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Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-07 · 323 added, 396 removed, 656 unchanged (52% of the section changed)

1 unchanged sentence

The following discussion should be read in conjunction with the Corporation’s Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2022, 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, 2022 are not necessarily indicative of the results for the full-year ended December 31, 2022 or any future period.

Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results for the full-year ended December 31, 2023 or any future period.

Forward-Looking Statements

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

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

• changes in general business and economic conditions on a national basis and in the local markets in which we operate;

• changes in customer behavior due to political, business and economic conditions, including inflation and concerns about liquidity;

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

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

• operational risks including, but not limited to, changes in information technology, cybersecurity incidents, fraud, natural disasters, war, terrorism, civil unrest, the ongoing COVID-19 pandemic, and future pandemics;

• 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;

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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.

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;

telephone banking;

mobile banking and its internet website (www.washtrust.com).

Washington Trust offers a full range of financial services, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management and trust services through its offices in Rhode Island, Massachusetts and Connecticut.

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

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

Our principal noninterest

In addition, we generate noninterest income from a number of

Management's Discussion and Analysis

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

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

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

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

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

In July 2022, we opened a new commercial lending office in New Haven, Connecticut.

In August 2022, we opened a new full-service branch in Cumberland, Rhode Island.

In addition, we recently announced that we submitted applications to establish a branch office in three northern Rhode Island locations in 2023 to further expand our branch footprint and serve the broader Rhode Island community.

The three branch offices will be located in Barrington, Providence and Smithfield, Rhode Island and are subject to federal, state, local, and regulatory approvals.

In April 2023, we opened a new full-service branch in Barrington, Rhode Island.

In addition, we have plans to open a branch in the Olneyville section of Providence and another in Smithfield, Rhode Island later in 2023.

Risk Management

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

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

The Board of Directors has approved an ERM Policy that addresses each category of risk.

The risk categories include:

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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.

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

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

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Strategic and reputation risk represent the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, and failure to assess existing and new opportunities and threats in business, markets, and products.

Management's Discussion and Analysis

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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They are responsible for identifying, measuring, monitoring, and controlling current and emerging risks.

They report on and escalate their concerns.

They are responsible for reporting on and escalating their concerns.

Corporate functions such as Credit Risk Management, Financial Administration, Information Assurance and Compliance, represent the second line of defense.

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They collaborate closely with business units on planning and resource allocation with respect to risk management.

Internal Audit and third party credit review represent the third line of defense.

Internal Audit is a third line of defense.

They provide independent assurance to the Board of Directors of the effectiveness of the first and second lines in fulfilling their risk management responsibilities.

For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see the section labeled “Risk Factors” in Item 1A of 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.

For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see Part II, Item 1A below and the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC.

Management's Discussion and Analysis

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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, 2022 2021 $ % 2022 2021 $ %

(Dollars in thousands)

Three months ended March 31, 2023 2022 $ %

Net interest income $37,193 $35,091 $2,102 6 %

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

Three Months Nine Months

Periods ended September 30, 2022 2021 2022 2021

Three months ended March 31, 2023 2022

Diluted earnings per common share $0.74 $0.94

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Noninterest income as a percentage of total revenues 26 % 33 %

Net income totaled $18.7 million and $55.1 million, respectively, for the three and nine months ended September 30, 2022, compared to $18.8 million and $56.7 million, respectively, for the same periods in 2021.

In 2022, growth in net interest income was driven by higher yields on, and growth in, average interest-earning assets, partially offset by a higher cost of funds.

The decline in noninterest income reflected lower mortgage banking revenues resulting from an overall reduction in mortgage origination and sales activity, and lower wealth management asset-based revenues attributable to recent declines in the financial markets.

The provision for credit losses recognized in 2022 provided for loan growth and was also reflective of low loss rates, strong asset and credit quality metrics and our current estimate of forecasted economic conditions.

We experienced modest increases across a variety of noninterest expense categories, however declines in debt prepayment penalties and volume-related mortgage originator compensation expense resulted in an overall decline in year-to-date noninterest expenses in 2022.

Net income totaled $12.8 million for the three months ended March 31, 2023, down by 22% from the $16.5 million reported for the same period in 2022.

Results in 2023 were impacted by steep increases in market interest rates and a decline in wealth management revenues.

In 2023, growth in net interest income was driven by higher average interest-earning asset balances, but was partially offset by increased average wholesale funding balances.

In addition, increases in funding costs outpaced increases in asset yields.

The decline in noninterest income reflected lower mortgage banking revenues, as higher market interest rates have dampened mortgage activity.

The decline in noninterest income also reflected lower wealth management asset-based revenues and AUA balances attributable to a higher level of client asset outflows and net investment depreciation.

The increased provisioning was largely attributable to a higher level of loan growth in 2023.

The provision also reflected a slowdown in loan prepayment speeds, continued negative outlook in economic forecasts and continued strength in our asset and credit quality.

The increase in noninterest expenses largely reflected increases in salaries and employee benefits expense and FDIC deposit insurance costs, as well as modest increases in a variety of other interest expense categories.

Management's Discussion and Analysis

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The following table presents average balance and interest rate information.

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.

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

Unrealized gains (losses) on available for sale securities 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, 2022 2021 Change

Three months ended March 31, 2023 2022 Change

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

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(Dollars in thousands)

Three months ended September 30, 2022 2021 Change

Commercial loans $317 $205 $112

Nine months ended September 30, 2022 2021 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 $128,606 $769 0.80 $160,350 $121 0.10 ($31,744) $648 0.70

Mortgage loans held for sale 29,985 851 3.79 53,307 1,144 2.87 (23,322) (293) 0.92

Taxable debt securities 1,106,632 15,209 1.84 997,741 10,366 1.39 108,891 4,843 0.45

FHLB stock 15,745 218 1.85 24,265 338 1.86 (8,520) (120) (0.01)

Commercial real estate 1,648,061 43,360 3.52 1,638,200 35,269 2.88 9,861 8,091 0.64

Commercial & industrial 628,574 19,456 4.14 794,091 23,865 4.02 (165,517) (4,409) 0.12

Total commercial 2,276,635 62,816 3.69 2,432,291 59,134 3.25 (155,656) 3,682 0.44

Residential real estate 1,875,175 46,376 3.31 1,531,529 39,248 3.43 343,646 7,128 (0.12)

Home equity 257,814 6,753 3.50 255,959 6,220 3.25 1,855 533 0.25

Other 15,995 550 4.60 20,301 742 4.89 (4,306) (192) (0.29)

Total consumer 273,809 7,303 3.57 276,260 6,962 3.37 (2,451) 341 0.20

Total loans 4,425,619 116,495 3.52 4,240,080 105,344 3.32 185,539 11,151 0.20

Total interest-earning assets 5,706,587 133,542 3.13 5,475,743 117,313 2.86 230,844 16,229 0.27

Noninterest-earning assets 268,744 346,514 (77,770)

Total assets $5,975,331 $5,822,257 $153,074

Liabilities and Shareholders’ Equity:

Interest-bearing demand deposits (in-market) $255,014 $1,114 0.58 $190,979 $196 0.14 $64,035 $918 0.44

NOW accounts 867,464 492 0.08 747,385 350 0.06 120,079 142 0.02

Money market accounts 1,193,599 3,984 0.45 958,812 1,852 0.26 234,787 2,132 0.19

Savings accounts 570,129 246 0.06 513,110 211 0.05 57,019 35 0.01

Time deposits (in-market) 800,037 5,997 1.00 687,278 5,822 1.13 112,759 175 (0.13)

Interest-bearing in-market deposits 3,686,243 11,833 0.43 3,097,564 8,431 0.36 588,679 3,402 0.07

Wholesale brokered demand deposits 17,197 212 1.65 — — — 17,197 212 1.65

Wholesale brokered time deposits 396,465 1,677 0.57 655,165 982 0.20 (258,700) 695 0.37

Wholesale brokered deposits 413,662 1,889 0.61 655,165 982 0.20 (241,503) 907 0.41

Total interest-bearing deposits 4,099,905 13,722 0.45 3,752,729 9,413 0.34 347,176 4,309 0.11

FHLB advances 285,590 3,891 1.82 438,213 3,253 0.99 (152,623) 638 0.83

Junior subordinated debentures 22,681 443 2.61 22,681 278 1.64 — 165 0.97

Total interest-bearing liabilities 4,408,176 18,056 0.55 4,213,623 12,944 0.41 194,553 5,112 0.14

Noninterest-bearing demand deposits 925,433 918,760 6,673

Other liabilities 129,967 147,244 (17,277)

Shareholders’ equity 511,755 542,630 (30,875)

Total liabilities and shareholders’ equity $5,975,331 $5,822,257 $153,074

Net interest income (FTE)

$115,486 $104,369 $11,117

Interest rate spread 2.58 2.45 0.13

Net interest margin 2.71 2.55 0.16

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, 2022 2021 Change

Three months ended March 31, 2023 2022 Change

Commercial loans $228 $244 ($16)

Net Interest Income

Net interest income, the primary source of our operating income, totaled $42.0 million and $114.6 million, respectively, for the three and nine months ended September 30, 2022, compared to $36.1 million and $103.7 million, respectively, for the same periods in 2021.

