What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-26 compared with 2023-02-23 · 312 added, 279 removed, 835 unchanged (41% of the section changed)

12 unchanged sentences

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

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 and in January 2024, we opened a new full-service branch in Smithfield, Rhode Island.

We plan to open another branch in the Olneyville section of Providence in mid-2024.

Risk Management

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For further discussion regarding the credit risk and the credit quality of the Corporation’s loan portfolio, see Notes 4 and 5 to the Consolidated Financial Statements.

For further discussion regarding credit risk associated with unfunded commitments, see Note 21 to the Consolidated Financial Statements.

For further discussion regarding the Corporation’s securities portfolio, see Note 3 to the Consolidated Financial Statements.

Interest rate risk is the risk of loss to future earnings due to changes in interest rates.

The risk to earnings arising from movements in interest rates.

Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows.

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

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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.

Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources.

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

5 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.

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

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

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Net income totaled $48.2 million in 2023, down by 33% from the $71.7 million reported in 2022.

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 largely reflected lower mortgage banking revenues resulting from an overall reduction in mortgage origination and sales activity due to higher market interest rates and changes in the housing markets.

Results also benefited from continued strength in asset and credit quality metrics and the recognition of a negative provision for credit losses.

The decrease in noninterest expenses largely reflected declines in debt prepayment penalties and volume-related mortgage originator compensation expense.

Results in 2023 were impacted by steep increases in market interest rates and declines in wealth management and mortgage banking revenues.

The decline in net interest income in 2023 was driven by increased 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 wealth management asset-based revenues and lower average AUA balances, attributable to client asset outflows concentrated in the fourth quarter of 2022.

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

The provision for credit losses reflected loan growth and slowdown of loan prepayment speeds, changes in asset and credit quality, and reflected our estimate of forecasted economic conditions.

The increase in noninterest expenses reflected higher FDIC deposit insurance costs and increases in various categories of noninterest expenses, partially offset by a decrease in salaries and employee benefits.

Income tax expense declined in 2023, largely reflecting a lower level of pre-tax income and a net $3.3 million reduction of income tax expense resulting from the revaluation of the Corporation’s net deferred tax assets.

Management's Discussion and Analysis

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

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

The analysis of net interest income, 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 $183 thousand (or 0 basis points benefit to NIM) and $3.2 million (or 6 basis points benefit to NIM), respectively, in 2022 and 2021.

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

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

Prepayment penalty fee income amounted to $272 thousand (or 1 basis point benefit to NIM) and $183 thousand (or no basis point benefit to NIM), respectively, in 2023 and 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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As noted in the Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to net interest income) amounted to $1.4 million in 2023, compared to $2.9 million in 2022.

Accelerated amortization of net deferred fee balances on PPP loans forgiven by the SBA amounted to $1.2 million (or 2 basis points benefit to NIM) and $5.4 million (or 10 basis points benefit to NIM), respectively, in 2022 and 2021.

FTE net interest income in 2022 amounted to $157.2 million, up by $14.9 million, or 10%, from 2021.

Growth in average interest-earning assets, net of increased average interest-bearing liability balances, contributed $7.8 million of net interest income in 2022.

Increases in asset yields outpaced increases in funding costs, contributing $7.1 million of net interest income.

This included no accelerated amortization of net deferred fee balances on PPP loans forgiven by the SBA in 2023, compared to $1.2 million (or 2 basis points benefit to NIM) in 2022.

FTE net interest income in 2023 amounted to $138.0 million, down by $19.1 million, or 12%, from 2022.

Growth in average interest-earning assets, net of increased average interest-bearing liability balances, contributed $544 thousand of net interest income in 2023.

Increases in funding costs outpaced increases in asset yields, reducing net interest income by $19.7 million.

See additional discussion regarding interest rate sensitivity under the caption “Asset/Liability Management and Interest Rate Risk.”

NIM was 2.69% in 2022, up by 10 basis points from 2.59% in 2021.

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

Excluding the impact of both these items, NIM amounted to 2.67% in 2022, compared to 2.43% in 2021.

NIM benefited from higher market interest rates in 2022.

Total average securities for 2022 increased by $108.0 million, or 11%, from the average balance for 2021, reflecting purchases of debt securities.

NIM was 2.05% in 2023, down by 64 basis points from 2.69% in 2022.

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

Total average securities for 2023 increased by $63.7 million, or 6%, from the average balance for 2022, due to purchases of debt securities.

The FTE rate of return on securities was 2.45% in 2023, up by 50 basis points from 1.95% in 2022, reflecting the impact of higher market interest rates in 2023.

Total average loan balances increased by $840.3 million, or 18%, from the average balance for 2022.

