terms at June 30, 2024.

Residential Real Estate Loans

The residential real estate loan portfolio represented 45% of total loans at June 30, 2024, compared to 46% of total loans at December 31, 2023.

Residential real estate loans amounted to $2.6 billion at June 30, 2024, down by $45.9 million, or 2%, from the balance at December 31, 2023, as total origination activity has declined and a lower proportion of loans was originated for portfolio.

The following is a geographic summary of residential real estate loans by property location:

(Dollars in thousands)

(1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $51.0 million and $53.4 million, respectively, as of June 30, 2024 and December 31, 2023.

Residential real estate loans are originated both for sale to the secondary market as well as for retention in the Bank’s loan portfolio. We also originate residential real estate loans for various investors in a broker capacity, including conventional mortgages and reverse mortgages.

The table below presents residential real estate loan origination activity:

(Dollars in thousands)

(1) Includes the full commitment amount of homeowner construction loans.

(2) Includes brokered loans (loans originated for others).

Residential real estate loan origination and refinancing activities decreased in response to increases in market interest rates and changes in the housing markets. The proportion of residential real estate loans originated for portfolio has decreased for balance sheet management purposes.

The table below presents residential real estate loan sales activity:

(Dollars in thousands)

(1) Includes brokered loans (loans originated for others).

We have active relationships with various secondary market investors that purchase residential real estate loans we originate. In addition to managing our interest rate risk position and earnings through the sale of these loans, we are also able to manage our liquidity position through timely sales of residential real estate loans to the secondary market.

Loans are sold with servicing retained or released. Loans sold with servicing rights retained result in the capitalization of servicing rights. Loan servicing rights are included in other assets and are subsequently amortized as an offset to mortgage banking revenues over the estimated period of servicing. The net balance of capitalized servicing rights amounted to

$8.2 million and $8.5 million, respectively, as of June 30, 2024 and December 31, 2023. The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $1.4 billion and $1.5 billion, respectively, as of June 30, 2024 and December 31, 2023.

Consumer Loans

The consumer loan portfolio represented 6% of total loans at both June 30, 2024 and December 31, 2023.

Consumer loans include home equity loans and lines of credit and personal installment loans. Home equity lines of credit and home equity loans represented 94% of the total consumer portfolio at June 30, 2024. Our home equity line and home equity loan origination activities are conducted primarily in southern New England. The Bank estimates that approximately 50% of the combined home equity lines of credit and home equity loan balances are first lien positions or subordinate to other Washington Trust mortgages.

The consumer loan portfolio totaled $320.5 million at June 30, 2024, down by $11.3 million, or 3%, from December 31, 2023, largely reflecting a decrease in home equity lines.

Asset Quality

The Corporation continually monitors the asset quality of the loan portfolio using all available information.

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. See Note 4 to the Unaudited Consolidated Financial Statements for additional information regarding TLMs.

Nonperforming Assets

Nonperforming assets include nonaccrual loans and OREO.

The following table presents nonperforming assets and additional asset quality data:

(Dollars in thousands)

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Nonaccrual Loans

During the six months ended June 30, 2024, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.

The following table presents the activity in nonaccrual loans:

(Dollars in thousands)

The following table presents additional detail on nonaccrual loans:

(Dollars in thousands)

(1) Percentage of nonaccrual loans to the total loans outstanding within the respective loan class.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2024.

As of June 30, 2024, the composition of nonaccrual loans was 62% commercial and 38% residential and consumer. This compared to 75% commercial and 25% residential and consumer as of December 31, 2023.

Total nonaccrual loans decreased by $14.1 million from the end of 2023, reflecting a decline in nonaccrual commercial real estate loans. Nonaccrual commercial real estate loans decreased by $14.4 million from the balance at December 31, 2023, primarily due to one loan secured by a healthcare facility that returned to accruing status in the first quarter of 2024.

As of June 30, 2024, the balance of nonaccrual commercial real estate loans consisted of two collateral dependent loans that were current with respect to payment terms. These loans were individually assessed for credit impairment and based on the estimated fair value of the collateral less estimated costs to sell (when appropriate), no specific reserves were deemed necessary at June 30, 2024. Of the total carrying value, $10.5 million is secured by an office property in Massachusetts and $7.9 million is secured by an office property in Connecticut and was modified as a TLM in 2023.

