What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-04 · 283 added, 223 removed, 756 unchanged (40% 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 months ended March 31, 2023 are not necessarily indicative of the results for the full-year ended December 31, 2023 or any future period.

Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results for the full-year ended December 31, 2023 or any future period.

Forward-Looking Statements

16 unchanged sentences

• 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;

• regulatory, litigation and reputational risks;

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

11 unchanged sentences

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.

In addition, we have plans to open a branch in Smithfield, Rhode Island and another in the Olneyville section of Providence later in 2023 or early in 2024.

Risk Management

24 unchanged sentences

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

Operational risk is the risk of loss due to human behavior, inadequate or failed internal 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.

13 unchanged sentences

The following table presents a summarized consolidated statement of operations:

(Dollars in thousands)

Three months ended March 31, 2023 2022 $ %

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2023 2022 $ % 2023 2022 $ %

Net interest income $33,500 $37,515 ($4,015) (11 %) $70,693 $72,606 ($1,913) (3 %)

7 unchanged sentences

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

Three months ended March 31, 2023 2022

Three Months Six Months

Periods ended June 30, 2023 2022 2023 2022

Diluted earnings per common share $0.66 $1.14 $1.41 $2.08

4 unchanged sentences

Noninterest income as a percentage of total revenues 30 % 30 % 28 % 31 %

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.

Net income totaled $11.3 million and $24.1 million, respectively, for the three and six months ended June 30, 2023, compared to $20.0 million and $36.4 million, respectively, for the same periods 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.

In 2023, the decrease in net interest income was driven by increases in funding costs, which offset the benefit of higher yields on, and growth in, average interest-earning asset balances.

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.

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, which were partially offset by net investment appreciation.

The increased provisioning for credit losses reflected a higher level of loan growth in 2023 and continued negative outlook in economic forecasts, partially offset by continued strength in our asset and credit quality.

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

Management's Discussion and Analysis

4 unchanged sentences

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

Three months ended March 31, 2023 2022 Change

Three months ended June 30, 2023 2022 Change

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

46 unchanged sentences

(Dollars in thousands)

Three months ended March 31, 2023 2022 Change

Three months ended June 30, 2023 2022 Change

Commercial loans $235 $276 ($41)

Six months ended June 30, 2023 2022 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 $106,253 $2,349 4.46 $146,852 $266 0.37 ($40,599) $2,083 4.09

Mortgage loans held for sale 15,905 393 4.98 27,688 490 3.57 (11,783) (97) 1.41

Taxable debt securities 1,197,935 14,597 2.46 1,084,246 9,148 1.70 113,689 5,449 0.76

FHLB stock 44,952 1,455 6.53 10,849 130 2.42 34,103 1,325 4.11

Commercial real estate 1,894,087 54,100 5.76 1,625,537 25,386 3.15 268,550 28,714 2.61

Commercial & industrial 622,896 18,528 6.00 627,667 12,342 3.97 (4,771) 6,186 2.03

Total commercial 2,516,983 72,628 5.82 2,253,204 37,728 3.38 263,779 34,900 2.44

Residential real estate 2,400,997 44,801 3.76 1,788,431 28,997 3.27 612,566 15,804 0.49

Home equity 289,288 7,841 5.47 251,796 3,950 3.16 37,492 3,891 2.31

Other 17,110 391 4.61 16,349 378 4.66 761 13 (0.05)

Total consumer 306,398 8,232 5.42 268,145 4,328 3.25 38,253 3,904 2.17

Total loans 5,224,378 125,661 4.85 4,309,780 71,053 3.32 914,598 54,608 1.53

Total interest-earning assets 6,589,423 144,455 4.42 5,579,415 81,087 2.93 1,010,008 63,368 1.49

Noninterest-earning assets 252,733 273,521 (20,788)

Total assets $6,842,156 $5,852,936 $989,220

Liabilities and Shareholders’ Equity:

Interest-bearing demand deposits (in-market) $346,255 $6,728 3.92 $248,580 $292 0.24 $97,675 $6,436 3.68

NOW accounts 801,296 758 0.19 865,647 281 0.07 (64,351) 477 0.12

Money market accounts 1,226,303 16,878 2.78 1,221,923 1,753 0.29 4,380 15,125 2.49

Savings accounts 544,159 636 0.24 563,837 191 0.07 (19,678) 445 0.17

Time deposits (in-market) 915,898 12,537 2.76 801,479 3,968 1.00 114,419 8,569 1.76