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

The yield on total loans in 2022 was 3.75%, up by 39 basis points from 3.36% in 2021.

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

Excluding the impact of these items for both periods, the yield on total loans amounted to 3.71% in 2022, up by 55 basis points, from 3.16% in 2021, reflecting higher market interest rates.

Management's Discussion and Analysis

This reflected growth in average residential real estate and CRE loans.

The yield on total loans in 2023 was 5.03%, up by 128 basis points from 3.75% in 2022, reflecting higher market interest rates in 2023.

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

The average balance of FHLB advances for 2023 increased by $642.5 million, or 155%, compared to the average balance for 2022.

The average rate paid on such advances in 2022 was 2.83%, up 181 basis points from 1.02% in 2021, reflecting increases in market interest rates.

Included in total average interest-bearing deposits were wholesale brokered deposits, which decreased by $237.3 million, or 37%, from 2021.

The average rate paid on wholesale brokered deposits in 2022 was 1.04%, up by 85 basis points from 0.19% in 2021, reflecting increases in market interest rates.

Average in-market interest-bearing deposits, which excludes wholesale brokered deposits, increased by $523.7 million, or 16%, from the average balance in 2021, reflecting growth across all deposit categories.

The average rate paid on in-market interest-bearing deposits in 2022 was 0.59%, up by 24 basis points from 0.35% in 2021, reflecting recent increases in market interest rates.

The average balance of noninterest-bearing demand deposits for 2022 decreased by $11.2 million, or 1%, from the average balance for 2021.

Due to increases in market rates, the average rate paid on such advances in 2023 was 4.69%, up 186 basis points from 2.83% in 2022.

Included in total average interest-bearing deposits were wholesale brokered deposits, which increased by $199.6 million, or 49%, from 2022.

The average rate paid on wholesale brokered deposits in 2023 was 4.76%, up by 372 basis points from 1.04% in 2022.

Management's Discussion and Analysis

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, increased by $210.2 million, or 6%, from the average balance in 2022, with increases in time deposits and interest-bearing demand deposits.

The average rate paid on in-market interest-bearing deposits in 2023 was 2.34%, up by 175 basis points from 0.59% in 2022.

The average balance of noninterest-bearing demand deposits for 2023 decreased by $145.3 million, or 16%, from the average balance in 2022.

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

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Taxable debt securities 1,311 5,921 7,232

1,188 1,579 2,767

Commercial real estate 12,901 40,326 53,227

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

A negative provision for credit losses (or a benefit) of $1.3 million was recognized in earnings in 2022 compared to a negative provision for credit losses (or a benefit) of $4.8 million in 2021.

The negative provision recognized in 2022 was reflective of low loss rates and continued strength in asset and credit quality metrics that more than offset negative trends in macroeconomic forecasts and loan growth that was concentrated in residential real estate loans.

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

Net recoveries totaled $368 thousand, or 0.01% of average loans, in 2022, compared to net charge-offs of $417 thousand, or 0.01% of average loans, in 2021.

Management's Discussion and Analysis

The following table presents the provision for credit losses:

(Dollars in thousands)

Years ended December 31, 2023 2022 $ %

Provision for credit losses on loans $3,550 ($1,429) $4,979 348 %

Provision for credit losses on unfunded commitments (350) 129 (479) (371)

Provision for credit losses $3,200 ($1,300) $4,500 346 %

The provision recognized in 2023 reflected loan growth and slowdown of loan prepayment speeds, changes in asset and credit quality, and our current estimate of forecasted economic conditions.

Econometric factors have been stable to improving in 2023 with our forecast reflecting a lower probability of a recession.

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

Net charge-offs totaled $520 thousand, or 0.01% of average loans, in 2023, compared to net recoveries of $368 thousand, or 0.01% of average loans, in 2022.

The ACL on loans was $41.1 million, or 0.73% of total loans, at December 31, 2023, compared to $38.0 million, or 0.74% of total loans, at December 31, 2022.

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

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.

Wealth management revenues also include “transaction-based” revenues 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:

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The average balance of AUA in 2023 decreased by 9% from the average balance in 2022.

The end of period AUA balance amounted to $6.6 billion at December 31, 2023, up by $626.4 million, or 11%, from December 31, 2022, reflecting net investment appreciation and income.

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

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

Net investment (depreciation) appreciation & income (1,132,378) 931,302

Net investment appreciation (depreciation) & income 894,990 (1,132,378)

Net client asset outflows (268,574) (689,843)

Balance at the end of period $6,588,406 $5,961,990

The end of period AUA balance amounted to $6.0 billion at December 31, 2022, down by $1.8 billion, or 23%, from

Management's Discussion and Analysis

December 31, 2021.

