WASHINGTON TRUST BANCORP INC (WASH) FY 2024 MD&A

Management's Discussion and Analysis

The following table presents adjusted noninterest income, adjusted income before income taxes, adjusted income tax expense, adjusted effective tax rate, adjusted net income, and adjusted net income available to common shareholders:

(1)Calculated as income tax expense (benefit) divided by income (loss) before income taxes.

(2)Calculated as income tax expense (benefit), adjusted for the tax impact of the adjustments as outlined in the table above, divided by income (loss) before income taxes, adjusted for the pre-tax impact of the adjustments as outlined in the table above.

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Management's Discussion and Analysis

The following table presents adjusted diluted earnings per common share and adjusted dividend payout ratio:

(1)Net income (loss) available to common shareholders divided by weighted average diluted common and potential shares outstanding.

(2)Net income (loss) available to common shareholders, adjusted for the after-tax impact of adjustments as outlined in the table above, divided by weighted average diluted common and potential shares outstanding.

(3)Cash dividends declared per share divided by diluted earnings (loss) per common share.

(4)Cash dividends declared per share divided by diluted earnings (loss) per common share, adjusted for the after-tax impact of adjustments as outlined in the table above.

The following table presents adjusted return on average assets and adjusted return on average equity:

(1)Net income (income) loss divided by total average assets.

(2)Net income (loss), adjusted for the after-tax impact of adjustments as outlined in the table above, divided by total average assets.

(3)Net income (loss) available to common shareholders divided by total average equity.

(4)Net income (loss) available to common shareholders, adjusted for the after-tax impact of adjustments as outlined in the table above, divided by total average equity.

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Management's Discussion and Analysis

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 and in September 2024, we opened a new full-service branch in the Olneyville section of Providence.

Common Stock Issued in Public Offering and Balance Sheet Repositioning Transactions

On December 16, 2024, the Corporation completed an underwritten public offering of 2,198,528 shares of its common stock at a public offering price of $34.00 per share, and disclosed that the use of proceeds was expected to include investments in the Bank and Bank balance sheet optimization strategies involving the sale of lower-yielding loans and securities, the purchase of debt securities with current market yields, and the repayment of wholesale funding balances. The net proceeds received from the offering, after deducting underwriting discounts and commissions and operating expenses payable by the Corporation, were $70.5 million.

On December 20, 2024, the Corporation announced the execution of balance sheet repositioning transactions to support continued organic growth and capital generation. The Bank sold available for sale debt securities with an amortized cost balance of $409.5 million (fair value of $378.4 million) and a weighted average yield of 2.65% and reinvested $378.4 million into purchases of available for sale debt securities with a weighted average yield of 5.30%. The sale of debt securities resulted in a net pre-tax realized loss of $31.0 million (after-tax of $23.5 million) that was recognized in the fourth quarter of 2024.

In addition, pursuant to the terms of a sales agreement effective December 30, 2024, the Bank committed to sell residential mortgage loans with an amortized cost balance of $344.6 million and a weighted average rate of approximately 3.02%. These loans were reclassified to held for sale and written down to a fair value of $281.7 million, resulting in a net pre-tax loss of $62.9 million (after-tax of $47.7 million) that was recognized in the fourth quarter of 2024. The sale of these loans was completed on January 24, 2025. The net proceeds received from the equity offering and the loan sale were used to pay down wholesale funding balances in December 2024 and the first quarter of 2025.

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 the 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

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Management's Discussion and Analysis

discussion regarding the credit risk and the credit quality of the Corporation’s loan portfolio, see Notes 4 and 5 to the Consolidated Financial Statements. For further discussion regarding credit risk associated with unfunded commitments, see Note 21 to the Consolidated Financial Statements. For further discussion regarding the Corporation’s securities portfolio, see Note 3 to the 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 that 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” concept 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 the section labeled “Risk Factors” in Item 1A of this Annual Report on Form 10-K.

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Management's Discussion and Analysis

Results of Operations

The following table presents a summarized consolidated statement of operations:

In 2024, a net loss of $28.1 million was recognized, compared to net income of $48.2 million in 2023. As further described under the caption “Overview” above, balance sheet repositioning transactions were executed that impacted the 2024 results. In addition, income of $2.1 million associated with a litigation settlement was recognized in the first quarter of 2024 and a net gain of $988 thousand was recognized on the sale of a bank-owned operations facility in the second quarter of 2024. In 2023, a state legislative tax change resulted in a net reduction in income tax expense of $3.3 million. Excluding these items, adjusted net income (non-GAAP) in 2024 was $40.9 million, compared to $44.9 million in 2023, down by $4.1 million, or 9%. This decrease was primarily attributable to a decline in net interest income and a relatively modest increase in noninterest expenses, partially offset by higher wealth management revenues and mortgage banking revenues.

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

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Management's Discussion and Analysis

Average Balances/Net Interest Margin - Fully Taxable Equivalent Basis

The following table presents 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, changes in fair value on mortgage loans held for sale, and basis adjustments associated with fair value hedges 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.

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Management's Discussion and Analysis

Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:

Net Interest Income

Net interest income, the primary source of our operating income, totaled $128.4 million and $137.1 million, respectively, for 2024 and 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 $70 thousand (or 0 basis point benefit to NIM) and $272 thousand (or 1 basis point benefit to NIM), respectively, in 2024 and 2023.