Net interest income, the primary source of our operating income, totaled $37.2 million for the three months ended March 31, 2023, compared to $35.1 million for the same period in 2022.

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

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

Prepayment penalty fee income amounted to $30 thousand (or 0 basis point benefit to NIM) and $168 thousand (or 1 basis point benefit to NIM), respectively, for the three and nine months ended September 30, 2022.

There was no prepayment penalty fee income recognized in the third quarter of 2021 and $934 thousand (or 2 basis points benefit to NIM) recognized in the nine months ended September 30, 2021.

Prepayment penalty fee income amounted to $124 thousand (or 0 basis point benefit to NIM) for the three months ended March 31, 2023, compared to $76 thousand (or 0 basis point benefit to NIM) for the same period in 2022.

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.

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

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

As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to interest income) amounted to $2.5 million for the nine months ended September 30, 2022, compared $2.7 million for the same period in 2021.

Accelerated amortization of net deferred fee balances on PPP loans forgiven by the SBA amounted to $21 thousand (or 0 basis point benefit to NIM) and $1.2 million (or 3 basis points benefit to NIM), respectively, for the three and nine months ended September 30, 2022.

This compared to $2.0 million (or 13 basis points benefit to NIM) and $4.3 million (or 11 basis points benefit to NIM), respectively, for the same periods in 2021.

FTE net interest income for the three and nine months ended September 30, 2022 amounted to $42.4 million and $115.5 million, respectively, up by $6.1 million and $11.1 million, respectively, from the same periods in 2021.

Increases in asset yields outpaced increases in funding costs, contributing $4.3 million and $6.9 million, respectively, of net interest income for the three and nine months ended September 30, 2022.

In the three months ended September 30, 2022, growth in average interest-earning assets, net of increased average interest-bearing liability balances, contributed approximately $1.8 million of net interest income.

In the nine months ended September 30, 2022, growth in average interest-earning assets and declines in average interest-bearing liability balances contributed approximately $4.2 million of net interest income.

NIM was 2.82% and 2.71%, respectively, for the three and nine months ended September 30, 2022, compared to 2.58% and 2.55%, respectively, for the same periods in 2021 as NIM benefited from higher market interest rates.

Total average securities for the three and nine months ended September 30, 2022 increased by $104.7 million and $108.9 million, respectively, from the average balances for the same periods a year earlier.

The FTE rate of return on the securities portfolio for the three and nine months ended September 30, 2022 was 2.09% and 1.84%, respectively, compared to 1.40% and 1.39%, respectively, for the same periods in 2021, reflecting the impact of higher market interest rates in 2022.

Total average loan balances for the three and nine months ended September 30, 2022 increased by $371.8 million and $185.5 million, respectively, from the average loan balances for the comparable 2021 periods.

The increase reflected growth

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

As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to interest income) amounted to $324 thousand for the three months ended March 31, 2023, compared $966 thousand for the same period in 2022.

This included no accelerated amortization of net deferred fee balances on PPP loans forgiven by the SBA for the three months ended March 31, 2023, compared to $819 thousand (or 6 basis points benefit to NIM) for the same period in 2022.

FTE net interest income for the three months ended March 31, 2023 amounted to $37.4 million, up by $2.1 million from the same period in 2022.

In the three months ended March 31, 2023, growth in average interest-earning assets net of increased average interest-bearing liability balances, contributed approximately $2.2 million of net interest income.

Increases in funding costs outpaced increases in asset yields, reducing net interest income by $138 thousand for the three months ended March 31, 2023.

NIM was 2.33% for the three months ended March 31, 2023, compared to 2.57% for the same period in 2022.

While NIM benefited from higher market interest rates on loans, it was adversely impacted by a higher cost of funds.

Total average securities for the three months ended March 31, 2023 increased by $122.1 million 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, 2023 was 2.44%, compared to 1.60% for the same period in 2022, reflecting the impact of higher market interest rates in 2023.

Total average loan balances for the three months ended March 31, 2023 increased by $875.7 million from the average loan balances for the comparable 2022 period, largely reflecting growth in average residential real estate loan and CRE balances.

The yield on total loans for the three months ended March 31, 2023 was 4.73%, compared to 3.25% in the corresponding period in 2022.

As discussed above, the yield on total loans was impacted by the accelerated amortization of net deferred fee balances on PPP loans when such loans were forgiven by the SBA and to a lesser extent by the periodic recognition of

Management's Discussion and Analysis

in average residential real estate loan balances, partially offset by a decline in commercial & industrial loans due to PPP loans that were forgiven by the SBA.

The yield on total loans for the three and nine months ended September 30, 2022 was 3.87% and 3.52%, respectively, compared to 3.33% and 3.32%, respectively, in the corresponding periods in 2021.

The yield on total loans may be impacted by the periodic recognition of commercial loan prepayment fee income, as well as the accelerated amortization of net deferred fee balances on PPP loans when such loans were forgiven by the SBA.

Excluding the impact of these items for both periods, the yield on total loans for the three and nine months ended September 30, 2022 was 3.87% and 3.48%, respectively, up from 3.14% and 3.16%, respectively, for the same periods in 2021, reflecting higher market interest rates.

The average balance of FHLB advances for the three and nine months ended September 30, 2022 increased by $232.0 million and decreased by $152.6 million, respectively, compared to the average balances for the same periods in 2021.

The average rate paid on such advances for the three and nine months ended September 30, 2022 was 2.33% and 1.82%, respectively, up from 1.09% and 0.99%, respectively, for the same periods in 2021, reflecting recent increases in market interest rates.

Included in total average interest-bearing deposits were wholesale brokered deposits, which decreased by $309.2 million and $241.5 million, respectively, from the same periods in 2021.

The average rate paid on wholesale brokered deposits for the three and nine months ended September 30, 2022 was 1.26% and 0.61%, respectively, compared to 0.14% and 0.20%, respectively, for the same periods in 2021, reflecting recent increases in market interest rates.

Average in-market interest-bearing deposits, which excludes wholesale brokered deposits, for the three and nine months ended September 30, 2022 increased by $449.9 million and $588.7 million, respectively, from the average balances for the same periods in 2021.

The increases reflected growth across all deposit categories.

The average rate paid on in-market interest-bearing deposits for the three and nine months ended September 30, 2022 increased by 27 basis points and 7 basis points, respectively, from the same periods in 2021, reflecting recent increases in market interest rates.

The average balance of noninterest-bearing demand deposits for the three and nine months ended September 30, 2022 decreased by $8.5 million and increased by $6.7 million, respectively, from the average balance for the same periods in 2021.

commercial loan prepayment fee income.

Excluding the impact of these items for both periods, the yield on total loans for the three months ended March 31, 2023 was 4.72%, up from 3.16% for the same period in 2022, reflecting higher market interest rates.

The average balance of FHLB advances for the three months ended March 31, 2023 increased by $893.1 million compared to the average balances for the same period in 2022, as higher levels of wholesale funding were utilized to fund balance sheet growth.

Due to increases in market interest rates, the average rate paid on such advances for the three months ended March 31, 2023 was 4.52%, up from 0.66% for the same period in 2022.

Included in total average interest-bearing deposits were wholesale brokered deposits, which decreased by $12.5 million from the same period in 2022.

Due to increases in market interest rates, the average rate paid on wholesale brokered deposits for the three months ended March 31, 2023 was 3.77%, compared to 0.18% for the same period in 2022.

Average in-market interest-bearing deposits, which excludes wholesale brokered deposits, for the three months ended March 31, 2023 increased by $144.1 million from the average balances for the same period in 2022, with increases in money market accounts, demand deposits and time deposits.

The average rate paid on in-market interest-bearing deposits for the three months ended March 31, 2023 increased by 134 basis points from the same period in 2022, reflecting the impact of increases in market interest rates.

The average balance of noninterest-bearing demand deposits for the three months ended March 31, 2023 decreased by $104.9 million from the average balance for the same period in 2022.

Management's Discussion and Analysis

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

(Dollars in thousands) Three Months Ended September 30, 2022 vs.