Interest-bearing in-market deposits 3,833,911 37,537 1.97 3,701,466 6,485 0.35 132,445 31,052 1.62

Wholesale brokered demand deposits 8,097 177 4.41 10,173 45 0.89 (2,076) 132 3.52

Wholesale brokered time deposits 539,333 11,579 4.33 403,826 536 0.27 135,507 11,043 4.06

Wholesale brokered deposits 547,430 11,756 4.33 413,999 581 0.28 133,431 11,175 4.05

Total interest-bearing deposits 4,381,341 49,293 2.27 4,115,465 7,066 0.35 265,876 42,227 1.92

FHLB advances 1,011,768 23,278 4.64 151,331 657 0.88 860,437 22,621 3.76

Junior subordinated debentures 22,681 728 6.47 22,681 237 2.11 — 491 4.36

Total interest-bearing liabilities 5,415,790 73,299 2.73 4,289,477 7,960 0.37 1,126,313 65,339 2.36

Noninterest-bearing demand deposits 802,506 915,918 (113,412)

Other liabilities 160,677 123,321 37,356

Shareholders’ equity 463,183 524,220 (61,037)

Total liabilities and shareholders’ equity $6,842,156 $5,852,936 $989,220

Net interest income (FTE)

$71,156 $73,127 ($1,971)

Interest rate spread 1.69 2.56 (0.87)

Net interest margin 2.18 2.64 (0.46)

Management's Discussion and Analysis

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

(Dollars in thousands)

Six months ended June 30, 2023 2022 Change

Commercial loans $463 $521 ($58)

Net Interest Income

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, the primary source of our operating income, totaled $33.5 million and $70.7 million, respectively, for the three and six months ended June 30, 2023, compared to $37.5 million and $72.6 million, respectively, for the same periods 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.

1 unchanged sentence

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

The analysis of net interest income, 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 $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.

Net interest income includes the periodic recognition of prepayment penalty fee income associated with commercial loan payoffs.

Prepayment penalty fee income amounted to $50 thousand (or 1 basis point benefit to NIM) and $174 thousand (or 1 basis point benefit to NIM), respectively, for the three and six months ended June 30, 2023, compared to $62 thousand (or 0 basis point benefit to NIM) and $138 thousand (or 0 basis point benefit to NIM), respectively, for the same periods in 2022.

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

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

2 unchanged sentences

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.

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 $707 thousand for the six months ended June 30, 2023, compared $1.8 million 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 and six months ended June 30, 2023, compared to $323 thousand (or 2 basis points benefit to NIM) and $1.1 million (or 4 basis points benefit to NIM), respectively, for the same periods in 2022.

FTE net interest income for the three and six months ended June 30, 2023 amounted to $33.7 million and $71.2 million, respectively, down by $4.1 million and $2.0 million, respectively, from the same periods in 2022.

For the three and six months ended June 30, 2023, growth in average interest-earning assets net of increased average interest-bearing liability balances, contributed approximately $1.6 million and $4.0 million, respectively, of net interest income.

Increases in funding costs outpaced increases in asset yields, reducing net interest income by $5.6 million and $5.9 million, respectively, for the three and six months ended June 30, 2023.

NIM was 2.03% and 2.18%, respectively, for the three and six months ended June 30, 2023, compared to 2.71% and 2.64%, respectively, for the same periods 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

Total average securities for the three and six months ended June 30, 2023 increased by $105.4 million and $113.7 million, respectively, from the average balances for the same periods a year earlier due to purchases of debt securities.

The FTE rate of return on the securities portfolio for the three and six months ended June 30, 2023 was 2.47% and 2.46%, respectively, compared to 1.80% and 1.70%, respectively, for the same periods in 2022, reflecting the impact of higher market interest rates in 2023.

Total average loan balances for the three and six months ended June 30, 2023 increased by $953.1 million and $914.6 million, respectively, from the average loan balances for the comparable 2022 periods, largely reflecting growth in average residential real estate loan and CRE balances.

The yield on total loans for the three and six months ended June 30, 2023 was 4.97% and 4.85%, respectively, compared to 3.40% and 3.32%, respectively, in the corresponding periods in 2022.

Management's Discussion and Analysis

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.

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 in 2022 and to a lesser extent by the periodic recognition of commercial loan prepayment fee income.

Excluding the impact of these items, the yield on total loans for the three and six months ended June 30, 2023 was 4.97% and 4.84%, respectively, up from 3.37% and 3.26%, respectively, for the same periods in 2022, reflecting higher market interest rates.