As of June 30, 2024, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Connecticut, and Rhode Island. Included in total nonaccrual residential real estate loans at June 30, 2024 were four loans purchased for portfolio and serviced by others amounting to $1.1 million. Management monitors the collection efforts of its third-party servicers as part of its assessment of the collectability of nonperforming loans.

Past Due Loans

The following table presents past due loans by category:

(Dollars in thousands)

(1) Percentage of past due loans to the total loans outstanding within the respective loan class.

As of both June 30, 2024 and December 31, 2023, the composition of past due loans (loans past due 30 days or more) was essentially all residential and consumer.

Total past due loans increased by $535 thousand from the end of 2023.

Total past due loans included $8.4 million of nonaccrual loans as of June 30, 2024, compared to $6.9 million as of December 31, 2023.

All loans 90 days or more past due at June 30, 2024 and December 31, 2023 were classified as nonaccrual.

Potential Problem Loans

The Corporation classifies certain loans as “substandard,” “doubtful,” or “loss” based on criteria consistent with guidelines provided by banking regulators. Potential problem loans include classified accruing commercial loans that were less than 90 days past due at June 30, 2024 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future. Potential problem loans are not included in the amounts of nonaccrual loans presented above.

Potential problem loans are assessed for loss exposure using the methods described in Note 4 to the Unaudited Consolidated Financial Statements under the caption “Credit Quality Indicators.” Management cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become modified, or require an increased allowance coverage and provision for credit losses on loans.

Management has identified $24.2 million in potential problem loans at June 30, 2024, compared to $22.9 million at December 31, 2023. The balances of potential problem loans largely consisted of two CRE loans secured by office properties in Massachusetts and Connecticut. At June 30, 2024 and December 31, 2023, these loans were current with respect to payment terms.

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 ACL on loans is established through a provision for credit losses recognized in earnings. The ACL on loans is reduced by charge-offs on loans and is increased by recoveries of amounts previously charged off.

The Corporation’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely. Full or partial charge-offs on collateral dependent individually analyzed loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan. The Corporation does not recognize a recovery when new appraisals indicate a subsequent increase in value.

Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status. New appraisals are generally obtained for nonaccrual loans or when management believes it is warranted. The Corporation has continued to maintain appropriate professional standards regarding the professional qualifications of appraisers and has an internal review process to monitor the quality of appraisals.

For residential real estate loans and real estate collateral dependent consumer loans that are in the process of collection, valuations are obtained from independent appraisal firms with values determined on an “as is” basis.

The following table presents additional detail on the Corporation’s loan portfolio and associated allowance:

(Dollars in thousands)

Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components. The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics. The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments.

The ACL for individually analyzed loans is measured using a DCF method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan was collateral dependent, at the fair value of the collateral.

The ACL for pooled loans is measured utilizing a DCF methodology to estimate credit losses for each pooled portfolio segment. The methodology incorporates a probability of default and loss given default framework. Loss given default is estimated based on historical credit loss experience. Probability of default is estimated using a regression model that incorporates econometric factors. Management utilizes forecasted econometric factors with a one-year reasonable and supportable forecast period and one-year straight-line reversion period in order to estimate the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, prepayment speeds, and remaining life of the loan to estimate a reserve for each loan. The sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived. Quantitative loss factors for pooled loans are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates.

The ACL on loans amounted to $42.4 million at June 30, 2024, up by $1.3 million, or 3%, from the balance at December 31, 2023. The ACL on loans as a percentage of total loans, also known as the reserve coverage ratio, was 0.75% at June 30, 2024, compared to 0.73% at December 31, 2023.

The Corporation recorded a provision for credit losses on loans of $500 thousand and $1.4 million, respectively, for the three and six months ended June 30, 2024. The provision for credit losses recognized in 2024 reflected continued, yet subsiding, slowdown of loan prepayment speeds, modest commercial loan growth and was partially offset by improvements in our estimate of forecasted economic conditions.

Net charge-offs totaled $27 thousand for the three months ended June 30, 2024, compared to $37 thousand for the same period in 2023. For the six months ended June 30, 2024, net charge-offs totaled $79 thousand, compared to net charge-offs of $84 thousand for the same period in 2023.

The ACL on loans is an estimate and ultimate losses may vary from management’s estimate. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans; conversely, improving conditions or assumptions could lead to further reductions in the ACL on loans.