2021 Nine Months Ended September 30, 2022 vs.

Change Due to Change Due to

Volume Rate Net Change Volume Rate Net Change

(Dollars in thousands) Three Months Ended March 31, 2023 vs.

Change Due to

Volume Rate Net Change

Interest on Interest-Earning Assets:

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The provision for credit losses results from management’s review of the adequacy of the ACL.

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

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

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

The Corporation recorded a positive provision for credit losses (or a charge) of $800 thousand for the three months ended September 30, 2022, compared to no provision for credit losses recognized in the third quarter of 2021.

On a year-to-date basis, the Corporation recognized a negative provision for credit losses (or a benefit) of $2.1 million in 2022, compared to a negative provision (or a benefit) of $2.0 million in 2021.

The year-to-date negative provision recognized in 2022 was reflective of low loss rates, strong asset and credit quality metrics, our current estimate of forecasted economic conditions, and also provided for loan growth.

The year-to-date negative provision recorded in 2021 largely reflected an improvement in

The Corporation recorded a provision for credit losses of $800 thousand for the three months ended March 31, 2023, compared to $100 thousand for the same period in 2022.

The provision recognized in 2023 provided for loan growth and included modest additional reserve allocation for commercial loans migrating to nonaccrual status.

The provision also reflected a slowdown in loan prepayment speeds and continued negative outlook in economic forecasts, partially offset by continued strength in asset and credit quality metrics.

The provision recorded in three months ended March 31, 2022 related

Management's Discussion and Analysis

forecasted economic conditions following higher credit provisioning in 2020, which was attributable to the emergence of the COVID-19 pandemic.

Net charge-offs totaled $54 thousand for the three months ended September 30, 2022, compared to $168 thousand for the same period in 2021.

Net recoveries totaled $104 thousand for the nine months ended September 30, 2022, compared to net charge-offs of $444 thousand for the same period in 2021.

The ACL on loans was $36.9 million, or 0.76% of total loans, at September 30, 2022, compared to an ACL on loans of $39.1 million, or 0.91% of total loans, at December 31, 2021.

to an increase in the ACL on unfunded commitments.

There was no provision for credit losses on loans recognized in the first quarter of 2022, largely reflecting modest loan growth in that period, low loss rates and strong asset and credit quality.

Net charge-offs totaled $47 thousand for the three months ended March 31, 2023, compared to net recoveries of $148 thousand for the same period in 2022.

The ACL on loans was $38.8 million, or 0.74% of total loans, at March 31, 2023, compared to $38.0 million, or 0.74% of total loans, at December 31, 2022.

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, 2022 2021 $ % 2022 2021 $ %

(Dollars in thousands)

Three months ended March 31, 2023 2022 $ %

Noninterest income:

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Noninterest Income Analysis

Revenue from wealth management services represented 62% of total noninterest income for the nine months ended September 30, 2022, compared to 46% for the same period in 2021.

Revenue from wealth management services represented 65% of total noninterest income for the three months ended March 31, 2023, compared to 61% for the same period in 2022.

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.

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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, 2022 2021 $ % 2022 2021 $ %

(Dollars in thousands)

Three months ended March 31, 2023 2022 $ %

Wealth management revenues:

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Total wealth management revenues $8,663 $10,531 ($1,868) (18 %)

Wealth management revenues for the three and nine months ended September 30, 2022 decreased by $930 thousand and $656 thousand, respectively, from the same periods in 2021, reflecting decreases in asset-based revenues.

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

The average balance of AUA for the three and nine months ended September 30, 2022 decreased by approximately 11% and 2%, respectively, from the average balance for the same periods in 2021.

Wealth management revenues for the three months ended March 31, 2023 decreased by $1.9 million from the same period in 2022, reflecting a decrease in asset-based revenues.

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

The average balance of AUA for the three months ended March 31, 2023 decreased by 19% from the average balance for the same period in 2022.

The end of period AUA balance amounted to $6.2 billion at March 31, 2023, down by $1.3 billion, or 18%, from March 31, 2022.

This decline included $872 million of net client asset outflows and net investment depreciation of $457 million.

Management's Discussion and Analysis

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(Dollars in thousands)

Three Months Nine Months

Periods ended September 30, 2022 2021 2022 2021

Three months ended March 31, 2023 2022

Wealth management assets under administration:

Balance at the beginning of period $5,961,990 $7,784,211

Net investment (depreciation) appreciation & income (239,762) (4,830) (1,444,785) 572,506

Net investment appreciation (depreciation) & income 286,262 (388,733)

Net client asset (outflows) inflows (84,830) 97,415

Balance at the end of period $6,163,422 $7,492,893

Wealth management AUA amounted to $6.3 billion at September 30, 2022.

Wealth management AUA balances declined in 2022, primarily due to net investment depreciation as a result of recent declines in the financial markets.

Recently, four client-facing wealth management advisors in our registered investment adviser subsidiary resigned.

These four employees were associated with approximately $1.0 billion of AUA as of September 30, 2022.

From October 1, 2022 through November 4, 2022, we have been notified of client AUA withdrawals of approximately $546 million.

We estimate a decline in annual revenues of approximately $3.2 million associated with these withdrawals.

Washington Trust could experience additional AUA outflows in upcoming months associated with the departure of the former advisors.

Mortgage banking revenues represented 16% of total noninterest income for the nine months ended September 30, 2022, compared to 36% for the same period in 2021.

AUA and related asset-based revenues were adversely impacted by client withdrawals associated with the departure of four client-facing advisors at the end of the third quarter of 2022.

These four advisors were associated with approximately $1.0 billion of AUA as of September 30, 2022.

Through March 31, 2023, cumulative client asset withdrawals associated with the departure of the advisors amounted to $651 million, of which $47 million were withdrawn in the first quarter of 2023 and $604 million in the fourth quarter of 2022.

The cumulative withdrawals resulted in a reduction of wealth management revenues of $928 thousand in the first quarter of 2023 and $525 thousand in the fourth quarter of 2022.

From April 1, 2023 through April 28, 2023, we have been notified of additional client AUA withdrawals of approximately $29 million.

We currently estimate a decline in full-year 2023 revenues of approximately $3.9 million associated with these withdrawals.

While there are cost savings in salaries and employee benefits expense associated with the departure of these advisors, they currently are being offset by a higher level of legal expenses also associated with this matter.

Mortgage banking revenues represented 9% of total noninterest income for the three months ended March 31, 2023, compared to 20% for the same period in 2022.

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

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, 2022 2021 $ % 2022 2021 $ %

(Dollars in thousands)

Three months ended March 31, 2023 2022 $ %

Mortgage banking revenues:

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

For the three and nine months ended September 30, 2022, mortgage banking revenues were down by $4.3 million and $16.7 million, respectively, compared to the same periods in 2021.

For the three months ended March 31, 2023, mortgage banking revenues were down by $2.3 million, or 64%, compared to the same period in 2022.

The decline in mortgage banking revenues was mainly attributable to a decline in sales volume and a reduction in the sales yield.

Mortgage loans sold to the secondary market totaled $75.3 million and $285.2 million, respectively, for the three and nine months ended September 30, 2022, compared to $173.9 million and $756.4 million, respectively, for the same periods in 2021, reflecting an overall reduction in mortgage origination and sales activity, as well as a shift to a higher proportion of loans originated for retention in portfolio in 2022.

Mortgage loans sold to the secondary market totaled $29.3 million for the three months ended March 31, 2023, compared to $130.1 million for the same period in 2022, reflecting an overall reduction in mortgage origination, refinancing and sales activity, as well as a shift to a higher proportion of loans originated for retention in portfolio in 2023.

The reduction of mortgage activity was driven by increase in market interest rates and changes in the housing markets.

Mortgage banking revenues were also impacted by 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 size of the mortgage pipeline.

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Management's Discussion and Analysis

Other income for the nine months ended September 30, 2022 decreased by $1.1 million 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.

Income from BOLI for the three months ended March 31, 2023, was up by $564 thousand from the same period in 2022, reflecting the recognition of $476 thousand in non-taxable income in the first quarter of 2023 associated with the receipt of life insurance proceeds.

For the three months ended March 31, 2023, loan related derivative income decreased by $352 thousand from the same period in 2022, reflecting a lower volume of commercial borrower interest rate derivative transactions.

Noninterest Expense

The following table presents noninterest expense comparisons:

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2022 2021 $ % 2022 2021 $ %

(Dollars in thousands) Change

Three months ended March 31, 2023 2022 $ %

Noninterest expense:

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Amortization of intangibles 212 217 (5) (2)

Debt prepayment penalties — — — — — 4,230 (4,230) (100)

Other 2,431 2,053 378 18

1 unchanged sentence

Noninterest Expense Analysis

Salaries and employee benefits expense, the largest component of noninterest expense, for the three and nine months ended September 30, 2022 decreased by $553 thousand and $2.8 million, respectively, compared to the same periods in 2021.

This included volume-related decreases in mortgage originator compensation expense, annual merit increases and higher staffing levels.

Debt prepayment penalty expense for the nine months ended September 30, 2021 totaled $4.2 million, due to the prepayment of higher-yielding FHLB advances.

There were no such debt prepayments in the comparable period in 2022.

Other expense for the three and nine months ended September 30, 2022 increased by $674 thousand and $814 thousand, respectively, compared to the same periods in 2021, reflecting modest increases across a variety of other noninterest expense categories.

Salaries and employee benefits expense, the largest component of noninterest expense, for the three months ended March 31, 2023 increased by $782 thousand, compared to the same period in 2022.

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

Outsourced services expense for the three months ended March 31, 2023, increased by $254 thousand, compared to the same period in the prior year, due to changes to and expansion of services provided by third party vendors.

FDIC deposit insurance costs for the three months ended March 31, 2023 increased by $506 thousand, compared to the same period in 2022, reflecting an increase in the FDIC’s deposit assessment rate.

Other expense for the three months ended March 31, 2023 increased by $378 thousand, compared to the same period in 2022, reflecting modest increases across a variety of other noninterest expense categories.

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, 2022 2021 2022 2021

Three months ended March 31, 2023 2022

Income tax expense $3,300 $4,448

Effective income tax rate 20.5 % 21.3 %

The effective income tax rates for the three and nine months ended September 30, 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 effective income tax rates for the three months ended March 31, 2023 and 2022 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.

Management's Discussion and Analysis

The decrease in the effective tax rate for the nine months ended September 30, 2022 compared to the same period in 2021 largely reflected an increase in benefits from federal tax credits and a decrease in state tax expense, partially offset by a decrease in benefits from tax-exempt income.

The Corporation’s net deferred tax assets amounted to $62.1 million at September 30, 2022, compared to $14.0 million at December 31, 2021.

The Corporation has determined that a valuation allowance is not required for any of the deferred tax assets since it is more-likely-than-not that these assets will be realized primarily through future reversals of existing taxable temporary differences or by offsetting projected future taxable income.

Net deferred tax assets increased in 2022, largely reflecting increases in deferred tax assets associated with the declines in fair value of securities available for sale and cash flow hedges that were primarily attributable to relative changes in market interest rates.

The decrease in the effective tax rate for the three months ended March 31, 2023 compared to the same period in 2022 largely reflected an increase in benefits from BOLI income.

Segment Reporting

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

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2022 2021 $ % 2022 2021 $ %

(Dollars in thousands) Change

Three months ended March 31, 2023 2022 $ %

Net interest income $37,180 $35,108 $2,072 6 %

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Net income $12,258 $14,401 ($2,143) (15 %)

Net interest income for the Commercial Banking segment for the three and nine months ended September 30, 2022, increased by $6.0 million and $11.0 million, respectively, from the same periods in 2021.

Net interest income largely benefited from higher yields on and growth in average interest-earning assets, partially offset by a higher cost of funds.

The Corporation recorded a positive provision for credit losses (or a charge) of $800 thousand for the three months ended September 30, 2022, compared to no provision for the same period in 2021.

For the nine months ended September 30, 2022, the Corporation recorded a negative provision for credit losses (or a benefit) of $2.1 million, compared to a negative provision (or a benefit) of $2.0 million for the same period in 2021.

Net interest income for the Commercial Banking segment for the three months ended March 31, 2023, increased by $2.1 million from the same period in 2022.

Net interest income largely benefited from growth in and higher rates on average interest-earning assets, but was adversely impacted by a higher cost of funds.

The Corporation recorded a provision for credit losses of $800 thousand for the three months ended March 31, 2023, compared to $100 thousand provision for the same period in 2022.

See additional discussion under the caption “Provision for Credit Losses.”

Noninterest income derived from the Commercial Banking segment for the three and nine months ended September 30, 2022 was down by $3.9 million and $16.9 million, respectively, from the comparable periods in 2021, primarily due to lower mortgage banking revenues.

Noninterest income derived from the Commercial Banking segment for the three months ended March 31, 2023 was down by $2.1 million, from the comparable period in 2022, primarily 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 September 30, 2022 were up by $468 thousand from the same period in 2021.

For the nine months ended September 30, 2022, noninterest expenses for the commercial banking segment were down by $5.3 million from the same period in 2021, largely reflecting decreases in debt prepayment penalties and salaries and employee benefits expense.

Commercial Banking noninterest expenses for the three months ended March 31, 2023 were up by $2.1 million from the same period in 2022, largely reflecting increases in salaries and employee benefits expense, FDIC deposit insurance costs and outsourced services expense.

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

Management's Discussion and Analysis

Wealth Management Services

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

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2022 2021 $ % 2022 2021 $ %

(Dollars in thousands) Change

Three months ended March 31, 2023 2022 $ %

Net interest expense $13 ($17) $30 176 %

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Net income $554 $2,082 ($1,528) (73 %)

For the three and nine months ended September 30, 2022, noninterest income derived from the Wealth Management Services segment decreased by $798 thousand and $1.4 million, respectively, from the same periods in 2021, reflecting a decrease in asset-based revenues.

The decline in year-to-date revenues also included income of $1.0 million associated with a litigation settlement that was recognized in the first quarter of 2021.

Management's Discussion and Analysis

For the three months ended March 31, 2023, noninterest income derived from the Wealth Management Services segment decreased by $1.8 million from the same period in 2022, largely reflecting a decrease in asset-based revenues.

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

For the three and nine months ended September 30, 2022, noninterest expenses for the Wealth Management Services segment increased by $79 thousand and $370 thousand, respectively, from the comparable periods in 2021.

For the three months ended March 31, 2023, noninterest expenses for the Wealth Management Services segment increased by $201 thousand from the comparable period in 2022.

These included modest changes across a variety of noninterest expense categories.

2 unchanged sentences

(Dollars in thousands) Change

September 30,

2023 December 31,

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Total shareholders’ equity 464,983 453,669 11,314 2

Total assets amounted to $6.4 billion at September 30, 2022, up by $556.9 million, or 10%, from the end of 2021, due to loan growth.

Cash and due from banks balances declined by $45.2 million, or 26%, from the end of 2021, including a reduction in cash collateral pledged to derivative counterparties and lower cash balances with correspondent banks.

See Note 9 to the Unaudited Consolidated Financial Statements for additional disclosure regarding derivative financial instruments.

The securities portfolio decreased by $60.3 million, or 6%, from the end of 2021, reflecting a temporary decline in fair value and routine pay-downs on mortgage-backed securities, partially offset by purchases of debt securities.

Total loans increased by $575.9 million, or 13%, from the end of 2021, led by growth in the residential real estate portfolio.

Management's Discussion and Analysis

Total deposits increased by $89.8 million, or 2%, from the end of 2021, with an increase of $161.9 million, or 4%, in in-market deposits partially offset by a decrease of $72.1 million, or 14%, in wholesale brokered deposits.

FHLB advances increased by $555.0 million, or 383%, from December 31, 2021.

Higher levels of wholesale funding were utilized to fund loan growth and purchases of debt securities.

Shareholders’ equity decreased by $132.5 million, or 23%, largely reflecting a decline in the AOCL component of shareholders' equity due to decreases in the fair value of available for sale debt securities and cash flow hedges that were primarily attributable to relative changes in market interest rates.

Total assets amounted to $6.9 billion at March 31, 2023, up by $199.1 million, or 3%, from the end of 2022, reflecting loan growth and an increase in the securities portfolio.

Cash and due from banks balances increased by $19.5 million, or 17%, from the end of 2022, reflecting higher cash balances on deposit at correspondent banks.

The securities portfolio increased by $60.8 million, or 6%, from the end of 2022, reflecting purchases of debt securities and an increase in fair value of available for sale securities primarily attributable to changes in interest rates, partially offset by routine pay-downs on mortgage-backed securities.

Total loans increased by $117.8 million, or 2%, from the end of 2022, with growth in both the residential real estate and commercial portfolios.

Total deposits increased by $249.6 million, or 5%, from the end of 2022, due to an increase in wholesale brokered deposits.

In-market deposits were slightly down by $813 thousand, or 0.02%.

FHLB advances decreased by $55.0 million, or 6%, from December 31, 2022 reflecting a shift to wholesale brokered deposits to fund loan growth and purchases of debt securities.

