What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-06 · 322 added, 284 removed, 832 unchanged (42% of the section changed)

1 unchanged sentence

The following discussion should be read in conjunction with the Corporation’s Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2020, and in conjunction with the condensed Unaudited Consolidated Financial Statements and notes thereto included in Item 1 of this report.

Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results for the full-year ended December 31, 2021 or any future period.

Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results for the full-year ended December 31, 2021 or any future period.

Forward-Looking Statements

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changes in loan collectability, increases in defaults and charge-off rates;

changes related to the discontinuation and replacement of LIBOR;

changes in the size and nature of our competition;

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PPP loans are 100% guaranteed by the SBA.

In the first quarter of 2021, we originated 1,058 PPP loans with principal balances totaling approximately $97 million and we processed SBA forgiveness on approximately 700 PPP loans with principal balances totaling $66 million.

As of March 31, 2021, the carrying value of PPP loans amounted to $228.6 million and included net unamortized loan origination fee balances of $5.7 million.

On May 4, 2021, the SBA announced that PPP funding has been exhausted and that it has stopped accepting applications from most lenders.

As of this date, the carrying value of PPP loans held in our commercial and industrial portfolio totaled approximately $208 million, down from the end of first quarter due to additional loans being forgiven by the SBA.

A significant portion of this remaining balance is expected to ultimately be forgiven by the SBA in accordance with the terms of the program.

In the second quarter of 2021, we originated approximately 100 PPP loans with principal balances totaling approximately $4 million and we processed SBA forgiveness on approximately 650 PPP loans with principal balances totaling $85 million.

As of June 30, 2021, the carrying value of PPP loans amounted to $147.0 million and included net unamortized loan origination fee balances of $4.9 million.

As of July 31, 2021, the carrying value of PPP loans has declined to $135.3 million and included net unamortized loan origination fee balances of $4.6 million.

Management expects a significant portion of PPP loans to be ultimately forgiven by the SBA in accordance with the terms of the program.

See additional disclosure regarding PPP loans under the heading “Commercial & Industrial Loans” in the Financial Condition section.

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The following table presents a summarized consolidated statement of operations:

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2021 2020 $ % 2021 2020 $ %

Net interest income $34,754 $30,945 $3,809 12 % $67,625 $63,547 $4,078 6 %

7 unchanged sentences

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

Three months ended March 31, 2021 2020

Three Months Six Months

Periods ended June 30, 2021 2020 2021 2020

Diluted earnings per common share $1.00 $1.21 $2.17 $1.89

4 unchanged sentences

Noninterest income as a percentage of total revenues 37 % 46 % 41 % 42 %

Net income totaled $20.5 million for the three months ended March 31, 2021, up by $8.6 million, or 72%, from the same period in 2020.

These results reflected higher levels of noninterest income and a reduction in the provision for credit losses, partially offset by an increase in noninterest expenses.

Noninterest income increased due primarily to strong mortgage banking results and growth in wealth management revenues.

A negative provision for credit losses (or a benefit) was recognized in the first quarter of 2021 as a result of improvement in forecasted economic conditions and continued stable asset quality metrics.

Noninterest expenses increased largely due to debt prepayment penalty expense recognized in the first quarter of 2021 on the prepayment of FHLB advances.

Net income totaled $17.5 million and $37.9 million, respectively, for the three and six months ended June 30, 2021, compared to $21.0 million and $32.9 million, respectively, for the same periods in 2020.

Net interest income in 2021 largely benefited from lower funding costs and a reduction in wholesale funding balances, as well as accelerated amortization of net deferred fee balances on PPP loans that were forgiven by the SBA.

Noninterest income changes reflected lower mortgage banking revenues and higher wealth management revenues.

The year-over-year reduction in credit loss provisioning reflected improvement in forecasted economic conditions and continued stable asset quality metrics.

Noninterest expenses in 2021 included debt prepayment penalty expense associated with paying off higher yielding FHLB advances, as well as an increase in salaries and benefits expense.

Management's Discussion and Analysis

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Nonaccrual loans, as well as interest recognized on these loans, are included in amounts presented for loans.

Three months ended March 31, 2021 2020 Change

Three months ended June 30, 2021 2020 Change

(Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate

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22,681 92 1.63 22,681 171 3.03 — (79) (1.40)

PPPLF borrowings — — — 2,565 2 0.31 (2,565) (2) (0.31)

Total interest-bearing liabilities

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(Dollars in thousands)

Three months ended March 31, 2021 2020 Change

Three months ended June 30, 2021 2020 Change

Commercial loans $223 $254 ($31)

Six months ended June 30, 2021 2020 Change

(Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate

Cash, federal funds sold and short-term investments $150,580 $65 0.09 $150,325 $385 0.52 $255 ($320) (0.43)

Mortgage loans held for sale 59,429 846 2.87 42,265 725 3.45 17,164 121 (0.58)

Taxable debt securities 973,214 6,683 1.38 905,043 11,311 2.51 68,171 (4,628) (1.13)

FHLB stock 26,987 243 1.82 51,964 1,294 5.01 (24,977) (1,051) (3.19)

Commercial real estate 1,632,725 23,060 2.85 1,609,193 28,677 3.58 23,532 (5,617) (0.73)

Commercial & industrial 823,580 15,979 3.91 699,586 13,294 3.82 123,994 2,685 0.09

Total commercial 2,456,305 39,039 3.21 2,308,779 41,971 3.66 147,526 (2,932) (0.45)

Residential real estate 1,484,571 25,737 3.50 1,483,473 28,613 3.88 1,098 (2,876) (0.38)

Home equity 257,494 4,177 3.27 284,151 5,483 3.88 (26,657) (1,306) (0.61)

Other 20,545 495 4.86 19,406 478 4.95 1,139 17 (0.09)

Total consumer 278,039 4,672 3.39 303,557 5,961 3.95 (25,518) (1,289) (0.56)

Total loans 4,218,915 69,448 3.32 4,095,809 76,545 3.76 123,106 (7,097) (0.44)

Total interest-earning assets 5,429,125 77,285 2.87 5,245,406 90,260 3.46 183,719 (12,975) (0.59)

Noninterest-earning assets 343,889 346,914 (3,025)

Total assets $5,773,014 $5,592,320 $180,694

Liabilities and Shareholders’ Equity:

Interest-bearing demand deposits $183,223 $145 0.16 $158,902 $642 0.81 $24,321 ($497) (0.65)

NOW accounts 729,301 221 0.06 538,010 154 0.06 191,291 67 —

Money market accounts 930,656 1,266 0.27 808,166 3,462 0.86 122,490 (2,196) (0.59)

Savings accounts 504,040 141 0.06 388,831 128 0.07 115,209 13 (0.01)

Time deposits (in-market) 695,038 4,127 1.20 763,552 7,556 1.99 (68,514) (3,429) (0.79)

Total interest-bearing in-market deposits 3,042,258 5,900 0.39 2,657,461 11,942 0.90 384,797 (6,042) (0.51)

Wholesale brokered time deposits 621,075 724 0.24 475,822 3,706 1.57 145,253 (2,982) (1.33)

Total interest-bearing deposits 3,663,333 6,624 0.36 3,133,283 15,648 1.00 530,050 (9,024) (0.64)

FHLB advances 499,435 2,381 0.96 1,095,894 10,147 1.86 (596,459) (7,766) (0.90)

Junior subordinated debentures 22,681 186 1.65 22,681 384 3.40 — (198) (1.75)

PPPLF borrowings — — — 1,282 2 0.31 (1,282) (2) (0.31)

Total interest-bearing liabilities 4,185,449 9,191 0.44 4,253,140 26,181 1.24 (67,691) (16,990) (0.80)

Noninterest-bearing demand deposits 901,522 677,961 223,561

Other liabilities 149,622 153,781 (4,159)

Shareholders’ equity 536,421 507,438 28,983

Total liabilities and shareholders’ equity $5,773,014 $5,592,320 $180,694

Net interest income (FTE) $68,094 $64,079 $4,015

Interest rate spread 2.43 2.22 0.21

Net interest margin 2.53 2.46 0.07

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

(Dollars in thousands)

Six months ended June 30, 2021 2020 Change

Commercial loans $469 $532 ($63)

Management's Discussion and Analysis

Net Interest Income

Net interest income continues to be the primary source of our operating income.

Net interest income for the three months ended March 31, 2021 totaled $32.9 million, compared to $32.6 million for the same period in 2020.

Net interest income for the three and six months ended June 30, 2021 totaled $34.8 million and $67.6 million, respectively, compared to $30.9 million and $63.5 million, respectively, for the same periods in 2020.

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.

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The analysis of net interest income, net interest margin and the yield on loans may be impacted by the periodic recognition of prepayment penalty fee income associated with loan payoffs.

Prepayment penalty fee income associated with loan payoffs for both the three months ended March 31, 2021 and 2020 was immaterial.

Prepayment penalty fee income associated with loan payoffs was $717 thousand and $934 thousand, respectively, for the three and six months ended June 30, 2021.

Prepayment penalty fee income associated with loan payoffs amounted to $21 thousand and $146 thousand, respectively, for the three and six months ended June 30, 2020.