This decline was attributable to net investment depreciation as a result of declines in the financial markets and also reflected elevated net client asset outflows.

At the end of the third quarter of 2022, four client-facing wealth management advisors at WTA, our registered investment adviser subsidiary, resigned.

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

In the fourth quarter of 2022, client asset withdrawals associated with the departure of the advisors amounted to $604 million, which reduced wealth management revenues by approximately $525 thousand in the fourth quarter.

Since the end of 2022 and through February 14, 2023, we have been notified of additional client withdrawals of approximately $76 million.

Based on the cumulative withdrawals through February 14, 2023, we estimate a decline in 2023 wealth management revenues of approximately $3.4 million associated with these withdrawals.

Washington Trust could experience additional client asset withdrawals in upcoming months associated with the departure of the former advisors.

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.

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 December 31, 2023, cumulative client asset withdrawals associated with the departure of the advisors amounted to $675 million, of which $71 million was withdrawn in 2023 and $604 million was withdrawn in the fourth quarter of 2022.

The cumulative withdrawals reduced wealth management revenues by approximately $3.8 million in 2023.

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

Mortgage banking revenues represented 12% of total noninterest income in 2023, compared to 14% for 2022.

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

Mortgage banking revenues in 2022 decreased by $19.9 million, or 69%, from 2021.

Management's Discussion and Analysis

Mortgage banking revenues decreased by $2.1 million, or 24%, in 2023.

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 $339.7 million in 2022 compared to $953.4 million in 2021, reflecting an overall reduction of mortgage origination and sales activity, as well as a shift to a higher proportion of loans originated for portfolio in 2022.

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

Residential real estate loan origination, refinancing and sales activity decreased in response to increases 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 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.

Loan related derivative income decreased by $1.6 million, or 37%, from 2021, largely reflecting a decrease in commercial borrower interest rate derivative transactions.

Other income decreased by $952 thousand, or 37%, from 2021, largely due to $1.0 million of income associated with a litigation settlement that was recognized in 2021.

Management's Discussion and Analysis

Loan related derivative income from interest rate swap contracts with commercial borrowers decreased by $1.4 million, or 50%, in 2023, reflecting a decline in volume.

Income from BOLI was up by $897 thousand, or 35%, from 2022, reflecting the recognition of $658 thousand in non-taxable income in 2023 associated with the receipt of life insurance proceeds.

Noninterest Expense

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Amortization of intangibles 843 860 (17) (2)

Debt prepayment penalties — 6,930 (6,930) (100)

Other 10,661 9,997 664 7

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Noninterest Expense Analysis

Salaries and employee benefits expense, the largest component of noninterest expense, for 2022 decreased by $3.5 million, or 4%, from 2021, largely reflecting volume-related decreases in mortgage originator compensation expense, lower performance-based compensation costs and lower wealth management compensation expense, partially offset by annual merit increases and higher staffing levels.

Debt prepayment penalty expense amounted to $6.9 million in 2021, due to the prepayment of higher-yielding FHLB advances.

There were no such debt prepayments in 2022.

Other expenses for 2022 increased by $1.6 million, or 19% from 2021.

Included in other expenses in 2022 was a contribution totaling $600 thousand that Washington Trust made to its charitable foundation.

There was no such contribution expense in 2021.

Excluding the impact of this item, other expenses was up by $1.0 million, or 12%, from 2021, reflecting increases across a variety of other noninterest expense categories.

Salaries and employee benefits expense, the largest component of noninterest expense, for 2023 decreased by $1.3 million, or 2%, from 2022, largely reflecting adjustments to performance-based compensation accruals, partially offset by annual merit increases and higher staffing levels.

Outsourced services expense for 2023 increased by $784 thousand, or 6%, from 2022 due to changes to and expansion of services provided by third-party vendors.

Net occupancy expense for 2023 increased by $510 thousand, or 6%, from 2022 primarily due to branch expansion.

Equipment expense for 2023 increased by $521 thousand, or 14%, from 2022, largely reflecting depreciation associated with branch and office equipment purchases.

Legal, audit and professional fees for 2023 increased by $764 thousand, or 24%, from 2022, reflecting higher legal expenses.

FDIC deposit insurance costs for the 2023 increased by $3.0 million, or 177%, from 2022, reflecting an increase in the FDIC’s deposit assessment rate and the impact of growth in assets.

Other expenses for 2023 increased by $664 thousand, or 7% from 2022.

This increase was largely due to higher charitable contribution expense as a $1.0 million contribution was made to Washington Trust’s charitable foundation in 2023, compared to $600 thousand contribution made in the prior year.