Shareholders’ equity increased by $11.3 million, or 2%, reflecting net income and an increase in the AOCL component of shareholders' equity due to increases in the fair value of available for sale debt securities and cash flow hedges that were primarily attributable to relative changes in market interest rates.

These increases were partially offset by dividend declarations and an increase in treasury stock balances, largely due to stock repurchases.

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

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However, the Corporation also recognizes that there are certain specific risks inherent in investment activities.

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

Management's Discussion and Analysis

monitor risks associated with investing in securities.

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

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Securities are designated as either available for sale, held to maturity or trading at the time of purchase.

The Corporation does not have securities designated as held to maturity and does not maintain a portfolio of trading securities.

The Corporation does not maintain a portfolio of trading securities and does not have securities designated as held to maturity.

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

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

As of September 30, 2022 and December 31, 2021, management did not make any adjustments to the prices provided by the pricing service.

As of March 31, 2023 and December 31, 2022, management did not make any adjustments to the prices provided by the pricing service.

Our fair value measurements generally utilize Level 2 inputs, representing quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and model-derived valuations in which all significant input assumptions are observable in active markets.

See Notes 3 and 7 to the Unaudited Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities.

Management's Discussion and Analysis

Securities Portfolio

The carrying amounts of securities held are as follows:

(Dollars in thousands) September 30, 2022 December 31, 2021

(Dollars in thousands) March 31, 2023 December 31, 2022

Amount % Amount %

10 unchanged sentences

Total available for sale debt securities $1,054,747 100 % $993,928 100 %

The securities portfolio amounted to $1.0 billion, or 15% of total assets, as of September 30, 2022 compared to $1.0 billion, or 18% of total assets, as of December 31, 2021.

The securities portfolio represented 15% of total assets at March 31, 2023, unchanged from December 31, 2022.

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

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government-sponsored enterprises.

The securities portfolio decreased by $60.3 million, or 6%, 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.

The securities portfolio increased by $60.8 million, or 6%, from the end of 2022.

This included purchases of U.S.

government agency and U.S.

government-sponsored debt securities, including mortgage-backed securities, totaling $214.6 million, with a weighted average yield of 3.45%.

The carrying amount of available for sale debt securities included net unrealized losses of $183.2 million and $8.9 million, respectively, as of September 30, 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.

government-sponsored debt securities, including mortgage-backed securities, totaling $60.2 million, with a weighted average yield of 4.98%, as well as an increase of $17.4 million (pre-tax) in the fair value of available for sale securities.

These were partially offset by $16.4 million of routine pay-downs on mortgage-backed securities.

As of March 31, 2023, the carrying amount of available for sale debt securities included net unrealized losses of $155.0 million, compared to net unrealized losses of $172.4 million as of December 31, 2022.

The increase in fair value of

Management's Discussion and Analysis

available for sale debt securities from the end of 2022 was primarily concentrated in obligations of U.S.

government agencies and U.S.

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

Total loans amounted to $4.8 billion at September 30, 2022, up by $575.9 million, or 13.5%, from the end of 2021, led by growth in the residential real estate portfolio.

Total loans amounted to $5.2 billion at March 31, 2023, up by $117.8 million, or 2%, from the end of 2022, with growth in both the residential real estate and commercial portfolios.

The following is a summary of loans:

(Dollars in thousands) September 30, 2022 December 31, 2021

(Dollars in thousands) March 31, 2023 December 31, 2022

Amount % Amount %

14 unchanged sentences

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

C&I also includes PPP loans.

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

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

Management's Discussion and Analysis

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.

All of these loans with qualified deferments exited their payment deferral period prior to March 31, 2022.

Commercial Loans

The commercial loan portfolio represented 50% of total loans at September 30, 2022.

The commercial loan portfolio represented 48% of total loans at March 31, 2023.

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 $431.9 million and $451.6 million, respectively, at September 30, 2022 and December 31, 2021.

Our participation in commercial loans originated by other banks amounted to $534.2 million and $510.6 million, respectively, at March 31, 2023 and December 31, 2022.

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

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Commercial Real Estate Loans

CRE loans totaled $1.8 billion at September 30, 2022, up by $123.6 million, or 8%, from the balance at December 31, 2021.

Loan originations and advances of approximately $420 million were partially offset by payoffs and pay-downs.

Included in CRE loans were construction and development loans with carrying values of $118.3 million and $122.4 million, respectively, as of September 30, 2022 and December 31, 2021.

Shared national credit balances outstanding included in the CRE loan portfolio totaled $8.1 million at September 30, 2022.

The balance was included in the pass-rated category of commercial loan credit quality and current with respect to contractual payment terms at September 30, 2022.

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

(Dollars in thousands) September 30, 2022 December 31, 2021

CRE loans totaled $1.9 billion at March 31, 2023, up by $79.8 million, or 4%, from the balance at December 31, 2022.

In 2023, CRE loan originations and advances of approximately $62 million were partially offset by payments of approximately

Management's Discussion and Analysis

Included in the net increase in CRE this quarter were reclassifications of $34 million from C&I, predominantly due to changes in the source of repayment.

Included in the CRE loan portfolio were construction and development loans of $165.7 million and $164.1 million, respectively, as of March 31, 2023 and December 31, 2022.

Shared national credit balances outstanding included in the CRE loan portfolio totaled $12.6 million and $10.5 million, respectively, at March 31, 2023 and December 31, 2022.

The balances were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at both March 31, 2023 and December 31, 2022.

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

(Dollars in thousands) March 31, 2023 December 31, 2022

Outstanding Balance % of Total Outstanding Balance % of Total

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Total $1,909,136 100 % $1,829,304 100 %

Management's Discussion and Analysis

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

(Dollars in thousands) September 30, 2022 December 31, 2021

(Dollars in thousands) March 31, 2023 December 31, 2022

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

CRE Portfolio Segmentation:

Retail 109 $441,631 25 % 121 $389,487 24 %

Multi-family dwelling 130 $488,219 26 % 127 $469,233 26 %

Retail 106 421,341 22 108 421,617 23

Office 53 264,429 14 53 257,551 14

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Commercial and Industrial Loans

C&I loans amounted to $652.8 million at September 30, 2022, up by $11.2 million, or 2%, from the balance at December 31, 2021.

This included a net reduction in PPP loans of $36.6 million, reflecting loans forgiven by the SBA.

Excluding PPP loans, C&I loans increased by approximately $47.8 million, with loan originations and advances of $99 million, partially offset by payoffs and pay-downs.

As of September 30, 2022, the carrying value of PPP loans was $1.4 million and included net unamortized loan origination fee balances of $58 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 $40.3 million at September 30, 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 September 30, 2022.

C&I loans amounted to $609.7 million at March 31, 2023, down by $46.7 million, or 7%, from the balance at December 31, 2022.

The net reduction in C&I reflected payments of approximately $29 million and reclassifications of $34 million to CRE, partially offset by originations and advances of $16 million.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $40.9 million at both March 31, 2023 and December 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 both March 31, 2023 and December 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, 2022 December 31, 2021

(Dollars in thousands) March 31, 2023 December 31, 2022

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

3 unchanged sentences

Manufacturing 56 60,510 10 55 60,601 9

Retail 54 58,870 10 50 56,012 9

Transportation and warehousing

17 50,269 8 20 51,347 8

Retail 55 49,365 8 79 47,290 7

Educational services 19 46,245 8 19 46,708 7

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Residential Real Estate Loans

The residential real estate loan portfolio represented 44% of total loans at September 30, 2022.

Residential real estate loans held in portfolio amounted to $2.1 billion at September 30, 2022, up by $417.1 million, or 24%, from the balance at December 31, 2021, reflecting a higher proportion of loans originated for portfolio in 2022.

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

(Dollars in thousands) September 30, 2022 December 31, 2021

The residential real estate loan portfolio represented 46% of total loans at March 31, 2023.

Residential real estate loans held in portfolio amounted to $2.4 billion at March 31, 2023, up by $80.3 million, or 3%, from the balance at December 31, 2022.

While total residential real estate loan origination activity has slowed, a higher proportion of loans were originated for portfolio than for sale in 2023.

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

(Dollars in thousands) March 31, 2023 December 31, 2022

Amount % of Total Amount % of Total

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$2,403,255 100 % $2,323,002 100 %

(1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $62.7 million and $78.7 million, respectively, as of September 30, 2022 and December 31, 2021.