The analysis of net interest income, net interest margin 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.

As market interest rates decline, the receipt of payments on mortgage-backed securities and loan prepayments generally increase.

As market interest rates decline, payments on mortgage-backed securities and loan prepayments generally increase.

This results in accelerated levels of amortization reducing net interest income and may also result in the proceeds having to be reinvested at a lower rate than the mortgage-backed security or loan being prepaid.

In addition, as lower yielding PPP loans are forgiven by the SBA, unamortized net fee balances are accelerated and amortized into net interest income.

As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to interest income) amounted to $882 thousand for the three months ended March 31, 2021.

This compares to net amortization or a net reduction of $1.5 million for the same period in 2020.

Net interest income in 2021 included approximately $1.2 million of accelerated amortization of net fees associated with $66 million of PPP loans that were forgiven by the SBA in the three months ended March 31, 2021.

FTE net interest income for the three months ended March 31, 2021 amounted to $33.1 million, up by $238 thousand, or 1%, from the same period in 2020.

Growth in average interest-earning assets and a decline in average interest-bearing liability balances, contributed approximately $4.1 million of net interest income for the three months ended March 31, 2021.

This was largely offset by lower asset yields out-pacing declines in funding costs, which reduced net interest income by $3.8 million.

The net interest margin was 2.51% for the three months ended March 31, 2021, down by 10 basis points from 2.61% for the same period a year ago.

Compression in net interest margin reflected the downward repricing of assets, which occurred at a faster pace than the downward repricing of liabilities.

Total average securities for the three months ended March 31, 2021 increased by $10.6 million, or 1%, from the average balances for the same period a year earlier.

The FTE rate of return on the securities portfolio for the three months ended March 31, 2021 was 1.44% compared to 2.59% for the same period in 2020, reflecting purchases of relatively lower yielding debt securities and lower market interest rates.

Total average loan balances for the three months ended March 31, 2021 increased by $232.3 million, or 6%, from the average loan balances for the comparable 2020 period.

This reflected growth in average commercial loan balances concentrated in lower yielding PPP loans.

The yield on total loans for the three months ended March 31, 2021 was 3.32% compared to 4.09% for the same period in 2020.

Yields on LIBOR-based and prime-based loans reflected lower market interest rates.

The average balance of FHLB advances for the three months ended March 31, 2021 decreased by $581.1 million, or 52%, compared to the average balances for the same period in 2020.

The average rate paid on such advances for the three months ended March 31, 2021 was 1.03%, down from 2.06% for the same period in 2020, due to lower rates on short-term advances.

As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to interest income) amounted to $2.4 million for the six months ended June 30, 2021.

This compares to net amortization or a net reduction to interest income of $2.7 million for the same period in 2020.

The year-over-year change in net amortization reflected accelerated amortization of net deferred fee balances on PPP loans, partially offset by an increase in amortization of net premiums on securities.

As PPP loans are forgiven by the SBA, related unamortized net fee balances are accelerated and amortized into net interest income.

Such accelerated amortization amounted to $1.0 million and $2.2 million, respectively, for the three and six months ended June 30, 2021.

There was no PPP forgiveness in the corresponding periods in 2020.

FTE net interest income for the three and six months ended June 30, 2021 amounted to $35.0 million and $68.1 million, respectively, up by $3.8 million and $4.0 million, respectively, from the same periods in 2020.

A decline in average interest-bearing liability balances and growth in average interest-earnings assets contributed approximately $2.2 million and $6.2 million, respectively, of net interest income for the three and six months ended June 30, 2021.

For the three months ended June 30, 2021 compared to the same period a year ago, declines in funding costs out-paced lower asset yields and contributed $1.6 million to net interest income.

For the six months ended June 30, 2021 compared to the same period a year ago, lower asset yields out-paced declines in funding costs and reduced net interest income by $2.2 million.

The net interest margin was 2.55% and 2.53%, respectively, for the three and six months ended June 30, 2021, compared to 2.31% and 2.46%, respectively, for the same periods a year ago.

The net interest margin benefited in 2021 from lower funding costs and a reduction in wholesale funding balances.

It also benefited from accelerated amortization of net deferred fee balances on PPP loans that were forgiven by the SBA and loan prepayment fees.

Accelerated PPP amortization added 7 basis points and 9 basis points, respectively, to the net interest margin for the three and six months ended June 30, 2021, compared to zero in 2020.

Loan prepayment fees added 5 basis points and 4 basis points, respectively, to the net interest margin for the three and six months ended June 30, 2021, as compared to zero and 1 basis point, respectively, for the same periods in 2020.

Total average securities for the three and six months ended June 30, 2021 increased by $125.1 million and $68.2 million, respectively, from the average balances for the same periods a year earlier.

The FTE rate of return on the securities portfolio for the three and six months ended June 30, 2021 was 1.34% and 1.38%, respectively, compared to 2.43% and 2.51%, respectively, for the same periods in 2020, reflecting purchases of relatively lower yielding debt securities and the impact of lower market interest rates.

Total average loan balances for the three and six months ended June 30, 2021 increased by $13.6 million and $123.1 million, respectively, from the average loan balances for the comparable 2020 periods.

The year-to-date increase reflected growth in

Management's Discussion and Analysis

Included in total average interest-bearing deposits were of out-of-market wholesale brokered time deposits, which increased by $187.3 million, or 48%, from the same period in 2020.

The average rate paid on wholesale brokered time deposits for the three months ended March 31, 2021 was 0.31%, down by 150 basis points from 1.81% for the same period in 2020, reflecting lower market interest rates.

Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, for the three months ended March 31, 2021 increased by $374.6 million, or 14%, from the average balances for the same period in 2020.

average commercial loan balances concentrated in lower yielding PPP loans.

The yield on total loans for the both the three and six months ended June 30, 2021 was 3.32%, compared to 3.45% and 3.76%, respectively, for the same periods in 2020.

Yields on LIBOR-based and prime-based loans reflected lower market interest rates.

The average balance of FHLB advances for the three and six months ended June 30, 2021 decreased by $611.4 million and $596.5 million, respectively, compared to the average balances for the same periods in 2020.

The average rate paid on such advances for the three and six months ended June 30, 2021 was 0.88% and 0.96%, respectively, down from 1.65% and 1.86%, respectively, for the same periods in 2020, reflecting maturities and payoffs of higher-yielding FHLB advances and lower market interest rates.

Included in total average interest-bearing deposits were of out-of-market wholesale brokered time deposits, which increased by $102.7 million and $145.3 million, respectively, from the same periods in 2020.

The average rate paid on wholesale brokered time deposits for the three and six months ended June 30, 2021 was 0.17% and 0.24%, respectively, compared to 1.40% and 1.57%, respectively, for the same periods in 2020, reflecting lower market interest rates.

Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, for the three and six months ended June 30, 2021 increased by $394.4 million and $384.8 million, respectively, from the average balances for the same periods in 2020.

The increases largely reflected growth in lower-cost deposit categories, partially offset by maturities of higher-cost promotional time deposits.

The average rate paid on in-market interest-bearing deposits for the three months ended March 31, 2021 was 0.44%, down by 60 basis points from 1.04% for the same period in 2020, reflecting downward repricing of interest-bearing in-market deposits due to lower market interest rates.

The average balance of noninterest-bearing demand deposits for the three months ended March 31, 2021 increased by $279.8 million, or 46%, from the average balance for the same period in 2020.

The average rate paid on in-market interest-bearing deposits for the three and six months ended June 30, 2021 decreased by 42 basis points and 51 basis points, respectively, from the same periods in 2020, reflecting downward repricing of interest-bearing in-market deposits due to lower market interest rates.

The average balance of noninterest-bearing demand deposits for the three and six months ended June 30, 2021 increased by $167.2 million and $223.6 million, respectively, from the average balance for the same periods in 2020.

See additional disclosure under the caption “Sources of Funds.”

Management's Discussion and Analysis

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

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The net change attributable to both volume and rate has been allocated proportionately.

(Dollars in thousands) Change Due to

Three Months Ended March 31, 2021 vs.

Volume Rate Net Change

(Dollars in thousands) Three Months Ended June 30, 2021 vs.

2020 Six Months Ended June 30, 2021 vs.

Change Due to Change Due to

Volume Rate Net Change Volume Rate Net Change

Interest on Interest-Earning Assets:

25 unchanged sentences

Junior subordinated debentures — (79) (79) — (198) (198)

PPPLF borrowings 1 1 2 (1) (1) (2)

Total interest expense (1,568) (6,045) (7,613) (3,210) (13,780) (16,990)

Net interest income (FTE) $2,168 $1,609 $3,777 $6,193 ($2,178) $4,015

Management's Discussion and Analysis

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 best estimate of expected lifetime credit losses as of the reporting date and includes consideration of current forecasted economic conditions.

The ACL is management’s estimate of expected lifetime credit losses as of the reporting date and includes consideration of current forecasted economic conditions.

Estimating an appropriate level of ACL necessarily involves a high degree of judgment.