Higher levels of wholesale funding were used in 2023 to fund balance sheet growth.

The average balance of FHLB advances for the three and six months ended June 30, 2023 increased by $828.1 million and $860.4 million, respectively, compared to the average balances for the same periods in 2022.

Due to increases in market interest rates, the average rate paid on such advances for the three and six months ended June 30, 2023 was 4.77% and 4.64%, respectively, up from 1.09% and 0.88%, respectively, for the same periods in 2022.

Included in total average interest-bearing deposits were wholesale brokered deposits, which increased by $277.7 million and $133.4 million, respectively, from the same periods in 2022.

Due to increases in market interest rates, the average rate paid on wholesale brokered deposits for the three and six months ended June 30, 2023 was 4.71% and 4.33%, respectively, compared to 0.41% and 0.28%, respectively, for the same periods in 2022.

As market interest rates rose, deposit balances shifted from lower cost deposits to higher cost deposits.

Average in-market interest-bearing deposits, which excludes wholesale brokered deposits, for the three and six months ended June 30, 2023 increased by $120.9 million and $132.4 million, respectively, from the average balances for the same periods in 2022, with increases in time deposits and interest-bearing demand deposits.

The average rate paid on in-market interest-bearing deposits for the three and six months ended June 30, 2023 was 2.27% and 1.97%, respectively, compared to 0.38% and 0.35%, respectively, from the same periods in 2022.

The average balance of noninterest-bearing demand deposits for the three and six months ended June 30, 2023 decreased by $121.8 million and $113.4 million, respectively, from the average balances for the same periods in 2022.

Management's Discussion and Analysis

2 unchanged sentences

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

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

Change Due to

Volume Rate Net Change

(Dollars in thousands) Three Months Ended June 30, 2023 vs.

2022 Six Months Ended June 30, 2023 vs.

Change Due to Change Due to

Volume Rate Net Change Volume Rate Net Change

Interest on Interest-Earning Assets:

33 unchanged sentences

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

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

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.

The following table presents the provision for credit losses:

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2023 2022 $ % 2023 2022 $ %

Provision for credit losses on loans $600 ($2,929) $3,529 120 % $1,400 ($2,929) $4,329 148 %

Provision for credit losses on unfunded commitments 100 (71) $171 241 100 29 $71 245

Provision for credit losses $700 ($3,000) $3,700 123 % $1,500 ($2,900) $4,400 152 %

The provision recognized in 2023 provided for loan growth and reflected continued negative outlook in economic forecasts, partially offset by continued strength in asset and credit quality metrics.

The negative provision recorded in 2022, reflected low loss rates and strong asset and credit quality that more than offset negative trends in macroeconomic forecasts and loan growth that was concentrated in residential real estate loans.

Net charge-offs totaled $37 thousand for the three months ended June 30, 2023, compared to net recoveries of $10 thousand for the same period in 2022.

For the six months ended June 30, 2023, net charge-offs totaled $84 thousand, compared to net recoveries of $158 thousand for the same period in 2022.

The ACL on loans was $39.3 million, or 0.73% of total loans, at June 30, 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.

2 unchanged sentences

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

(Dollars in thousands)

Three months ended March 31, 2023 2022 $ %

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2023 2022 $ % 2023 2022 $ %

Noninterest income:

11 unchanged sentences

Noninterest Income Analysis

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.

Revenue from wealth management services represented 64% of total noninterest income for the six months ended June 30, 2023, compared to 62% 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.

1 unchanged sentence

Wealth management revenues also include “transaction-based” revenues, such as commissions and other service fees that are not primarily derived from the value of assets.

Management's Discussion and Analysis

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

(Dollars in thousands)

Three months ended March 31, 2023 2022 $ %

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2023 2022 $ % 2023 2022 $ %

Wealth management revenues:

2 unchanged sentences

Total wealth management revenues $9,048 $10,066 ($1,018) (10 %) $17,711 $20,597 ($2,886) (14 %)

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

Wealth management revenues for the three and six months ended June 30, 2023 decreased by $1.0 million and $2.9 million, respectively, from the same periods in 2022, reflecting a decrease 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 six months ended June 30, 2023 decreased by 12% and 15%, respectively, from the average balance for the same periods in 2022.

The end of period AUA balance amounted to $6.4 billion at June 30, 2023.