Management's Discussion and Analysis

The following table presents the Corporation’s income tax expense and effective tax rate for the periods indicated:

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Effective income tax rate 14.7 % 21.4 %

The effective tax rates 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.

In October 2023, the Commonwealth of Massachusetts enacted into law a tax bill changing how corporations calculate their Massachusetts taxable income effective on January 1, 2025.

As required, the Corporation revalued its deferred tax assets and liabilities and in the fourth quarter of 2023.

The revaluation of our net deferred tax assets is subject to further guidance and interpretation of the law that may be issued.

Income tax expense in 2023 was reduced by a net $3.3 million adjustment associated with the revaluation of the Corporation's net deferred tax assets due to the enactment of tax legislation mentioned above, and a valuation allowance that reflected management’s estimate regarding the realizability of a portion of the Corporation’s state deferred tax assets, largely associated with state net operating loss carryforwards.

The effective tax rates differed from the federal rate of 21%, primarily due to benefits of state tax changes, tax-exempt income, income from BOLI, and federal tax credits partially offset by the establishment of the valuation allowance pertaining to state deferred tax assets.

Excluding the net $3.3 million adjustment, the effective tax rate for 2023 would have been 20.4%, down from 21.4% in 2022, reflecting a lower proportion of taxable income to pre-tax book income.

The Corporation’s net deferred tax assets amounted to $53.8 million at December 31, 2023, compared to $56.4 million at December 31, 2022.

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.

Net deferred tax assets decreased by $2.6 million during 2023, including the establishment of the valuation allowance, as mentioned above.

Management’s assessment considered the Corporation’s forecasted future taxable income, existing taxable temporary differences along with tax planning strategies.

Management believes deferred tax assets, net of the valuation allowance, are more-likely-than-not to be realized.

See Note 11 to the Consolidated Financial Statements for additional information regarding income taxes.

Management's Discussion and Analysis

Segment Reporting

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

See Note 18 to the Consolidated Financial Statements for additional disclosure related to business segments.

See Note 18 to the Consolidated Financial Statements.

Commercial Banking

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Net income $43,873 $65,898 ($22,025) (33 %)

Net interest income for the Commercial Banking segment increased by $14.5 million, or 10%, from 2021.

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

These increases were partially offset by lower levels of accelerated amortization of net deferred fee balances on PPP loans forgiven by the SBA and prepayment penalty fee income associated with loans payoffs.

A negative provision for credit losses (or a benefit) of $1.3 million was recognized in earnings in 2022, compared to a negative provision for credit losses (or a benefit) of $4.8 million in 2021.

Net interest income for the Commercial Banking segment decreased by $19.0 million, or 12%, from 2022.

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

Management's Discussion and Analysis

A provision for credit losses of $3.2 million was recognized in earnings in 2023, compared to a negative provision for credit losses (or a benefit) of $1.3 million in 2022.

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

Noninterest income derived from the Commercial Banking segment decreased by $21.7 million, or 48%, from 2021, largely reflecting lower mortgage banking revenues and lower loan related derivative income.

Noninterest income derived from the Commercial Banking segment decreased by $3.1 million, or 13%, from 2022, largely reflecting lower mortgage banking revenues and lower loan related derivative income, partially offset by higher BOLI income.

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

Commercial Banking noninterest expenses were down by $6.9 million, or 7%, from 2021.

This reflected decreases in debt prepayment penalty expense and salaries and employee benefits, partially offset by increases in outsourced services, advertising and promotion and other expenses.

Commercial Banking noninterest expenses were up by $6.0 million, or 6%, from 2022, with the largest increases in FDIC deposit insurance costs, outsourced services, net occupancy expense, equipment expense and legal expense.

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

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Years Ended December 31, 2023 2022 $ %

Net interest expense ($50) ($58) $8 (14 %)

Net interest income (expense) $37 ($50) $87 (174 %)

Noninterest income 36,134 39,514 (3,380) (9)

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Noninterest income for the Wealth Management Services segment decreased by $3.4 million, or 9%, compared to 2022, due to a decrease in asset-based revenues.

The decline in revenues in 2022 also included income of $1.0 million associated with a

Management's Discussion and Analysis

litigation settlement that was recognized in 2021.

See further discussion of wealth management revenues under the caption “Noninterest Income” above.

Noninterest expenses for the Wealth Management Services segment increased by $141 thousand, or 0.4%, compared to 2021.

Increases in legal, audit and professional fees and other expense were largely offset by a decrease in salaries and employee benefits expense.

Noninterest expenses for the Wealth Management Services segment decreased by $1.2 million, or 4%, compared to 2022, largely reflecting a decrease in salaries and employee benefits expense, partially offset by higher legal expenses.