(1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $58.0 million and $59.9 million, respectively, as of March 31, 2023 and December 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, 2022 2021 2022 2021

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

(Dollars in thousands)

Three months ended March 31, 2023 2022

Amount % of Total Amount % of Total

Originations for retention in portfolio (1)

$109,768 80 % $164,401 61 %

Originations for sale to the secondary market (2)

27,763 20 106,619 39

Total $137,531 100 % $271,020 100 %

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(Dollars in thousands)

Three Months Nine Months

Periods ended September 30, 2022 2021 2022 2021

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

Three months ended March 31, 2023 2022

Amount % of Total Amount % of Total

Loans sold with servicing rights retained $17,114 58 % $14,627 11 %

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

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

Residential real estate loan origination, refinancing and sales activity decreased in response to increases in market interest rates and changes in the housing markets.

We have active relationships with various secondary market investors that purchase residential real estate loans we originate.

In addition to managing our interest rate risk position and earnings through the sale of these loans, we are also able to manage our liquidity position through timely sales of residential real estate loans to the secondary market.

Loans are sold with servicing retained or released.

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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 $9.2 million and $9.8 million, respectively, as of September 30, 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 September 30, 2022 and December 31, 2021.

The net balance of capitalized servicing rights amounted to $8.8 million and $9.0 million, respectively, as of March 31, 2023 and December 31, 2022.

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, 2023 and December 31, 2022.

Consumer Loans

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

Home equity lines of credit and home equity loans represented 95% of the total consumer portfolio at September 30, 2022.

Home equity lines of credit and home equity loans represented 94% of the total consumer portfolio at March 31, 2023.

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

The Bank estimates that approximately 55% of the combined home equity lines of credit and home equity loan balances are first lien positions or subordinate to other Washington Trust mortgages.

The consumer loan portfolio totaled $289.3 million at September 30, 2022, up by $24.0 million, or 9%, from December 31, 2021, reflecting increases in home equity lines and loans.

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $8.9 million and $9.4 million, respectively, at September 30, 2022 and December 31, 2021.

The consumer loan portfolio totaled $305.9 million at March 31, 2023, up by $4.4 million, or 1%, from December 31, 2022, reflecting increases in home equity lines and loans.

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $10.9 million and $9.6 million, respectively, at March 31, 2023 and December 31, 2022.

Management's Discussion and Analysis

Asset Quality

The Corporation continually monitors the asset quality of the loan portfolio using all available information.

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

As disclosed in Note 2, the Corporation adopted ASU 2022-02, which eliminated the accounting guidance for TDRs and added enhanced disclosures with respect to certain modifications for borrowers experiencing financial difficulty.

Effective January 1, 2023, a loan that has been modified is considered a TLM when the following conditions are met:

(1) the modification is considered a continuation of an existing loan and not a new loan in accordance with GAAP, (2) the modification is made to a borrower experiencing financial difficulty and (3) the modification has a direct impact to the contractual cash flows.

During the three months ended March 31, 2023 , there were no TLMs.

Nonperforming Assets

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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 $1,601 $—

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Total past due loans to total loans 0.15 % 0.23 %

Allowance for credit losses on loans to total loans 0.74 % 0.74 %

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

Total nonperforming assets decreased by $2.1 million from December 31, 2021, reflecting a decline in nonaccrual loans.

Nonaccrual Loans

During the nine months ended September 30, 2022, 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, 2023, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.

Management's Discussion and Analysis

The following table presents the activity in nonaccrual loans:

(Dollars in thousands) Three Months Nine Months

For the periods ended September 30, 2022 2021 2022 2021

(Dollars in thousands)

For the periods ended March 31, 2023 2022

Balance at beginning of period $12,846 $14,203

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Loans charged-off (61) (36)

Loans transferred to other real estate owned (683) —

Payments, payoffs and other changes (582) (1,942)

Balance at end of period $13,980 $12,589

Management's Discussion and Analysis

The following table presents additional detail on nonaccrual loans:

(Dollars in thousands) September 30, 2022 December 31, 2021

(Dollars in thousands) March 31, 2023 December 31, 2022

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, 2022.

As of both September 30, 2022 and December 31, 2021, the composition of nonaccrual loans was 100% residential and consumer.

Nonaccrual residential real estate mortgage loans amounted to $11.7 million at September 30, 2022, down by $1.9 million from the end of 2021.

As of September 30, 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 September 30, 2022 were four loans purchased for portfolio and serviced by others amounting to $1.1 million.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2023.

As of March 31, 2023, the composition of nonaccrual loans was 82% residential and consumer and 18% commercial, compared to 100% residential and consumer as of December 31, 2022.

Total nonaccrual loans increased by $1.1 million from the end of 2022.

Nonaccrual residential real estate mortgage loans amounted to $10.5 million at March 31, 2023, down by $1.4 million from the end of 2022.

As of March 31, 2023, 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, 2023 were four loans purchased for portfolio and serviced by others amounting to $1.1 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.

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.

TDRs are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan.

Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status.

Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term and full collection of principal and interest is in doubt.

TDRs are reported as such for at least one year from the date of the restructuring.

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

See Note 2 for discussion on ASU No.

2022-02, a recently issued accounting pronouncement that is pending adoption.

Management's Discussion and Analysis

2022-02, which becomes effective on January 1, 2023, updates the accounting treatment and related disclosure requirements for TDRs.

As noted above under the caption “Loans,” the Corporation elected 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.

The amounts below consist of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs.

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

(Dollars in thousands) Sep 30,

Accruing TDRs

Commercial real estate

$3,609 $10,603

Commercial & industrial

Total commercial

Residential Real Estate:

Residential real estate

Total consumer

Accruing TDRs 7,214 16,328

Nonaccrual TDRs

Commercial real estate

Commercial & industrial

Total commercial

Residential Real Estate:

Residential real estate 2,819 2,748

Total consumer

Nonaccrual TDRs 2,890 2,819

Total TDRs $10,104 $19,147

As of September 30, 2022, the composition of TDRs was 44% commercial and 56% residential and consumer, compared to 70% commercial and 30% residential and consumer at December 31, 2021.

TDRs amounted to $10.1 million at September 30, 2022, down by $9.0 million from the end of 2021.

The net decline reflected a pay-down of $6.5 million on one accruing CRE TDR loan and the declassification from TDR status of one accruing C&I loan with a carrying value of $2.8 million that was declassified in accordance with policy.

The ACL included specific reserves for TDRs of $132 thousand at September 30, 2022, compared to $148 thousand at December 31, 2021.

Management's Discussion and Analysis

Past Due Loans

The following table presents past due loans by category:

(Dollars in thousands) September 30, 2022 December 31, 2021

(Dollars in thousands) March 31, 2023 December 31, 2022

Commercial real estate $1,188 0.06 % $1,187 0.06 %

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

As of both September 30, 2022 and December 31, 2021, the composition of past due loans (loans past due 30 days or more) was essentially 100% residential and consumer.

As of March 31, 2023 and December 31, 2022, the composition of past due loans (loans past due 30 days or more) was 82% residential and consumer and 18% commercial, compared to 87% residential and consumer and 13% commercial at December 31, 2022.

Total past due loans decreased by $3.6 million from the end of 2022.

Total past due loans included $7.1 million of nonaccrual loans as of September 30, 2022, compared to $9.4 million as of December 31, 2021.

All loans 90 days or more past due at September 30, 2022 and December 31, 2021 were classified as nonaccrual.

Total past due loans included $5.6 million of nonaccrual loans as of March 31, 2023, compared to $7.2 million as of December 31, 2022.

All loans 90 days or more past due at March 31, 2023 and December 31, 2022 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, 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.

Potential problem loans include classified accruing commercial loans that were less than 90 days past due at March 31, 2023 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 loans presented above.

They are assessed for loss exposure using the methods described in Note 4 to the Unaudited Consolidated Financial Statements under the caption “Credit Quality Indicators.” Management cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans.

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

Management has identified two loans associated with one C&I relationship with carrying values totaling $722 thousand as potential problem loans at September 30, 2022.

These two loans were current with respect to payment terms at September 30, 2022.

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

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

As of March 31, 2023, there were no loans deemed to be potential problem loans.

Allowance for Credit Losses on Loans

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 management’s estimate of expected lifetime credit losses on loans carried at amortized cost.

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

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

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

Management's Discussion and Analysis

value of the loan.

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

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

Management's Discussion and Analysis

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

New appraisals are generally obtained for TDRs or nonaccrual loans or when management believes it is warranted.

New appraisals are generally obtained for nonaccrual loans or when management believes it is warranted.

The Corporation has continued to maintain appropriate professional standards regarding the professional qualifications of appraisers and has an internal review process to monitor the quality of appraisals.

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

(Dollars in thousands) September 30, 2022 December 31, 2021

(Dollars in thousands) March 31, 2023 December 31, 2022

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 $36.9 million at September 30, 2022, down by $2.2 million from the balance at December 31, 2021.

The ACL on loans as a percentage of total loans, also known as the reserve coverage ratio, was 0.76% at September 30, 2022, compared to 0.91% at December 31, 2021.

The Corporation recorded a positive provision for credit losses (or a charge) of $800 thousand for the three months ended September 30, 2022, compared to no provision for the same period in 2021.

On a year-to-date basis, the Corporation recognized a negative provision for credit losses (or a benefit) of $2.1 million, compared to a negative provision (or a benefit) of $2.0 million for the same period in 2021.

Net recoveries totaled $54 thousand and $104 thousand, respectively, for the three and nine months ended September 30, 2022.

Management's Discussion and Analysis

The ACL on loans amounted to $38.8 million at March 31, 2023, up by $753 thousand, or 2%, from the balance at December 31, 2022.

The ACL on loans as a percentage of total loans, also known as the reserve coverage ratio, was 0.74% at March 31, 2023, unchanged from December 31, 2022.

The Corporation recorded a provision for credit losses of $800 thousand for the three months ended March 31, 2023.

The provision provided for loan growth and included modest additional reserve allocation for commercial loans migrating to nonaccrual status.

The provision also reflected a slowdown in loan prepayment speeds and continued negative outlook in economic forecasts, partially offset by continued strength in asset and credit quality metrics.

Net charge-offs totaled $47 thousand for the three months ended March 31, 2023, compared to net recoveries of $148 thousand for the same period in 2022.

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

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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, 2022 December 31, 2021

(Dollars in thousands) March 31, 2023 December 31, 2022

Allocated ACL

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Total consumer 1,334 0.44 6 1,496 0.50 6

Total allowance for credit losses on loans at end of period $36,863 0.76 % 100 % $39,088 0.91 % 100 %

Total ACL on loans at end of period

$38,780 0.74 % 100 % $38,027 0.74 % 100 %

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

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(Dollars in thousands) Change

September 30,

2023 December 31,

5 unchanged sentences

Time deposits (in-market) 924,506 795,838 128,668 16

In-market deposits 4,626,686 4,464,823 161,863 4

Total in-market deposits 4,659,952 4,660,765 (813) —

Wholesale brokered demand deposits 1,233 31,153 (29,920) (96)

Wholesale brokered time deposits 607,329 327,044 280,285 86

Wholesale brokered deposits 443,171 515,228 (72,057) (14)

Total wholesale brokered deposits 608,562 358,197 250,365 70

Total deposits $5,268,514 $5,018,962 $249,552 5 %

In-market deposits were up by $161.9 million, or 4%, from the balance at December 31, 2021, while wholesale brokered deposits declined by $72.1 million, or 14%.

Total deposits amounted to $5.1 billion at September 30, 2022, up by $89.8 million, or 2%, from December 31, 2021.

Total deposits amounted to $5.3 billion at March 31, 2023, up by $249.6 million, or 5%, from December 31, 2022, reflecting an increase in wholesale brokered time deposits.

Wholesale brokered deposits increased by $250.4 million, or 70%, from December 31, 2022, as higher levels were utilized to fund balance sheet growth.

In-market deposits, which exclude wholesale brokered deposits, were slightly down by $813 thousand, or 0.02%, from the balance at December 31, 2022.

As expected, due to higher market interest rates, in-market deposits shifted from relatively lower cost products to higher cost time deposits in the first quarter of 2023.

As of March 31, 2023, in-market deposits were approximately 58% retail and 42% commercial.

Our in-market deposits are well-diversified by industry and customer type.

The average size of our in-market deposit accounts was approximately $37 thousand at March 31, 2023.

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

(Dollars in thousands) March 31, 2023 December 31, 2022

Balance % of Total Deposits Balance % of Total Deposits

Uninsured / Unprotected Deposits:

Uninsured deposits (1)

$1,394,178 26 % $1,514,900 30 %

fully-collateralized preferred deposits (2)

319,308 6 % 329,868 6 %

Unprotected deposits $1,074,870 20 % $1,185,032 24 %

(1) Determined in accordance with regulatory reporting requirements.

(2) Uninsured deposits of states and political subdivisions, which are secured or collateralized as required by state law.

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 $700.0 million at September 30, 2022, up by $555.0 million, or 383%, from the balance at the end of 2021, as higher levels of wholesale funding were utilized to fund loan growth and purchases of debt securities.

FHLB advances totaled $925.0 million at March 31, 2023, down by $55.0 million, or 6%, from the balance at the end of 2022.

For additional information regarding FHLB advances see Note 9 to the Unaudited Consolidated Financial Statements.

Management's Discussion and Analysis

Liquidity and Capital Resources

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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 77% of total average assets in the nine months ended September 30, 2022.

The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 68% of total average assets in the three months ended March 31, 2023.

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

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

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

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

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

Management's Discussion and Analysis

The table below presents unused funding capacity by source as of the dates indicated:

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

(Dollars in thousands)

September 30,

2023 December 31,

Additional Funding Capacity:

Contingent Liquidity:

Federal Home Loan Bank of Boston (1)

2 unchanged sentences

26,119 27,059

Unencumbered investment securities 672,024 702,963

Total $1,663,549 $2,362,259

(1) As of September 30, 2022 and December 31, 2021, loans with a carrying value of $2.3 billion and $2.2 billion, respectively, and securities available for sale with carrying values of $121.4 million and $163.2 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of September 30, 2022 and December 31, 2021, loans with a carrying value of $17.8 million and $8.2 million, respectively, and securities available for sale with a carrying value of $12.8 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.

Unencumbered securities 710,578 691,893

Total contingent liquidity $1,596,286 $1,387,247

Percentage of total contingent liquidity to uninsured deposits 114.5 % 91.6 %

Percentage of total contingent liquidity to unprotected deposits 148.5 % 117.1 %

(1) As of March 31, 2023 and December 31, 2022, loans with a carrying value of $2.6 billion and $2.4 billion, respectively, and securities available for sale with carrying values of $107.3 million and $102.1 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of March 31, 2023 and December 31, 2022, loans with a carrying value of $19.5 million and $20.9 million, respectively, and securities available for sale with a carrying value of $12.7 million and $12.7 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.

Additionally, $215.0 million of availability was utilized in the year to collateralize an institutional deposit through a standby letter of credit with the FHLB.

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

Liquidity remained within target ranges established by the ALCO during the nine months ended September 30, 2022.

Liquidity remained within target ranges established by the ALCO during the three months ended March 31, 2023.

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 $71.8 million for the nine months ended September 30, 2022, reflecting net income of $55.1 million and mortgage banking related adjustments to reconcile net income to net cash provided by operating activities.

Net cash used in investing activities totaled $723.8 million for the nine months ended September 30, 2022, reflecting an increase in loans, outflows to fund purchases of debt securities and a purchase of BOLI.

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

For the nine months ended September 30, 2022, net cash provided by financing activities amounted to $606.3 million, with a net increase in FHLB advances and growth in deposits, partially offset by the payment of dividends to shareholders and purchases of treasury stock.

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

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

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

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.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

In the ordinary course of business, the Corporation enters into contractual obligations that require future cash payments.

These include payments related to lease obligations, time deposits with stated maturity dates, and borrowings.

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

These financial

Management's Discussion and Analysis

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

These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk.

The Corporation’s credit policies with respect to interest rate contracts with commercial borrowers, commitments to extend credit, and standby letters of credit are similar to those used for loans.

Some commitments to extend credit and standby letters of credit are expected to expire without being drawn upon, and thus, total amounts do not necessarily represent future cash requirements.

Interest rate risk management contracts with other counterparties are generally subject to bilateral collateralization terms.

For additional information on derivative financial instruments and financial instruments with off-balance sheet risk see Notes 9 and 17 to the Unaudited Consolidated Financial Statements.

These contracts with various counterparties may subject the Corporation to various cash flow requirements, which may include posting of cash as collateral for arrangements that are in a liability position.

For additional information on derivative financial instruments and financial instruments with off-balance sheet risk see Notes 6 and 16 to the Consolidated Financial Statements.

Capital Resources

Total shareholders’ equity amounted to $432.3 million at September 30, 2022, down by $132.5 million from December 31, 2021.

The decline reflected a decrease of $151.8 million in the AOCL component of shareholders' equity, due to decreases in the fair value of available for sale debt securities and cash flow hedges primarily attributable to relative changes in market interest rates.

In addition, the decline also reflected $28.3 million in dividend declarations and a net increase in treasury stock repurchases of $8.2 million, partially offset by net income of $55.1 million.

The Corporation declared a quarterly dividend of 54 cents per share for the three months ended September 30, 2022, compared to 52 cents per share declared for the same period in 2021.

On a year-to-date basis, dividend declarations totaled $1.62 per share in 2022, compared to $1.56 per share in 2021.

Management's Discussion and Analysis

The ratio of total equity to total assets was 6.75% at September 30, 2022, compared to a ratio of 9.65% at December 31, 2021.

Book value per share at September 30, 2022 and December 31, 2021 was $25.17 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 12.65% at September 30, 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.

Total shareholders’ equity amounted to $465.0 million at March 31, 2023, up by $11.3 million from December 31, 2022.

The increase included net income of $12.8 million.

In addition, the AOCL component of shareholders' equity increased by $16.0 million, reflecting increases in the fair value of available for sale debt securities and cash flow hedges primarily attributable to changes in market interest rates.

These increases to shareholders’ equity were partially offset by $9.6 million in dividend declarations and a net increase in treasury stock balances of $8.6 million.

The increase in treasury stock reflected the repurchase of 200,000 shares in January and February at an average price of $43.70 and a total cost of $8.7 million, under the 2023 Repurchase Program.

The Corporation declared a quarterly dividend of 56 cents per share for the three months ended March 31, 2023, compared to 54 cents per share declared for the same period in 2022.

The ratio of total equity to total assets was 6.78% at March 31, 2023, compared to a ratio of 6.81% at December 31, 2022.

Book value per share was $27.37 at March 31, 2023, compared to $26.40 at December 31, 2022.

The Bancorp and the Bank are subject to various regulatory capital requirements and are considered “well capitalized” with the Bancorp having a total risk-based capital ratio of 12.01% at March 31, 2023, compared to 12.37% at December 31, 2022.

See Note 10 to the Unaudited Consolidated Financial Statements for additional discussion regarding shareholders’ equity, including the stock repurchase program and regulatory capital requirements.

Asset/Liability Management and Interest Rate Risk

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

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.

The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors.

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

The interest rate contracts may include interest rate swaps, caps and floors.

These interest rate contracts involve, to varying degrees, credit risk and interest rate risk.

3 unchanged sentences

See Notes 6 and 16 to the Unaudited Consolidated Financial Statements for additional information.

The ALCO uses income simulation to measure interest rate risk inherent in the Corporation’s on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 12-month horizon, a 13- to 24-month horizon and a 60-month horizon.

The simulations assume that the size and general composition of the Corporation’s balance sheet remain static over the simulation horizons, with the exception of certain deposit mix shifts from low-cost core savings to higher-cost time deposits in selected interest rate scenarios.

The ALCO uses income simulation to measure interest rate risk inherent in the Corporation’s financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 12-month horizon, a 13- to 24-month horizon and a 60-month horizon.

The simulations assume that the size and general composition of the Corporation’s balance sheet remain static over the simulation horizons, with the exception of certain deposit mix shifts from low-cost savings to higher-cost time deposits in selected interest rate scenarios.

Additionally, the simulations take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios.

The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency.

Management's Discussion and Analysis

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, 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.

As of March 31, 2023 and December 31, 2022, 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.

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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, 2022 and December 31, 2021.

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

Management's Discussion and Analysis

assumed to have certain minimum rate levels below which they will not fall.

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

Since market interest rates have risen sharply, management has incorporated the down 200 basis point scenario into the tabular presentation below.

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

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

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

100 basis point rate decrease (2.25) % 0.60 % (1.09) % 1.55 %

200 basis point rate decrease (6.79) (8.14) (4.17) (5.21)

100 basis point rate increase 0.56 (4.37) (0.78) (5.45)

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300 basis point rate increase 5.73 (6.72) 1.42 (10.07)

The ALCO estimates that negative exposure of net interest income to falling rates as compared to an unchanged rate scenario results from a more rapid decline in earning asset yields compared to rates paid on deposits.

If market interest rates were to fall and remain lower for a sustained period, certain core savings and time deposit rates could decline more slowly and by a lesser amount than other market interest rates.

The relative change in interest rate sensitivity from December 31, 2022, as shown in the above table, was largely attributable to the March 31, 2023 termination of an interest rate swap contract that was designated as a cash flow hedge to hedge the risk associated with a pool of variable rate commercial loans.

This receive-fixed, pay-floating interest rate swap previously mitigated exposure to declining rates and reduced positive exposure to rising rates.

See Note 6 to the Unaudited Consolidated Financial Statements for additional information on the termination.

As of March 31, 2023, the ALCO estimates that negative exposure of net interest income to falling rates as compared to an unchanged rate scenario in Year 1 results from a more rapid decline in earning asset yields compared to rates paid on deposits.

If market interest rates were to fall and remain lower for a sustained period, certain savings and time deposit rates could decline more slowly and by a lesser amount than other market interest rates.

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

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.

As of September 30, 2022, the ALCO estimates that positive exposure of net interest income to rising rates in Year 1 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.

The ALCO estimates that the positive exposure of net interest income in the down 100 basis point scenario in Year 2 results from a more rapid projected relative rate of decline in funding costs than asset yields.

The negative exposure in the down 200 basis point scenario in Year 2 reflects the insensitivity of certain deposit rates to market interest rate declines as they approach their floors.

The positive exposure of net interest income in Year 1 to rising rates at March 31, 2023 as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term.

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

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

As of September 30, 2022, the negative exposure of net interest income to rising rates as compared to an unchanged rate scenario is primarily attributable to a projected increase in funding costs.

As market rates increase, ALCO modeling assumes that deposits will shift from low cost to higher cost deposits.

This assumption reflects historical operating conditions in rising rate cycles.

Although asset yields would increase in a rising interest rate environment, the cumulative impact of relative growth in rate-sensitive higher cost deposit categories and wholesale funds suggests that by Year 2 of rising interest rate scenarios, the increase in the Corporation’s cost of funds could result in a relative decline in net interest margin compared to an unchanged rate scenario.

The overall decline 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, as well as an increase in the proportion of wholesale funds to total sources of funds at September 30, 2022.

The negative exposure to rising rates in Year 2 is due to a higher level of longer-term fixed rate assets, as well as

Management's Discussion and Analysis

larger proportion of wholesale funds to total sources of funds.

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

Wholesale funds would reprice more quickly and by a greater amount than the repricing of core deposits in response to changes in market interest rates.

Wholesale funds generally would reprice more quickly and by a greater amount than the repricing of in-market deposits in response to changes in market interest rates.

As market rates increase, ALCO modeling assumes that deposits shift from low cost to higher cost deposits.

This assumption reflects historical operating conditions in rising rate cycles.

Although asset yields would increase in a rising interest rate environment, the cumulative impact of relative growth in rate-sensitive higher cost deposit categories and wholesale funds suggests that the increase in the Corporation’s cost of funds could result in a relative decline in net interest income in Year 2 compared to an unchanged rate scenario.

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

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

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 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.

Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates.

Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates.

The relationship between short-term interest rate changes and core deposit rate and balance changes may differ from the ALCO’s estimates used in income simulation.

Management's Discussion and Analysis

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

As part of its policy response to the COVID-19 pandemic in 2020, the Federal Reserve reduced its target range for the Fed Funds rate to 0% - 0.25%.

This, and various Federal stimulus programs, had the effect of attracting low-cost deposits across the banking industry.

During 2022 and into 2023, the Federal Reserve reversed policy and increased the target range to 4.75% - 5.00% as of March 31, 2023.

This policy change has resulted in higher rates on existing deposit products and a shift of low-cost balances into higher cost alternatives, which could continue into the future, particularly if interest rates continue to rise.

As such, the ALCO 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, as well as due to heightened uncertainty in the banking industry.

This may cause interest rate sensitivity to differ from the results as presented.

Another significant simulation assumption is the sensitivity of savings deposits to fluctuations in interest rates.

Income simulation results assume that changes in both savings deposit rates and balances are related to changes in short-term interest rates.

The relationship between short-term interest rate changes and deposit rate and balance changes may differ from the ALCO’s estimates used in income simulation.

It should also be noted that the static balance sheet assumption does not necessarily reflect the Corporation’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior.

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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, 2022 and December 31, 2021 resulting from immediate parallel rate shifts:

The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of March 31, 2023 and December 31, 2022 resulting from immediate parallel rate shifts:

(Dollars in thousands)

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Trust preferred debt and other corporate debt securities (24) 24

Total change in market value as of September 30, 2022 $83,900 ($108,551)

Total change in market value as of March 31, 2023 $61,282 ($134,029)

Total change in market value as of December 31, 2022 $63,712 ($125,079)

Management's Discussion and Analysis

Critical Accounting Policies and Estimates

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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.

There have been no material 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, 2022.

Recently Issued Accounting Pronouncements

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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