As a result of improvement in forecasted economic conditions and continued stable asset quality metrics, a negative provision for credit losses (or a benefit) of $2.0 million was recognized in earnings in the three months ended March 31, 2021.

This compares to a positive provision for credit losses (or a charge) of $7.0 million for the same period in 2020.

The higher credit provisioning in 2020 was attributable to the negative impact of the emergence of the COVID-19 pandemic on economic conditions.

Total net charge-offs were $18 thousand for the three months ended March 31, 2021, compared to $623 thousand for the same period in 2020.

The ACL on loans was $42.1 million, or 1.00% of total loans, at March 31, 2021, compared to an ACL on loans of $44.1 million, or 1.05% of total loans, at December 31, 2020.

For the three months ended June 30, 2021 there was no provision for credit losses, compared to a positive provision for credit losses (or a charge) of $2.2 million for the same period in 2020.

For the six months ended June 30, 2021, a negative provision for credit losses (or a benefit) of $2.0 million was recognized in earnings, compared to a positive provision for credit losses (or a charge) of $9.2 million for the same period in 2020.

The year-over-year reduction in credit loss provisioning reflected improvement in forecasted economic conditions and continued stable asset quality metrics.

Management's Discussion and Analysis

Total net charge-offs were $258 thousand and $276 thousand, respectively, for the three and six months ended June 30, 2021, compared to $308 thousand and $931 thousand, respectively, for the same periods in 2020.

The ACL on loans was $41.9 million, or 0.97% of total loans, at June 30, 2021, compared to an ACL on loans of $44.1 million, or 1.05% of total loans, at December 31, 2020.

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

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The principal categories of noninterest income are shown in the following table:

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2021 2020 $ % 2021 2020 $ %

Noninterest income:

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Noninterest Income Analysis

Revenue from wealth management services represented 38% of total noninterest income for the three months ended March 31, 2021, compared to 44% for the same period in 2020.

Revenue from wealth management services represented 44% of total noninterest income for the six months ended June 30, 2021, compared to 37% for the same period in 2020.

A substantial portion of wealth management revenues is dependent on the value of wealth management assets under administration and is closely tied to the performance of the financial markets.

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

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2021 2020 $ % 2021 2020 $ %

Wealth management revenues:

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Total wealth management revenues $10,428 $8,605 $1,823 21 % $20,323 $17,294 $3,029 18 %

Wealth management revenues for the three and six months ended June 30, 2021 increased by $1.8 million and $3.0 million, respectively, from the comparable periods in 2020, reflecting growth in asset-based revenues.

The increase in asset-based revenues correlated with the increase in the average balances of assets under administration (“AUA”).

Management's Discussion and Analysis

Wealth management revenues for the three months ended March 31, 2021 increased by $1.2 million, or 14%, from the comparable period in 2020, reflecting growth in asset-based revenues.

The increase in asset-based revenues was directionally consistent with an increase in the average balances of assets under administration (“AUA”).

The following table presents the changes in wealth management AUA:

(Dollars in thousands)

Three months ended March 31, 2021 2020

Three Months Six Months

Periods ended June 30, 2021 2020 2021 2020

Wealth management assets under administration:

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Net investment appreciation (depreciation) & income 368,383 671,602 577,336 (101,133)

Net client asset outflows (26,464) (125,333)

Net client asset inflows (outflows) 23,910 129,510 (2,554) 4,177

Balance at the end of period $7,441,519 $6,138,845 $7,441,519 $6,138,845

Wealth management AUA amounted to $7.0 billion at March 31, 2021, up by $1.7 billion, or 32%, from the balance at March 31, 2020, primarily due to net investment appreciation.

The average balance of AUA for the three months ended March 31, 2021 increased by approximately 17% from the average balance for the same period in 2020.

Mortgage banking revenues represented 46% of total noninterest income for the three months ended March 31, 2021, compared to 31% for the same period in 2020.

These revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets.

Wealth management AUA amounted to $7.4 billion at June 30, 2021, up by $1.3 billion, or 21%, from the balance at June 30, 2020, primarily due to net investment appreciation.

The average balance of AUA for the three and six months ended June 30, 2021 increased by approximately 26% and 20%, respectively, from the average balance for the same periods in 2020.

Mortgage banking revenues represented 38% of total noninterest income for the six months ended June 30, 2021, compared to 45% for the same period in 2020.

The composition of mortgage banking revenues and the volume of loans sold to the secondary market are shown in the following table:

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2021 2020 $ % 2021 2020 $ %

Mortgage banking revenues:

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

For the three months ended March 31, 2021, mortgage banking revenues were up by $5.8 million, or 96%, compared to the same period in 2020.

The increase was primarily the result of higher mortgage origination, refinancing and sales activity in response to a low interest rate environment.

For the three months ended March 31, 2021, mortgage loans sold to the secondary market totaled $292.0 million, compared to $162.2 million for the same period in 2020.

Also included in mortgage banking revenues were changes in the fair value of mortgage loans held for sale and mortgage loan commitments.

Service charges on deposit accounts for the three months ended March 31, 2021 decreased by $251 thousand, or 29%, from the same period in 2020, primarily due to lower overdraft activity and related fee income.

Loan related derivative income for the three months ended March 31, 2021 decreased by $2.0 million, or 81%, from the same period in 2020, reflecting lower volume of commercial borrower interest rate swap transactions.

Other income for the three months ended March 31, 2021 increased by $1.1 million from the same period in 2020.

Included in other income in the first quarter of 2021 was income of $1.0 million associated with a litigation settlement.

For the three and six months ended June 30, 2021, mortgage banking revenues were down by $8.9 million and $3.0 million, respectively, compared to the same periods in 2020.

These revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets.

Included in mortgage banking revenues are changes in the fair value of mortgage loans held for sale and mortgage loan commitments, which are primarily based on current market prices in the secondary market and correlate to changes in the mortgage pipeline.

The year-over-year decline in second quarter mortgage banking revenues reflected both a decline from previously elevated sales yield levels in the secondary market, as well as a decline in the quarterly volume of loans sold.

On a year-to-date basis, higher sales volume mitigated the impact of the decline in current market pricing.

For the three and six months ended June 30, 2021, loan related derivative income increased by $1.1 million and decreased by $912 thousand, respectively, from the comparable periods in 2020, reflecting changes in the volume of commercial borrower transactions relative to each period.

Income from BOLI for the three and six months ended June 30, 2021 was down by $184 thousand and $192 thousand, respectively, from the same periods in 2020.

Included in income from BOLI for the three and six months ended June 30, 2020 was a $229 thousand non-taxable gain due to the receipt of life insurance proceeds.

Excluding this non-taxable gain, income from BOLI was up year-over-year, resulting from a $7.0 million purchase of BOLI in the second quarter of 2021.

Other income for the six months ended June 30, 2021 increased by $1.1 million from the same period in 2020 due to $1.0 million of income associated with a litigation settlement that was recognized in the first quarter of 2021.

Management's Discussion and Analysis

1 unchanged sentence

The following table presents noninterest expense comparisons:

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2021 2020 $ % 2021 2020 $ %

Noninterest expense:

11 unchanged sentences

Noninterest Expense Analysis

Salaries and employee benefits expense for the three months ended March 31, 2021 increased by $2.1 million, or 11%, compared to the same period in 2020, largely reflecting volume-related increases in mortgage banking commissions expense and annual merit increases, partially offset by higher deferred labor costs (a contra expense) largely associated with PPP loan originations.

Legal, audit and professional fees for the three months ended March 31, 2021 decreased by $225 thousand, or 27%, compared to the same period in 2020, reflecting a decline in legal expenses.

Debt prepayment penalty expense for the three months ended March 31, 2021 totaled $3.3 million and resulted from the prepayment of $26.8 million of higher-yielding FHLB advances.

There were no debt prepayments in the comparable period in 2020.

Other expenses for the three months ended March 31, 2021 decreased by $1.1 million, or 34%, compared to the same period in 2020.

Salaries and employee benefits expense for the three and six months ended June 30, 2021 increased by $2.6 million and $4.7 million, respectively, compared to the same periods in 2020, reflecting volume-related increases in mortgage banking commissions expense, annual merit increases, increased staffing levels and increases in performance-based compensation accruals.

These increases were partially offset by a net increase in deferred labor costs (a contra expense) associated with loan originations for portfolio.

A higher proportion of residential real estate loans were originated for portfolio in 2021 and was partially offset by the decline in PPP loan originations in 2021.

Outsourced services expense for the three and six months ended June 30, 2021 increased by $433 thousand and $633 thousand, respectively, compared to the same periods in 2020, reflecting volume-related increases in third party processing costs and the expansion of services provided by third party vendors.

Debt prepayment penalty expense for the three and six months ended June 30, 2021 totaled $895 thousand and $4.2 million, respectively, and resulted from the prepayment of $5.3 million and $32.1 million of higher-yielding FHLB advances.

There were no debt prepayments in the comparable periods in 2020.

Other expenses for the three and six months ended June 30, 2021 increased by $287 thousand and decreased by $830 thousand, respectively, from the same periods in 2020.

Included in other expenses in the first quarter of 2020 was a charge for $800 thousand representing the establishment of contingency loss reserve associated with counterfeit checks drawn on a commercial customer’s account.