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

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Cash and due from banks declined by $28.7 million, or 25%, from the end of 2022, reflecting lower cash balances on deposit at correspondent banks and a reduction in cash collateral pledged to derivative counterparties.

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

The securities portfolio decreased by $48.9 million, or 5%, from the end of 2021.

A decline in the fair value of available for sale securities primarily attributable to changes in interest rates and routine pay-downs on mortgage-backed securities were partially offset by purchases of debt securities.

Total loans increased by $837.2 million, or 20%, from the balance at December 31, 2021, led by growth in the residential real estate portfolio.

Total deposits increased by $38.9 million, or 1%, from the end of 2021 with growth in in-market deposits, partially offset by a decrease in wholesale brokered deposits.

FHLB advances increased by $835.0 million, or 576%, from December 31, 2021, as higher levels of wholesale funding were utilized to fund balance sheet growth.

Shareholders’ equity amounted to $453.7 million at December 31, 2022, down by $111.1 million, or 20%, from the balance at December 31, 2021, largely reflecting a decline in the AOCL component of shareholders’ equity due decreases in the fair value of available for sale debt securities and cash flow hedges that were primarily attributable to changes in market interest rates.

Management's Discussion and Analysis

Total loans increased by $537.6 million, or 11%, from the balance at December 31, 2022, with growth in the residential real estate and CRE portfolios.

Total deposits increased by $329.2 million, or 7%, from the end of 2022, largely reflecting an increase in wholesale brokered time deposits.

FHLB advances increased by $210.0 million, or 21%, from December 31, 2022.

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

Shareholders’ equity increased by $19.0 million, or 4%, from the end of 2022, as net income and a net increase in the AOCL component of shareholders’ equity was partially offset by dividend declarations and changes in treasury stock balances.

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

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

Management's Discussion and Analysis

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

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See Notes 3 and 10 to the Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities.

Management's Discussion and Analysis

Securities Portfolio

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December 31, 2023 2022

Amount % Amount %

Amount % of Total Amount % of Total

Available for Sale Debt Securities:

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government-sponsored enterprises.

The securities portfolio decreased by $48.9 million, or 5%, from the end of 2021.

This included a decline of $163.5 million (pretax) in the fair value of available for sale securities and $116.1 million of routine pay-downs on mortgage-backed securities.

These were partially offset by purchases of U.S.

The securities portfolio increased by $6.5 million, or 1%, 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 $234.1 million, with a weighted average yield of 3.58%.

government-sponsored debt securities, including mortgage-backed securities, totaling $60.2 million, with a weighted average yield of 4.98% and an increase of $20.2 million (pretax) in the fair value of available for sale securities.

These were partially offset by $72.5 million of routine pay-downs on mortgage-backed securities.

As of December 31, 2023, the carrying amount of available for sale debt securities included net unrealized losses of $152.2 million, compared to net unrealized losses of $172.4 million as of December 31, 2022.

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

The net unrealized losses were concentrated in obligations of U.S.

government agencies and U.S.

government-sponsored enterprises, including mortgage-backed securities, and primarily attributable to relative

Management's Discussion and Analysis

changes in market interest rates since the time of purchase.

government-sponsored enterprises, including mortgage-backed securities, and primarily attributable to relative changes in market interest rates since the time of purchase.

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

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See Note 1 to the Consolidated Financial Statements for additional information.

Total loans amounted to $5.1 billion at December 31, 2022, up by $837.2 million, or 20%, from the end of 2021, led by growth in the residential real estate portfolio.

Total loans amounted to $5.6 billion at December 31, 2023, up by $537.6 million, or 11%, from the end of 2022, largely reflecting growth in both the residential real estate and CRE portfolios.

Management's Discussion and Analysis

The following table sets forth the composition of the Corporation’s loan portfolio:

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(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 $1.1 million and $38.0 million, respectively, of PPP loans as of December 31, 2022 and 2021.

(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

An analysis of the maturity and interest rate sensitivity of the Corporation’s loan portfolio as of December 31, 2023 follows:

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Interest rate terms on amounts due after one year:

Predetermined rates $412,404 $156,289 $568,693 $1,207,513 $37,336 $10,256 $47,592 $1,823,798

Variable or adjustable rates 1,179,549 381,120 1,560,669 1,058,001 245,354 1,429 246,783 2,865,453

Fixed rates $574,893 $116,841 $691,734 $1,166,514 $53,873 $13,965 $67,838 $1,926,086

Variable rates 1,280,633 342,108 1,622,741 1,379,060 251,586 1,761 253,347 3,255,148

(1) Includes construction and development loans that will convert to repayment terms following the construction period and will be reclassified to either the CRE or C&I category.

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Under the latter scenario, the average yield on portfolio loans tends to decrease as higher yielding loans are repaid or refinanced at lower rates.

Due to the fact that the Bank may, consistent with industry practice, renew a significant portion of commercial loans at or immediately prior to their maturity by renewing the loans on substantially similar or revised terms, the principal repayments actually received by the Bank are anticipated to be significantly less than the amounts contractually due in any particular period.

Management's Discussion and Analysis

particular period.

In other circumstances, a loan, or a portion of a loan, may not be repaid due to the borrower’s inability to satisfy the contractual terms of the loan.

Commercial Loans

The commercial loan portfolio represented 49% of total loans at December 31, 2022.

The commercial loan portfolio represented 48% of total loans at December 31, 2023, compared to 49% of total loans at December 31, 2022.

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

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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.

Management's Discussion and Analysis

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 $2.1 billion at December 31, 2023, up by $277.1 million, or 15%, from the balance at December 31, 2022.

In 2022, CRE loan originations and advances totaled approximately $569 million, partially offset by principal payments of approximately $379 million.

Included in the CRE loan portfolio were construction and development loans of $164.1 million and $122.4 million, respectively, as of December 31, 2022 and 2021.

In 2023, CRE loan originations and advances amounted to $420.8 million and were partially offset by principal payments of $158.4 million.

The net increase in CRE also reflected reclassifications of $14.7 million from C&I, which included changes in the primary source of repayment.

Construction and development loans included in the CRE loan portfolio amounted to $214.6 million and $164.1 million, respectively, as of December 31, 2023 and 2022.

Shared national credit balances outstanding included in the CRE loan portfolio totaled $47.4 million and $10.5 million, respectively, at December 31, 2023 and 2022.

The balance was included in the pass-rated category of commercial loan credit quality and current with respect to contractual payment terms at both December 31, 2022 and 2021.

At December 31, 2023, $29.0 million of the balance was included in the pass-rated category of commercial loan credit quality and $18.4 million of the balance was classified.

At December 31, 2022 all of the balances were included in the pass-rated category.

All of the shared national credit balances included in CRE loans were current with respect to payment terms at both December 31, 2023 and 2022.

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

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Total $2,106,359 100 % $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) December 31, 2023 December 31, 2022

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

Outstanding Balance (1)

% of Total Outstanding Balance (1)

CRE Portfolio Segmentation:

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Retail 434,913 21 421,617 23

Industrial and warehouse 307,987 15 192,717 11

Office 284,199 13 257,551 14

Hospitality 235,015 11 214,829 12

Industrial and warehouse 42 192,717 11 35 137,254 8

Healthcare 175,490 8 136,225 7

7 unchanged sentences

$65,458 $65,431

(1) Does not include unfunded commitments of $351.5 million and $322.4 million, respectively, as of December 31, 2023 and 2022.

(2) Total commitment (outstanding loan balance plus unfunded commitments) divided by number of loans.

In 2023, there has been heightened focus in the banking industry on the CRE office sector, given the continuation of remote work and an increase in vacancies across the office market.

As of December 31, 2023, Washington Trust’s CRE office loan segment totaled $284.2 million, or 5% of total loans and 13% of the total CRE loans.

These office loans are secured by properties located in our primary lending market area of southern New England - Connecticut, Massachusetts and Rhode Island.

Furthermore, approximately 66% of the CRE office segment balance of $284.2 million is secured by properties located in suburban areas.

As of December 31, 2023, all of the CRE office loans were current with respect to payment terms and 93% of the CRE office segment balance was on accruing status.

Additionally, the credit quality of the CRE office loan segment was 84% pass-rated, 2% special mention-rated and 14% classified as of December 31, 2023.

Commercial and Industrial Loans

C&I loans amounted to $656.4 million at December 31, 2022, up by $14.8 million, or 2%, from the balance at December 31, 2021.

This included a net reduction of PPP loans of $36.9 million, reflecting loans forgiven by the SBA.

Excluding PPP loans, C&I loans increased by $51.7 million in 2022, as loan originations and advances of approximately $142 million were offset by principal payments of approximately $90 million.

Included in C&I loans were PPP loans of $1.1 million and $38.0 million, respectively, as of December 31, 2022 and 2021.

Management's Discussion and Analysis

C&I loans amounted to $605.1 million at December 31, 2023, down by $51.3 million, or 8%, from the balance at December 31, 2022.

The decline in C&I balances reflected payments of $87.3 million and reclassifications to CRE of $14.7 million, partially offset by loan originations and advances of approximately $50.7 million.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $66.3 million and $40.9 million, respectively, at December 31, 2023 and 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 December 31, 2022 and 2021.

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

Management's Discussion and Analysis

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

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

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

Outstanding Balance (1)

% of Total Outstanding Balance (1)

C&I Portfolio Segmentation:

Healthcare and social assistance $166,490 28 % $193,052 29 %

Owner occupied and other real estate 168 72,429 11 185 72,957 11

Manufacturing 55 60,601 9 65 55,341 9

Retail 50 56,012 9 79 47,290 7

Real estate rental and leasing 70,540 12 72,429 11

Transportation and warehousing

63,789 11 51,347 8

Manufacturing 54,905 9 60,601 9

Retail trade 43,746 7 56,012 9

Educational services 41,968 7 46,708 7

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33,617 6 28,313 4

Entertainment and recreation

22,674 4 23,948 4

Arts, entertainment and recreation

22,249 4 25,646 4

Accommodation and food services 13,502 2 17,167 3

Professional, scientific and technical

Professional, scientific and technical services

7,998 1 6,451 1

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$25,324 $27,676

(1) Does not include unfunded commitments of $341.9 million and $344.2 million, respectively, as of December 31, 2023 and 2022.

(2) Total commitment (outstanding loan balance plus unfunded commitments) divided by number of loans.

Residential Real Estate Loans

The residential real estate loan portfolio represented 45% of total loans at December 31, 2022.

Residential real estate loans held in portfolio amounted to $2.3 billion at December 31, 2022, up by $596.0 million, or 35%, from the balance at December 31, 2021, reflecting a higher proportion of loans originated for portfolio than for sale in 2022.

The residential real estate loan portfolio represented 46% of total loans at December 31, 2023, compared to 45% of total loans at December 31, 2022.

Residential real estate loans held in portfolio amounted to $2.6 billion at December 31, 2023, up by $281.5 million, or 12%, from the balance at December 31, 2022.

A large proportion of loan origination activity was originated for portfolio.

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

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

Residential real estate loan origination, refinancing and sales activity decreased in 2022 in response to increases in market interest rates.

Residential real estate loan origination, refinancing and sales activity decreased in 2023 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.

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Consumer Loans

The consumer loan portfolio represented 6% of total loans at both December 31, 2023 and 2022.

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

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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 $301.4 million at December 31, 2022, up by $36.1 million, or 14%, from December 31, 2021, reflecting increases in home equity lines and loans.

The consumer loan portfolio totaled $331.8 million at December 31, 2023, up by $30.4 million, or 10%, 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 $13.2 million and $9.6 million, respectively, at December 31, 2023 and 2022.

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BOLI amounted to $103.7 million and $102.2 million, respectively, at December 31, 2023 and 2022.

The increase in 2022 included $7.0 million of purchases of BOLI.

BOLI provides a means to mitigate increasing employee benefit costs.

The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time.

The purchase of the life insurance policy results in an income-earning asset on the Consolidated Balance Sheet that provides monthly tax-free income to the Corporation.

The largest risk to the BOLI program is credit risk of the insurance carriers.

To mitigate this risk, annual financial condition reviews are completed

The purchase of the

Management's Discussion and Analysis

on all carriers.

life insurance policy results in an income-earning asset on the Consolidated Balance Sheet that provides monthly tax-free income to the Corporation.

The largest risk to the BOLI program is credit risk of the insurance carriers.

To mitigate this risk, annual financial condition reviews are completed on all carriers.

BOLI is invested in the “general account” of quality insurance companies.

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The Finance Committee has oversight responsibility for the credit granting function, including approval authority for credit granting policies, review of management’s credit granting activities and approval of large exposure credit requests.

The Audit Committee has oversight responsibility for the risk management program, which includes credit risk management activities performed by management such as the monitoring of the credit quality of the loan portfolio, conducting a credit review program and determining the adequacy of the ACL.

The Audit Committee has oversight responsibility for the ERM program, which includes credit risk management activities performed by management such as the monitoring of the credit quality of the loan portfolio, conducting a credit review program and determining the adequacy of the ACL.

The Audit Committee also approves the policy and methodology for establishing the ACL.

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In addition, the Board of Directors receives information concerning asset quality measurements and trends on a regular basis.

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

Effective January 1, 2023, a loan that has been modified is considered a TLM when the modification is made to a borrower experiencing financial difficulty and the modification has a direct impact to the contractual cash flows.

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

See Notes 2 and 4 to the Consolidated Financial Statements for additional information regarding TLMs.

Management's Discussion and Analysis

Nonperforming Assets

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Residential real estate

11,894 13,576

Total consumer

5 unchanged sentences

Allowance for credit losses on loans to total loans 0.73% 0.74%

Allowance for credit losses on loans to nonaccrual loans 92.02% 296.02%

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

Total nonperforming assets decreased by $1.4 million from December 31, 2021, reflecting a decline in nonaccrual loans.

