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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-08 · 273 added, 482 removed, 688 unchanged (52% of the section changed)

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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, 2021, 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 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.

Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results for the full-year ended December 31, 2022 or any future period.

Forward-Looking Statements

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

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, including concerns about inflation, or legislative or regulatory initiatives;

• ongoing disruptions in our business and operations, and changes in consumer behavior due to the ongoing COVID-19 pandemic;

• changes in political, business and economic conditions, including 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;

• volatility in national and international financial markets;

reductions in net interest income resulting from interest rate changes or volatility as well as changes in the balance and mix of loans and deposits;

reductions in the market value or outflows of wealth management assets under administration;

• interest rate changes or volatility, as well as changes in the balance and mix of loans and deposits;

• reductions in the market value or outflows of wealth management AUA;

• decreases in the value of securities and other assets;

reductions in loan demand;

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

changes related to the discontinuation and replacement of LIBOR;

• changes in loan demand and collectability;

• increases in defaults and charge-off rates;

• changes in the size and nature of our competition;

• changes in legislation or regulation and accounting principles, policies and guidelines;

operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics;

reputational risk relating to our participation in the Paycheck Protection Program and other pandemic-related legislative and regulatory initiatives and programs;

and changes in the assumptions used in making such forward-looking statements.

• operational risks including, but not limited to, changes in information technology, cybersecurity incidents, fraud, natural disasters, war, terrorism, civil unrest and future pandemics;

• reputational risks;

• changes in the assumptions used in making such forward-looking statements.

In addition, the factors described under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC, may result in these differences.

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These forward-looking statements were based on information, plans and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

Critical Accounting Policies and Estimates

Accounting policies involving significant judgments, estimates and assumptions by management, which have, or could have, a material impact on the Corporation’s consolidated financial statements are considered critical accounting policies.

Management considers the following to be its critical accounting policies:

the determination of the allowance for credit losses on loans, the valuation of goodwill and identifiable intangible assets, and accounting for defined benefit pension plans.

See our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for a description of the Corporation’s critical accounting policies for the valuation of goodwill and identifiable intangible assets and accounting for defined benefit pension plans.

Management updated its critical accounting policy for the allowance for credit losses on loans in the first quarter of 2021 as the result of incorporating additional econometric factors in the determination of the probability of default for each loan portfolio segment.

The updated policy is presented below.

Allowance for Credit Losses on Loans

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.

The ACL on loans is established through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income and by recoveries of amounts previously charged-off.

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

Management's Discussion and Analysis

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.

Historical credit loss experience provides the basis for the calculation of loss given default and the estimation of expected credit losses.

As discussed further below, adjustments to historical information are made for differences in specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, that may not be reflected in historical loss rates.

Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors.

The methodology for evaluating quantitative factors consists of two basic components.

The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics.

Pooled loan portfolio segments include commercial real estate (including commercial construction loans), commercial and industrial (including Paycheck Protection Program (“PPP”) loans), residential real estate (including homeowner construction), home equity and other consumer loans.

The second component involves identifying individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments.

Individually analyzed loans include nonaccrual commercial loans, reasonably expected troubled debt restructurings (“TDRs”) and executed TDRs, as well as certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans.

For loans that are individually analyzed, the ACL is measured using a discounted cash flow (“DCF”) method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan is collateral dependent, at the fair value of the collateral.

Factors management considers when measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due.

For collateral dependent loans for which repayment is to be provided substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell.

For collateral dependent loans for which repayment is to be provided substantially through the operation of the collateral, such as accruing TDRs, estimated costs to sell are not incorporated into the measurement.

Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the collateral.

For pooled loans, the Corporation utilizes a DCF methodology to estimate credit losses over the expected life of the loan.

The life of the loan excludes expected extensions, renewals and modifications, unless the extension or renewal options are included in the original or modified contract terms and not unconditionally cancellable by the Corporation.

The methodology incorporates a probability of default and loss given default framework.

Default triggers include the loan has become past due by 90 or more days, a charge-off has occurred, the loan has been placed on nonaccrual status, the loan has been modified in a TDR or the loan is risk-rated as special mention or classified.

Loss given default is estimated based on historical credit loss experience.

Probability of default is estimated utilizing a regression model that incorporates econometric factors.

These factors are selected based on the correlation of the factor to historical credit losses for each portfolio segment.

The national unemployment rate (“NUR”) and gross domestic product (“GDP”) econometric factors are utilized for the commercial real estate and other consumer loan portfolio segments;

the NUR and national home price index (“HPI”) econometric factors are utilized for the residential real estate and home equity portfolio segments;

and the NUR econometric factor is utilized for the commercial & industrial loan portfolio segment.

To estimate the probability of default, the model utilizes forecasted econometric factors over a one-year reasonable and supportable forecast period.

After the forecast period, the model reverts to the historical mean of the respective econometric factor and the associated probability of default on a straight-line basis over a one-year reversion period.

The DCF methodology combines the probability of default, the loss given default, prepayment speeds and the remaining life of the loan to estimate a reserve for each loan.

The sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived.

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

These qualitative risk factors include:

(1) changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

(2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;

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

(4) changes in the experience,

Management's Discussion and Analysis

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;

(7) changes in the value of underlying collateral for collateral dependent loans;

(8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations;

and (9) the effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.

Qualitative loss factors are applied to each portfolio segment with the amounts determined by historical loan charge-offs of a peer group of similar-sized regional banks.

Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations.

Deteriorating conditions or assumptions could lead to future increases in the ACL on loans.

In addition, various regulatory agencies periodically review the ACL on loans.

Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination.

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

Recently Issued Accounting Pronouncements

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

The Corporation offers a comprehensive product line of banking and financial services to individuals and businesses, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut;

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Our largest source of operating income is net interest income, which is the difference between interest earned on loans and securities and interest paid on deposits and borrowings.

In addition, we generate noninterest income from a number of sources, including wealth management services, mortgage banking activities and deposit services.

In addition, we generate noninterest income from a number of

Management's Discussion and Analysis

sources, including wealth management services, mortgage banking activities and deposit services.