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(Dollars in thousands)

Three months ended March 31, 2021 2020

Three Months Six Months

Periods ended June 30, 2021 2020 2021 2020

Income tax expense $4,875 $5,547 $10,536 $8,686

Effective income tax rate 21.8 % 20.9 % 21.7 % 20.9 %

The effective income tax rates for the three months ended March 31, 2021 and 2020 differed from the federal rate of 21%, primarily due to state income tax expense, partially offset by the benefits of tax-exempt income and income from BOLI.

The increase in the effective tax rate for the three months ended March 31, 2021 compared to the same period in 2020 largely reflected higher state income tax expense and a decrease in the proportion of tax-exempt income to pre-tax income.

Management's Discussion and Analysis

The effective income tax rates for the three and six months ended June 30, 2021 and 2020 differed from the federal rate of 21%, primarily due to state income tax expense, partially offset by the benefits of tax-exempt income, income from BOLI and federal tax credits.

The increase in the effective tax rate for the three and six months ended June 30, 2021 compared to the same periods in 2020 largely reflected higher state income tax expense and a decrease in the proportion of tax-exempt income to pre-tax income.

Segment Reporting

The Corporation manages its operations through two business segments, Commercial Banking and Wealth Management Services.

Activity not related to the segments, including activity related to the investment securities portfolio, wholesale funding matters and administrative units are considered Corporate.

The Corporate unit also includes income from BOLI and the residual impact of methodology allocations such as funds transfer pricing offsets.

The Corporation manages its operations through two operating segments, Commercial Banking and Wealth Management Services.

The Corporate unit includes activity not allocated to the operating segments, such as activity related to the wholesale investment securities portfolio and wholesale funding matters.

The Corporate unit also includes income from BOLI, as well as administrative and executive expenses not allocated to the operating segments and the residual impact of methodology allocations such as FTP offsets.

Methodologies used to allocate income and expenses to business lines are periodically reviewed and revised.

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

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2021 2020 $ % 2021 2020 $ %

Net interest income $35,326 $32,580 $2,746 8 % $69,847 $61,590 $8,257 13 %

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Net income $18,943 $22,887 ($3,944) (17 %) $42,729 $33,459 $9,270 28 %

Net interest income for the Commercial Banking segment for the three months ended March 31, 2021, increased by $5.5 million, or 19%, from the same period in 2020, reflecting growth in loans partially offset by lower yields on loans due to lower market interest rates.

For the three months ended March 31, 2021, a negative provision for credit losses (or a benefit) of $2.0 million was charged to earnings, compared to a positive provision for credit losses (or a charge) of $7.0 million for the same period in 2020.

Net interest income for the Commercial Banking segment for the three and six months ended June 30, 2021, increased by $2.7 million and $8.3 million, respectively, from the same periods in 2020.

This was attributable to lower cost of funds due to declines in market interest rates.

Net interest income for the Commercial Banking segment also reflected lower yields on loans due to lower market interest rates, partially offset by growth in loans and accelerated amortization of net deferred fee balances on PPP loans that were forgiven by the SBA.

For the three months ended June 30, 2021 there was no provision for credit losses, compared to a positive provision for credit losses (or a charge) of $2.2 million for the same period in 2020.

The year-over-year reduction in credit loss provisioning reflected improvement in forecasted economic conditions and continued stable asset quality metrics.

Noninterest income derived from the Commercial Banking segment for the three months ended March 31, 2021 was up by $3.9 million, or 36%, from the comparable period in 2020 reflecting higher mortgage banking revenues, partially offset by lower loan related derivative income and lower fee income for service charges on deposit accounts.

Noninterest income derived from the Commercial Banking segment for the three and six months ended June 30, 2021 was down by $7.4 million and $3.5 million, respectively, from the comparable periods in 2020, largely due to lower mortgage banking revenues and changes in loan related derivative income.

See additional discussion regarding mortgage banking revenues and loan related derivative income under the caption “Noninterest Income” above.

Commercial Banking noninterest expenses for the three months ended March 31, 2021 were up by $1.2 million, or 6%, from the same period in 2020, largely reflecting increases in salaries and employee benefits.

Commercial Banking noninterest expenses for the three and six months ended June 30, 2021 were up by $2.4 million and $3.8 million, respectively, from the same periods in 2020, reflecting increases in salaries and employee benefits and outsourced services expense.

See additional discussion under the caption “Noninterest Expense” above.

Management's Discussion and Analysis

Wealth Management Services

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

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2021 2020 $ % 2021 2020 $ %

Net interest expense ($24) ($26) $2 8 % ($47) ($93) $46 49 %

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Net income $2,286 $1,543 $743 48 % $5,467 $2,450 $3,017 123 %

Management's Discussion and Analysis

For the three months ended March 31, 2021, noninterest income derived from the Wealth Management Services segment increased by $2.2 million, or 25%, compared to the same period in 2020, reflecting growth in asset-based revenues and income of $1.0 million associated with a litigation settlement.

For the three and six months ended June 30, 2021, noninterest income derived from the Wealth Management Services segment increased by $1.8 million and $4.0 million, respectively, compared to the same periods in 2020, reflecting growth in asset-based revenues and income of $1.0 million associated with a settlement recognized in the first quarter of 2021.

See further discussion under the caption “Noninterest Income” above.

For the three months ended March 31, 2021, noninterest expenses for the Wealth Management Services segment decreased by $463 thousand, or 6%, from the same period in 2020.

This included decreases in legal and other expenses partially offset by an increase and salaries and employee benefits expense.

See further discussion under the caption “Noninterest Expense” above.

For the three and six months ended June 30, 2021, noninterest expenses for the Wealth Management Services segment increased by $791 thousand and $169 thousand, respectively, from the same periods in 2020, largely reflecting annual merit compensation increases, as well as increases in performance-based compensation accruals.

The year-to-date increase was partially offset by decreases in legal and other expenses.

The following table presents a summarized statement of operations for the Corporate unit:

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2021 2020 $ % 2021 2020 $ %

Net interest (expense) income ($548) ($1,609) $1,061 (66 %) ($2,175) $2,050 ($4,225) (206 %)

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Net (loss) income ($3,769) ($3,390) ($379) 11 % ($10,265) ($2,968) ($7,297) 246 %

Net interest income for the Corporate unit for the three months ended March 31, 2021 was down by $5.3 million, or 144%, compared to the same period in 2020.

Lower interest income on securities resulting from lower yields was partially offset by lower wholesale funding costs.

The decline in net interest income for the Corporate unit reflected unfavorable net funds transfer pricing allocations with the Commercial Banking segment as the downward repricing of assets occurred at a faster pace than the repricing of liabilities.

For the three months ended March 31, 2021, noninterest expenses for the Corporate unit increased by $3.5 million, or 93%, from the same period in 2020, due to debt prepayment penalty expense of $3.3 million that was recognized in the first quarter of 2021.

Net interest income for the Corporate unit for the three and six months ended June 30, 2021 was up by $1.1 million and down by $4.2 million, respectively, compared to the same periods in 2020.

The year-over-year increase in second quarter net interest income reflected lower funding costs and lower wholesale funding balances, partially offset by lower interest income on securities resulting from lower yields.

On a year-to-date basis, the decline in net interest income reflected lower interest income on securities resulting from lower yields, partially offset by lower funding costs and lower wholesale funding balances.

Additionally, the year-to-date decline in Corporate net interest income reflected unfavorable net funds transfer pricing allocations with the Commercial Banking segment resulting from the downward repricing of assets exceeding the downward repricing of liabilities.

For the three and six months ended June 30, 2021, noninterest expenses for the Corporate unit increased by $1.3 million and $4.8 million, respectively, from the same periods in 2020, primarily due to debt prepayment penalty expense recognized in the three and six months ended June 30, 2021 of $895 thousand and $4.2 million, respectively.

See further discussion under the caption “Noninterest Expense” above.

Management's Discussion and Analysis

Financial Condition

10 unchanged sentences

Total shareholders’ equity 547,856 534,195 13,661 3

Total assets amounted to $5.7 billion at March 31, 2021, up by $6.2 million, from the end of 2020.

Management's Discussion and Analysis

The securities portfolio increased by $53.5 million due to purchases of debt securities and the balance of cash and due from banks declined by $27.2 million reflecting lower levels of cash collateral pledged to derivative counterparties.

Total assets amounted to $5.9 billion at June 30, 2021, up by $138.8 million from the end of 2020.

The balance of cash and due from banks declined by $66.4 million, including a reduction of cash collateral pledged to derivative counterparties.

See Note 10 to the Unaudited Consolidated Financial Statements for additional disclosure regarding derivative financial instruments.

Total loans declined modestly by $1.3 million, as loan originations were offset by payoffs and pay-downs.

The securities portfolio increased by $158.0 million, reflecting purchases of $401.8 million, partially offset by pay-downs, called securities and a temporary decline in fair value.

Total loans increased by $103.8 million, as loan originations and purchases were partially offset by payoffs, pay-downs and PPP loans that were forgiven by the SBA.