The following table presents the changes in wealth management AUA balances:

(Dollars in thousands)

Three months ended March 31, 2023 2022

Three Months Six Months

Periods ended June 30, 2023 2022 2023 2022

Wealth management assets under administration:

5 unchanged sentences

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.

Through June 30, 2023, cumulative client asset withdrawals associated with the departure of the advisors amounted to $660 million, of which $56 million was withdrawn in the six months ended June 30, 2023 and $604 million was withdrawn in the fourth quarter of 2022.

The cumulative withdrawals reduced wealth management revenues by approximately $951 thousand and $1.9 million, respectively, in the three and six months ended June 30, 2023.

We currently estimate a decline in full-year 2023 revenues of approximately $3.8 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.

Mortgage banking revenues represented 11% of total noninterest income for the six months ended June 30, 2023, compared to 17% 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 ended March 31, 2023 2022 $ %

Management's Discussion and Analysis

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2023 2022 $ % 2023 2022 $ %

Mortgage banking revenues:

12 unchanged sentences

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

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.

For the three and six months ended June 30, 2023, mortgage banking revenues were down by $329 thousand and $2.6 million, respectively, compared to the same periods 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 $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.

In addition, the decline in mortgage banking revenues was partially offset by higher net loan servicing fee income associated with loans sold with servicing retained.

The volume of loans sold to the secondary market reflected an overall reduction in mortgage origination, refinancing and sales activity in 2023, which was driven by increase in market interest rates and changes in the housing markets.

Mortgage banking revenues are 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.

In addition, the overall decline in mortgage banking revenues in 2023 was partially offset by higher net loan servicing fee income associated with loans sold with servicing retained.

The increase in net loan servicing fee income was largely due to lower amortization of servicing rights, reflecting lower prepayment speeds on the serviced mortgage portfolio.

Management's Discussion and Analysis

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.

Income from BOLI for the six months ended June 30, 2023, was up by $828 thousand from the same period in 2022, reflecting the recognition of $658 thousand in non-taxable income in 2023 associated with the receipt of life insurance proceeds.

For the three and six months ended June 30, 2023, loan related derivative income decreased by $422 thousand and $774 thousand, respectively, from the same periods 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) Change

Three months ended March 31, 2023 2022 $ %

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2023 2022 $ % 2023 2022 $ %

Noninterest expense:

9 unchanged sentences

Total noninterest expense $33,016 $31,077 $1,939 6 % $66,580 $62,296 $4,284 7 %

Management's Discussion and Analysis

Noninterest Expense Analysis

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.

Salaries and employee benefits expense, the largest component of noninterest expense, for the three and six months ended June 30, 2023 increased by $207 thousand and $989 thousand, respectively, compared to the same periods in 2022.

The increase in 2023 largely reflected annual merit increases and higher staffing levels, partially offset by decreases in performance-based compensation accruals.

Outsourced services expense for the three and six months ended June 30, 2023, increased by $246 thousand and $500 thousand, respectively, compared to the same periods in the prior year, due to changes to and expansion of services provided by third party vendors.

Net occupancy expense for the three and six months ended June 30, 2023 increased by $242 thousand and $379 thousand, respectively, compared to the same periods in 2022, primarily due to branch expansion.

Legal, audit and professional fees for the three and six months ended June 30, 2023 increased by $301 thousand and $427 thousand, respectively, compared to the same periods in 2022, reflecting higher legal expenses.

FDIC deposit insurance costs for the three and six months ended June 30, 2023 increased by $969 thousand and $1.5 million, respectively, compared to the same periods in 2022, reflecting an increase in the FDIC’s deposit assessment rate and growth in assets.

Advertising and promotion expense for the three and six months ended June 30, 2023 decreased by $297 thousand and $240 thousand, respectively, due to timing of activities.

Other expense for the three and six months ended June 30, 2023 increased by $163 thousand and $541 thousand, respectively, compared to the same periods 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 ended March 31, 2023 2022

Three Months Six Months

Periods ended June 30, 2023 2022 2023 2022

Income tax expense $2,853 $5,333 $6,153 $9,781

Effective income tax rate 20.2 % 21.1 % 20.4 % 21.2 %

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 three months ended March 31, 2023 compared to the same period in 2022 largely reflected an increase in benefits from BOLI income.

The effective income tax rates for the three and six months ended June 30, 2023 and 2022 differed from the federal rate of 21%, primarily due to the benefits of tax-exempt income, income from BOLI and federal tax credits, partially offset by state income tax expense.

The decrease in the effective tax rate for the three and six months ended June 30, 2023 compared to the same periods in 2022 largely reflected an increase in benefits from BOLI income.

Segment Reporting

1 unchanged sentence

See Note 13 to the Unaudited Consolidated Financial Statements for additional disclosure related to business segments.

Management's Discussion and Analysis

Commercial Banking

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

(Dollars in thousands) Change

Three months ended March 31, 2023 2022 $ %

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2023 2022 $ % 2023 2022 $ %

Net interest income $33,486 $37,563 ($4,077) (11 %) $70,666 $72,671 ($2,005) (3 %)

7 unchanged sentences

Net income $10,103 $18,223 ($8,120) (45 %) $22,362 $32,625 ($10,263) (31 %)

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.

Net interest income for the Commercial Banking segment for the three and six months ended June 30, 2023, decreased by $4.1 million and $2.0 million, respectively, from the same periods in 2022.

Net interest income was adversely impacted increases in funding costs, but this was partially offset by growth in and higher yields on average interest-earning assets.

The provision recognized in 2023 provided for loan growth and reflected continued negative outlook in economic forecasts, partially offset by continued strength in asset and credit quality metrics.

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

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 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.

Noninterest income derived from the Commercial Banking segment for the three and six months ended June 30, 2023 was down by $477 thousand and $2.6 million, respectively, from the comparable periods in 2022, reflecting lower mortgage banking revenues, lower loan related derivative income and higher BOLI income.

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

Commercial Banking noninterest expenses for the three and six months ended June 30, 2023 were up by $2.1 million and $4.2 million, respectively, from the same periods in 2022, with the largest increases in FDIC deposit insurance costs, salaries and employee benefits and net occupancy costs.

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

1 unchanged sentence

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

(Dollars in thousands) Change

Three months ended March 31, 2023 2022 $ %

(Dollars in thousands) Three Months Six Months

Change Change

Periods ended June 30, 2023 2022 $ % 2023 2022 $ %

Net interest expense $14 ($48) $62 129 % $27 ($65) $92 142 %

4 unchanged sentences

Net income $1,153 $1,734 ($581) (34 %) $1,706 $3,815 ($2,109) (55 %)

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.

For the three and six months ended June 30, 2023, noninterest income derived from the Wealth Management Services segment decreased by $1.1 million and $2.8 million, respectively, from the same periods in 2022, largely reflecting a decrease in asset-based revenues.

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

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.

For the three and six months ended June 30, 2023, noninterest expenses for the Wealth Management Services segment decreased by $157 thousand and increased modestly by $44 thousand, respectively, from the comparable periods in 2022.

Management's Discussion and Analysis

Financial Condition

2 unchanged sentences

2023 December 31,

Cash and due from banks $134,989 $115,492 $19,497 17 %

Total securities 1,022,458 993,928 28,530 3

5 unchanged sentences

Total shareholders’ equity 459,161 453,669 5,492 1

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.

Total assets amounted to $7.0 billion at June 30, 2023, up by $351.7 million, or 5%, from the end of 2022, largely reflecting loan growth.

The securities portfolio increased by $28.5 million, or 3%, 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 $271.0 million, or 5%, 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.

Total deposits increased by $295.5 million, or 6%, from the end of 2022, with increases in both wholesale brokered deposits and in-market deposits.

FHLB advances increased by $60.0 million, or 6%, from December 31, 2022.

The increase in both wholesale brokered deposits and FHLB advances reflected higher levels of wholesale funding being utilized to fund balance sheet growth.

Shareholders’ equity increased by $5.5 million, or 1%, 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.

These increases were partially offset by dividend declarations and an increase in treasury stock balances, largely due to stock repurchases in early 2023.

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

1 unchanged sentence

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

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.

4 unchanged sentences

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

Management's Discussion and Analysis

Determination of Fair Value

6 unchanged sentences

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

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

As of June 30, 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.

2 unchanged sentences

The carrying amounts of securities held are as follows:

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

Amount % Amount %

(Dollars in thousands) June 30, 2023 December 31, 2022

Amount % of Total Amount % of Total

Available for Sale Debt Securities:

9 unchanged sentences

Total available for sale debt securities $1,022,458 100 % $993,928 100 %

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

The securities portfolio represented 15% of total assets at June 30, 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.

6 unchanged sentences

These were partially offset by $35.4 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.

As of June 30, 2023, the carrying amount of available for sale debt securities included net unrealized losses of $168.0 million, compared to net unrealized losses of $172.4 million as of December 31, 2022.

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

government agencies and U.S.

1 unchanged sentence

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

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.

Total loans amounted to $5.4 billion at June 30, 2023, up by $271.0 million, or 5%, from the end of 2022.

Management's Discussion and Analysis

The following is a summary of loans:

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

Amount % Amount %

(Dollars in thousands) June 30, 2023 December 31, 2022

Amount % of Total Amount % of Total

Commercial real estate (1)

16 unchanged sentences

Commercial Loans

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

The commercial loan portfolio represented 47% of total loans at June 30, 2023.

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

1 unchanged sentence

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

Our participation in commercial loans originated by other banks amounted to $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 amounted to $545.3 million and $510.6 million, respectively, at June 30, 2023 and December 31, 2022.

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

6 unchanged sentences

A portion of the Bank’s C&I loans is also collateralized by real estate.

C&I loans also include PPP loans that are fully guaranteed by the U.S.

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

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

Commercial Real Estate Loans

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

CRE loans totaled $1.9 billion at June 30, 2023, up by $110.7 million, or 6%, from the balance at December 31, 2022.

In 2023, CRE loan originations and advances of approximately $151 million were partially offset by payments of approximately $53 million.

Included in the net increase in CRE were reclassifications of $13 million from C&I.

Included in the CRE loan portfolio were construction and development loans of $156.3 million and $164.1 million, respectively, as of June 30, 2023 and December 31, 2022.

Shared national credit balances outstanding included in the CRE loan portfolio totaled $16.4 million and $10.5 million, respectively, at June 30, 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 June 30, 2023 and December 31, 2022.

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

(Dollars in thousands) June 30, 2023 December 31, 2022

Outstanding Balance % of Total Outstanding Balance % of Total

6 unchanged sentences

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

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

(Dollars in thousands) June 30, 2023 December 31, 2022

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

15 unchanged sentences

Commercial and Industrial Loans

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.

C&I loans amounted to $611.5 million at June 30, 2023, down by $44.9 million, or 7%, from the balance at December 31, 2022.

The net reduction in C&I reflected payments of approximately $60 million and reclassifications of $13 million to CRE, partially offset by originations and advances of $28 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.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $38.4 million and $40.9 million, respectively, at June 30, 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 June 30, 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) March 31, 2023 December 31, 2022

(Dollars in thousands) June 30, 2023 December 31, 2022

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

2 unchanged sentences

Owner occupied and other real estate 161 80,874 13 168 72,429 11

Manufacturing 56 60,510 10 55 60,601 9

Retail 54 58,870 10 50 56,012 9

Transportation and warehousing

18 59,727 10 20 51,347 8

Manufacturing 55 58,074 9 55 60,601 9

Educational services 16 43,104 7 19 46,708 7

Retail 47 40,319 7 50 56,012 9

Finance and insurance

15 unchanged sentences

Residential Real Estate Loans

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 residential real estate loan portfolio represented 47% of total loans at June 30, 2023.

Residential real estate loans held in portfolio amounted to $2.5 billion at June 30, 2023, up by $187.1 million, or 8%, from the balance at December 31, 2022.

While total residential real estate loan origination activity has declined from the prior year, we originated a high proportion of loans for portfolio.

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

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

(Dollars in thousands) June 30, 2023 December 31, 2022

Amount % of Total Amount % of Total

6 unchanged sentences

$2,510,125 100 % $2,323,002 100 %

(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.

(1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $56.6 million and $59.9 million, respectively, as of June 30, 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.

2 unchanged sentences

The table below presents residential real estate loan origination activity:

(Dollars in thousands)

Three months ended March 31, 2023 2022

Amount % of Total Amount % of Total

(Dollars in thousands) Three Months Six Months

Periods ended June 30, 2023 2022 2023 2022

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

Originations for retention in portfolio (1)

7 unchanged sentences

(Dollars in thousands)

Three months ended March 31, 2023 2022

Amount % of Total Amount % of Total

Three Months Six Months

Periods ended June 30, 2023 2022 2023 2022

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

Loans sold with servicing rights retained $28,727 44 % $23,478 29 % $45,841 49 % $38,105 18 %

9 unchanged sentences

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

The net balance of capitalized servicing rights amounted to $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.

The net balance of capitalized servicing rights amounted to $8.7 million and $9.0 million, respectively, as of June 30, 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 June 30, 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 94% of the total consumer portfolio at March 31, 2023.

Home equity lines of credit and home equity loans represented 94% of the total consumer portfolio at June 30, 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 $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.