Our principal noninterest expenses include salaries and employee benefit costs, outsourced services provided by third party vendors, occupancy and facility-related costs and other administrative expenses.

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

COVID-19 Pandemic Related

On March 11, 2021, the American Rescue Plan Act (“ARP”) was signed into law providing an additional $1.9 trillion in COVID-19 economic relief.

The ARP included provisions on aid to state and local governments, hard-hit industries and communities, additional direct stimulus payments to qualifying individuals, additional funding for the Small Business Administration’s (“SBA’s”) PPP and other provisions.

PPP loans are 100% guaranteed by the SBA.

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.

Risk Management

The Corporation has a comprehensive enterprise risk management (“ERM”) program through which the Corporation identifies, measures, monitors and controls current and emerging material risks.

Management's Discussion and Analysis

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

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

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It exists because the repricing frequency and magnitude of interest-earning assets and interest-bearing liabilities are not identical.

See the “Asset/Liability Management and Interest Rate Risk” section below for additional disclosure.

Liquidity risk is the risk that the Corporation will not have the ability to generate adequate amounts of cash for it to meet its maturing liability obligations and customer loan demand.

For detailed disclosure regarding liquidity management, asset/liability management and interest rate risk, see “Liquidity and Capital Resources” and “Asset/Liability Management and Interest Rate Risk” sections below.

For detailed disclosure regarding liquidity management, see the “Liquidity and Capital Resources” section below.

Price and market risk refers to the risk of loss arising from adverse changes in interest rates and other relevant market rates and prices, such as equity prices.

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

Management's Discussion and Analysis

ERM is an overarching program that includes all areas of the Corporation.

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The following table presents a summarized consolidated statement of operations:

(Dollars in thousands) Three Months Nine Months

Change Change

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

(Dollars in thousands) Change

Three months ended March 31, 2022 2021 $ %

Net interest income $35,091 $32,871 $2,220 7 %

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

Three Months Nine Months

Periods ended September 30, 2021 2020 2021 2020

Three months ended March 31, 2022 2021

Diluted earnings per common share $0.94 $1.17

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Noninterest income as a percentage of total revenues 33 % 44 %

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 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.

Net income totaled $16.5 million for the three months ended March 31, 2022, compared to $20.5 million for the same period in 2021.

In 2022, net interest income largely benefited from lower funding costs, a reduction in average wholesale funding balances and an increase in average interest-earning asset balances.

The decrease in noninterest income reflected lower mortgage banking revenues and other income, partially offset by higher wealth management revenues.

The provision for credit losses recognized for the three months ended March 31, 2022 was modest, reflecting continued low loss rates, strong asset and credit quality metrics, as well as our current estimate of forecasted economic conditions.

This compared to a release of credit loss reserves in first quarter of 2021.

Noninterest expenses for the three months ended March 31, 2021 included debt prepayment penalty expense of $3.3 million associated with paying off higher yielding FHLB advances, while there was no such expense incurred for the three months ended March 31, 2022.

The year-over-year decline in noninterest expenses also reflected a decrease in salaries and employee benefits expense.

Management's Discussion and Analysis

Average Balances / Net Interest Margin - Fully Taxable Equivalent (FTE) Basis

Average Balances / Net Interest Margin - Fully Taxable Equivalent Basis

The following table presents average balance and interest rate information.

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.

Tax-exempt income is converted to a 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 September 30, 2021 2020 Change

Three months ended March 31, 2022 2021 Change

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

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22,681 99 1.77 22,681 94 1.68 — 5 0.09

PPPLF borrowings — — — 180,128 159 0.35 (180,128) (159) (0.35)

Total interest-bearing liabilities

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(Dollars in thousands)

Three months ended September 30, 2021 2020 Change

Commercial loans $205 $248 ($43)

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

Cash, federal funds sold and short-term investments $160,350 $121 0.10 $156,296 $424 0.36 $4,054 ($303) (0.26)

Mortgage loans held for sale 53,307 1,144 2.87 48,570 1,193 3.28 4,737 (49) (0.41)

Taxable debt securities 997,741 10,366 1.39 905,692 16,181 2.39 92,049 (5,815) (1.00)

FHLB stock 24,265 338 1.86 49,236 1,826 4.95 (24,971) (1,488) (3.09)

Commercial real estate 1,638,200 35,269 2.88 1,623,612 40,326 3.32 14,588 (5,057) (0.44)

Commercial & industrial 794,091 23,865 4.02 749,905 20,214 3.60 44,186 3,651 0.42

Total commercial 2,432,291 59,134 3.25 2,373,517 60,540 3.41 58,774 (1,406) (0.16)

Residential real estate 1,531,529 39,248 3.43 1,492,589 42,660 3.82 38,940 (3,412) (0.39)

Home equity 255,959 6,220 3.25 281,488 7,802 3.70 (25,529) (1,582) (0.45)

Other 20,301 742 4.89 19,171 716 4.99 1,130 26 (0.10)

Total consumer 276,260 6,962 3.37 300,659 8,518 3.78 (24,399) (1,556) (0.41)

Total loans 4,240,080 105,344 3.32 4,166,765 111,718 3.58 73,315 (6,374) (0.26)

Total interest-earning assets 5,475,743 117,313 2.86 5,326,559 131,342 3.29 149,184 (14,029) (0.43)

Noninterest-earning assets 346,514 357,133 (10,619)

Total assets $5,822,257 $5,683,692 $138,565

Liabilities and Shareholders’ Equity:

Interest-bearing demand deposits $190,979 $196 0.14 $158,594 $725 0.61 $32,385 ($529) (0.47)

NOW accounts 747,385 350 0.06 569,283 253 0.06 178,102 97 —

Money market accounts 958,812 1,852 0.26 818,530 4,439 0.72 140,282 (2,587) (0.46)

Savings accounts 513,110 211 0.05 402,243 195 0.06 110,867 16 (0.01)

Time deposits (in-market) 687,278 5,822 1.13 752,443 10,571 1.88 (65,165) (4,749) (0.75)

Total interest-bearing in-market deposits 3,097,564 8,431 0.36 2,701,093 16,183 0.80 396,471 (7,752) (0.44)