The ACL on loans decreased by $2.2 million from the end of 2020, reflecting improvement in forecasted economic conditions and continued stable asset quality metrics.

Total deposits increased by $170.8 million, or 4%, with an increase in in-market deposits partially offset by a decrease in wholesale brokered time deposits.

Total deposits increased by $347.3 million, or 8%, with increases in in-market deposits and wholesale brokered time deposits.

FHLB advances decreased by $185.3 million, or 31%, from December 31, 2020.

Shareholders’ equity declined modesty by $596 thousand, reflecting a decrease in accumulated other comprehensive income due to a temporary decline in the fair value of available for sale debt securities.

Shareholders’ equity increased by $13.7 million, reflecting earnings net of dividend declarations and a decline in the accumulated other comprehensive income component of shareholders' equity largely due to a temporary decline in the fair value of available for sale debt securities.

I nvestment security activity is monitored by the Investment Committee, the members of which also sit on the Asset/Liability Committee (“ALCO”).

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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.

Management's Discussion and Analysis

Determination of Fair Value

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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 March 31, 2021 and December 31, 2020, management did not make any adjustments to the prices provided by the pricing service.

As of June 30, 2021 and December 31, 2020, 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 4 and 11 to the Unaudited Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities.

Management's Discussion and Analysis

Securities Portfolio

The carrying amounts of securities held are as follows:

(Dollars in thousands) March 31, 2021 December 31, 2020

(Dollars in thousands) June 30, 2021 December 31, 2020

Amount % Amount %

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Total available for sale debt securities $1,052,577 100 % $894,571 100 %

The securities portfolio stood at $948.1 million as of March 31, 2021, or 17% of total assets, compared to $894.6 million as of December 31, 2020, or 16% of total assets.

The securities portfolio stood at $1.1 billion as of June 30, 2021, or 18% of total assets, compared to $894.6 million as of December 31, 2020, or 16% of total assets.

The largest component of the securities portfolio is mortgage-backed securities, all of which are issued by U.S.

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government-sponsored enterprises.

The securities portfolio increased by $53.5 million, or 6%, from the end of 2020, reflecting purchases of debt securities totaling $208.0 million, with a weighted average yield of 1.44%.

These purchases were partially offset by routine pay-downs on mortgage-backed securities and calls of debt securities, as well as a temporary decline in the fair value of available for sale securities.

As of March 31, 2021, the carrying amount of available for sale debt securities included net unrealized losses of $4.5 million, compared to a net unrealized gains of $13.0 million as of December 31, 2020.

The securities portfolio increased by $158.0 million, or 18%, from the end of 2020, reflecting purchases of U.S.

government agency and U.S.

government sponsored debt securities, including mortgage-backed securities, totaling $401.8 million, with a weighted average yield of 1.67%.

These purchases were partially offset by routine pay-downs on mortgage-backed securities and called securities, as well as a temporary decline in the fair value of available for sale securities.

As of June 30, 2021, the carrying amount of available for sale debt securities included net unrealized gains of $916 thousand, compared to a net unrealized gains of $13.0 million as of December 31, 2020.

The decline in fair value of available for sale debt securities from the end of 2020 was primarily concentrated in obligations of U.S.

2 unchanged sentences

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

Total loans amounted to $4.2 billion at March 31, 2021, down by $1.3 million, from the end of 2020.

This included a net decrease of $9.8 million in the residential real estate portfolio, reflecting continued elevated payoff and refinancing activity, and a net increase of $8.7 million in the commercial loan portfolio.

Growth in commercial loans was largely due to first quarter 2021 originations of PPP loans within the commercial and industrial portfolio, which were partially offset by payoffs and pay-downs, including PPP loans that were forgiven by the SBA.

Total loans amounted to $4.3 billion at June 30, 2021, up by $103.8 million from the end of 2020, reflecting growth in the residential real estate portfolio partially offset by a decline in the commercial loan portfolio.

Management's Discussion and Analysis

The following is a summary of loans:

(Dollars in thousands) March 31, 2021 December 31, 2020

(Dollars in thousands) June 30, 2021 December 31, 2020

Amount % Amount %

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

Since the beginning of the COVID-19 pandemic and through March 31, 2021, Washington Trust has processed loan payment deferral modifications, or "deferments", on 652 loans totaling $727 million.

Washington Trust has processed loan payment deferral modifications, or "deferments", on 654 loans totaling $728 million since the beginning of the second quarter of 2020, in response to the COVID-19 pandemic.

The majority of these deferments qualified as eligible loan modifications under Section 4013 of the CARES Act, as amended, and therefore were not required to be classified as TDRs and were not reported as past due.

As of March 31, 2021, we had active deferments on 88 loans totaling $191.4 million, or 5% of total loans excluding PPP loans.

As of May 3, 2021, we have active deferments on 44 loans totaling $121.5 million, or 3% of total loans excluding PPP loans at March 31, 2021.

Management continues to actively monitor the deferments and loan portfolios in certain industry segments that it considers “at risk” of significant impact.

Deferment extensions have been prudently underwritten and have resulted in loan risk rating downgrades when warranted.

Management considers deferments when estimating the allowance for credit losses.

Loss exposure within these industries is mitigated by a number of factors such as collateral values, LTV ratios, and other key indicators, however, some degree of credit loss has been incorporated into the ACL on loans.

Loss exposure within these industries is mitigated by a number of factors such as collateral values, LTV ratios, and other key indicators;

however, some degree of credit loss has been incorporated into the ACL on loans.

Management continues to monitor active deferments through its quarterly watched asset list review.

At June 30, 2021, we had active deferments on 22 loans totaling $93.4 million, or 2% of the outstanding balance of total loans, excluding PPP loan balances as of June 30, 2021.

At July 31, 2021, active deferments remain on 13 loans totaling $54.0 million, or 1% of the outstanding balance of total loans, excluding PPP loans balances as of June 30, 2021.

Commercial Loans

The commercial loan portfolio represented 59% of total loans at March 31, 2021.

The commercial loan portfolio represented 57% of total loans at June 30, 2021.

In making commercial loans, we may occasionally solicit the participation of other banks.

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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 $409.9 million and $408.8 million, respectively, at March 31, 2021 and December 31, 2020.

Our participation in commercial loans originated by other banks amounted to $450.8 million and $408.8 million, respectively, at June 30, 2021 and December 31, 2020.

Our participation in commercial loans originated by other banks also includes shared national credits.

Shared national credits are defined as participations in loans or loan commitments of at least $100.0 million that are shared by three or more banks.

Shared national credits are defined as participation in loans or loan commitments of at least $100.0 million that are shared by three or more banks.

Commercial loans fall into two major categories, commercial real estate and commercial and industrial loans.

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Commercial Real Estate Loans (“CRE”)

CRE loans totaled $1.6 billion at March 31, 2021, down by $14.5 million, or 1%, from the balance at December 31, 2020.

Included in CRE loans were construction and development loans of $123.6 million and $111.2 million, respectively, as of March 31, 2021 and December 31, 2020.

For the three months ended March 31, 2021, CRE loan originations and construction advances were offset by payoffs and pay-downs of approximately $60 million.

CRE loans totaled $1.7 billion at June 30, 2021, up by $36.6 million, or 2%, from the balance at December 31, 2020.

Included in CRE loans were construction and development loans of $135.6 million and $111.2 million, respectively, as of June 30, 2021 and December 31, 2020.

For the six months ended June 30, 2021, CRE loan originations and construction advances were offset by payoffs and pay-downs of approximately $112 million.

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

(Dollars in thousands) March 31, 2021 December 31, 2020

(Dollars in thousands) June 30, 2021 December 31, 2020

Outstanding Balance % of Total Outstanding Balance % of Total

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The following table presents a summary of CRE loans by property type segmentation:

(Dollars in thousands) March 31, 2021 December 31, 2020

(Dollars in thousands) June 30, 2021 December 31, 2020

Count Outstanding Balance % of Total Count Outstanding Balance % of Total

14 unchanged sentences

$32,200 $32,200

Management's Discussion and Analysis

The following table presents a summary of CRE loan deferments by industry segmentation:

(Dollars in thousands) May 3, 2021 March 31, 2021 December 31, 2020

Count Balance % of Outstanding Balance (1) Count Balance % of Outstanding Balance (1) Count Balance % of Outstanding Balance (2)

CRE Deferments by Segment:

Hospitality 5 $27,280 16 % 16 $69,406 41 % 20 $83,073 53 %

Retail 3 20,600 6 3 20,600 6 5 39,781 12

Healthcare 1 18,425 16 1 18,345 16 2 22,305 20

Office 1 1,833 1 1 1,833 1 2 2,457 1

Commercial mixed use — — — — — — 1 637 2

Multi-family dwelling — — — — — — 1 364 —

Other 7 27,750 40 7 27,749 40 7 27,785 39

The following table presents a summary of CRE loan deferments:

(Dollars in thousands) July 31, 2021 June 30, 2021 December 31, 2020

Count Balance % of Outstanding Balance (1)

Count Balance % of Outstanding Balance (2)

Total CRE deferments 7 $49,198 3 % 14 $87,363 5 % 38 $176,132 11 %

17 $95,888 6 % 28 $137,933 9 % 38 $176,402 11 %

(1) Percent of respective outstanding portfolio segment balance as of March 31, 2021.