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 decrease as market interest rates rise and increase as market interest rates decline. 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 Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to net interest income) amounted to $1.3 million in 2024, compared to $1.4 million in 2023.

FTE net interest income in 2024 amounted to $129.4 million, down by $8.7 million, or 6%, from 2023. Increases in average interest-bearing liability balances, net of increases in average interest-earning assets, reduced net interest income by $4.4 million in 2024. Increases in funding costs outpaced increases in asset yields, reducing net interest income by $4.3 million. See additional discussion regarding interest rate sensitivity under the caption “Asset/Liability Management and Interest Rate Risk.”

NIM was 1.87% in 2024, down by 18 basis points from 2.05% 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 2024 decreased by $66.8 million, or 6%, from the average balance for 2023, primarily due to routine pay downs. The FTE rate of return on securities was 2.49% in 2024, up by 4 basis points from 2.45% in 2023.

Total average loan balances increased by $195.9 million, or 4%, from the average balance for 2023. This reflected growth in average CRE and residential real estate loans. The yield on total loans in 2024 was 5.37%, up by 34 basis points from 5.03% in 2023, reflecting higher market interest rates in 2024.

The Bank utilizes FHLB advances and brokered time deposits as wholesale funding sources. The average balance of FHLB advances for 2024 increased by $255.7 million, or 24%, compared to the average balance for 2023. Due to increases in market rates, the average rate paid on such advances in 2024 was 4.92%, up 23 basis points from 4.69% in 2023. Included in total average interest-bearing deposits were wholesale brokered deposits, which decreased by $101.8 million, or 17%, from 2023. The average rate paid on wholesale brokered deposits in 2024 was 5.22%, up by 46 basis points from 4.76% 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, increased by $132.9 million, or 3%, from the average balance in 2023, with increases in time deposits and interest-bearing demand deposits. The average rate paid on in-market

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Management's Discussion and Analysis

interest-bearing deposits in 2024 was 2.96%, up by 62 basis points from 2.34% in 2023. The average balance of noninterest-bearing demand deposits for 2024 decreased by $113.6 million, or 15%, from the average balance 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.

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.

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Management's Discussion and Analysis

The following table presents the provision for credit losses:

The provision for credit losses in 2024 reflected specific reserve allocations on individually analyzed nonaccrual commercial loans, as well as the impact of continued, yet subsiding, slowdown in prepayment speeds. This was partially offset by relatively stable to improving forecasted economic conditions in 2024 and a decline in loan balances that was concentrated in residential real estate and also included the reclassification of loans from portfolio to held for sale.

The provision recognized in 2023 reflected loan growth and slowdown of loan prepayment speeds, changes in asset and credit quality, and our estimate of forecasted economic conditions. Econometric factors were stable to improving in 2023, with our forecast reflecting a lower probability of a recession.

Net charge-offs totaled $2.0 million, or 0.04% of average loans, in 2024, compared to net charge-offs of $520 thousand, or 0.01% of average loans, in 2023.

The ACL on loans was $42.0 million, or 0.82% of total loans, at December 31, 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 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:

Noninterest Income Analysis

Noninterest income amounted to a net loss of $27.8 million in 2024, compared to income of $56.1 million in 2023. Noninterest income in 2024 was impacted by the recognition of $93.9 million in net realized losses on securities and net losses on the sale of portfolio loans associated with balance sheet repositioning transactions. In addition, other income in 2024 included income of $2.1 million associated with a litigation settlement and a net gain of $988 thousand recognized on the sale of a bank-owned operations facility. Excluding the impact of these transactions, adjusted noninterest income (non-GAAP) was $63.1 million in 2024, compared to $56.1 million in 2023, up by $6.9 million, or 12.3%.

Wealth management revenues represent our largest source of noninterest income. A substantial portion of wealth

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Management's Discussion and Analysis

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:

Wealth management revenues for 2024 increased by $3.5 million, or 10%, from 2023, reflecting an increase in asset-based revenues. The change in asset-based revenues correlated with the increase in average AUA balances in 2024. The average balance of AUA in 2024 increased by 10% from the average balance in 2023.

The end of period AUA balance amounted to $7.1 billion at December 31, 2024, up by $489.4 million, or 7%, from December 31, 2023. The following table presents the changes in wealth management AUA balances:

Mortgage banking 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:

(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).

Mortgage banking revenues increased by $4.3 million, or 65%, in 2024. The increase in mortgage banking revenues was mainly attributable to increases in both sales volume and sales yield.

Loan related derivative income from interest rate swap contracts with commercial borrowers decreased by $923 thousand, or 66%, in 2024, reflecting a decline in volume.

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Management's Discussion and Analysis

Income from BOLI was down by $447 thousand, or 13%, from 2023, reflecting the recognition of $658 thousand in non-taxable income in 2023 associated with the receipt of life insurance proceeds.

Other income was up by $3.2 million, or 242%, from 2023, primarily due to the receipt of income associated with a litigation settlement and the net gain on the sale of a bank-owned operations facility as mentioned above.

Noninterest Expense

The following table presents noninterest expense comparisons:

Noninterest Expense Analysis

Salaries and employee benefits expense, the largest component of noninterest expense, increased by $3.8 million, or 5%, from 2023. This included higher performance-based incentive compensation, merit increases, and lower staffing levels.

Outsourced services expense increased by $1.7 million, or 12%, from 2023. Equipment expense decreased by $480 thousand, or 11%, from 2023. Both the increase in outsourced services expense and decline in equipment expense reflected changes to and expansion of services, including software as a service, that are provided by third-party vendors, as well as volume-related increases in third-party costs.

Legal, audit and professional fees decreased by $763 thousand, or 20%, in 2024, reflecting lower legal fees.

FDIC deposit insurance costs for the 2024 increased by $846 thousand, or 18%, from 2023, reflecting the impact of increases in average assets from a year ago and a higher FDIC deposit assessment rate.

Other expenses for 2024 decreased by $1.8 million, or 17%, from 2023. In 2023, a charitable contribution expense as a $1.0 million contribution was made to Washington Trust’s charitable foundation. There was no such expense in 2024.

Income Taxes

The following table presents the Corporation’s income tax expense and effective tax rate for the periods indicated:

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Management's Discussion and Analysis

The effective tax rates differed from the federal rate of 21%, primarily due to state income tax benefits, tax-exempt income, income from BOLI, and federal tax credits. The blended statutory rates include the federal income tax rate of 21% and a blended state income tax rate net of a federal tax benefit.

In 2024, the Corporation recognized an income tax benefit of $10.8 million, compared to income tax expense of $8.3 million in 2023. The effective tax rate for 2024 was 27.7%, compared to a rate 14.7% for 2023. The year over year comparisons include the impact of the balance sheet repositioning transactions, litigation settlement income and net gain on sale of a bank-owned operations facility in 2024, as well as a net tax expense reduction associated with a state tax legislative change and valuation allowance adjustment in 2023. Excluding these items, the adjusted effective income tax rate (non-GAAP) increased to 21.5% in 2024 from 20.5% in 2023, reflecting changes in state tax expense, lower levels of income from BOLI and tax-exempt income, and higher excess tax expense associated with the settlement of share-based awards.

The Corporation’s net deferred tax assets amounted to $63.0 million at December 31, 2024, compared to $53.8 million at December 31, 2023. This increase included the establishment of a deferred tax asset associated with the loans that were reclassified to held for sale and written down to fair value in December 2024, as part of the balance sheet repositioning transactions. This deferred tax asset was realized in January 2025 when the loan sale was completed. Management’s assessment considered the Corporation’s forecasted future taxable income, existing taxable temporary differences along with tax planning strategies. Management believes deferred tax assets, net of the valuation allowance, are more-likely-than-not to be realized.

See Note 11 to the Consolidated Financial Statements for additional information regarding income taxes.

Segment Reporting

The Corporation manages its operations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services. See Note 18 to the Consolidated Financial Statements.

Commercial Banking

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

Net interest income for the Commercial Banking segment decreased by $8.6 million, or 6%, from 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 increases in, average interest-earning asset balances.

The provision for credit losses decreased by $800 thousand, or 25%, from 2023. See additional discussion under the caption “Provision for Credit Losses.”

Noninterest income derived from the Commercial Banking segment was a loss of $69.6 million, compared to income of $20.0 million in 2023. Noninterest income in 2024 included net losses recognized on balance sheet repositioning transactions, as well as a net gain recognized on the sale of a bank-owned operations facility. Excluding these items, the year over year change in Commercial Banking noninterest reflected higher mortgage banking revenues that was partially offset by lower loan related derivative income. See additional discussion under the caption “Noninterest Income” above.

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Management's Discussion and Analysis

Commercial Banking noninterest expenses were up by $5.8 million, or 6%, from 2023, largely reflecting increases in salaries and employee benefits expense, outsourced services, and FDIC deposit insurance costs. See additional disclosure 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:

Noninterest income for the Wealth Management Services segment was $41.8 million, up by $5.7 million, or 16%, from 2023, reflecting an increase in asset-based revenues, as well as the receipt of income associated with a litigation settlement. See further discussion of wealth management revenues under the caption “Noninterest Income” above.

Noninterest expenses for the Wealth Management Services segment decreased by $2.3 million, or 8%, compared to 2023, largely reflecting decreases in salaries and employee benefits expense, legal fees, and other expenses. See additional discussion under the caption “Noninterest Expense” above.

Financial Condition

Summary

The following table presents selected financial condition data:

As further disclosed under the caption “Overview,” in December 2024, the Corporation completed an equity offering and announced a subsequent balance sheet repositioning involving the sale of lower-yielding residential mortgage loans and debt securities, the purchase of debt securities with current market yields, and the repayment of wholesale funding balances.

Mortgage loans held for sale at lower of cost or market totaled $281.7 million at December 31, 2024, as loans with an amortized cost balance of $344.6 million that were held in portfolio were reclassified to held for sale as part of the balance sheet repositioning transactions. These loans were written down to their fair value.

The securities portfolio decreased by $84.1 million, or 8%, 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.

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Management's Discussion and Analysis

Total loans decreased by $509.9 million, or 9%, from the balance at December 31, 2023, largely reflecting a decrease in the residential real estate loan portfolio, which included the reclassification of loans to held for sale associated with the balance sheet repositioning transactions.

Total deposit balances decreased by $232.4 million, or 4%, from the end of 2023, reflecting a decrease in wholesale brokered time deposits that was partially offset by in-market deposit growth. FHLB advances decreased by $65.0 million, or 5%, from December 31, 2023. Both FHLB and wholesale brokered time deposits decreased in 2024, reflecting less need for wholesale funding and the use of net proceeds received from December 2024 equity offering to pay down balances.

