What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-08 compared with 2021-08-05 · 288 added, 272 removed, 882 unchanged (39% 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 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.

Operating results for the three and nine months ended September 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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the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations;

changes in consumer behavior due to changing political, business and economic conditions, or legislative or regulatory initiatives;

changes in consumer behavior due to changing political, business and economic conditions, including concerns about inflation, or legislative or regulatory initiatives;

the possibility that future credits losses are higher than currently expected due to changes in economic assumptions or adverse economic developments;

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Allowance for Credit Losses on Loans

The allowance for credit losses (“ACL") on loans is management’s estimate of expected credit losses over the expected life of the loans at the reporting date.

The allowance for credit losses (“ACL") on loans is management’s current estimate of expected credit losses over the expected life of the loans.

In accordance with the ACL policy, the methodology is reviewed no less than annually.

1 unchanged sentence

The ACL on loans is reduced by charge-offs on loans.

Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely.

Management's Discussion and Analysis

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

offs are recognized when management believes the collectability of the principal balance outstanding is unlikely.

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

The level of the ACL on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.

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(3) changes in the nature and volume of the portfolio and in the terms of loans;

(4) changes in the experience, ability, and depth of lending management and other relevant staff;

(5) changes in the volume and severity of past due loans,

(4) changes in the experience,

Management's Discussion and Analysis

the volume of nonaccrual loans, and the volume and severity of adversely classified or rated loans;

ability, and depth of lending management and other relevant staff;

(5) changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or rated loans;

(6) changes in the quality of the institution’s credit review system;

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We continue to leverage our strong regional brand to build market share and remain steadfast in our commitment to provide superior service.

We believe the key to future growth is providing customers with convenient in-person service and digital banking solutions.

In 2022, we plan to open a new full-service branch in Cumberland, Rhode Island.

COVID-19 Pandemic Related

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PPP loans are 100% guaranteed by the SBA.

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

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.

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

In the nine months ended September 30, 2021, we originated 1,157 PPP loans with principal balances totaling $101 million and we processed SBA forgiveness on 2,228 PPP loans with principal balances totaling $224 million.

As of September 30, 2021, the carrying value of PPP loans amounted to $77.4 million and included net unamortized loan origination fee balances of $2.6 million.

As of October 31, 2021, the carrying value of PPP loans declined to $59.7 million and included net unamortized loan origination fee balances of $2.0 million.

Management expects that a significant portion of remaining PPP loans will 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 Corporation has a comprehensive enterprise risk management (“ERM”) program through which the Corporation identifies, measures, monitors and controls current and emerging material risks.

The Board of Directors is responsible for oversight of the ERM program.

The ERM program enables the aggregation of risk across the Corporation and ensures the Corporation has the tools, programs and processes in place to support informed

Management's Discussion and Analysis

decision making, to anticipate risks before they materialize and to maintain the Corporation’s risk profile consistent with its risk strategy.

The Board of Directors is responsible for oversight of the ERM program.

The ERM program enables the aggregation of risk across the Corporation and ensures the Corporation has the tools, programs and processes in place to support informed decision making, to anticipate risks before they materialize and to maintain the Corporation’s risk profile consistent with its risk strategy.

The Board of Directors has approved an enterprise risk management policy that addresses each category of risk.

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The following table presents a summarized consolidated statement of operations:

(Dollars in thousands) Three Months Six Months

(Dollars in thousands) Three Months Nine Months

Change Change

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

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

Net interest income $36,070 $31,654 $4,416 14 % $103,695 $95,201 $8,494 9 %

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

Three Months Six Months

Periods ended June 30, 2021 2020 2021 2020

Three Months Nine Months

Periods ended September 30, 2021 2020 2021 2020

Diluted earnings per common share $1.07 $1.06 $3.24 $2.95

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Noninterest income as a percentage of total revenues 36 % 45 % 39 % 43 %

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.

Net income totaled $18.8 million and $56.7 million, respectively, for the three and nine months ended September 30, 2021, compared to $18.3 million and $51.3 million, respectively, for the same periods in 2020.

In 2021, net interest income 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.

The 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.

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The following table presents average balance and interest rate information.

Tax-exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit.

Unrealized gains (losses) on available for sale securities and fair value adjustments on mortgage loans held for sale are excluded from the average balance and yield calculations.

Tax-exempt income is converted to a fully taxable equivalent (“FTE”) basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit.

Unrealized gains (losses) on available for sale securities and changes in fair value on mortgage loans held for sale are excluded from the average balance and yield calculations.

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

Three months ended June 30, 2021 2020 Change

Three months ended September 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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(Dollars in thousands)

Three months ended June 30, 2021 2020 Change

Three months ended September 30, 2021 2020 Change

Commercial loans $205 $248 ($43)

Six months ended June 30, 2021 2020 Change

Nine months ended September 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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Net interest margin 2.55 2.41 0.14

Management's Discussion and Analysis

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

Nine months ended September 30, 2021 2020 Change

Commercial loans $674 $780 ($106)

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 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 for the three and nine months ended September 30, 2021 totaled $36.1 million and $103.7 million, respectively, compared to $31.7 million and $95.2 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.

Prepayment penalty income associated with loan payoffs is included in net interest income.

The following discussion presents net interest income on a fully taxable equivalent (“FTE”) basis by adjusting income and yields on tax-exempt loans and securities to be comparable to taxable loans and securities.

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 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.

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

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

There was no prepayment penalty fee income associated with loan payoffs for the three months ended September 30, 2021, while there was $934 thousand of such income (or 2 basis points of benefit to NIM) for the nine months ended September 30, 2021.

Prepayment penalty fee income associated with loan payoffs amounted to $33 thousand (or 0 basis points benefit to NIM) and $180 thousand (or 1 basis point benefit to the NIM), respectively, for the three and nine months ended September 30, 2020.

The analysis of net interest income, NIM and the yield on loans is also impacted by changes in the level of net amortization of premiums and discounts on securities and loans, which is included in interest income.

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

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.

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 $4.1 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.

The decline 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.

Accelerated amortization of net deferred fee balances on PPP loans forgiven by the SBA amounted to $2.0 million and $4.3 million, respectively, for the three and nine months ended September 30, 2021.

This added 13 basis points and 11 basis points, respectively, to NIM for the three and nine months ended September 30, 2021.

There were no PPP loans forgiven in the corresponding periods in 2020.

FTE net interest income for the three and nine months ended September 30, 2021 amounted to $36.3 million and $104.4 million, respectively, up by $4.4 million and $8.4 million, respectively, from the same periods in 2020.

Declines in average interest-bearing liability balances and growth in average interest-earnings assets contributed approximately $1.4 million and $7.4 million, respectively, of net interest income for the three and nine months ended September 30, 2021.

Declines in funding costs out-paced lower asset yields and contributed $3.0 million and $1.0 million, respectively, of net interest income for the three and nine months ended September 30, 2021.

The NIM was 2.58% and 2.55%, respectively, for the three and nine months ended September 30, 2021, compared to 2.31% and 2.41%, respectively, for the same periods a year ago.

NIM benefited from lower funding costs and a reduction in average 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

Excluding the impact of both accelerated net deferred fee amortization on PPP loans and commercial loan prepayment fee income, the NIM amounted to 2.45% and 2.42%, respectively, for the three and nine months ended September 30, 2021, compared to 2.31% and 2.40%, respectively, for the same periods in 2020.

Total average securities for the three and nine months ended September 30, 2021 increased by $139.0 million and $92.0 million, respectively, from the average balances for the same periods a year earlier.

The FTE rate of return on the

Management's Discussion and Analysis

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.

securities portfolio for the three and nine months ended September 30, 2021 was 1.40% and 1.39%, respectively, compared to 2.14% and 2.39%, 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 months ended September 30, 2021 decreased by $25.4 million from the average loan balances for the comparable 2020 period.

Total average loan balances for the nine months ended September 30, 2021 increased by $73.3 million from the average loan balances for the same period in 2020.

The year-to-date increase reflected growth in average commercial loan balances concentrated in PPP loans, as well as growth in average residential real estate loan balances.

The yield on total loans for the three and nine months ended September 30, 2021 was 3.33% and 3.32%, respectively, compared to 3.25% and 3.58%, respectively, for the same periods in 2020.

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

Excluding the impact of accelerated net deferred fee amortization on PPP loans and commercial loan prepayment fee income, the yield on total loans for the three and nine months ended September 30, 2021 was 3.14% and 3.16%, respectively, compared to 3.25% and 3.58%, 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.

The average balance of FHLB advances for the three and nine months ended September 30, 2021 decreased by $543.0 million and $578.7 million, respectively, compared to the average balances for the same periods in 2020.

The average rate paid on such advances for the three and nine months ended September 30, 2021 was 1.09% and 0.99%, respectively, down from 1.55% and 1.77%, 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 $258.5 million and $183.4 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 average rate paid on wholesale brokered time deposits for the three and nine months ended September 30, 2021 was 0.14% and 0.20%, respectively, compared to 1.11% and 1.41%, 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 nine months ended September 30, 2021 increased by $419.0 million and $396.5 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 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.

The average rate paid on in-market interest-bearing deposits for the three and nine months ended September 30, 2021 decreased by 30 basis points and 44 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 nine months ended September 30, 2021 increased by $109.7 million and $185.4 million, respectively, from the average balance for the same periods in 2020.

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

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

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

2020 Six Months Ended June 30, 2021 vs.

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

2020 Nine Months Ended September 30, 2021 vs.

Change Due to Change Due to

34 unchanged sentences

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

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.

For the three months ended September 30, 2021 there was no provision for credit losses recognized in earnings, compared to a positive provision for credit losses (or a charge) of $1.3 million for the same period in 2020.

For the nine months ended September 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 $10.6 million for the same period in 2020.

The reduction in credit loss provisioning in 2021 reflected relative 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.

Total net charge-offs were $168 thousand and $444 thousand, respectively, for the three and nine months ended September 30, 2021, compared to $96 thousand and $1.0 million, respectively, for the same periods in 2020.

The ACL on loans was $41.7 million, or 0.97% of total loans, at September 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) Three Months Six Months

(Dollars in thousands) Three Months Nine Months

Change Change

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

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

Noninterest income:

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Noninterest Income Analysis

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.

Revenue from wealth management services represented 46% of total noninterest income for the nine months ended September 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 (“AUA”) and is closely tied to the performance of the financial markets.

This portion of wealth management revenues is referred to as “asset-based” and includes trust and investment management fees.

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

(Dollars in thousands) Three Months Six Months

(Dollars in thousands) Three Months Nine Months

Change Change

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

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

Wealth management revenues:

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Total wealth management revenues $10,455 $8,954 $1,501 17 % $30,778 $26,248 $4,530 17 %

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”).

Wealth management revenues for the three and nine months ended September 30, 2021 increased by $1.5 million and $4.5 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 AUA balances.

Management's Discussion and Analysis

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(Dollars in thousands)

Three Months Six Months

Periods ended June 30, 2021 2020 2021 2020

Three Months Nine Months

Periods ended September 30, 2021 2020 2021 2020

Wealth management assets under administration:

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Balance at the end of period $7,443,396 $6,395,652 $7,443,396 $6,395,652

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.

Wealth management AUA amounted to $7.4 billion at September 30, 2021, up by $1.0 billion from the balance at September 30, 2020, primarily due to net investment appreciation.

The average balance of AUA for both the three and nine months ended September 30, 2021 increased by approximately 19%, respectively, from the average balance for the same periods in 2020.

Mortgage banking revenues represented 36% of total noninterest income for the nine months ended September 30, 2021, compared to 46% 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) Three Months Six Months

(Dollars in thousands) Three Months Nine Months

Change Change

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

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

Mortgage banking revenues:

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$5,750 $14,280 ($8,530) (60 %) $28,057 $28,614 ($557) (2 %)

Unrealized (losses) gains, net (2)

Changes in fair value, net (2)

467 (1,555) 2,022 130 (3,964) 5,185 (9,149) (176)

5 unchanged sentences

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

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

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

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

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

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

For the three and nine months ended September 30, 2021, mortgage banking revenues were down by $6.0 million and $9.0 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.

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

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

The year-to-date decline in mortgage banking revenues was mainly attributable to a decline in current market pricing and lower sales volume.

As noted in the above table, mortgage banking revenues also includes net loan servicing fee income associated with loans sold with servicing retained.

There was a higher level of servicing right amortization in 2020 driven by higher prepayment speeds on our serviced mortgage portfolio.

For the three and nine months ended September 30, 2021, loan related derivative income decreased by $536 thousand and $1.4 million, respectively, from the comparable periods in 2020, reflecting a lower volume of commercial borrower interest rate swaps transactions.

Income from BOLI for the three and nine months ended September 30, 2021 was up by $51 thousand and down by $141 thousand, respectively, from the same periods in 2020.

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

Excluding this non-

Management's Discussion and Analysis

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 nine months ended September 30, 2021 increased by $920 thousand 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.

Noninterest Expense

The following table presents noninterest expense comparisons:

(Dollars in thousands) Three Months Six Months

(Dollars in thousands) Three Months Nine Months

Change Change

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

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

Noninterest expense:

11 unchanged sentences

Noninterest Expense Analysis

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.

Salaries and employee benefits expense for the three and nine months ended September 30, 2021 increased by $270 thousand and $4.9 million, respectively, compared to the same periods in 2020.

This largely reflected annual merit increases, increased staffing levels and increases in performance-based compensation accruals.

These increases were partially offset by net declines in variable mortgage banking compensation expense, which included higher deferred labor costs (a contra expense) associated with residential real estate loan originations for portfolio.

Outsourced services expense for the three and nine months ended September 30, 2021 increased by $134 thousand and $767 thousand, respectively, compared to the same periods in 2020, reflecting increases in third party services and processing costs.

Legal, audit and professional fees for the three and nine months ended September 30, 2021 decreased by $485 thousand and $691 thousand, respectively, compared to the same periods in 2020, reflecting a decline in legal expenses.

Debt prepayment penalty expense for the nine months ended September 30, 2021 totaled $4.2 million, and resulted from the prepayment of $32.1 million of higher-yielding FHLB advances in the first half of 2021.

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

Other expenses for the three and nine months ended September 30, 2021 decreased by $168 thousand and $998 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.

This contingency matter was resolved in the second quarter of 2020 and resulted in a partial reversal, or a benefit, of $170 thousand being recognized as a reduction to other expenses in the second quarter of 2020.

Management's Discussion and Analysis

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

(Dollars in thousands)

Three Months Six Months

Periods ended June 30, 2021 2020 2021 2020

Three Months Nine Months

Periods ended September 30, 2021 2020 2021 2020

Income tax expense $5,319 $5,131 $15,855 $13,817

Effective income tax rate 22.1 % 21.9 % 21.9 % 21.2 %

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.

The effective income tax rates for the three and nine months ended September 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, federal tax credits and the recognition of excess tax expense or benefits associated with the settlement of share-based awards.

The increase in the effective tax rate for the three and nine months ended September 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

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

(Dollars in thousands) Three Months Six Months

(Dollars in thousands) Three Months Nine Months

Change Change

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

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

Net interest income $35,732 $33,103 $2,629 8 % $105,579 $94,692 $10,887 11 %

7 unchanged sentences

Net income $18,952 $21,016 ($2,064) (10 %) $61,681 $54,474 $7,207 13 %

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 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.

Net interest income for the Commercial Banking segment for the three and nine months ended September 30, 2021, increased by $2.6 million and $10.9 million, respectively, from the same periods in 2020.

Net interest income largely benefited from accelerated amortization of net deferred fee balances on PPP loans that were forgiven by the SBA and lower cost of funds, and was also negatively impacted by lower yields on loans.

For the nine months ended September 30, 2021, the increase was also attributable to growth in average loan balances.

For the three months ended September 30, 2021 there was no provision for credit losses, compared to a positive provision for credit losses (or a charge) of $1.3 million for the same period in 2020.

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

Management's Discussion and Analysis

Noninterest income derived from the Commercial Banking segment for the three and nine months ended September 30, 2021 was down by $6.5 million and $10.0 million, respectively, from the comparable periods in 2020, largely due to lower mortgage banking revenues and 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 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.

Commercial Banking noninterest expenses for the three and nine months ended September 30, 2021 were down by $48 thousand and up by $3.7 million, respectively, from the same periods in 2020.

The year-to-date increase largely reflected increases in salaries and employee benefits expense and outsourced services.

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) Three Months Six Months

(Dollars in thousands) Three Months Nine Months

Change Change

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

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

Net interest expense ($25) ($24) ($1) 4 % ($72) ($117) $45 38 %

4 unchanged sentences

Net income $2,189 $999 $1,190 119 % $7,656 $3,449 $4,207 122 %

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.

For the three and nine months ended September 30, 2021, noninterest income derived from the Wealth Management Services segment increased by $1.5 million and $5.5 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 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.

For the three and nine months ended September 30, 2021, noninterest expenses for the Wealth Management Services segment increased by $3 thousand and $172 thousand, respectively, from the same periods in 2020, largely reflecting an increase in salaries and employee benefits expense and declines in legal and other expenses.

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

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

(Dollars in thousands) Three Months Six Months

(Dollars in thousands) Three Months Nine Months

Change Change

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

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

Net interest (expense) income $363 ($1,425) $1,788 (125 %) ($1,812) $626 ($2,438) (389 %)

4 unchanged sentences

Net (loss) income ($2,390) ($3,693) $1,303 (35 %) ($12,655) ($6,660) ($5,995) 90 %

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.

Net interest income for the Corporate unit for the three and nine months ended September 30, 2021 was up by $1.8 million and down by $2.4 million, respectively, compared to the same periods in 2020.

The year-over-year increase in third 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

For the three and nine months ended September 30, 2021, noninterest expenses for the Corporate unit increased by $221 thousand and $5.1 million, respectively, from the same periods in 2020.

The year-to-date increase was primarily due to debt prepayment penalty expense recognized in 2021 of $4.2 million.

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

Financial Condition

1 unchanged sentence

(Dollars in thousands) Change

September 30,

2021 December 31,

7 unchanged sentences

Total shareholders’ equity 555,318 534,195 21,123 4

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.

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

Total assets amounted to $6.0 billion at September 30, 2021, up by $289.5 million, or 5%, from the end of 2020.

This included an increase of $102.9 million, or 53%, in the balance of cash and due from banks.

The securities portfolio increased by $151.3 million, or 17%, reflecting purchases, partially offset by pay-downs, called securities and a temporary decline in fair value.

Total loans increased by $90.4 million, or 2%, 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 $2.4 million, or 5%, from the end of 2020, reflecting relative improvement in forecasted economic conditions and continued stable asset quality metrics.

Total deposits increased by $679.8 million, or 16%, with increases in both in-market deposits and wholesale brokered time deposits.

FHLB advances decreased by $371.3 million, or 63%, from December 31, 2020.

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.

Shareholders’ equity increased by $21.1 million, or 4%, 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”).

7 unchanged sentences

Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements.

Debt securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized.

Management's Discussion and Analysis

securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized.

Determination of Fair Value

6 unchanged sentences

In addition, management periodically performs independent price tests of securities to ensure proper valuation and to verify our understanding of how securities are priced.

As of June 30, 2021 and December 31, 2020, management did not make any adjustments to the prices provided by the pricing service.

As of September 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.

2 unchanged sentences

The carrying amounts of securities held are as follows:

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

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

Amount % Amount %

10 unchanged sentences

Total available for sale debt securities $1,045,833 100 % $894,571 100 %

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 securities portfolio amounted to $1.0 billion, or 17% of total assets, as of September 30, 2021 compared to $894.6 million, or 16% of total assets, as of December 31, 2020.

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

5 unchanged sentences

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.

As of September 30, 2021, the carrying amount of available for sale debt securities included net unrealized losses of $3.2 million, compared to 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 $4.3 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.

Federal Home Loan Bank Stock

The Bank is a member of the FHLB, which is a cooperative that provides services to its member banking institutions.

The primary reason for the Bank’s membership is to gain access to a reliable source of wholesale funding in order to manage interest rate risk.

The purchase of FHLB stock is a requirement for a member to gain access to funding.

The Bank purchases

Management's Discussion and Analysis

FHLB stock in proportion to the volume of funding received and views the purchases as a necessary long-term investment for the purposes of balance sheet liquidity and not for investment return.

The Bank’s investment in FHLB stock totaled $15.1 million at September 30, 2021, compared to $30.3 million at December 31, 2020.

Total loans amounted to $4.3 billion at September 30, 2021, up by $90.4 million from the end of 2020, reflecting growth in the residential real estate portfolio partially offset by a decline in the commercial loan portfolio.

The following is a summary of loans:

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

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

Amount % Amount %

19 unchanged sentences

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.

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.

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

Management considers deferments when estimating 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;

1 unchanged sentence

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.

At September 30, 2021, we had active deferments remaining on 5 loans totaling $38.0 million, or 1% of the outstanding balance of total loans, excluding PPP loan balances as of September 30, 2021.

Commercial Loans

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

The commercial loan portfolio represented 55% of total loans at September 30, 2021.

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

1 unchanged sentence

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 $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 amounted to $439.9 million and $408.8 million, respectively, at September 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 participation in loans or loan commitments of at least $100.0 million that are shared by three or more banks.

Management's Discussion and Analysis

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

3 unchanged sentences

Commercial and industrial loans are frequently collateralized by equipment, inventory, accounts receivable, and/or general business assets.

A portion of the

Management's Discussion and Analysis

Bank’s commercial and industrial loans is also collateralized by real estate.

A portion of the Bank’s commercial and industrial loans is also collateralized by real estate.

Commercial and industrial loans also include PPP loans that are fully guaranteed by the U.S.

1 unchanged sentence

Commercial Real Estate Loans (“CRE”)

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.

CRE loans totaled $1.7 billion at September 30, 2021, up by $28.8 million, or 2%, from the balance at December 31, 2020.

Included in CRE loans were construction and development loans of $125.4 million and $111.2 million, respectively, as of September 30, 2021 and December 31, 2020.

For the nine months ended September 30, 2021, CRE loan originations and construction advances were partially offset by payoffs and pay-downs of approximately $204 million.

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

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

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

Outstanding Balance % of Total Outstanding Balance % of Total

Connecticut $632,339 38 % $649,919 40 %

Massachusetts 471,426 28 468,947 29

Rhode Island 467,182 28 431,133 26

Massachusetts 462,456 28 468,947 29

Subtotal 1,561,977 94 1,549,999 95

2 unchanged sentences

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

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

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

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

4 unchanged sentences

Hospitality 39 199,379 12 40 157,720 10

Healthcare 15 134,689 8 15 109,321 7

Industrial and warehouse 37 143,597 9 28 97,055 6

Healthcare 15 136,615 8 15 109,321 7

Commercial mixed use 20 39,293 2 22 42,405 3

6 unchanged sentences

$32,200 $32,200

Management's Discussion and Analysis

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)

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

Count Balance % of Outstanding Balance (1)

1 unchanged sentence

Total CRE deferments 5 $37,955 2 % 38 $176,132 11 %

(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.

(1) CRE deferments as a percent of the outstanding CRE portfolio balance as of the dates indicated.

CRE loans with active deferrals remaining as of September 30, 2021 are principal only deferrals and continue to pay interest.

These deferrals are in the healthcare, hospitality and retail 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.

C&I loans amounted to $682.8 million at September 30, 2021, down by $134.6 million, or 16%, from the balance at December 31, 2020.

This included a net reduction in PPP loans of $122.4 million.

Excluding PPP loans, C&I loans decreased by approximately $12.2 million, with payoffs and pay-downs of approximately $87 million partially offset by new loan originations.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $43.4 million at September 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 September 30, 2021.

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

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

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

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

1 unchanged sentence

Healthcare and social assistance 138 $184,906 27 % 253 $200,217 24 %

Manufacturing 123 68,908 9 146 88,802 11

Owner occupied and other real estate 193 76,104 11 268 74,309 9

Manufacturing 78 64,447 9 146 88,802 11

Accommodation and food services 162 57,513 8 271 47,020 6

Educational services 46 50,872 7 53 64,969 8

Retail 92 49,741 7 192 63,895 8

Professional, scientific and technical

Educational services 33 49,566 7 53 64,969 8

Entertainment and recreation

54 33,756 5 91 29,415 4

1 unchanged sentence

65 33,129 5 106 26,244 3

Entertainment and recreation

18 25,536 4 32 28,394 3

26 26,542 3 32 28,394 3

Transportation and warehousing

32 20,637 3 42 24,061 3

Professional, scientific and technical

93 12,073 2 265 39,295 5

Public administration

6 unchanged sentences

$18,916 $19,500

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

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

Management's Discussion and Analysis

1 unchanged sentence

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

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

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

2 unchanged sentences

Healthcare and social assistance 71 15,684 20 173 47,354 24

Manufacturing 70 9,844 7 89 23,321 12

Professional, scientific and technical

61 6,078 8 220 20,031 10

Retail 103 10,117 7 134 12,107 6

Educational services 28 3,352 2 32 9,681 5

Owner occupied and other real estate 80 3,349 2 115 9,241 5

Manufacturing 25 5,662 7 89 23,321 12

Entertainment and recreation

27 2,597 3 61 3,386 2

Educational services 15 2,512 3 32 9,681 5

Retail 37 2,222 3 134 12,107 6

8 2,130 3 20 2,478 1

Transportation and warehousing

Owner occupied and other real estate 33 1,412 2 115 9,241 5

Public administration

3 417 1 4 483 —

1 unchanged sentence

11 405 1 55 2,000 1

Public administration

Transportation and warehousing

10 360 — 21 2,059 1

5 unchanged sentences

Residential Real Estate Loans

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

The residential real estate loan portfolio represented 39% of total loans at September 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.

1 unchanged sentence

The table below presents residential real estate loan origination activity:

(Dollars in thousands) Three Months Six Months

Periods ended June 30, 2021 2020 2021 2020

(Dollars in thousands) Three Months Nine Months

Periods ended September 30, 2021 2020 2021 2020

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

7 unchanged sentences

(Dollars in thousands)

Three Months Six Months

Periods ended June 30, 2021 2020 2021 2020

Three Months Nine Months

Periods ended September 30, 2021 2020 2021 2020

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

8 unchanged sentences

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 $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 net balance of capitalized servicing rights amounted to $10.7 million and $7.4 million, respectively, as of September 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 $1.6 billion and $1.2 billion, respectively, as of September 30, 2021 and December 31, 2020.

Residential real estate loans held in portfolio amounted to $1.7 billion at September 30, 2021, up by $205.1 million, or 14%, 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) June 30, 2021 December 31, 2020

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

Amount % of Total Amount % of Total

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$1,672,364 100 % $1,467,312 100 %

(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.

(1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $89.5 million and $131.8 million, respectively, as of September 30, 2021 and December 31, 2020.

At September 30, 2021, we had no active deferrals on residential real estate loans.

Consumer Loans

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

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

The consumer loan portfolio totaled $269.5 million at September 30, 2021, down by $8.8 million from December 31, 2020.

Home equity lines of credit and home equity loans represented 93% of the total consumer portfolio at September 30, 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 $9.4 million and $10.0 million, respectively at September 30, 2021 and December 31, 2020.

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

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) Jun 30,

(Dollars in thousands) Sep 30,

Commercial real estate $— $—

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Nonaccrual Loans

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.

During the nine months ended September 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) Three Months Six Months

For the periods ended June 30, 2021 2020 2021 2020

(Dollars in thousands) Three Months Nine Months

For the periods ended September 30, 2021 2020 2021 2020

Balance at beginning of period $10,481 $16,017 $13,197 $17,408

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The following table presents additional detail on nonaccrual loans:

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

(Dollars in thousands) September 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 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.

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

As of both September 30, 2021 and December 31, 2020, the composition of nonaccrual loans was 100% residential and consumer.

Nonaccrual residential real estate mortgage loans amounted to $10.3 million at September 30, 2021, down by $1.7 million from the end of 2020.

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

As of September 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) Jun 30,

(Dollars in thousands) Sep 30,

Accruing TDRs

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Total TDRs $9,711 $15,685

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.

TDRs amounted to $9.7 million at September 30, 2021, down by $6.0 million from the end of 2020, reflecting payoffs.

As of September 30, 2021, the composition of TDRs was 39% commercial and 61% residential and consumer, compared to 55% and 45%, respectively, as of December 31, 2020.

The ACL included specific reserves for TDRs of $195 thousand at September 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) June 30, 2021 December 31, 2020

(Dollars in thousands) September 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 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.

As of September 30, 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.

Total past due loans decreased by $2.8 million from the end of 2020.

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.

Total past due loans included $6.9 million of nonaccrual loans as of September 30, 2021, compared to $8.5 million as of December 31, 2020.

All loans 90 days or more past due at September 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 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 include classified accruing commercial loans that were less than 90 days past due at September 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.

They are assessed for loss exposure using the methods described in Note 5 to the Unaudited Consolidated Financial Statements under the caption “Credit Quality Indicators.” Management cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans.

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

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

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

Management has identified approximately $12.7 million in potential problem loans at September 30, 2021.

There were no potential problem loans identified at December 31, 2020.

As of September 30, 2021, the balance of potential problem loans consisted of three loans associated with two commercial real estate relationships that management considers adequately secured.

At October 31, 2021, two of the underlying loans in these relationships were past due by 38 and 42 days, respectively.

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

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Allowance for Credit Losses on Loans

The ACL on loans is management’s estimate of expected credit losses over the expected life of the loans at the reporting date in accordance with GAAP.

The ACL on loans is management’s current estimate of expected credit losses over the expected life of the loans.

The ACL on loans is established through a provision charged to earnings.

The ACL on loans is reduced by charge-offs on loans and is increased by recoveries of amounts previously charged off.

Management's Discussion and Analysis

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.

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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) June 30, 2021 December 31, 2020

(Dollars in thousands) September 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 $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.

The ACL on loans amounted to $41.7 million at September 30, 2021, down by $2.4 million from the balance at December 31, 2020.

There was no provision for credit losses for the three months ended September 30, 2021 and a negative provision for credit losses (or a benefit) of $2.0 million for the nine months ended September 30, 2021.

Credit loss provisioning and the ACL reflect management’s estimate of forecasted economic conditions and continued stable asset quality metrics.

Net charge-offs amounted to $168 thousand and $444 thousand, respectively, for the three and nine months ended September 30, 2021.

Management's Discussion and Analysis

The ACL on loans as a percentage of total loans, also known as the reserve coverage ratio, was 0.97% at September 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.

The following table presents the allocation of the ACL on loans by portfolio segment.

The total ACL on loans is available to absorb losses from any segment of the loan portfolio.

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

(Dollars in thousands) September 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)

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We consider these reciprocal deposit balances to be in-market deposits as distinguished from traditional out-of-market wholesale brokered deposits.

Management's Discussion and Analysis

The following table presents a summary of deposits:

(Dollars in thousands) Change

September 30,

2021 December 31,

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Total deposits $5,058,142 $4,378,353 $679,789 16 %

Management's Discussion and Analysis

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

Total deposits amounted to $5.1 billion at September 30, 2021, up by $679.8 million, or 16%, from December 31, 2020.

This included an increase of $163.5 million, or 28%, in out-of-market brokered time deposits.