(2) Percent of respective outstanding portfolio segment balance as of December 31, 2020.

As of May 3, 2021, we have active deferrals on 17 CRE loans totaling $95.9 million, which represented 6% of the total CRE portfolio at March 31, 2021.

The hospitality segment consisted of 39 loans with balances totaling $168.1 million at March 31, 2021, representing 10% of the total CRE portfolio.

We generally underwrite this segment at an LTV of 65% or less.

Our hospitality properties are largely limited service properties with no restaurants and limited meeting space.

This segment also includes leisure travel properties that are located on the New England coastline.

At May 3, 2021, we have active deferrals on 5 hospitality loans totaling $27.3 million, which represented 16% of this segment’s balance at March 31, 2021.

The retail segment consisted of 131 loans with balances totaling $345.7 million at March 31, 2021, representing 21% of the total CRE portfolio.

Our retail properties generally have single tenant drugstores or strong anchor tenants, often national grocery store chains.

At May 3, 2021, we have active deferrals on 3 retail loans totaling $20.6 million, which represented 6% of this segment’s balance at March 31, 2021.

The healthcare segment consisted of 15 loans with balances totaling $116.8 million at March 31, 2021, representing 7% of the total CRE portfolio.

This segment is composed of assisted living, nursing homes and continuing care retirement communities.

At May 3, 2021, we have active deferrals on 1 healthcare loan totaling $18.4 million, which represented 16% of this segment’s balance at March 31, 2021.

Commercial and Industrial Loans (“C&I”)

C&I loans amounted to $840.6 million at March 31, 2021, up by $23.2 million, or 3%, from the balance at December 31, 2020.

For the three months ended March 31, 2021, C&I loan originations were concentrated in PPP loan originations.

Originations were partially offset by payoffs and pay-downs of $93 million, which included $66 million of PPP loans that were forgiven by the SBA.

C&I line utilization increased modestly in the first quarter of 2021.

As of March 31, 2021, there were 2,065 PPP loans with a carrying value of $228.6 million included in the C&I portfolio.

The average PPP loan size was $111 thousand.

Net unamortized loan origination fees on PPP loans amounted to $5.7 million at March 31, 2021.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $44.7 million at March 31, 2021.

All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at March 31, 2021.

(1) CRE deferments as a percent of the outstanding CRE portfolio balance as of June 30, 2021.

(2) CRE deferment as a percent of the outstanding CRE portfolio balance as of December 31, 2020.

CRE loans with active deferrals remaining as of July 31, 2021 are principal only deferrals and continue to pay interest.

Management's Discussion and Analysis

deferrals are primarily in the hospitality, retail and healthcare industry segments, which are segments management previously identified as “at risk” of significant impact of the COVID-19 pandemic.

Commercial and Industrial Loans (“C&I”)

C&I loans amounted to $764.5 million at June 30, 2021, down by $52.9 million, or 6%, from the balance at December 31, 2020.

In the six months ended June 30, 2021, approximately $102 million of PPP loans were originated and approximately $151 million of PPP loans were forgiven by the SBA.

Excluding the net reduction in PPP loans of $49 million, C&I loans decreased by approximately $3.9 million.

This decrease reflected payoffs and pay-downs of approximately $76 million, which were partially offset by new loan originations.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $48.2 million at June 30, 2021.

All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at June 30, 2021.

The following table presents a summary of C&I loan by industry segmentation:

(Dollars in thousands) March 31, 2021 December 31, 2020

(Dollars in thousands) June 30, 2021 December 31, 2020

Count Outstanding Balance % of Total Count Outstanding Balance % of Total

23 unchanged sentences

$19,111 $19,500

PPP loans were included in the C&I portfolio.

At June 30, 2021, we had no active deferrals on C&I loans.

Management's Discussion and Analysis

PPP loans are included in the C&I portfolio.

The following table presents a summary of PPP loans by industry segmentation:

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Count Outstanding Balance % of Total Count Outstanding Balance % of Total

20 unchanged sentences

1,513 $146,970 100 % 1,706 $199,780 100 %

Management's Discussion and Analysis

The following table presents a summary of C&I loan deferments by industry segmentation:

(Dollars in thousands) May 3, 2021 March 31, 2021 December 31, 2020

Count Balance % of Outstanding Balance, excl PPP loans (1)

Count Balance % of Outstanding Balance, excl PPP loans (2)

C&I Deferments by Segment:

Healthcare and social assistance 3 $12,990 9 % 5 $19,855 13 % 5 $19,620 13 %

Accommodation and food services

1 304 1 1 304 1 2 2,889 12

Transportation and warehousing

— — — 3 814 4 4 1,120 5

Entertainment and recreation

— — — 2 424 2 3 560 2

Owner occupied and other real estate — — — 1 326 1 1 326 1

Manufacturing — — — — — — 2 947 1

— — — 5 7,693 12 4 7,673 12

Total C&I deferments

4 $13,294 2 % 17 $29,416 5 % 21 $33,135 5 %

(1) Percent of respective outstanding portfolio segment balance, excluding PPP loans, as of March 31, 2021.

(2) Percent of respective outstanding portfolio segment balance, excluding PPP loans, as of December 31, 2020.

As of May 3, 2021, we have active deferrals on 4 C&I loans totaling $13.3 million, which represented 2% of the total C&I portfolio (excluding PPP loans) at March 31, 2021.

Healthcare and social assistance totaled $196.6 million as of March 31, 2021 and is our largest single C&I industry segment, representing 23% of the total C&I portfolio.

This segment includes specialty medical practices, elder services and community and mental health centers.

At May 3, 2021, we have active deferrals on 3 healthcare and social assistance loans of $13.0 million, which represented 9% of this industry segment’s balances (excluding PPP loans) as of March 31, 2021.

Average PPP loan size $97 $117

Net unamortized fees on PPP loans $4,874 $3,893

Residential Real Estate Loans

The residential real estate loan portfolio represented 35% of total loans at March 31, 2021.

The residential real estate loan portfolio represented 37% of total loans at June 30, 2021.

Residential real estate loans are originated both for sale to the secondary market as well as for retention in the Bank’s loan portfolio.

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The table below presents residential real estate loan origination activity:

(Dollars in thousands)

Three months ended March 31, 2021 2020

Amount % of Total Amount % of Total

(Dollars in thousands) Three Months Six Months

Periods ended June 30, 2021 2020 2021 2020

Amount % of Total Amount % of Total Amount % of Total Amount % of Total

Originations for retention in portfolio (1) $244,821 50 % $126,894 30 % $376,612 40 % $235,392 33 %

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(Dollars in thousands)

Three months ended March 31, 2021 2020

Amount % of Total Amount % of Total

Three Months Six Months

Periods ended June 30, 2021 2020 2021 2020

Amount % of Total Amount % of Total Amount % of Total Amount % of Total

Loans sold with servicing rights retained $235,280 81 % $246,945 81 % $461,925 79 % $291,443 62 %

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Loan servicing rights are included in other assets and are subsequently amortized as an offset to mortgage banking revenues over the estimated period of servicing.

The net balance of capitalized servicing rights amounted to $8.9 million and $7.4 million, respectively, as of March 31, 2021 and December 31, 2020.

The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $1.4 billion and $1.2 billion, respectively, as of March 31, 2021 and December 31, 2020.

Residential real estate loans held in portfolio amounted to $1.5 billion at March 31, 2021, down by $9.8 million, or 1%, from the balance at December 31, 2020, reflecting continued elevated payoff and refinancing activity.

The net balance of capitalized servicing rights amounted to $10.5 million and $7.4 million, respectively, as of June 30, 2021 and December 31, 2020.

The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $1.5 billion and $1.2 billion, respectively, as of June 30, 2021 and December 31, 2020.

Residential real estate loans held in portfolio amounted to $1.6 billion at June 30, 2021, up by $123.1 million, or 8%, from the balance at December 31, 2020, reflecting a higher proportion of loans originated for portfolio, as well as purchases of $39.3 million of loans with a weighted average rate of 2.74%.

The purchased loans were individually evaluated to our underwriting standards and are predominantly secured by properties in Massachusetts.

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

(Dollars in thousands) March 31, 2021 December 31, 2020

(Dollars in thousands) June 30, 2021 December 31, 2020

Amount % of Total Amount % of Total

6 unchanged sentences

$1,590,389 100 % $1,467,312 100 %

(1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $114.0 million and $131.8 million, respectively, as of March 31, 2021 and December 31, 2020.

As of May 3, 2021, we have active deferrals on 19 residential real estate loans totaling $11.9 million, which represented 1% of the total residential real estate portfolio balance as of March 31, 2021.

The average size of residential real estate loans with active deferrals as of May 3, 2021 was approximately $624 thousand and these loans have an estimated LTV ratio of 53%.

(1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $100.4 million and $131.8 million, respectively, as of June 30, 2021 and December 31, 2020.