The following table presents the allocation of the ACL on loans by portfolio segment. The total ACL on loans is available to absorb losses from any segment of the loan portfolio.

(Dollars in thousands)

(1) Percentage of loans outstanding in respective class to total loans outstanding.

Sources of Funds

Our sources of funds include in-market deposits, wholesale brokered deposits, FHLB advances, other borrowings, and proceeds from the sales, maturities, and payments of loans and investment securities. The Corporation uses funds to originate and purchase loans, purchase investment securities, conduct operations, expand the branch network, and pay dividends to shareholders.

Deposits

The Corporation offers a wide variety of deposit products to consumer and business customers. Deposits provide an important source of funding for the Bank, as well as an ongoing stream of fee revenue.

The Bank is a participant in the DDM program, ICS program, and the CDARS program. The Bank uses these deposit sweep services to place customer and client funds into interest-bearing demand accounts, money market accounts, and/or time deposits issued by other participating banks. Customer and client funds are placed at one or more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a program participant, we receive reciprocal amounts of deposits from other participating banks. We consider these reciprocal deposit balances to be in-market deposits as distinguished from traditional wholesale brokered deposits.

The following table presents a summary of deposits:

(Dollars in thousands)

Total deposits amounted to $5.0 billion at June 30, 2024, compared to $5.3 billion at December 31, 2023.

Wholesale brokered time deposits decreased by $314.8 million, or 48%, from December 31, 2023, reflecting a shift in wholesale funding mix based on pricing. See disclosure regarding FHLB advances under the caption “Borrowings” below.

In-market deposits, which exclude wholesale brokered time deposits, were down by $57.2 million, or 1%, from the balance at December 31, 2023. In-market deposits continue to shift from relatively lower-cost products to higher-cost products, due to elevated market interest rates and increased competition.

As of June 30, 2024, in-market deposits were approximately 61% retail and 39% commercial. Our in-market deposits are well-diversified by industry and customer type. The average size of our in-market deposit accounts was approximately $35 thousand at June 30, 2024.

The following table presents a summary of the Bank’s uninsured deposits:

(Dollars in thousands)

(1) Determined in accordance with regulatory reporting requirements, which includes affiliate deposits and fully-collateralized preferred deposits.

(2) Uninsured deposit balances of Washington Trust Bancorp, Inc. and its subsidiaries that are eliminated in consolidation.

(3) Uninsured deposits of states and political subdivisions, which are secured or collateralized as required by state law.

Borrowings

Borrowings primarily consist of FHLB advances, which are used as a source of funding for liquidity and interest rate risk management purposes.

FHLB advances totaled $1.6 billion at June 30, 2024, up by $360.0 million, or 30%, from the balance at the end of 2023, reflecting a shift to utilize higher levels of FHLB advances and lower levels of wholesale brokered time certificates as a wholesale funding source.

For additional information regarding FHLB advances see Note 9 to the Unaudited Consolidated Financial Statements.

Liquidity and Capital Resources

Liquidity Management

Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 64% of total average assets in the six months ended June 30, 2024. While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and brokered deposits), cash flows from the investment securities portfolio, and loan repayments. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs, although management has no intention to do so at this time.

The Corporation has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management employs stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as usual” cash flows. In management’s estimation, risks are concentrated in two major categories: (1) runoff of in-market deposit balances; and (2) unexpected drawdown of loan commitments. Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our stress test scenarios, therefore, emphasize attempts to quantify deposits at risk over selected time horizons. In addition to these unexpected outflow risks, several other “business as usual” factors enter into the calculation of the adequacy of contingent liquidity including: (1) payment proceeds from loans and investment securities; (2) maturing debt obligations; and (3) maturing time deposits. The Corporation has established collateralized borrowing capacity with the FRBB and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business. Borrowing capacity is impacted by the amount and type of assets available to be pledged.

The table below presents a summary of contingent liquidity balances by source:

(Dollars in thousands)

(1) As of June 30, 2024 and December 31, 2023, loans with a carrying value of $3.5 billion and $3.4 billion, respectively, and securities available for sale with carrying values of $87.5 million and $94.3 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of June 30, 2024 and December 31, 2023, loans with a carrying value of $87.5 million and $71.0 million, respectively, and securities available for sale with a carrying value of $13.7 million and $13.1 million, respectively, were pledged to the FRBB for the discount window resulting in this additional unused borrowing capacity.