Excluding out-of-market brokered time deposits, in-market deposits were up by $516.3 million, or 14%, 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.

In-market deposit growth from the end of 2020 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.

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

FHLB advances totaled $222.6 million at September 30, 2021, down by $371.3 million, or 63%, from the balance at the end of 2020, as lower levels of wholesale funding were needed given the in-market deposits increase.

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 six months ended June 30, 2021.

The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 69% of total average assets in the nine months ended September 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.

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and (3) maturing time deposits.

The Corporation has established collateralized borrowing capacity with the FRB and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business.

The Corporation has established collateralized borrowing capacity with the FRB and also maintains additional collateralized borrowing capacity with the

Management's Discussion and Analysis

FHLB in excess of levels used in the ordinary course of business.

Borrowing capacity is impacted by the amount and type of assets available to be pledged.

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(Dollars in thousands)

September 30,

2021 December 31,

6 unchanged sentences

Total $2,205,206 $1,585,411

(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

(1) As of September 30, 2021 and December 31, 2020, loans with a carrying value of $2.2 billion and $2.1 billion, respectively, and securities available for sale with carrying values of $118.7 million and $128.6 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of September 30, 2021 and December 31, 2020, loans with a carrying value of $8.4 million and $12.6 million, respectively, and securities available for sale with a carrying value of $15.6 million and $14.9 million, respectively, were pledged to the FRB for the discount window resulting in this additional unused borrowing capacity.

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 six months ended June 30, 2021.

Liquidity remained within target ranges established by the ALCO during the nine months ended September 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 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.

Net cash provided by operating activities amounted to $106.9 million for the nine months ended September 30, 2021 and largely included net income of $56.7 million and mortgage banking related adjustments to reconcile net income to net cash provided by operating activities.

Net cash used in investing activities totaled $289.8 million for the nine months ended September 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 debt securities.

For the nine months ended September 30, 2021, net cash provided by financing activities amounted to $281.0 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 $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.

Total shareholders’ equity amounted to $555.3 million at September 30, 2021, up by $21.1 million from December 31, 2020.

The increase included net income of $56.7 million, partially offset by $27.4 million in dividend declarations and a decrease of $10.7 million in the accumulated other comprehensive income component of shareholders' equity that was largely attributable 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 September 30, 2021, compared to 51 cents per share declared for the same period in 2020.

On a year-to-date basis, dividend declarations totaled $1.56 per share in 2021, compared to $1.53 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.

The ratio of total equity to total assets was 9.25% at September 30, 2021, compared to a ratio of 9.35% at December 31, 2020.

Book value per share at September 30, 2021 and December 31, 2020 was $32.06 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 13.83% at September 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.

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In the normal course of business, the Corporation engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts.

Such transactions are used to meet the financing needs of its customers and to manage the exposure to fluctuations in interest rates.

Management's Discussion and Analysis

transactions are used to meet the financing needs of its customers and to manage the exposure to fluctuations in interest rates.

These financial transactions include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts.

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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.

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The ALCO reviews simulation results to determine whether the Corporation’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure.

As of June 30, 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 September 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.

In addition to measuring the change in net interest income as compared to an unchanged rate scenario, the ALCO also measures the trend of both net interest income and net interest margin over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.

In addition to measuring the change in net interest income as compared to an unchanged rate scenario, the ALCO also measures the trend of both net interest income and NIM over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.

The ALCO regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve of up to 500 basis points, as well as parallel changes in interest rates of up to 400 basis points.

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 June 30, 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.

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

Management's Discussion and Analysis

shift by lesser amounts due to their relative historical insensitivity to market interest rate movements.

Further, deposits are assumed to have certain minimum rate levels below which they will not fall.

It should be noted that the rate scenarios shown do not necessarily reflect the ALCO’s view of the “most likely” change in interest rates over the periods indicated.

June 30, 2021 December 31, 2020

September 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.

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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.

A higher level of longer-term fixed rate assets at September 30, 2021 as compared to December 31, 2020 has also contributed to the reduction in the positive exposure to rising rates as they would not reprice upward in a rising rate environment.

Over time, the repricing, maturity and prepayment characteristics of financial instruments and the composition of the Corporation’s balance sheet may change to a different degree than estimated.

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Mortgage-backed securities and residential real estate loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments.

Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value.

Such changes could affect the level

Management's Discussion and Analysis

of reinvestment risk associated with cash flow from these instruments, as well as their market value.

Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.

2 unchanged sentences

Results are calculated using industry-standard analytical techniques and securities data.

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:

The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of September 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 1,489 (66)

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

Total change in market value as of September 30, 2021 $16,922 ($113,273)

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