At June 30, 2021, we had active deferrals on 8 residential real estate loans totaling $6.0 million, which represented 0.4% of the total residential real estate portfolio balance as of June 30, 2021.

The average size of residential real estate loans with active deferrals as of June 30, 2021 was approximately $753 thousand and these loans have an estimated LTV ratio of 46%.

At July 31, 2021, active deferrals remain on 6 residential real estate loans totaling $4.8 million.

Consumer Loans

Consumer loans include home equity loans and lines of credit and personal installment loans.

The consumer loan portfolio totaled $278.1 million at March 31, 2021, down by $195 thousand from December 31, 2020.

Home equity lines of credit and home equity loans represented 92% of the total consumer portfolio at March 31, 2021.

The Bank estimates that approximately 60% of the combined home equity lines of credit and home equity loan balances are first lien positions or subordinate to other Washington Trust mortgages.

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $10.6 million and $10.0 million, respectively, at March 31, 2021 and December 31, 2020.

As of May 3, 2021, we have active deferrals on 4 consumer loans totaling $486 thousand, which represented 0.2% of the total consumer portfolio balance as of March 31, 2021.

The consumer loan portfolio totaled $275.3 million at June 30, 2021, down by $3.0 million from December 31, 2020.

Home equity lines of credit and home equity loans represented 93% of the total consumer portfolio at June 30, 2021.

The Bank estimates that approximately 60% of the combined home equity lines of credit and home equity loan balances are first lien

Management's Discussion and Analysis

positions or subordinate to other Washington Trust mortgages.

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $10.0 million at both June 30, 2021 and December 31, 2020.

At June 30, 2021, we had no active deferrals on consumer loans.

Asset Quality

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

(Dollars in thousands) Mar 31,

(Dollars in thousands) Jun 30,

Commercial real estate $— $—

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Nonaccrual Loans

During the three months ended March 31, 2021, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.

During the six months ended June 30, 2021, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.

The following table presents the activity in nonaccrual loans:

(Dollars in thousands)

For the periods ended March 31, 2021 2020

(Dollars in thousands) Three Months Six Months

For the periods ended June 30, 2021 2020 2021 2020

Balance at beginning of period $12,983 $17,918 $13,197 $17,408

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The following table presents additional detail on nonaccrual loans:

(Dollars in thousands) March 31, 2021 December 31, 2020

(Dollars in thousands) June 30, 2021 December 31, 2020

Days Past Due Days Past Due

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

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2021.

As of March 31, 2021, the composition of nonaccrual loans was 100% residential and consumer and 0% commercial, unchanged from the composition at December 31, 2020.

Nonaccrual residential real estate mortgage loans amounted to $11.7 million at March 31, 2021, down by $233 thousand from the end of 2020.

As of March 31, 2021, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Connecticut and Rhode Island.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2021.

As of June 30, 2021, the composition of nonaccrual loans was 95% residential and consumer and 5% commercial, compared to 100% and 0%, respectively at December 31, 2020.

Nonaccrual residential real estate mortgage loans amounted to $8.9 million at June 30, 2021, down by $3.1 million from the end of 2020, reflecting payoffs and to a lesser extent, loans returning to accruing status.

As of June 30, 2021, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Connecticut and Rhode Island.

Troubled Debt Restructurings

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In years after the restructuring, a TDR is removed from this classification if the restructuring did not involve a below-market rate concession and the loan is performing in accordance with its modified contractual terms for a reasonable period of time.

As of March 31, 2021, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured in a TDR.

As of June 30, 2021, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured in a TDR.

See Note 5 for disclosure regarding the Corporation’s election to account for eligible loan modifications under Section 4013 of the CARES Act, as amended.

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Accrued interest is not included in the carrying amounts set forth below.

(Dollars in thousands) Mar 31,

(Dollars in thousands) Jun 30,

Accruing TDRs

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Nonaccrual TDRs

Commercial real estate

Commercial & industrial

Total commercial

Residential Real Estate:

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Total TDRs $10,819 $15,685

TDRs amounted to $14.3 million at March 31, 2021, down by $1.4 million from the end of 2020, reflecting payoffs.

As of March 31, 2021, the composition of TDRs was 54% commercial and 46% residential and consumer, compared to 55% and 45%, respectively, as of December 31, 2020.

The ACL included specific reserves for TDRs of $161 thousand at March 31, 2021, compared to $159 thousand at December 31, 2020.

TDRs amounted to $10.8 million at June 30, 2021, down by $4.9 million from the end of 2020, reflecting payoffs.

As of June 30, 2021, the composition of TDRs was 40% commercial and 60% residential and consumer, compared to 55% and 45%, respectively, as of December 31, 2020.

The ACL included specific reserves for TDRs of $233 thousand at June 30, 2021, compared to $159 thousand at December 31, 2020.

Management's Discussion and Analysis

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The following table presents past due loans by category:

(Dollars in thousands) March 31, 2021 December 31, 2020

(Dollars in thousands) June 30, 2021 December 31, 2020

Commercial real estate $— — % $265 0.02 %

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

As of March 31, 2021, the composition of past due loans (loans past due 30 days or more) was 100% residential and consumer and 0% commercial, compared to 98% and 2%, respectively, at December 31, 2020.

As of June 30, 2021, the composition of past due loans (loans past due 30 days or more) was 94% residential and consumer and 6% commercial, compared to 98% and 2%, respectively, at December 31, 2020.

Total past due loans decreased by $3.9 million from the end of 2020.

Total past due loans included $8.4 million of nonaccrual loans as of March 31, 2021, compared to $8.5 million as of December 31, 2020.

All loans 90 days or more past due at March 31, 2021 and December 31, 2020 were classified as nonaccrual.

Total past due loans included $5.8 million of nonaccrual loans as of June 30, 2021, compared to $8.5 million as of December 31, 2020.

All loans 90 days or more past due at June 30, 2021 and December 31, 2020 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 March 31, 2021 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 include classified accruing commercial loans that were less than 90 days past due at June 30, 2021 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 or TDRs presented above.

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Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require increased allowance coverage and provision for loan losses.

As of both March 31, 2021 and December 31, 2020, there were no potential problem loans.

In addition and as a result of the COVID-19 pandemic, management continues to actively monitor loan deferments and loan portfolios in certain industry segments that it considers “at-risk” of significant impact.

As of both June 30, 2021 and December 31, 2020, there were no potential problem loans.

In addition, management continues to monitor active loan deferments resulting from the COVID-19 pandemic through its quarterly watched asset list review.

See additional disclosure under the caption “ Commercial Loans” within the Financial Condition section.

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The Corporation’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely.

Full or partial charge-offs on collateral dependent individually analyzed loans are recognized when the collateral is deemed to be insufficient to support the carrying

Management's Discussion and Analysis

value of the loan.

Full or partial charge-offs on collateral dependent individually analyzed loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.

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

Management's Discussion and Analysis

Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status.

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

(Dollars in thousands) March 31, 2021 December 31, 2020

(Dollars in thousands) June 30, 2021 December 31, 2020

Loans Related Allowance Allowance / Loans Loans Related Allowance Allowance / Loans

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Quantitative loss factors for pooled loans are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates.

The ACL on loans amounted to $42.1 million at March 31, 2021, down by $2.0 million from the balance at December 31, 2020.

Net charge-offs amounted to $18 thousand for the three months ended March 31, 2021.

The ACL on loans as a percentage of total loans, also known as the reserve coverage ratio, was 1.00% at March 31, 2021, compared to 1.05% at December 31, 2020.

The ACL on loans amounted to $41.9 million at June 30, 2021, down by $2.2 million from the balance at December 31, 2020.

As a result of improvement in forecasted economic conditions and continued stable asset quality metrics, there was no provision for credit losses for the three months ended June 30, 2021 and a negative provision for credit losses (or a benefit) of $2.0 million for the six months ended June 30, 2021.

Net charge-offs amounted to $258 thousand and $276 thousand, respectively, for the three and six months ended June 30, 2021.

The ACL on loans as a percentage of total loans, also known as the reserve coverage ratio, was 0.97% at June 30, 2021, compared to 1.05% at December 31, 2020.

The ACL on loans is an estimate and ultimate losses may vary from management’s estimate.

Management's Discussion and Analysis

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.

Management's Discussion and Analysis

(Dollars in thousands) March 31, 2021 December 31, 2020

(Dollars in thousands) June 30, 2021 December 31, 2020

Allocated ACL ACL to Loans Loans to Total Portfolio (1) Allocated ACL ACL to Loans Loans to Total Portfolio (1)

32 unchanged sentences

Total deposits $4,725,659 $4,378,353 $347,306 8 %

Total deposits amounted to $4.5 billion at March 31, 2021, up by $170.8 million, or 4%, from December 31, 2020.

This included a decrease of $56.0 million, or 9%, in out-of-market brokered time deposits.

Excluding out-of-market brokered time

Management's Discussion and Analysis

deposits, in-market deposits were up by $226.8 million, or 6%, from the balance at December 31, 2020.

In-market deposit growth reflected a continuation of consumer behavior fostering excess liquidity across the banking industry, as well as temporary increases associated with PPP loan origination funds deposited to customer accounts at Washington Trust.