In addition to the amounts presented above, the Bank also has access to a $40.0 million unused line of credit with the FHLB at June 30, 2024 and December 31, 2023. Furthermore, availability of $66.0 million and $65.0 million, respectively, at June 30, 2024 and December 31, 2023, was utilized to collateralize institutional deposits through standby letters of credit with the FHLB.

The ALCO establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained within target ranges established by the ALCO during the six months ended June 30, 2024. Based on its assessment of the liquidity considerations described above, management believes the Corporation’s sources of funding meet anticipated funding needs.

Contractual Obligations, Commitments, and Off-Balance Sheet Arrangements

In the ordinary course of business, the Corporation enters into contractual obligations that require future cash payments. These include payments related to lease obligations, time deposits with stated maturity dates, and borrowings. Also, in the ordinary course of business, the Corporation engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These financial transactions include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. For additional information on derivative financial instruments and financial instruments with off-balance sheet risk see Notes 6 and 16 to the Unaudited Consolidated Financial Statements.

Capital Resources

Total shareholders’ equity amounted to $471.0 million at June 30, 2024, down by $1.7 million from December 31, 2023. Net income of $21.8 million was offset by $19.3 million in dividend declarations and a decline of $5.2 million in the AOCL component of shareholders' equity. The decline in AOCL reflected a decrease in the fair value of available for sale debt securities due to changes in market interest rates, which was partially offset by the amortization of a loss on a previously terminated cash flow hedge. See Note 6 to the Unaudited Consolidated Financial Statements for additional discussion regarding the previously terminated cash flow hedge.

The Corporation declared a quarterly dividend of 56 cents per share for the three months ended June 30, 2024, unchanged from the 56 cents per share declared for the same period in 2023. On a year-to-date basis, dividend declarations totaled $1.12 per share in 2024, unchanged from the $1.12 per share declared in 2023.

The ratio of total equity to total assets amounted to 6.56% at both June 30, 2024 and December 31, 2023. Book value per share was $27.61 at June 30, 2024, compared to $27.75 at December 31, 2023.

The Bancorp and the Bank are subject to various regulatory capital requirements and are considered “well capitalized,” with a total risk-based capital ratio of 11.81% at June 30, 2024, compared to 11.58% at December 31, 2023.

See Note 10 to the Unaudited Consolidated Financial Statements for additional discussion regarding shareholders’ equity.

Asset/Liability Management and Interest Rate Risk

Interest rate risk is the risk to earnings due to changes in interest rates. The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. Quarterly, the ALCO reports on the status of liquidity and interest rate risk matters to the Corporation’s Audit Committee. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with the Corporation’s liquidity, capital adequacy, growth, risk, and profitability goals.

The Corporation utilizes the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, interest rate contracts, and the pricing and structure of loans and deposits, to manage interest rate risk. The interest rate contracts may include interest rate swaps, caps, floors, and collars. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract. The notional amount of the interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk. See Note 6 to the Unaudited Consolidated Financial Statements for additional information.

The ALCO uses income simulation to measure interest rate risk inherent in the Corporation’s financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 12-month horizon and a 13- to 24-month horizon. The simulations assume that the size and general composition of the Corporation’s balance sheet remain static over the simulation horizons, with the exception of certain deposit mix shifts from low-cost savings to higher-cost time deposits in selected interest rate scenarios. Additionally, the simulations take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. Mortgage-backed securities and residential real estate loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency.

The increase of the Federal Funds target rate in recent years has resulted in higher rates paid on deposit balances and a shift of low-cost balances into higher-cost alternatives, which could continue into the future, particularly if interest rates remain elevated. As such, the ALCO has modeled deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above. Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment, as well as due to heightened uncertainty in the banking industry. This may cause interest rate sensitivity to differ from the results as presented. Another significant simulation assumption is the sensitivity of savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both savings deposit rates and balances are related to changes in short-term interest rates. The relationship between short-term interest rate changes and deposit rate and balance changes may differ from the ALCO’s estimates used in income simulation.

The ALCO reviews simulation results to determine whether the Corporation’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. As of June 30, 2024 and December 31, 2023, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation. All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where both interest rates and the composition of the Corporation’s balance sheet remain stable.

The ALCO regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including parallel changes in interest rates and scenarios showing the effect of steepening or flattening changes in the yield curve. Because income simulations assume that the Corporation’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts. It should also be noted that the static balance sheet assumption does not necessarily reflect the Corporation’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior.

While the ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future NIM. Over time, the repricing, maturity, and prepayment characteristics of financial instruments and the composition of the Corporation’s balance sheet may change to a different degree than estimated.

The following table sets forth the estimated change in net interest income from an unchanged rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on- and off-balance sheet financial instruments as of June 30, 2024 and December 31, 2023. Interest rates are assumed to shift by parallel rate changes as shown in the table below. Further, deposits are assumed to have certain minimum rate levels below which they will not fall. It should be noted that the rate scenarios shown do not necessarily reflect the ALCO’s view of the “most likely” change in interest rates over the periods indicated.

The relative change in interest rate sensitivity from December 31, 2023, as shown in the above table, was attributable to changes in balance sheet composition and market interest rates. As of June 30, 2024, the ALCO estimates that negative exposure of net interest income in Year 1 to falling rates as compared to an unchanged rate scenario results from a more rapid decline in earning asset yields compared to rates paid on deposits. If market interest rates were to fall and remain lower for a sustained period, certain savings and time deposit rates could decline more slowly and by a lesser amount than other market interest rates. For simulation purposes, deposit rate changes are anticipated to lag behind other market interest rates in both timing and magnitude. Asset yields would likely decline more rapidly than deposit costs as holdings mature or reprice, since cash flow from mortgage-related prepayments and redemption of callable securities would increase as market interest rates fall. The negative exposure in down rate scenarios reflects the insensitivity of certain deposit rates to market interest rate declines as they approach their floors. The positive exposure to falling rates in Year 2 is attributable to continued downward repricing of liabilities as time deposits and wholesale funding are replaced with lower rates as they mature.

As of June 30, 2024, the positive exposure of net interest income in Year 1 to rising rates as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term. As mentioned above, for simulation purposes, deposit rate changes are anticipated to lag behind other market interest rates in both timing and magnitude. The negative exposure to rising rates in Year 2 is due to a higher level of longer-term fixed rate assets, as well as larger proportion of wholesale funds to total sources of funds. Fixed rate assets would not reprice upward in a rising rate environment. Wholesale funds generally would reprice more quickly and by a greater amount than the repricing of in-market deposits in response to changes in market interest rates. Although asset yields would increase in a rising interest rate environment, the cumulative impact of relative growth in rate-sensitive higher-cost deposit categories and wholesale funds suggests that the increase in the Corporation’s cost of funds could result in a relative decline in net interest income in Year 2 compared to an unchanged rate scenario.

Additionally, the Corporation monitors the potential change in market value of its available for sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to the Corporation’s capital position. Results are calculated using industry-standard analytical techniques and securities data.

The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of June 30, 2024 and December 31, 2023 resulting from immediate parallel rate shifts:

(Dollars in thousands)

Critical Accounting Policies and Estimates

Estimates and assumptions are necessary in the application of certain accounting policies and procedures and can be susceptible to significant change. Critical accounting policies are defined as those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Corporation’s financial condition or results of operations.

Management considers its accounting policy relating to the ACL on loans to be a critical accounting policy. There have been no material changes in the Corporation’s critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Recently Issued Accounting Pronouncements

See Note 2 to the Unaudited Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Corporation’s financial statements.

Information regarding quantitative and qualitative disclosures about market risk appears under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Interest Rate Risk.”

For factors that could adversely impact Washington Trust’s future results of operations and financial condition, see Part II, Item 1A below and the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC.

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, the Corporation carried out an evaluation under the supervision and with the participation of the Corporation’s management, including the Corporation’s principal executive officer and principal financial officer, of the Corporation’s disclosure controls and procedures as of the period ended June 30, 2024. Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Corporation’s disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Corporation’s management including its Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosures. The Corporation will continue to review and document its disclosure controls and procedures and consider such changes in future evaluations of the effectiveness of such controls and procedures, as it deems appropriate.

Internal Control Over Financial Reporting

There has been no change in the Corporation’s internal controls over financial reporting during the quarter ended June 30, 2024 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes in the risk factors described in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 26, 2024.