The consumer loan portfolio totaled $319.5 million at June 30, 2023, up by $18.1 million, or 6%, from December 31, 2022, largely reflecting increases in home equity lines and loans.

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $12.6 million and $9.6 million, respectively, at June 30, 2023 and December 31, 2022.

Management's Discussion and Analysis

5 unchanged sentences

(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.

During the three and six months ended June 30, 2023, there were no TLMs.

Nonperforming Assets

1 unchanged sentence

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

(Dollars in thousands) Mar 31,

(Dollars in thousands) June 30,

2023 December 31,

Commercial real estate $— $—

13 unchanged sentences

Nonaccrual Loans

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.

During the six months ended June 30, 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)

For the periods ended March 31, 2023 2022

(Dollars in thousands) Three Months Six Months

For the periods ended June 30, 2023 2022 2023 2022

Balance at beginning of period $13,980 $12,589 $12,846 $14,203

6 unchanged sentences

The following table presents additional detail on nonaccrual loans:

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

(Dollars in thousands) June 30, 2023 December 31, 2022

Days Past Due Days Past Due

13 unchanged sentences

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

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

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2023.

As of June 30, 2023, the composition of nonaccrual loans was 91% residential and consumer and 9% commercial, compared to 100% residential and consumer as of December 31, 2022.

Total nonaccrual loans decreased by $2.4 million from the end of 2022.

Nonaccrual residential real estate mortgage loans amounted to $8.5 million at June 30, 2023, down by $3.4 million from the end of 2022.

As of June 30, 2023, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Connecticut, Massachusetts and Rhode Island.

Included in total nonaccrual residential real estate loans at June 30, 2023 were five loans purchased for portfolio and serviced by others amounting to $1.5 million.

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

2 unchanged sentences

The following table presents past due loans by category:

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

(Dollars in thousands) June 30, 2023 December 31, 2022

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

8 unchanged sentences

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

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.

As of June 30, 2023 and December 31, 2022, the composition of past due loans (loans past due 30 days or more) was 96% residential and consumer and 4% commercial, compared to 87% residential and consumer and 13% commercial at December 31, 2022.

Total past due loans decreased by $5.2 million from the end of 2022.

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.

Total past due loans included $3.7 million of nonaccrual loans as of June 30, 2023, compared to $7.2 million as of December 31, 2022.

All loans 90 days or more past due at June 30, 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 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 include classified accruing commercial loans that were less than 90 days past due at June 30, 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.

1 unchanged sentence

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.

As of June 30, 2023, there were no loans deemed to be potential problem loans.

Allowance for Credit Losses on Loans

11 unchanged sentences

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

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

(Dollars in thousands) June 30, 2023 December 31, 2022

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

15 unchanged sentences

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 $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 amounted to $39.3 million at June 30, 2023, up by $1.3 million, or 3%, 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 0.73% at June 30, 2023, compared to 0.74% at December 31, 2022.

The Corporation recorded a provision for credit losses of $700 thousand and $1.5 million, respectively, for the three and six months ended June 30, 2023.

The provision provided for loan growth and reflected continued negative outlook in economic forecasts, partially offset by continued strength in asset and credit quality metrics.

Net charge-offs totaled $37 thousand for the three months ended June 30, 2023, compared to net recoveries of $10 thousand for the same period in 2022.

For the six months ended June 30, 2023, net charge-offs totaled $84 thousand, compared to net recoveries of $158 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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The total ACL on loans is available to absorb losses from any segment of the loan portfolio.

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

(Dollars in thousands) June 30, 2023 December 31, 2022

Allocated ACL

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The following table presents a summary of deposits:

(Dollars in thousands) Change

2023 December 31,

(Dollars in thousands)

June 30, 2023 December 31, 2022

Amount % of Total Amount % of Total

Noninterest-bearing demand deposits $758,242 14 % $858,953 17 %

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Total deposits $5,314,478 100 % $5,018,962 100 %

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.

Total deposits amounted to $5.3 billion at June 30, 2023, up by $295.5 million, or 6%, from December 31, 2022, with increases in wholesale brokered deposits and in-market deposits.

Wholesale brokered deposits increased by $243.3 million, or 68%, 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.

In-market deposits, which exclude wholesale brokered deposits, were up by $52.2 million, or 1%, from the balance at December 31, 2022.

As expected, due to higher market interest rates and increased competition, in-market deposits shifted from relatively lower cost products to higher cost products in 2023.

As of June 30, 2023, in-market deposits were approximately 59% retail and 41% commercial.

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

The average size of our in-market deposit accounts was approximately $37 thousand at 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

The average size of our in-market deposit accounts was approximately $37 thousand at June 30, 2023.

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

(Dollars in thousands) June 30, 2023 December 31, 2022

Balance % of Total Deposits Balance % of Total Deposits

Uninsured / Unprotected Deposits:

Uninsured Deposits:

Uninsured deposits (1)

$1,369,174 26 % $1,514,900 30 %

affiliate deposits (2)

119,034 2 210,444 4

Uninsured deposits, excluding affiliate deposits 1,250,140 24 1,304,456 26

fully-collateralized preferred deposits (3)

313,237 6 329,868 7

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

(1) Determined in accordance with regulatory reporting requirements.

Uninsured deposits, after exclusions $936,903 18 % $974,588 19 %

(1) Determined in accordance with regulatory reporting requirements, which includes affiliate deposits and fully-collateralized preferred deposits.

(2) Uninsured deposit balances of Washington Trust Bancorp, Inc.

and its subsidiaries that are eliminated in consolidation.

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

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

FHLB advances totaled $1.0 billion at June 30, 2023, up by $60.0 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.

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Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand.

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

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

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Percentage of total contingent liquidity to uninsured deposits 125.8 % 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.

Percentage of total contingent liquidity to uninsured deposits, after exclusions 183.9 % 142.3 %

(1) As of June 30, 2023 and December 31, 2022, loans with a carrying value of $2.9 billion and $2.4 billion, respectively, and securities available for sale with carrying values of $97.4 million and $102.1 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of June 30, 2023 and December 31, 2022, loans with a carrying value of $18.5 million and $20.9 million, respectively, and securities available for sale with a carrying value of $12.9 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.

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

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

Liquidity remained within target ranges established by the ALCO during the six months ended June 30, 2023.

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

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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

These financial transactions include commitments to extend credit, standby letters of credit, forward loan commitments, loan related

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.

derivative contracts and interest rate risk management contracts.

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

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Capital Resources

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

Total shareholders’ equity amounted to $459.2 million at June 30, 2023, up by $5.5 million from December 31, 2022.

The increase included net income of $24.1 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.

In addition, the AOCL component of shareholders' equity increased by $9.0 million, reflecting increases in the fair value of cash flow hedges and available for sale debt securities primarily attributable to changes in market interest rates.

These increases to shareholders’ equity were partially offset by $19.1 million in dividend declarations and a net increase in treasury stock balances of $7.1 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.

The net increase in treasury stock included 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 June 30, 2023, compared to 54 cents per share declared for the same period in 2022.

On a year-to-date basis, dividend declarations totaled $1.12 per share in 2023, compared to $1.08 in 2022.

The ratio of total equity to total assets was 6.55% at June 30, 2023, compared to a ratio of 6.81% at December 31, 2022.

Book value per share was $26.98 at June 30, 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 11.81% at June 30, 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.

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

As of 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.

As of June 30, 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 March 31, 2023 and December 31, 2022.

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.

2 unchanged sentences

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

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

4 unchanged sentences

300 basis point rate increase 7.23 (8.11) 1.42 (10.07)

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.

The relative change in interest rate sensitivity from December 31, 2022, as shown in the above table, was attributable to changes in balance sheet composition and market rates, as well as 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.

As of June 30, 2023, 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 savings and time deposit rates could decline more slowly and by a lesser amount than other market interest rates.

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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.

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.

The negative exposure in down rate scenarios reflects the insensitivity of certain deposit rates to market interest rate declines as they approach their floors.

As of June 30, 2023, the positive exposure of net interest income in Year 1 to rising rates as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term.

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

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

The negative exposure to rising rates in Year 2 is due to a higher level of longer-term fixed rate assets, as well as larger proportion of wholesale funds to total sources of funds.

Fixed rate assets would not reprice upward in a rising rate

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 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.

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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.

During 2022 and into 2023, the Federal Reserve reversed policy and increased the target range to 5.00% - 5.25% as of June 30, 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.

12 unchanged sentences

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

The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of March 31, 2023 and December 31, 2022 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 June 30, 2023 and December 31, 2022 resulting from immediate parallel rate shifts:

(Dollars in thousands)

6 unchanged sentences

Trust preferred debt and other corporate debt securities (9) 10

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

Total change in market value as of June 30, 2023 $64,166 ($126,668)

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

8 unchanged sentences

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