Total deposits amounted to $4.7 billion at June 30, 2021, up by $347.3 million, or 8%, from December 31, 2020.

This included an increase of $140.7 million, or 24%, in out-of-market brokered time deposits.

Excluding out-of-market brokered time deposits, in-market deposits were up by $206.6 million, or 5%, from the balance at December 31, 2020.

In-market deposit growth reflected a continuation of customer behavior fostering excess liquidity across the banking industry, as well as temporary increases associated with PPP loan origination funds deposited to customer accounts at Washington Trust.

These were also partially offset by seasonal outflows of various institutional and governmental depositors based on their underlying business cycles.

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 $466.9 million at March 31, 2021, down by $126.9 million, or 21%, from the balance at the end of 2020.

FHLB advances totaled $408.6 million at June 30, 2021, down by $185.3 million, or 31%, from the balance at the end of 2020.

See additional disclosure regarding the prepayment of certain FHLB advances and the recognition of debt prepayment penalties under the caption “Noninterest Expense” within the Results of Operations section.

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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 68% of total average assets in the three months ended March 31, 2021.

The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 68% of total average assets in the six months ended June 30, 2021.

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.

24 unchanged sentences

Total $1,949,110 $1,585,411

(1) As of March 31, 2021 and December 31, 2020, loans with a carrying value of $2.1 billion and $2.1 billion, respectively, and securities available for sale with carrying values of $94.4 million and $128.6 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of March 31, 2021 and December 31, 2020, loans with a carrying value of $11.8 million and $12.6 million, respectively, and securities available for sale with a carrying value of $15.3 million and $14.9 million, respectively, were pledged to the FRB for the discount window resulting in this additional unused borrowing capacity.

(1) As of June 30, 2021 and December 31, 2020, loans with a carrying value of $2.0 billion and $2.1 billion, respectively, and securities available for sale with carrying values of $131.0 million and $128.6 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of June 30, 2021 and December 31, 2020, loans with a carrying value of $10.1 million and $12.6 million, respectively, and securities available for sale with a carrying value of $15.4 million and $14.9 million, respectively, were pledged to the FRB for the discount window resulting in this additional unused borrowing capacity.

Management's Discussion and Analysis

In addition to the amounts presented above, the Bank also had access to a $40.0 million unused line of credit with the FHLB.

The ALCO establishes and monitors internal liquidity measures to manage liquidity exposure.

Liquidity remained within target ranges established by the ALCO during the three months ended March 31, 2021.

Based on its assessment of the

Management's Discussion and Analysis

liquidity considerations described above, management believes the Corporation’s sources of funding meet anticipated funding needs.

Net cash used in operating activities amounted to $3.4 million for the three months ended March 31, 2021.

Net income of $20.5 million was largely offset by mortgage banking related adjustments to reconcile net income to net cash used in operating activities.

Net cash used in investing activities totaled $62.7 million for the three months ended March 31, 2021, reflecting outflows to fund purchases of debt securities.

Liquidity remained within target ranges established by the ALCO during the six months ended June 30, 2021.

Based on its assessment of the liquidity considerations described above, management believes the Corporation’s sources of funding meet anticipated funding needs.

Net cash provided by operating activities amounted to $59.4 million for the six months ended June 30, 2021 and largely included net income of $37.9 million and mortgage banking related adjustments to reconcile net income to net cash provided by operating activities.

Net cash used in investing activities totaled $273.1 million for the six months ended June 30, 2021, reflecting outflows to fund purchases of debt securities, as well as the net increase in and purchases of loans.

These outflows were partially offset by net inflows from maturities, calls and principal payments of securities.

For the three months ended March 31, 2021, net cash provided by financing activities amounted to $34.6 million, with increases in deposits, partially offset by a net decrease in FHLB advances and the payment of dividends to shareholders.

For the six months ended June 30, 2021, net cash provided by financing activities amounted to $143.6 million, with increases in deposits, partially offset by a net decrease in FHLB advances and the payment of dividends to shareholders.

See the Unaudited Consolidated Statements of Cash Flows for further information about sources and uses of cash.

Capital Resources

Total shareholders’ equity amounted to $533.6 million at March 31, 2021, down by $596 thousand from December 31, 2020.

The decline reflected a decrease of $12.6 million in the accumulated other comprehensive income component of shareholders' equity largely due to a temporary decline in the fair value of available for sale debt securities, as well as $9.1 million in dividend declarations.

These decreases were partially offset by net income of $20.5 million.

The Corporation declared a quarterly dividend of 52 cents per share for the three months ended March 31, 2021, compared to 51 cents per share declared for the same period in 2020.

The ratio of total equity to total assets amounted to 9.33% at March 31, 2021 compared to a ratio of 9.35% at December 31, 2020.

Book value per share at March 31, 2021 and December 31, 2020 amounted to $30.83 and $30.94, respectively.

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 13.85% at March 31, 2021, compared to 13.51% at December 31, 2020.

Total shareholders’ equity amounted to $547.9 million at June 30, 2021, up by $13.7 million from December 31, 2020.

The increase included net income of $37.9 million, partially offset by $18.3 million in dividend declarations and a decline of $7.7 million in the accumulated other comprehensive income component of shareholders' equity largely due to a temporary decline in the fair value of available for sale debt securities.

The Corporation declared a quarterly dividend of 52 cents per share for the three months ended June 30, 2021, compared to 51 cents per share declared for the same period in 2020.

On a year-to-date basis, dividend declarations totaled $1.04 per share in 2021, compared to $1.02 per share in 2020.

The ratio of total equity to total assets amounted to 9.36% at June 30, 2021 compared to a ratio of 9.35% at December 31, 2020.

Book value per share at June 30, 2021 and December 31, 2020 amounted to $31.63 and $30.94, respectively.

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 13.65% at June 30, 2021, compared to 13.51% at December 31, 2020.

See Note 9 to the Unaudited Consolidated Financial Statements for additional discussion of regulatory capital requirements and the election of the ASC 326 phase-in option provided by regulatory guidance, which delays the estimated impact of ASC 326 on regulatory capital and phases it in over a three-year period beginning in 2022.

12 unchanged sentences

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.

Management's Discussion and Analysis

The Corporation utilizes the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, off-balance sheet interest rate contracts and the pricing and structure of loans and deposits, to manage interest rate risk.

2 unchanged sentences

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

Management's Discussion and Analysis

contracts is the amount upon which interest and other payments are based.

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.

5 unchanged sentences

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 March 31, 2021 and December 31, 2020, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation.

As of June 30, 2021 and December 31, 2020, 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 for a 60-month period.

2 unchanged sentences

Because income simulations assume that the Corporation’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

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 March 31, 2021 and December 31, 2020.

Interest rates are assumed to shift by a parallel 100, 200 or 300 basis points upward or 100 basis points downward over a 12-month period, except for core savings deposits, which are assumed to shift by lesser amounts due to their relative historical insensitivity to market interest rate movements.

1 unchanged sentence

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.

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Months 1 - 12 Months 13 - 24 Months 1 - 12 Months 13 - 24

6 unchanged sentences

Asset yields would likely decline more rapidly than deposit costs as current asset holdings mature or reprice, since cash flow from mortgage-related prepayments and redemption of callable securities would increase as market interest rates fall.

Management's Discussion and Analysis

The overall positive exposure of net interest income to rising rates as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term.

For simulation purposes, deposit rate changes are anticipated to lag behind other market interest rates in both timing and magnitude.

The ALCO’s estimate of interest rate risk exposure to rising rate environments, including those involving changes to the shape of the yield

Management's Discussion and Analysis

curve, incorporates certain assumptions regarding the shift in deposit balances from low-cost core savings categories to higher-cost deposit categories, which has characterized a shift in funding mix during the past rising interest rate cycles.

The ALCO’s estimate of interest rate risk exposure to rising rate environments, including those involving changes to the shape of the yield curve, incorporates certain assumptions regarding the shift in deposit balances from low-cost core savings categories to higher-cost deposit categories, which has characterized a shift in funding mix during the past rising interest rate cycles.

The relative change in interest rate sensitivity from December 31, 2020 as shown in the above table was largely attributable to an interest rate swap designated as a cash flow hedge that was executed in the second quarter of 2021 to hedge the interest rate risk associated with a pool of variable rate commercial loans.

The receive-fixed, pay-floating interest rate swap reduced the positive exposure to rising rates, while it will enhance earnings in the current rate environment and mitigate risk in declining rate scenarios.

The interest rate swap effectively fixes a portion of variable rate loan assets.

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 net interest margin.

14 unchanged sentences

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 March 31, 2021 and December 31, 2020 resulting from immediate parallel rate shifts:

Management's Discussion and Analysis

The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of June 30, 2021 and December 31, 2020 resulting from immediate parallel rate shifts:

(Dollars in thousands)

6 unchanged sentences

Trust preferred debt and other corporate debt securities (163) 127

Total change in market value as of March 31, 2021 $26,669 ($94,746)

Total change in market value as of June 30, 2021 $29,783 ($111,238)

Total change in market value as of December 31, 2020 $13,481 ($69,538)

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis