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Loans

6 Months Ended

Jun. 30, 2023

The following table presents a summary of loans:


(Dollars in thousands)	June 30, 2023	December 31, 2022
Commercial:


Commercial real estate (1)	$1,940,030	$1,829,304
Commercial & industrial (2)	611,472	656,397
Total commercial	2,551,502	2,485,701
Residential Real Estate:


Residential real estate (3)	2,510,125	2,323,002
Consumer:


Home equity	301,116	285,715
Other (4)	18,370	15,721
Total consumer	319,486	301,436
Total loans (5)	$5,381,113	$5,110,139

(1)CRE consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.

(2)C&I consists of loans to businesses and individuals, a portion of which are fully or partially collateralized by real estate.

(3)Residential real estate consists of mortgage and homeowner construction loans secured by one- to four-family residential properties.

(4)Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans.

(5)Includes net unamortized loan origination costs of $12.5 million and $11.6 million, respectively, at June 30, 2023 and December 31, 2022 and net unamortized premiums on loans purchased from and serviced by other financial institutions of $302 thousand and $318 thousand, respectively, at June 30, 2023 and December 31, 2022.

Loan balances exclude accrued interest receivable of $20.2 million and $17.6 million, respectively, as of June 30, 2023 and December 31, 2022.

As of June 30, 2023 and December 31, 2022, loans amounting to $2.9 billion and $2.4 billion, respectively, were pledged as collateral to the FHLB under a blanket pledge agreement and to the FRBB for the discount window. See Note 9 for additional disclosure regarding borrowings.

Concentrations of Credit Risk

A significant portion of our loan portfolio is concentrated among borrowers in southern New England and a substantial portion of the portfolio is collateralized by real estate in this area. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy, as well as the health of the real estate economic sector in the Corporation’s market area.

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, 2023	30-59	60-89	Over 90	Total Past Due	Current	Total Loans
Commercial:
Commercial real estate	$—	$—	$—	$—	$1,940,030	$1,940,030
Commercial & industrial	3	220	—	223	611,249	611,472
Total commercial	3	220	—	223	2,551,279	2,551,502
Residential Real Estate:
Residential real estate	1,943	973	1,468	4,384	2,505,741	2,510,125
Consumer:
Home equity	1,136	333	40	1,509	299,607	301,116
Other	214	—	—	214	18,156	18,370
Total consumer	1,350	333	40	1,723	317,763	319,486
Total loans	$3,296	$1,526	$1,508	$6,330	$5,374,783	$5,381,113


(Dollars in thousands)	Days Past Due
December 31, 2022	30-59	60-89	Over 90	Total Past Due	Current	Total Loans
Commercial:
Commercial real estate	$1,187	$—	$—	$1,187	$1,828,117	$1,829,304
Commercial & industrial	265	—	—	265	656,132	656,397
Total commercial	1,452	—	—	1,452	2,484,249	2,485,701
Residential Real Estate:
Residential real estate	4,793	303	3,779	8,875	2,314,127	2,323,002
Consumer:
Home equity	1,103	132	—	1,235	284,480	285,715
Other	16	—	—	16	15,705	15,721
Total consumer	1,119	132	—	1,251	300,185	301,436
Total loans	$7,364	$435	$3,779	$11,578	$5,098,561	$5,110,139

Included in past due loans as of June 30, 2023 and December 31, 2022, were nonaccrual loans of $3.7 million and $7.2 million, respectively. In addition, all loans 90 days or more past due at June 30, 2023 and December 31, 2022 were classified as nonaccrual.

Nonaccrual Loans

Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. When loans are placed on nonaccrual status, interest previously accrued but not collected is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.

The following table is a summary of nonaccrual loans, segregated by class of loans:


(Dollars in thousands)	June 30, 2023	December 31, 2022
Commercial:
Commercial real estate	$—	$—
Commercial & industrial	899	—
Total commercial	899	—
Residential Real Estate:
Residential real estate	8,542	11,894
Consumer:
Home equity	966	952
Other	—	—
Total consumer	966	952
Total nonaccrual loans	$10,407	$12,846
Accruing loans 90 days or more past due	$—	$—

No ACL was deemed necessary on nonaccrual loans with carrying values of $2.0 million and $6.5 million, respectively, as of June 30, 2023 and December 31, 2022.

Nonaccrual loans of $6.7 million and $5.7 million, respectively, at June 30, 2023 and December 31, 2022 were current as to the payment of principal and interest.

As of June 30, 2023 and December 31, 2022, nonaccrual loans secured by one- to four-family residential property amounting to $763 thousand and $2.9 million, respectively, were in process of foreclosure.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2023.

The following table presents interest income recognized on nonaccrual loans:


(Dollars in thousands)	Three Months		Six Months

Periods ended June 30,	2023	2022	2023	2022
Commercial:
Commercial real estate	$—	$—	$—	$—
Commercial & industrial	21	—	33	—
Total commercial	21	—	33	—
Residential Real Estate:
Residential real estate	89	69	182	167
Consumer:
Home equity	20	8	42	15
Other	1	2	2	2
Total consumer	21	10	44	17
Total	$131	$79	$259	$184

Troubled Loan Modifications

As disclosed in Note 2, the Corporation adopted ASU 2022-02, which eliminated the accounting guidance for TDRs and added enhanced disclosures with respect to certain modifications for borrowers experiencing financial difficulty. Effective January 1, 2023, a loan that has been modified is considered a troubled loan modification, or TLM, when the following conditions are met: (1) the modification is considered a continuation of an existing loan and not a new loan in accordance

with GAAP, (2) the modification is made to a borrower experiencing financial difficulty and (3) the modification has a direct impact to the contractual cash flows. Modifications with direct impact to contractual cash flows are defined as: principal forgiveness, interest rate reductions, maturity extensions, other-than-insignificant payment delays, or any combination thereof. If each of the aforementioned criteria are met, then the modification is considered a TLM and subject to the enhanced disclosure requirements. During the three and six months ended June 30, 2023, there were no TLMs.

Individually Analyzed Loans

Individually analyzed loans include nonaccrual commercial loans, as well as certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans. Prior to January 1, 2023, individually analyzed loans also included TDRs.

As of June 30, 2023, individually analyzed loans amounted to $2.0 million, all of which were considered collateral dependent. As of December 31, 2022, individually analyzed loans amounted to $10.0 million, of which $8.5 million were considered collateral dependent.

For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. See Note 7 for additional disclosure regarding fair value of individually analyzed collateral dependent loans.

The following table presents the carrying value of collateral dependent individually analyzed loans:


(Dollars in thousands)	June 30, 2023		December 31, 2022
	Carrying Value	Related Allowance	Carrying Value	Related Allowance
Commercial:
Commercial real estate (1)	$—	$—	$2,103	$—
Commercial & industrial (2)	899	—	—	—
Total commercial	899	—	2,103	—
Residential Real Estate:
Residential real estate (3)	1,131	—	5,760	—
Consumer:
Home equity (3)	—	—	592	—
Other	—	—	—	—
Total consumer	—	—	592	—
Total	$2,030	$—	$8,455	$—

(1) Secured by income-producing property.

(2) Secured by business assets.

(3) Secured by one- to four-family residential properties.

Credit Quality Indicators

Commercial

The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan risk rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. The Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate ACL on loans. See Note 5 for additional information.

A description of the commercial loan categories is as follows:

Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature.

Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality, but may exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, performance or may be in an industry or of a loan type known to have a higher degree of risk. These weaknesses may be mitigated by secondary sources of repayment, including SBA guarantees.

Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies.

Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectability. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined. “Loss” is not intended to imply that the loan has no recovery value, but rather, it is not practical or desirable to continue to carry the asset.

The Corporation’s procedures call for loan risk ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. On a quarterly basis, management reviews a watched asset list, which generally consists of commercial loans that are risk-rated 6 or worse, highly leveraged transaction loans, high-volatility commercial real estate and other selected loans. Management’s review focuses on the current status of the loans, the appropriateness of risk ratings and strategies to improve the credit.

An annual credit review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio.

Residential and Consumer

Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type.

In addition, other techniques are utilized to monitor indicators of credit deterioration in the residential real estate loans and home equity consumer loans. Among these techniques is the periodic tracking of loans with an updated Fair Isaac Corporation (commonly known as “FICO”) score and an updated estimated LTV ratio. LTV is estimated based on such factors as geographic location, the original appraised value and changes in median home prices, and takes into consideration the age of the loan. The results of these analyses and other credit review procedures, including selected targeted internal reviews, are taken into account in the determination of qualitative loss factors for residential real estate and home equity consumer credits.

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, 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	$154,806	$566,582	$396,671	$179,064	$157,234	$379,606	$10,977	$1,139	$1,846,079
Special Mention	22,747	—	17,863	52	27,636	25,594	59	—	93,951
Classified	—	—	—	—	—	—	—	—	—
Total CRE	177,553	566,582	414,534	179,116	184,870	405,200	11,036	1,139	1,940,030
CRE gross charge-offs	—	—	—	—	—	—	—	—	—

C&I:
Pass	14,828	125,865	68,250	51,898	86,043	157,798	90,177	938	595,797
Special Mention	12,841	831	—	—	184	—	920	—	14,776
Classified	—	—	203	—	696	—	—	—	899
Total C&I	27,669	126,696	68,453	51,898	86,923	157,798	91,097	938	611,472





C&I gross charge-offs (1)	20	—	—	—	—	—	—	—	20

Residential Real Estate:
Residential real estate:
Current	251,971	831,528	689,071	265,134	118,687	349,350	—	—	2,505,741
Past Due	—	—	392	368	263	3,361	—	—	4,384
Total residential real estate	251,971	831,528	689,463	265,502	118,950	352,711	—	—	2,510,125
Residential real estate gross charge-offs	—	—	—	—	—	—	—	—	—

Consumer:
Home equity:
Current	17,474	16,317	7,574	3,233	2,229	4,959	237,908	9,913	299,607
Past Due	—	—	—	—	—	194	311	1,004	1,509
Total home equity	17,474	16,317	7,574	3,233	2,229	5,153	238,219	10,917	301,116
Home equity gross charge-offs	—	—	—	—	—	—	—	—	—

Other:
Current	4,373	3,830	3,846	1,129	177	4,550	251	—	18,156
Past Due	14	—	—	199	—	1	—	—	214
Total other	4,387	3,830	3,846	1,328	177	4,551	251	—	18,370




Other gross charge-offs (1)	85	—	8	—	—	—	—	—	93

Total loans	$479,054	$1,544,953	$1,183,870	$501,077	$393,149	$925,413	$340,603	$12,994	$5,381,113
Total gross charge-offs	$105	$—	$8	$—	$—	$—	$—	$—	$113

(1)Gross charge-offs in 2023 represent charge-offs of business and consumer account overdraft balances.

The following table includes information on credit quality indicators for the Corporation’s loan portfolio, segregated by class of loans as of December 31, 2022:


(Dollars in thousands)	Term Loans Amortized Cost by Origination Year
	2022	2021	2020	2019	2018	Prior	Revolving Loans Amortized Cost	Revolving Loans Converted to Term Loans	Total
Commercial:
CRE:
Pass	$591,596	$383,062	$177,286	$170,259	$148,371	$242,061	$6,243	$1,437	$1,720,315
Special Mention	20,579	22,324	328	24,270	28,676	10,564	146	—	106,887
Classified	—	—	503	—	1,187	412	—	—	2,102
Total CRE	612,175	405,386	178,117	194,529	178,234	253,037	6,389	1,437	1,829,304
C&I:
Pass	127,152	63,180	71,265	86,470	85,011	114,241	90,987	745	639,051
Special Mention	13,566	—	—	—	1,427	—	1,426	—	16,419
Classified	—	225	—	7	—	—	695	—	927
Total C&I	140,718	63,405	71,265	86,477	86,438	114,241	93,108	745	656,397





Residential Real Estate:
Residential real estate:
Current	838,566	707,760	277,613	123,098	72,541	294,549	—	—	2,314,127
Past Due	—	600	—	266	2,315	5,694	—	—	8,875
Total residential real estate	838,566	708,360	277,613	123,364	74,856	300,243	—	—	2,323,002
Consumer:
Home equity:
Current	20,665	8,308	3,742	2,406	1,947	3,139	235,004	9,268	284,479
Past Due	—	—	—	—	68	98	548	522	1,236
Total home equity	20,665	8,308	3,742	2,406	2,015	3,237	235,552	9,790	285,715
Other:
Current	4,231	4,287	1,676	299	235	4,726	251	—	15,705
Past Due	16	—	—	—	—	—	—	—	16
Total other	4,247	4,287	1,676	299	235	4,726	251	—	15,721




Total Loans	$1,616,371	$1,189,746	$532,413	$407,075	$341,778	$675,484	$335,300	$11,972	$5,110,139

Consistent with industry practice, Washington Trust may renew commercial loans at or immediately prior to their maturity. In the tables above, renewals subject to full credit evaluation before being granted are reported as originations in the period renewed.