Wholesale brokered time deposits 655,165 982 0.20 471,771 4,997 1.41 183,394 (4,015) (1.21)

Total interest-bearing deposits 3,752,729 9,413 0.34 3,172,864 21,180 0.89 579,865 (11,767) (0.55)

FHLB advances 438,213 3,253 0.99 1,016,943 13,501 1.77 (578,730) (10,248) (0.78)

Junior subordinated debentures 22,681 278 1.64 22,681 519 3.06 — (241) (1.42)

PPPLF borrowings — — — 61,333 161 0.35 (61,333) (161) (0.35)

Total interest-bearing liabilities 4,213,623 12,944 0.41 4,273,821 35,361 1.11 (60,198) (22,417) (0.70)

Noninterest-bearing demand deposits 918,760 733,359 185,401

Other liabilities 147,244 164,928 (17,684)

Shareholders’ equity 542,630 511,584 31,046

Total liabilities and shareholders’ equity $5,822,257 $5,683,692 $138,565

Net interest income (FTE) $104,369 $95,981 $8,388

Interest rate spread 2.45 2.18 0.27

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)

Nine months ended September 30, 2021 2020 Change

Three months ended March 31, 2022 2021 Change

Commercial loans $244 $246 ($2)

Net Interest Income

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

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, the primary source of our operating income, totaled $35.1 million for the three months ended March 31, 2022, compared to $32.9 million for the same period in 2021.

Net interest income is affected by the level of and changes in interest rates, and changes in the amount and composition of interest-earning assets and interest-bearing liabilities.

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The 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 may be impacted by the periodic recognition of prepayment penalty fee income associated with loan payoffs.

Prepayment penalty fee income associated with loan payoffs amounted to $76 thousand (or 0 basis point benefit to NIM) for the three months ended March 31, 2022, compared to $217 thousand (or 2 basis points benefit to NIM) for the same period in 2021.

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 $2.7 million for the nine months ended September 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 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.

Additionally, as PPP loans are forgiven by the SBA, related unamortized net fee balances are accelerated and amortized, increasing net interest income.

Changes in market interest rates affect the level of loan prepayments and the receipt of payments on mortgage-backed securities.

Prepayment speeds generally increase as market interest rates decline and decrease as market interest rates rise.

Changes in prepayment speeds could increase or decrease the level of net amortization of premiums and discounts, thereby affecting interest income.

As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to interest income) amounted to $966 thousand for the three months ended March 31, 2022, compared $882 thousand for the same period in 2021.

Accelerated amortization of net deferred fee balances on PPP loans forgiven by the SBA amounted to $819 thousand (or 6 basis points benefit to NIM) for the three months ended March 31, 2022, compared to $1.2 million (or 10 basis points benefit to NIM) for the same period in 2021.

FTE net interest income for the three months ended March 31, 2022 amounted to $35.3 million, up by $2.2 million, or 7%, from the same period in 2021.

Declines in funding costs contributed $1.4 million of net interest income for the three months ended March 31, 2022.

In addition, growth in average interest-earning assets and declines in average interest-bearing liability balances contributed approximately $856 thousand of net interest income for the three months ended March 31, 2022.

NIM was 2.57% for the three months ended March 31, 2022, compared to 2.51% for the same period in 2021.

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.

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

Excluding the impact of both accelerated net deferred fee amortization on PPP loans and commercial loan prepayment fee income, the NIM amounted to 2.51% for the three months ended March 31, 2022, compared to 2.40% for the same period in 2021.

Total average securities for the three months ended March 31, 2022 increased by $155.9 million, or 17%, from the average balances for the same period a year earlier.

The FTE rate of return on the securities portfolio for the three months ended March 31, 2022 was 1.60%, compared to 1.44% for the same period in 2021, reflecting purchases of relatively higher yielding debt securities and higher market interest rates.

Total average loan balances for the three months ended March 31, 2022 increased by $72.7 million, or 2%, from the average loan balances for the comparable 2021 period.

The increase reflected growth in average residential real estate loan balances, partially offset by a decline in commercial loans concentrated in PPP loans.

The yield on total loans for the three months ended March 31, 2022 was 3.25%, compared to 3.32% for the same period in 2021.

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

Management's Discussion and Analysis

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 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 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 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.

prepayment fee income.

Excluding the impact of these items for both periods, the yield on total loans for the three months ended March 31, 2022 was 3.16%, down by 2 basis points, from 3.18% for the same period in 2021.

The average balance of FHLB advances for the three months ended March 31, 2022 decreased by $391.8 million, compared to the average balances for the same period in 2021.

The average rate paid on such advances for the three months ended March 31, 2022 was 0.66%, down by 37 basis points from 1.03% for the same period in 2021, reflecting maturities and payoffs of higher-yielding FHLB advances and lower market interest rates in the prior year.

Included in total average interest-bearing deposits were out-of-market wholesale brokered time deposits, which decreased by $123.4 million from the same period in 2021.

The average rate paid on wholesale brokered time deposits for the three months ended March 31, 2022 was 0.18%, compared to 0.31% for the same period in 2021, reflecting lower market interest rates in the prior year.

Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, for the three months ended March 31, 2022 increased by $640.3 million, or 21%, from the average balances for the same period in 2021.

The increases reflected growth across all in-market interest-bearing deposit categories.

The average rate paid on in-market interest-bearing deposits for the three months ended March 31, 2022 was 0.32%, down by 12 basis points from 0.44% for the same period in 2021, largely due to downward repricing of interest-bearing in-market deposits reflecting lower market interest rates in the prior year.

The average balance of noninterest-bearing demand deposits for the three months ended March 31, 2022 increased by $49.6 million, or 6%, from the average balance for the same period in 2021.

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

1 unchanged sentence

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

The following table presents certain information on a FTE basis regarding changes in our interest income and interest expense for the period indicated.

The following table presents certain information on an FTE basis regarding changes in our interest income and interest expense for the period indicated.

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

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

2020 Nine Months Ended September 30, 2021 vs.

Change Due to Change Due to

Volume Rate Net Change Volume Rate Net Change

(Dollars in thousands) Three Months Ended March 31, 2022 vs.

Change Due to

Volume Rate Net Change

Interest on Interest-Earning Assets:

Cash, federal funds sold and other short-term investments

$3 $14 $17 $11 ($314) ($303)

Mortgage loans held for sale (262) 53 (209)

22 unchanged sentences

Junior subordinated debentures — 5 5

PPPLF borrowings (80) (79) (159) (81) (80) (161)

Total interest expense (329) (1,362) (1,691)

4 unchanged sentences

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

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.

For the three months ended March 31, 2022, there was a positive $100 thousand provision for credit losses (or a charge) recognized, compared to a negative $2.0 million provision for credit losses (or a benefit) recognized for the same period in 2021.

For the three months ended March 31, 2022, the provision related to an increase in the ACL on unfunded commitments.

There was no provision for credit losses on loans recognized for the three months ended March 31, 2022, reflecting continued low loss rates, strong asset and credit quality metrics, as well as our current estimate of forecasted economic conditions.

The release of credit loss reserves in 2021 reflected an improvement in forecasted economic conditions following higher credit provisioning in 2020, which was attributable to the emergence of the COVID-19 pandemic.

Management's Discussion and Analysis

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.

Net recoveries totaled $148 thousand in the three months ended March 31, 2022, compared to net charge-offs of $18 thousand for the same period in 2021.

The ACL on loans was $39.2 million, or 0.92% of total loans, at March 31, 2022, compared to an ACL on loans of $39.1 million, or 0.91% of total loans, at December 31, 2021.

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 Nine Months

Change Change

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

(Dollars in thousands) Change

Three months ended March 31, 2022 2021 $ %

Noninterest income:

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Noninterest Income Analysis

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.

Revenue from wealth management services represented 61% of total noninterest income for the three months ended March 31, 2022, compared to 38% for the same period in 2021.

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

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

1 unchanged sentence

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

(Dollars in thousands) Three Months Nine Months

Change Change

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

(Dollars in thousands) Change

Three months ended March 31, 2022 2021 $ %

Wealth management revenues:

2 unchanged sentences

Total wealth management revenues $10,531 $9,895 $636 6 %

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.

Wealth management revenues for the three months ended March 31, 2022 increased by $636 thousand, or 6%, from the comparable period in 2021, reflecting growth in asset-based revenues.

The increase in asset-based revenues correlated with the increase in AUA balances.

Management's Discussion and Analysis

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(Dollars in thousands)

Three Months Nine Months

Periods ended September 30, 2021 2020 2021 2020

Three months ended March 31, 2022 2021

Wealth management assets under administration:

3 unchanged sentences

Balance at the end of period $7,492,893 $7,049,226

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.

Wealth management AUA amounted to $7.5 billion at March 31, 2022, up by $443.7 million, or 6% from the balance at March 31, 2021, primarily due to net investment appreciation.

The average balance of AUA for the three months ended March 31, 2022 increased by approximately 9% from the average balance for the same period in 2021.

Mortgage banking revenues represented 20% of total noninterest income for the three months ended March 31, 2022, compared to 46% for the same period in 2021.

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 Nine Months

Change Change

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

(Dollars in thousands) Change

Three months ended March 31, 2022 2021 $ %

Mortgage banking revenues:

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

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.

For the three months ended March 31, 2022, mortgage banking revenues totaled $3.5 million, down by $8.4 million, or 71%, compared to the same period in 2021.

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 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-

The decline in mortgage banking revenues was mainly attributable to a decline in sales volume and a reduction in the sales yield from the previously elevated level in the first quarter of 2021.

Mortgage loans sold to the secondary market totaled $130.1 million for the three months ended March 31, 2022, compared to $292.0 million for the same period in 2021, reflecting an overall reduction in mortgage origination and sales activity, as well as a larger proportion of loans originated for portfolio in 2022.

Other income for the three months ended March 31, 2022 decreased by $994 thousand from the same period in 2021, due to $1.0 million of income associated with a litigation settlement that was recognized in the first quarter of 2021.

Management's Discussion and Analysis

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 Nine Months

Change Change

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

(Dollars in thousands) Change

Three months ended March 31, 2022 2021 $ %

Noninterest expense:

11 unchanged sentences

Noninterest Expense Analysis

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

Salaries and employee benefits expense for the three months ended March 31, 2022 decreased by $525 thousand compared to the same period in 2021.

This reflected volume-related decreases in mortgage originator compensation expense, partially offset by annual merit increases and staffing increases.

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

There were no such debt prepayments in the first quarter of 2022.

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

(Dollars in thousands)

Three Months Nine Months

Periods ended September 30, 2021 2020 2021 2020

Three months ended March 31, 2022 2021

Income tax expense $4,448 $5,661

Effective income tax rate 21.3 % 21.7 %

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.

The effective income tax rates for the three months ended March 31, 2022 and 2021 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 decrease in the effective tax rate for the three months ended March 31, 2022 compared to the same period in 2021 reflected an increase in benefits from federal tax credits, partially offset by a decrease in benefits from tax-exempt income.

Segment Reporting

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

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

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

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

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

See Note 14 to the Unaudited Consolidated Financial Statements for additional disclosure related to business segments.

Management's Discussion and Analysis

Commercial Banking

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

(Dollars in thousands) Three Months Nine Months

Change Change

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

(Dollars in thousands) Change

Three months ended March 31, 2022 2021 $ %

Net interest income $35,108 $32,885 $2,223 7 %

7 unchanged sentences

Net income $14,401 $17,799 ($3,398) (19 %)

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 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.

Net interest income for the Commercial Banking segment for the three months ended March 31, 2022, increased by $2.2 million from the same period in 2021.

Net interest income largely benefited from lower funding costs, a reduction in average wholesale funding balances and an increase in average interest-earning asset balances.

For the three months ended March 31, 2022, the provision related to an increase in the ACL on unfunded commitments.

Noninterest income derived from the Commercial Banking segment for the three months ended March 31, 2022 was down by $8.5 million from the comparable period in 2021, largely due to lower mortgage banking revenues.

See additional discussion regarding mortgage banking revenues under the caption “Noninterest Income” above.

Commercial Banking noninterest expenses for the three months ended March 31, 2022 were down by $3.9 million from the same period in 2021, largely reflecting decreases in debt prepayment penalties and salaries and employee benefits expense.

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

1 unchanged sentence

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

(Dollars in thousands) Three Months Nine Months

Change Change

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

(Dollars in thousands) Change

Three months ended March 31, 2022 2021 $ %

Net interest expense ($17) ($14) ($3) 21 %

4 unchanged sentences

Net income $2,082 $2,672 ($590) (22 %)

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.

For the three months ended March 31, 2022, noninterest income derived from the Wealth Management Services segment decreased by $337 thousand, compared to the same period in 2021.

The decrease reflected $1.0 million of income associated with a litigation settlement that was recognized in the first quarter of 2021, partially offset by growth in asset-based revenues.

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

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 Nine Months

Change Change

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

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

Noninterest income 625 574 51 9 1,799 1,952 (153) (8)

Noninterest expense 4,163 3,942 221 6 16,474 11,406 5,068 44

(Loss) income before income taxes (3,175) (4,793) 1,618 (34) (16,487) (8,828) (7,659) 87

Income tax (benefit) expense (785) (1,100) 315 (29) (3,832) (2,168) (1,664) 77

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 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.

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.

For the three months ended March 31, 2022, noninterest expenses for the Wealth Management Services segment increased by $425 thousand from the same period in 2021, reflecting an increase in salaries and employee benefits expenses.

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

2 unchanged sentences

(Dollars in thousands) Change

September 30,

2022 December 31,

7 unchanged sentences

Total shareholders’ equity 513,192 564,808 (51,616) (9)

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 $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”).

Total assets amounted to $5.8 billion at March 31, 2022, down by $3.1 million, or 0.1%, from the end of 2021.

Cash and due from banks balances increased by $49.5 million, or 28%, from the end of 2021, reflecting higher cash balances with the FRBB .

The securities portfolio decreased by $34.7 million, or 3%, reflecting a temporary decline in fair value and pay-downs, partially offset by purchases.

Total loans increased by $10.9 million, or 0.3%, as loan originations were partially offset by payoffs, pay-downs and PPP loans that were forgiven by the SBA.

Total deposits increased by $147.9 million, or 3%, from the end of 2021, with an increase of $261.3 million, or 6%, in in-market deposits partially offset by a decrease of $113.4 million, or 22%, in wholesale brokered time deposits.

FHLB advances decreased by $90.0 million, or 62%, from December 31, 2021, as lower levels of wholesale funding were needed given the in-market deposits increase.

Shareholders’ equity decreased by $51.6 million, or 9%, largely reflecting a decline in the AOCL component of shareholders' equity due to a temporary decrease in the fair value of available for sale securities and cash flow hedges.

I nvestment security activity is monitored by the Investment Committee, the members of which also sit on the ALCO.

Asset and liability management objectives are the primary influence on the Corporation’s investment activities.

1 unchanged sentence

The securities portfolio is managed in accordance with regulatory guidelines and established internal corporate investment policies that provide limitations on specific risk factors such as market risk, credit risk and concentration, liquidity risk and operational risk to help monitor risks associated with investing in securities.

Reports on the activities conducted by Investment Committee and the ALCO are presented to the Board of Directors on a regular basis.

Reports on the activities conducted by the Investment Committee and the ALCO are presented to the Board of Directors on a regular basis.

The Corporation’s securities portfolio is managed to generate interest income, to implement interest rate risk management strategies, and to provide a readily available source of liquidity for balance sheet management.

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

As of March 31, 2022 and December 31, 2021, 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) September 30, 2021 December 31, 2020

(Dollars in thousands) March 31, 2022 December 31, 2021

Amount % Amount %

10 unchanged sentences

Total available for sale debt securities $1,008,184 100 % $1,042,859 100 %

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 securities portfolio amounted to $1.0 billion, or 17% of total assets, as of March 31, 2022 compared to $1.0 billion, or 18% of total assets, as of December 31, 2021.

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

1 unchanged sentence

government-sponsored enterprises.

The securities portfolio increased by $151.3 million, or 17%, from the end of 2020, reflecting purchases of U.S.

The securities portfolio decreased by $34.7 million, or 3%, from the end of 2021, reflecting a temporary decline in the fair value of available for sale securities and routine pay-downs on mortgage-backed securities.

These decreases were partially offset by purchases of U.S.

government agency and U.S.

government-sponsored debt securities, including mortgage-backed securities, totaling $75.2 million, with a weighted average yield of 2.41%.

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 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 carrying amount of available for sale debt securities included net unrealized losses of $74.0 million and $8.9 million, respectively, as of March 31, 2022 and December 31, 2021.

The decline in fair value of available for sale debt securities from the end of 2021 was primarily concentrated in obligations of U.S.

2 unchanged sentences

See Note 3 to the Unaudited Consolidated Financial Statements for additional information.

Federal Home Loan Bank Stock

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

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

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

The Bank purchases

Total loans amounted to $4.3 billion at March 31, 2022, up by $10.9 million, or 0.3%, from the end of 2021, reflecting growth in the residential real estate portfolio partially offset by a decline in the commercial loan portfolio.

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) September 30, 2021 December 31, 2020

(Dollars in thousands) March 31, 2022 December 31, 2021

Amount % Amount %

17 unchanged sentences

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

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

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

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;

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

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

At 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.

COVID-19 Pandemic Related

The Corporation elected to account for eligible loan modifications under Section 4013 of the CARES Act, as amended by the CRRSA Act.

Eligible loan modifications from March 1, 2020 through January 1, 2022 made in response to the COVID-19 pandemic were not required to be classified as TDRs.

During this period of time, we processed loan payment deferral modifications, or “deferments”, on 654 loans totaling $727.7 million.

The vast majority of the deferments qualified as eligible loan modifications and were not classified as TDRs.

As of March 31, 2022, all of these loans have exited their payment deferral period.

Commercial Loans

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

The commercial loan portfolio represented 52% of total loans at March 31, 2022.

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

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In such cases, these loans are individually underwritten by us using standards similar to those employed for our self-originated loans.

Our participation in commercial loans originated by other banks amounted to $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 amounted to $442.7 million and $451.6 million, respectively, at March 31, 2022 and December 31, 2021.

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.

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

Commercial real estate loans consist of commercial mortgages secured by real property where the primary source of repayment is derived from rental income associated with the property or the proceeds of the sale, refinancing or permanent financing of the property.

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government, tax-exempt loans made to states and political subdivisions, as well as industrial development or revenue bonds issued through quasi-public corporations for the benefit of a private or non-profit entity where that entity rather than the governmental entity is obligated to pay the debt service.

Commercial Real Estate Loans (“CRE”)

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.

Commercial Real Estate Loans

CRE loans totaled $1.6 billion at March 31, 2022, down by $10.4 million, or 1%, from the balance at December 31, 2021.

Included in CRE loans were construction and development loans with carrying values of $90.0 million and $122.4 million,

Management's Discussion and Analysis

respectively, as of March 31, 2022 and December 31, 2021.

For the three months ended March 31, 2022, CRE payoffs and pay-downs of approximately $100 million were partially offset by loan originations and advances.

Shared national credit balances outstanding included in the CRE loan portfolio totaled $5.0 million at March 31, 2022.

The balance was included in the pass-rated category of commercial loan credit quality and current with respect to contractual payment terms at March 31, 2022.

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

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

(Dollars in thousands) March 31, 2022 December 31, 2021

Outstanding Balance % of Total Outstanding Balance % of Total

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

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

(Dollars in thousands) March 31, 2022 December 31, 2021

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

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$39,883 $39,945

Management's Discussion and Analysis

The following table presents a summary of CRE loan deferments:

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

Count Balance % of Outstanding Balance (1)

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 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 $682.8 million at September 30, 2021, down by $134.6 million, or 16%, from the balance at December 31, 2020.

Commercial and Industrial Loans

C&I loans amounted to $614.9 million at March 31, 2022, down by $26.7 million, or 4%, from the balance at December 31, 2021.

This included a net reduction in PPP loans of $25.5 million.

Excluding PPP loans, C&I loans decreased by approximately $1.2 million, with payoffs and pay-downs of approximately $22 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.

As of March 31, 2022, the carrying value of PPP loans was $12.5 million and included net unamortized loan origination fee balances of $425 thousand.

The carrying value of PPP loans at December 31, 2021 was $38.0 million.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $41.9 million at March 31, 2022.

All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at March 31, 2022.

Management's Discussion and Analysis

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

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

(Dollars in thousands) March 31, 2022 December 31, 2021

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

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Manufacturing 52 55,868 9 65 55,341 9

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

Retail 92 49,741 7 192 63,895 8

Educational services 22 50,939 8 28 52,211 8

Entertainment and recreation

54 33,756 5 91 29,415 4

Retail 71 43,436 7 79 47,290 7

Finance and insurance

59 35,477 6 59 31,279 5

18 25,536 4 32 28,394 3

Transportation and warehousing

25 34,605 6 31 35,064 5

Professional, scientific and technical

93 12,073 2 265 39,295 5

Public administration

19 6,308 1 26 23,319 3

394 69,058 11 772 107,468 13

Total C&I loans

Entertainment and recreation

28 29,297 5 37 32,087 5

Average C&I loan size

Largest individual C&I loan outstanding

10 23,377 4 14 25,045 4

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

Management's Discussion and Analysis

PPP loans are included in the C&I portfolio.

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

September 30, 2021 December 31, 2020

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

PPP Loans By Industry:

Accommodation and food services 71 19,589 3 114 28,320 4

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

Professional, scientific and technical

46 6,781 1 69 8,912 1

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

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

Public administration

15 5,340 1 16 5,441 1

Finance and insurance

202 66,544 10 281 73,232 13

Transportation and warehousing

10 360 — 21 2,059 1

Total C&I loans

843 $614,892 100 % 1,079 $641,555 100 %

Total PPP loans (included in the C&I loan portfolio)

Average C&I loan size

Largest individual C&I loan outstanding

$27,661 $18,721

Average PPP loan size $123 $117

Net unamortized fees on PPP loans $2,618 $3,893

Residential Real Estate Loans

The residential real estate loan portfolio represented 39% of total loans at September 30, 2021.

The residential real estate loan portfolio represented 42% of total loans at March 31, 2022.

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

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The table below presents residential real estate loan origination activity:

(Dollars in thousands) Three Months Nine Months

Periods ended September 30, 2021 2020 2021 2020

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

(Dollars in thousands)

Three months ended March 31, 2022 2021

Amount % of Total Amount % of Total

Originations for retention in portfolio (1) $164,401 61 % $131,791 30 %

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(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

Three months ended March 31, 2022 2021

Amount % of Total Amount % of Total

Loans sold with servicing rights retained $14,627 11 % $226,645 78 %

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

Residential real estate loan origination, refinancing and sales activity increased year-over-year in response to declines in market interest rates.

Residential real estate loan origination, refinancing and sales activity decreased year-over-year in response to increases in market interest rates.

Loans are sold with servicing retained or released.

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

The net balance of capitalized servicing rights amounted to $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 net balance of capitalized servicing rights amounted to $9.4 million and $9.8 million, respectively, as of March 31, 2022 and December 31, 2021.

The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $1.5 billion as of both March 31, 2022 and December 31, 2021.

Residential real estate loans held in portfolio amounted to $1.8 billion at March 31, 2022, up by $51.0 million, or 3%, from the balance at December 31, 2021, reflecting a higher proportion of loans originated for portfolio.

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

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

(Dollars in thousands) March 31, 2022 December 31, 2021

Amount % of Total Amount % of Total

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$1,777,974 100 % $1,726,975 100 %

(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.

(1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $71.6 million and $78.7 million, respectively, as of March 31, 2022 and December 31, 2021.

Consumer Loans

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

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.

Home equity lines of credit and home equity loans represented 94% of the total consumer portfolio at March 31, 2022.

Our home equity line and home equity loan origination activities are conducted primarily in southern New England.

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.

The consumer loan portfolio totaled $262.4 million at March 31, 2022, down by $3.0 million, or 1%, from December 31, 2021.

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $8.5 million and $9.4 million, respectively, at March 31, 2022 and December 31, 2021.

Management's Discussion and Analysis

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

(Dollars in thousands) Sep 30,

(Dollars in thousands) Mar 31,

Commercial real estate $— $—

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Accruing loans 90 days or more past due $— $—

Total nonperforming assets decreased by $1.6 million from December 31, 2021, reflecting a decline in nonaccrual loans.

At March 31, 2022, there were no properties held in OREO.

Nonaccrual Loans

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.

During the three months ended March 31, 2022, 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 Nine Months

For the periods ended September 30, 2021 2020 2021 2020

(Dollars in thousands)

For the three months ended March 31, 2022 2021

Balance at beginning of period $14,203 $13,197

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Loans charged-off (36) (64)

Loans transferred to other real estate owned — — — (28)

Payments, payoffs and other changes (1,942) (881)

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The following table presents additional detail on nonaccrual loans:

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

(Dollars in thousands) March 31, 2022 December 31, 2021

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 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.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2022.

As of both March 31, 2022 and December 31, 2021, the composition of nonaccrual loans was 100% residential and consumer.

Nonaccrual residential real estate mortgage loans amounted to $11.9 million at March 31, 2022, down by $1.7 million from the end of 2021.

As of March 31, 2022, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Connecticut and Rhode Island.

Included in total nonaccrual residential real estate loans at March 31, 2022 were four loans purchased for portfolio and serviced by others amounting to $1.2 million.

Management monitors the collection efforts of its third party servicers as part of its assessment of the collectability of nonperforming loans.

Troubled Debt Restructurings

In the course of resolving problem loans, the Corporation may choose to restructure the contractual terms of certain loans.

A loan that has been modified or renewed is considered to be a TDR when two conditions are met:

(1) the borrower is experiencing financial difficulty and (2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or a transaction with similar credit risk characteristics.

These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest.

The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection.

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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 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.

Loan modifications that did not qualify for the TDR accounting relief provided under the CARES Act were classified as TDRs.

As of March 31, 2022, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured in a TDR.

Management's Discussion and Analysis

See Note 4 for disclosure regarding the Corporation’s election to account for eligible loan modifications under Section 4013 of the CARES Act, as amended by the CRRSA Act.

Loan modifications that did not qualify for the TDR accounting relief provided under the CARES Act were classified as TDRs.

The following table sets forth information on TDRs as of the dates indicated.

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

(Dollars in thousands) Sep 30,

(Dollars in thousands) Mar 31,

Accruing TDRs

Commercial real estate

$10,593 $10,603

Commercial & industrial

Total commercial

13,385 13,395

Residential Real Estate:

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Total TDRs $19,092 $19,147

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.

As of both March 31, 2022 and December 31, 2021, the composition of TDRs was 70% commercial and 30% residential and consumer.

TDRs amounted to $19.1 million at March 31, 2022, down by $55 thousand from the end of 2021.

The ACL included specific reserves for TDRs of $146 thousand at March 31, 2022, compared to $148 thousand at December 31, 2021.

Management's Discussion and Analysis

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The following table presents past due loans by category:

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

(Dollars in thousands) March 31, 2022 December 31, 2021

Commercial real estate $— — % $— — %

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

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.

As of March 31, 2022, the composition of past due loans (loans past due 30 days or more) was 98% residential and consumer and 2% commercial, compared to 100% and 0%, respectively, at December 31, 2021.

Total past due loans decreased by $3.4 million from the end of 2021.

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.

Total past due loans included $5.7 million of nonaccrual loans as of March 31, 2022, compared to $9.4 million as of December 31, 2021.

All loans 90 days or more past due at March 31, 2022 and December 31, 2021 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 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 include classified accruing commercial loans that were less than 90 days past due at March 31, 2022 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future.

Potential problem loans are not included in the amounts of nonaccrual or TDRs presented above.

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Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require 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.

Management has identified two loans associated with one C&I relationship with carrying values totaling $759 thousand as potential problem loans at March 31, 2022.

There were no potential problem loans identified at December 31, 2021.

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.

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

Allowance for Credit Losses on Loans

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 management’s estimate, at the reporting date, of expected credit losses over the expected life of the loans.

The ACL on loans is established through a provision for credit losses recognized in earnings.

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

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) September 30, 2021 December 31, 2020

(Dollars in thousands) March 31, 2022 December 31, 2021

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 $41.7 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 amounted to $39.2 million at March 31, 2022, up by $148 thousand from the balance at December 31, 2021.

There was no provision for credit losses on loans recognized in the first quarter of 2022, reflecting continued low loss rates, strong asset and credit quality metrics, as well as our current estimate of forecasted economic conditions.

Net recoveries totaled $148 thousand for the three months ended March 31, 2022,

The ACL on loans as a percentage of total loans, also known as the reserve coverage ratio, was 0.92% at March 31, 2022, compared to 0.91% at December 31, 2021.

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

Deteriorating conditions or assumptions could lead to further increases in the ACL on loans;

conversely, improving conditions or assumptions could lead to further reductions in the ACL on loans.

Management's Discussion and Analysis

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

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

(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)

(Dollars in thousands) March 31, 2022 December 31, 2021

Allocated ACL

Loans to Total Portfolio (1) Allocated ACL

Loans to Total Portfolio (1)

Commercial real estate $18,460 1.13 % 38 % $18,933 1.16 % 38 %

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Deposits provide an important source of funding for the Bank, as well as an ongoing stream of fee revenue.

The Bank is a participant in the Demand Deposit Marketplace program, Insured Cash Sweep program and the Certificate of Deposit Account Registry Service program.

The Bank is a participant in the DDM program, ICS program and the CDARS program.

The Bank uses these deposit sweep services to place customer and client funds into interest-bearing demand accounts, money market accounts, and/or time deposits issued by other participating banks.

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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,

2022 December 31,

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Total deposits $5,127,950 $4,980,051 $147,899 3 %

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 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.

Total deposits amounted to $5.1 billion at March 31, 2022, up by $147.9 million, or 3%, from December 31, 2021.

Management's Discussion and Analysis

Out-of-market wholesale brokered time deposits amounted to $401.8 million at March 31, 2022, down by $113.4 million, or 22%, from December 31, 2021.

Excluding out-of-market wholesale brokered time deposits, in-market deposits were up by $261.3 million, or 6%, from the balance at December 31, 2021, with growth concentrated in money market accounts.

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 $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.

FHLB advances totaled $55.0 million at March 31, 2022, down by $90.0 million, or 62%, from the balance at the end of 2021, as lower levels of wholesale funding were needed given the in-market deposits increase.

For additional information regarding FHLB advances see Note 7 to the Unaudited Consolidated Financial Statements.

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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 69% of total average assets in the nine months ended September 30, 2021.

The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 78% of total average assets in the three months ended March 31, 2022.

While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace.

Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and brokered time deposits), cash flows from the Corporation’s securities portfolios and loan repayments.

Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and brokered time deposits), cash flows from the investment securities portfolios and loan repayments.

Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs, although management has no intention to do so at this time.

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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

Management's Discussion and Analysis

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

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

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

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(Dollars in thousands)

September 30,

2022 December 31,

6 unchanged sentences

Total $2,275,894 $2,362,259

(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.

(1) As of March 31, 2022 and December 31, 2021, loans with a carrying value of $2.2 billion and $2.2 billion, respectively, and securities available for sale with carrying values of $126.8 million and $163.2 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of March 31, 2022 and December 31, 2021, loans with a carrying value of $8.7 million and $8.2 million, respectively, and securities available for sale with a carrying value of $13.3 million and $13.5 million, respectively, were pledged to the FRBB for the discount window resulting in this additional unused borrowing capacity.

In addition to the amounts presented above, the Bank also had access to a $40.0 million unused line of credit with the FHLB, as well as a $102.0 million standby letter of credit with the FHLB.

Management's Discussion and Analysis

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

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

Liquidity remained within target ranges established by the ALCO during the three months ended March 31, 2022.

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 $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.

Net cash provided by operating activities amounted to $38.6 million for the three months ended March 31, 2022 reflecting net income of $16.5 million and mortgage banking related adjustments to reconcile net income to net cash provided by operating activities.

Net cash used in investing activities totaled $37.4 million for the three months ended March 31, 2022, reflecting outflows to fund purchases of debt securities and an increase in 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.

For the three months ended March 31, 2022, net cash provided by financing activities amounted to $48.5 million, with growth 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 $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 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.

Total shareholders’ equity amounted to $513.2 million at March 31, 2022, down by $51.6 million from December 31, 2021.

The decline reflected a decrease of $59.5 million in the AOCL component of shareholders' equity, due to a temporary decrease in the fair value of available for sale debt securities and cash flow hedges reflecting relative changes in market interest rates, as well as $9.5 million in dividend declarations.

These decreases were partially offset by net income of $16.5 million.

The Corporation declared a quarterly dividend of 54 cents per share for the three months ended March 31, 2022, compared to 52 cents per share declared for the same period in 2021.

The ratio of total equity to total assets was 8.78% at March 31, 2022, compared to a ratio of 9.65% at December 31, 2021.

Book value per share at March 31, 2022 and December 31, 2021 was $29.61 and $32.59, 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 14.15% at March 31, 2022, compared to 14.01% at December 31, 2021.

See Note 8 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 phases in the impact of ASC 326 on regulatory capital over a three-year period that commenced January 1, 2022.

Off-Balance Sheet Arrangements

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.

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.

Such 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.

8 unchanged sentences

The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with the Corporation’s liquidity, capital adequacy, growth, risk and profitability goals.

Management's Discussion and Analysis

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

10 unchanged sentences

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

As of 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.

As of March 31, 2022 and December 31, 2021, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation.

All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where both interest rates and the composition of the Corporation’s balance sheet remain stable for a 60-month period.

2 unchanged sentences

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

The following table sets forth the estimated change in net interest income from an unchanged rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on- and off-balance sheet financial instruments as of September 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

Management's Discussion and Analysis

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 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.

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

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.

1 unchanged sentence

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

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

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

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

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.

The relative change in interest rate sensitivity to rising rates from December 31, 2021 as shown in the above table was largely attributable to a higher level of longer-term fixed rate assets at March 31, 2022, as compared to December 31, 2021.

Fixed rate assets would not reprice upward in a rising rate environment.

While the ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future NIM.

1 unchanged sentence

Simulation modeling assumes a static balance sheet, with the exception of certain modeled deposit mix shifts from low-cost core savings deposits to higher-cost time deposits in rising rate scenarios as noted above.

As market interest rates have declined, the banking industry has attracted low-cost core savings deposits.

The ALCO recognizes that a portion of these increased levels of low-cost balances could shift into higher yielding alternatives in the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above.

As market interest rates declined, the banking industry attracted low-cost core savings deposits.

The ALCO recognizes that a portion of these increased levels of low-cost balances could shift into higher yielding alternatives in the future, particularly as interest rates rise and as confidence in financial markets strengthens, and has modeled deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above.

Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment, which may cause interest rate sensitivity to differ from the results as presented.

4 unchanged sentences

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

Management's Discussion and Analysis

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

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

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

2 unchanged sentences

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

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

Management's Discussion and Analysis

The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of March 31, 2022 and December 31, 2021 resulting from immediate parallel rate shifts:

(Dollars in thousands)

6 unchanged sentences

Trust preferred debt and other corporate debt securities 2 (20)

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

Total change in market value as of March 31, 2022 $55,926 ($139,858)

Total change in market value as of December 31, 2021 $10,166 ($119,505)

Critical Accounting Policies and Estimates

Estimates and assumptions are necessary in the application of certain accounting policies and procedures and can be susceptible to significant change.

Critical accounting policies are defined as those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Corporation’s financial condition or results of operations.

Management considers its accounting policy relating to the ACL on loans to be a critical accounting policy.

There have been no significant changes in the Corporation’s critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Recently Issued Accounting Pronouncements

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

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