Shareholders’ equity increased by $27.0 million, or 6%, from the end of 2023, as the net capital raised from the equity offering of $70.5 million and a net increase in the AOCL component of shareholders’ equity were partially offset by a net loss and dividend declarations.

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 December 31, 2024 and 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 10 to the Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities.

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Management's Discussion and Analysis

Securities Portfolio

The carrying amounts of securities held are as follows:

The securities portfolio represented 13% of total assets at December 31, 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.

As part of the December 2024 balance sheet repositioning transactions, the Bank sold available for sale debt securities with an amortized cost balance of $409.5 million (fair value of $378.4 million) and a weighted average yield of 2.65% and reinvested $378.4 million into purchases of available for sale debt securities with a weighted average yield of 5.30%. These sales resulted in a net realized pre-tax loss of $31.0 million that was recognized in December 2024.

The carrying value of the securities portfolio decreased by $84.1 million, or 8%, from the end of 2023. The decrease included $72.1 million of routine pay-downs and maturities of mortgage-backed securities, as well as a temporary decline in the fair value of available for sale debt securities.

As of December 31, 2024, the carrying amount of available for sale debt securities included net unrealized losses of $133.3 million, compared to net unrealized losses of $152.2 million as of December 31, 2023. The decline in unrealized losses in 2024 reflected the impact of the sales of securities mentioned above, as well as net of changes in the fair value of securities. The net unrealized losses at December 31, 2024 and 2023 were concentrated mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises and were primarily attributable to relative changes in market interest rates since the time of purchase. See Note 3 to the Consolidated Financial Statements for additional information.

Federal Home Loan Bank Stock

The Bank is a member of the FHLB, which is a cooperative that provides services to its member banking institutions. The primary reason for the Bank’s membership is to gain access to a reliable source of wholesale funding in order to manage interest rate risk. The purchase of FHLB stock is a requirement for a member to gain access to funding. The Bank purchases FHLB stock in proportion to the volume of funding received and views the purchases as a necessary long-term investment for the purposes of balance sheet liquidity and not for investment return. The Bank’s investment in FHLB stock totaled $49.8 million at December 31, 2024, compared to $51.9 million at December 31, 2023. See Note 1 to the Consolidated Financial Statements for additional information.

Loans

Total loans amounted to $5.1 billion at December 31, 2024, down by $509.9 million, or 9%, from the end of 2023. This decline largely reflected a decrease in the residential real estate loan portfolio, which included the reclassification of $344.6 million of loans to held for sale associated with the balance sheet repositioning transactions.

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Management's Discussion and Analysis

The following table sets forth the composition of the Corporation’s loan portfolio:

(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. Also, includes a $1.5 million negative basis adjustment associated with fair value hedges at December 31, 2024. See Note 9 to the Consolidated Financial Statements for additional disclosure.

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

An analysis of the maturity and interest rate sensitivity of the Corporation’s loan portfolio as of December 31, 2024 follows:

(1)Includes construction and development loans that will convert to repayment terms following the construction period and will be reclassified to either the CRE or C&I category.

(2)Includes homeowner construction loans. Maturities of homeowner construction loans are included based on their contractual conventional mortgage repayment terms following the completion of construction.

Generally, the actual maturity of loans is substantially shorter than their contractual maturity due to prepayments and, in the case of loans secured by real estate, due to payoff of loans upon the sale of the property by the borrower. The average life of loans secured by real estate tends to increase when market loan rates are higher than rates on existing portfolio loans and, conversely, tends to decrease when rates on existing portfolio loans are higher than market loan rates. Under the latter scenario, the average yield on portfolio loans tends to decrease as higher yielding loans are repaid or refinanced at lower rates. Due to the fact that the Bank may, consistent with industry practice, renew a significant portion of commercial loans at or immediately prior to their maturity by renewing the loans on substantially similar or revised terms, the principal repayments actually received by the Bank are anticipated to be significantly less than the amounts contractually due in any

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Management's Discussion and Analysis

particular period. In other circumstances, a loan, or a portion of a loan, may not be repaid due to the borrower’s inability to satisfy the contractual terms of the loan.

Commercial Loans

The commercial loan portfolio represented 52% of total loans at December 31, 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 $685.7 million and $652.7 million, respectively, at December 31, 2024 and 2023. Our participation in commercial loans originated by other banks also includes shared national credits.

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.

From time to time, commercial loans may be reclassified between CRE and C&I categories, reflecting underlying changes in loans to/from owner occupied from/to non-owner occupied. Additionally, certain construction loans may be reclassified to C&I when the construction phase is complete and the loan transitions to permanent financing.

Commercial Real Estate Loans

CRE loans totaled $2.2 billion at December 31, 2024, up by $48.1 million, or 2%, from the balance at December 31, 2023.

In 2024, CRE loan originations and advances amounted to $272.5 million and were partially offset by principal payments.

Construction and development loans included in the CRE loan portfolio amounted to $102.2 million and $214.6 million, respectively, as of December 31, 2024 and 2023.

Shared national credit balances outstanding included in the CRE loan portfolio totaled $84.7 million and $47.4 million, respectively, at December 31, 2024 and 2023. At December 31, 2024 and December 31, 2023 balances of $63.7 million and $29.0 million, respectively, were included in the pass-rated category of commercial loan credit quality and balances of $21.0 million and $18.4 million, respectively, were included in the classified category. All of these loans were current with respect to payment terms at both dates.

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

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Management's Discussion and Analysis

Management considers the CRE portfolio to be well-diversified with loans across several property types. As discussed further below, the multi-family property type was the largest segment and represented 11% of total loans at December 31, 2024. There were no other property types within the CRE portfolio that exceeded 10% of total loans. The following table presents a summary of CRE loans by property type segmentation:

(1)Does not include unfunded commitments of $168.3 million and $351.5 million, respectively, as of December 31, 2024 and 2023.

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

Multi-family totaled $567.2 million as of December 31, 2024, and is our largest single CRE segment, representing 26% 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 December 31, 2024, the credit quality of the multi-family segment was 100% pass-rated. Also, there were no nonaccrual loans and all loans in this segment were current with respect to payment terms at December 31, 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 December 31, 2024, Washington Trust’s CRE office loan segment totaled $289.9 million, or 6% of total loans and 13% of the total CRE loans. These office loans are secured by properties 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 $289.9 million is secured by properties located in suburban areas. As of December 31, 2024, 100% of the CRE office loans were current with respect to payment terms, and 97% of the CRE office segment balance was on accruing status. Additionally, the credit quality of the CRE office loan segment was 84% pass-rated, 3% special mention and 13% classified as of December 31, 2024.

Commercial and Industrial Loans

C&I loans amounted to $542.5 million at December 31, 2024, down by $62.6 million, or 10%, from the balance at December 31, 2023.

In 2024, C&I originations, advances and line utilization amounted to $55.2 million and were more than offset by payments.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $71.0 million and $66.3 million, respectively, at December 31, 2024 and 2023. All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to payment terms at both December 31, 2024 and 2023.

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Management's Discussion and Analysis

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:

(1)Does not include unfunded commitments of $307.9 million and $341.9 million, respectively, as of December 31, 2024 and 2023.

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

Healthcare and social assistance totaled $126.5 million as of December 31, 2024, and is our largest single C&I segment, representing 23% of the total C&I portfolio. This segment includes specialty medical practices, elder services, and community and mental health centers. At December 31, 2024, the credit quality of the healthcare and social assistance segment was 86% pass-rated and 14% was special mention. Also, there were no nonaccrual loans and all loans in this segment were current with respect to payment terms at December 31, 2024.

Residential Real Estate Loans

The residential real estate loan portfolio represented 41% of total loans at December 31, 2024, compared to 46% of total loans at December 31, 2023.

Residential real estate loans held in portfolio amounted to $2.1 billion at December 31, 2024, down by $478.3 million, or 18%, from the balance at December 31, 2023. This decrease included the reclassification of $344.6 million of loans, with a weighted average rate of 3.02%, to held for sale associated with balance sheet repositioning transactions. In addition, total origination activity declined and a lower proportion of loans was originated for portfolio in 2024.

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Management's Discussion and Analysis

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

(1)Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $46.8 million and $53.4 million, respectively, as of December 31, 2024 and 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:

(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:

(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 $7.7 million and $8.5 million, respectively, as of December 31, 2024 and 2023. The balance of residential mortgage loans

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Management's Discussion and Analysis

serviced for others, which are not included in the Consolidated Balance Sheets, amounted to $1.4 billion at December 31, 2024, compared to $1.5 billion at December 31, 2023.

Consumer Loans

The consumer loan portfolio represented 7% of total loans at December 31, 2024, compared to 6% at 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 December 31, 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 $314.7 million at December 31, 2024, down by $17.1 million, or 5%, from December 31, 2023, largely reflecting decreases in home equity lines and loans. Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $11.6 million and $13.2 million, respectively, at December 31, 2024 and 2023.

Investment in Bank-Owned Life Insurance

BOLI amounted to $106.8 million and $103.7 million, respectively, at December 31, 2024 and 2023. BOLI provides a means to mitigate increasing employee benefit costs.  The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time.  The purchase of the life insurance policy results in an income-earning asset on the Consolidated Balance Sheets that provides monthly tax-free income to the Corporation.  The largest risk to the BOLI program is credit risk of the insurance carriers.  To mitigate this risk, annual financial condition reviews are completed on all carriers.  BOLI is invested in the “general account” of quality insurance companies.  All such general account carriers were rated as investment grade at December 31, 2024 by credit rating agencies such as A.M. Best, Moody’s and S&P.  BOLI is included in the Consolidated Balance Sheets at its cash surrender value.  Increases in BOLI’s cash surrender value are reported as a component of noninterest income in the Consolidated Statements of Income (Loss).

Asset Quality

Management continually monitors the asset quality of the loan portfolio using all available information. The Board of Directors monitors credit risk management through two committees, the Finance Committee and the Audit Committee.  The Finance Committee has oversight responsibility for the credit granting function, including approval authority for credit granting policies, review of management’s credit granting activities and approval of large exposure credit requests.  The Audit Committee has oversight responsibility for the ERM program, which includes credit risk management activities performed by management such as the monitoring of the credit quality of the loan portfolio, conducting a credit review program and determining the adequacy of the ACL. The Audit Committee also approves the policy and methodology for establishing the ACL. These committees report the results of their respective oversight functions to the Board of Directors.  In addition, the Board of Directors receives information concerning asset quality measurements and trends on a regular basis.

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 Consolidated Financial Statements for additional information regarding TLMs.

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Management's Discussion and Analysis

Nonperforming Assets

Nonperforming assets include nonaccrual loans and OREO.

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

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. Loans are removed from nonaccrual status when they have been current as to principal and interest (generally for six months), the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible. During 2024, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.

Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $1.6 million in 2024, compared to $3.4 million in 2023.  Interest income attributable to these loans included in the Consolidated Statements of Income (Loss) amounted to approximately $908 thousand and $2.9 million, respectively, in 2024 and 2023.

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Management's Discussion and Analysis

The following table presents the activity in nonaccrual loans:

The following table presents additional detail on nonaccrual loans:

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

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2024.

As of December 31, 2024, the composition of nonaccrual loans was 45% commercial and 55% residential and consumer. This compared to 75% commercial and 25% residential and consumer as of December 31, 2023.

Total nonaccrual loans decreased by $21.3 million from the end of 2023, reflecting a decline in nonaccrual commercial real estate loans.

Nonaccrual CRE loans declined by $22.8 million from the balance at December 31, 2023. This decline was primarily attributable to two loans secured by properties in our primary lending area of southern New England. One loan, with a carrying value of $13.7 million, was in the healthcare facility segment, returned to accruing status in the first quarter of 2024 and paid off in the third quarter of 2024. The second loan, with a carrying value of $10.5 million, was in the office segment and was resolved due to the sale of the underlying property to a third party in fourth quarter of 2024. The payoff received on this CRE office loan was $9.5 million, resulting in a charge-off of $976 thousand being recognized in the fourth quarter of 2024.

As of December 31, 2024, the balance of nonaccrual CRE loans consisted of two collateral dependent loans. One loan for $6.7 million (net of charge-offs to date of $1.4 million) was modified as a TLM in 2023, and another loan for $3.3 million was placed on nonaccrual status and modified as a TLM in 2024. Both of these loans are secured by office properties in our

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Management's Discussion and Analysis

primary lending area of southern New England and are current with respect to payment terms at December 31, 2024. 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), specific reserves of $1.3 million were deemed necessary at December 31, 2024.

Nonaccrual residential real estate mortgage loans amounted to $10.8 million at December 31, 2024, up by $1.1 million from the end of 2023. As of December 31, 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 December 31, 2024 were two loans purchased for portfolio and serviced by others totaling $535 thousand.  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 class:

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

The composition of past due loans (loans past due 30 days or more) was 92% residential and consumer and 8% commercial at December 31, 2024 and essentially all residential and consumer at December 31, 2023.

Total past due loans increased by $637 thousand from the end of 2023.

Total past due loans included $6.4 million of nonaccrual loans as of December 31, 2024, compared to $6.9 million of as of December 31, 2023.

All loans 90 days or more past due at December 31, 2024 and 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 December 31, 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 presented above.  They are assessed for loss exposure using the methods described in Note 4 to the 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 increased allowance coverage and provision for credit losses on loans.

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Management's Discussion and Analysis

Management has identified $28.2 million in potential problem loans at December 31, 2024, compared to $22.9 million at December 31, 2023. As of December 31, 2024, the balance of potential problem loans largely consisted of two CRE loans secured by office properties in Massachusetts. At December 31, 2024, 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. To determine if a loan should be charged-off, all possible sources of repayment are analyzed. Possible sources of repayment include the potential for future cash flows, the value of underlying collateral, and the strength of guarantors. Full or partial charge-offs are recognized as promptly as practicable when available information confirms that the collection of loan principal is unlikely. For collateral dependent loans, this confirming information may include an appraisal that reflects a shortfall between the value of the collateral and the carrying value of the loan or a deficiency balance following the sale of the collateral.

Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent 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.

The Corporation does not recognize a recovery when new appraisals indicate a subsequent increase in value.

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

(1)The amount reported for pooled loans excludes a $1.5 million negative basis adjustment associated with fair value hedges at December 31, 2024. See Note 9 to the Consolidated Financial Statements for additional disclosure.

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. For additional information regarding the ACL methodology, see Note 1 to the Consolidated Financial Statements, as well as disclosure under the caption “Critical Accounting Policies and Estimates.”

The ACL on loans amounted to $42.0 million at December 31, 2024, up by $903 thousand, or 2%, 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 0.82% at December 31, 2024, compared to 0.73% at December 31, 2023.

The Corporation recorded a provision for credit losses on loans of $2.9 million in 2024. This reflected specific reserve allocations on individually analyzed nonaccrual commercial loans, as well as the impact of continued, yet subsiding, slowdown in prepayment speeds. This was also partially offset by relatively stable to improving forecasted economic conditions in 2024 and a decline in loan balances that was concentrated in residential real estate and also included the reclassification of loans from portfolio to held for sale.

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Management's Discussion and Analysis

Net charge-offs totaled $2.0 million, or 0.04% of average loans, in 2024, compared to net charge-offs of $520 thousand, or 0.01% of average loans, in 2023. The charge-offs recognized in 2024 were concentrated in the CRE office portfolio segment.

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.

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

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Management's Discussion and Analysis

The following table reflects the activity in the ACL on loans during the years presented:

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, ICS, and CDARS programs. 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

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Management's Discussion and Analysis

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:

Total deposits amounted to $5.1 billion at December 31, 2024, down by $232.4 million, or 4%, from December 31, 2023, driven by a decline in wholesale brokered time deposits of $356.5 million, or 55%. See disclosure regarding wholesale funding under the caption “Borrowings” below.

In-market deposits, which exclude wholesale brokered deposits, were up by $124.2 million, or 3%, from the balance at December 31, 2023. Growing deposits continues to be highly competitive in our market area and demand for higher-cost deposit products is strong. In 2024, Washington Trust made investments in technology to enhance our customers’ experience, and we remain focused on maintaining and growing depositor relationships.

As of December 31, 2024, in-market deposits were approximately 59% retail and 41% commercial. Our in-market deposits are well-diversified by industry and customer type. The average size of our in-market deposit accounts was approximately $37 thousand at December 31, 2024.

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

(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.

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Management's Discussion and Analysis

The following table presents the amount of time certificates of deposit in denominations of $250 thousand or more at December 31, 2024, maturing during the periods indicated:

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 $1.1 billion at December 31, 2024, down by $65.0 million from the balance at the end of 2023. For additional information regarding FHLB advances see Note 13 to the Consolidated Financial Statements.

Both FHLB and wholesale brokered time deposits decreased in 2024, reflecting less need for wholesale funding and the use of net proceeds received from the December 2024 equity offering to pay down balances. See additional discussion under the caption “Overview.”

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 66% of total average assets in the twelve months ended December 31, 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.

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Management's Discussion and Analysis

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

(1)As of December 31, 2024, 2023 and 2022, loans with a carrying value of $2.8 billion, $3.4 billion and $2.4 billion, respectively, and securities available for sale with a carrying value of $74.2 million, $94.3 million and $102.1 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2)As of December 31, 2024, 2023 and 2022, loans with a carrying value of $68.5 million, $71.0 million and $20.9 million, respectively, and securities available for sale with a carrying value of $13.9 million, $13.1 million and $12.7 million, respectively, were pledged to the FRBB resulting in this additional unused borrowing capacity.

(3)Available cash liquidity excludes amounts restricted for collateral purposes and designated for operating needs.

Borrowing capacity at December 31, 2024 was reduced by the reclassification of residential mortgage loan collateral to held for sale as part of the balance sheet repositioning transactions. On January 24, 2025, the sale of these loans was completed and the cash proceeds received were used to pay down FHLB advances or other wholesale funding balances in the first quarter of 2025.

In addition to the amounts presented above, the Bank also access to a $40.0 million unused line of credit with the FHLB at December 31, 2024, 2023 and 2022.

The ALCO establishes and monitors internal liquidity measures to manage liquidity exposure.  Liquidity remained within target ranges established by the ALCO during 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, borrowings and defined benefit pension plans. For additional information on these arrangements and the expected timing of applicable payments as of December 31, 2024, see the following notes to the Consolidated Financial Statements: Note 7 for leases, Note 12 for time deposits, Note 13 for borrowings and Note 16 for defined benefit pension plans.

Land and premises associated with five branch locations with a total net book value of $4.8 million were reported as held for sale as of December 31, 2024, as the Bank committed to sell these assets and lease them back from the buyers. The sales-leaseback transactions for four of the locations were completed on January 30, 2025 and the remaining transaction associated with the fifth location is expected to be completed later in 2025. As a result, the Corporation expects to recognize a net gain on the sale of these assets of approximately $7 million in the Consolidated Statements of Income (Loss) in the first quarter of 2025. Additionally, the annual lease expense associated with leaseback of these five locations is estimated to be approximately $1 million. See Note 7 to the Consolidated Financial Statements for additional information related to the leaseback of the assets.

In the first quarter of 2025, the qualified pension plan liability will be settled after plan assets are distributed through a combination of lump sum payments to participants and the purchase of a group annuity contract from a highly-rated insurance company. This results in a pre-tax non-cash pension settlement charge of approximately $6.4 million, which includes the recognition of pre-tax actuarial losses accumulated in AOCL and the effects of the remeasurement of plan assets and liability upon settlement, being recognized in the Consolidated Statements of Income (Loss) in the first quarter of 2025. See Note 16 to the Consolidated Financial Statements for additional disclosure regarding the qualified pension plan.

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Management's Discussion and Analysis

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. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. The Corporation’s credit policies with respect to interest rate contracts with commercial borrowers, commitments to extend credit, and standby letters of credit are similar to those used for loans. Some commitments to extend credit and standby letters of credit are expected to expire without being drawn upon, and thus, total amounts do not necessarily represent future cash requirements. Interest rate risk management contracts with other counterparties are generally subject to bilateral collateralization terms. These contracts with various counterparties may subject the Corporation to various cash flow requirements, which may include posting of cash as collateral for arrangements that are in a liability position. For additional information on derivative financial instruments and financial instruments with off-balance sheet risk see Notes 9 and 21 to the Consolidated Financial Statements.

Capital Resources

In December 2024, the Corporation completed an equity offering and disclosed a subsequent balance sheet repositioning involving the sale of lower-yielding loans and debt securities, the purchase of debt securities with current market yields, and the repayment of wholesale funding balances. Though the sales of lower-yielding loans and securities resulted in a net loss being recognized in 2024, we believe the repositioning will favorably impact future revenues and provide additional capacity for growth and investment.

At December 31, 2024, total shareholders’ equity amounted to $499.7 million, up by $27.0 million from December 31, 2023. The net capital raised from the equity offering of $70.5 million and an increase of $22.0 million in the AOCL component of shareholders' equity were partially offset by a net loss of $28.1 million and dividend declarations of $39.8 million. The change in AOCL reflected net changes in the fair value of available for sale debt securities and cash flow hedges. See Note 19 to the Consolidated Financial Statements for additional disclosure regarding changes in AOCL.

The Corporation declared dividends of $2.24 per share in 2024, unchanged from dividends per share declared in 2023. The dividend payout ratio was (137.4 %) in 2024, compared to 79.4% in 2023. The adjusted dividend payout ratio (non-GAAP) was 94.5% in 2024, compared to 85.2% in 2023.

The ratio of total equity to total assets amounted to 7.21% at December 31, 2024, compared to a ratio of 6.56% at December 31, 2023.  Book value per share was $25.93 at December 31, 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 12.47% at December 31, 2024, compared to 11.58% at December 31, 2023.

See Note 14 to the 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 9 to the 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-

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Management's Discussion and Analysis

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. The simulations at December 31, 2024 incorporated the reclassification of residential mortgage loans from portfolio to held for sale and the sale of these loans completing in January 2025. The simulations at December 31, 2024 assume the proceeds from the sale of loans are used to pay down maturing wholesale funding balances. 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.

Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment. 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 December 31, 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 generally 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 December 31, 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.

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Management's Discussion and Analysis

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. The changes in balance sheet composition reflected the balance sheet repositioning transactions and included a reduction in loans, a lower level of wholesale funding and in-market deposit growth. Furthermore, additional interest rate management derivative contracts were executed to hedge interest rate risk.

The ALCO estimates that as interest rates change, interest-earning assets would reprice more quickly than interest-bearing liabilities. In-market deposit rate changes are modeled to lag behind other market interest rates in both pace and magnitude. The deposit lag assumption was reduced at December 31, 2024 to align with actual experience, as deposit rate changes have more closely followed changes in market interest rates. In addition, prepayments of loans and securities generally increase as market interest rates decline and decrease as market interest rates rise.

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 December 31, 2024 and 2023 resulting from immediate parallel rate shifts:

The potential change in market value at December 31, 2024, as compared to the prior year-end reflects the impact of the December 2024 securities transactions associated with the balance sheet repositioning, as well as changes in interest rates.

Impact of Inflation on Changing Prices

The Corporation’s consolidated financial statements and related notes have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical U.S. dollars without considering changes in the relative purchasing power of money over time due to inflation.

A substantial portion of the Corporation’s assets and liabilities are monetary in nature and as a result interest rates have a more significant impact on the overall performance of the Corporation than the general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as inflation. In 2023, the Federal Reserve’s policy response to counter high levels of inflation was to increase its Federal Funds target rate several times, which in turn resulted in higher market interest rates across the economy. As the inflation rate began to moderate, the Federal Reserve began lowering its Federal Funds target rate in the latter portion of 2024. While variable-rate assets reprice downward if interest rates decline, interest-bearing liabilities also reprice downward. Additionally, in a high-rate or rising rate environment, lower cost in-market deposits generally shift into higher cost deposit categories, which puts additional pressure on both net interest income and the net interest margin. We cannot predict whether or when the Federal Reserve may increase or decrease the Federal Funds rate in the future.

For additional discussion on interest due to changes in interest rates, see the caption “Asset/Liability Management and Interest Rate Risk” above.

Furthermore, a prolonged period of inflation could cause wages and other costs to increase.

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Management's Discussion and Analysis

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.

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 the Consolidated Statements of Income (Loss). Additionally, the ACL on loans is reduced by charge-offs on loans and increased by recoveries of amounts previously charged-off. At December 31, 2024 the ACL on loans totaled $42.0 million, compared to $41.1 million at December 31, 2023. A significant portion of our ACL is allocated to the commercial portfolio (both CRE and C&I). As of December 31, 2024 and 2023, the ACL allocated to the total commercial portfolio was $33.8 million and $32.2 million, respectively.

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 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 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.

Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans; conversely, improving conditions or assumptions could lead to further reductions in the ACL on loans.

In estimating the ACL on loans, management considers the sensitivity of the model and significant judgments and assumptions that could result in an amount that is materially different from management’s estimate. Given the concentration of ACL allocation to the total commercial portfolio and the significant judgments made by management in deriving the qualitative loss factors, management analyzed the impact that changes in qualitative judgments could have. The range of impact was an ACL allocated to the total commercial loan portfolio between $24.3 million and $53.5 million at December 31, 2024. The sensitivity and related range of impact is a hypothetical analysis and is not intended to represent management’s judgments or assumptions of qualitative loss factors that were utilized at December 31, 2024 in estimation of the ACL on loans recognized on the Consolidated Balance Sheets.

If the assumptions underlying the determination of the ACL prove to be incorrect, the ACL may not be sufficient to cover actual loan losses and an increase to the ACL may be necessary to allow for different assumptions or adverse developments. In addition, a problem with one or more loans could require a significant increase to the ACL.

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Recently Issued Accounting Pronouncements

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