Nonaccrual Loans

Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management.

Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms,

Management's Discussion and Analysis

and when, in management’s opinion, the loans are considered to be fully collectible.

Loans are removed from nonaccrual status when they have been current as to principal and interest (generally for six months), the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.

During 2023, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.

Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $640 thousand in 2022, compared to $647 thousand in 2021.

Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $463 thousand and $528 thousand, respectively, in 2022 and 2021.

Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $3.4 million in 2023, compared to $640 thousand in 2022.

Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $2.9 million and $463 thousand, respectively, in 2023 and 2022.

Management's Discussion and Analysis

The following table presents the activity in nonaccrual loans:

5 unchanged sentences

Loans charged-off (577) (184)

Loans transferred to other real estate owned (683) —

Payments, payoffs and other changes (5,608) (4,065)

3 unchanged sentences

Days Past Due Days Past Due

Over 90 Under 90 Total % (1)

Current 30-89 90 or More Total Nonaccrual % (1)

Commercial real estate

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Total nonaccrual loans $37,741 $4,133 $2,744 $44,618 0.79 % $5,650 $3,417 $3,779 $12,846 0.25 %

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

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

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

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

As of December 31, 2023, the composition of nonaccrual loans was 75% commercial and 25% residential and consumer.

This compared to 100% residential and consumer as of December 31, 2022.

Total nonaccrual loans increased by $31.8 million from the end of 2022.

Nonaccrual commercial loans increased by $33.5 million in 2023, due primarily to three CRE loans with a total carrying value of $32.8 million at December 31, 2023 that were placed on nonaccrual status during the year.

These three loans are collateral dependent.

They were included in individually analyzed loans and based on the estimated fair value of the collateral less estimated costs to sell (when appropriate), specific reserves of $97 thousand were deemed necessary at December 31, 2023.

Of the total carrying value, $11.0 million is secured by an office property in Massachusetts;

$8.0 million is secured by an office property in Connecticut and was modified as a TLM in 2023;

and $13.8 million is secured by a healthcare facility in Connecticut and was modified as TLM in 2023.

All three loans are current with respect to payment terms.

See Note 4 to the Consolidated Financial Statements for additional disclosure regarding TLMs.

Nonaccrual residential real estate mortgage loans amounted to $9.6 million at December 31, 2023, down by $2.3 million from the end of 2022.

As of December 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 December 31, 2022 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.

Management's Discussion and Analysis

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

See Note 2 to the Consolidated Financial Statements for discussion on ASU No.

2022-02, a recently issued accounting pronouncement that became effective January 1, 2023.

2022-02 updates the accounting treatment and related disclosure requirements for TDRs.

Management's Discussion and Analysis

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)

December 31, 2022 2021

Accruing TDRs

Commercial real estate

$2,102 $10,603

Commercial & industrial

Total commercial

Residential Real Estate:

Residential real estate

Total consumer

Accruing TDRs

Nonaccrual TDRs

Residential Real Estate:

Residential real estate

Total consumer

Nonaccrual TDRs

$8,592 $19,147

As of December 31, 2022, the composition of TDRs was 66% residential and consumer and 34% commercial, compared to 30% residential and consumer and 70% commercial at December 31, 2021.

TDRs amounted to $8.6 million at December 31, 2022, down by $10.6 million from the end of 2021.

The net decline largely reflected pay-downs of $8.0 million on two accruing CRE TDR loans associated with one commercial relationship 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 $115 thousand at December 31, 2022, compared to $148 thousand at December 31, 2021.

Included in total nonaccrual residential real estate loans at

Management's Discussion and Analysis

December 31, 2023 were four loans purchased for portfolio and serviced by others amounting to $1.2 million.

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

Past Due Loans

The following table presents past due loans by category:

The following table presents past due loans by class:

(Dollars in thousands)

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Commercial & industrial

10 — 265 0.04

Total commercial

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Total past due loans $11,345 0.20 % $11,578 0.23 %

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

As of December 31, 2022, the composition of past due loans (loans past due 30 days or more) was 87% residential and consumer and 13% commercial, compared to essentially 100% for residential and consumer at December 31, 2021.

Total past due loans increased by $1.2 million from the end of 2021, largely due to one CRE loan going past due in the fourth quarter.

This one loan was brought current in January 2023.

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

As of December 31, 2023, the composition of past due loans (loans past due 30 days or more) was 100% residential and consumer and 0% commercial, compared to 87% for residential and consumer and 13% commercial at December 31, 2022.

Total past due loans decreased by $233 thousand from the end of 2022.

Total past due loans included $6.9 million of nonaccrual loans as of December 31, 2023, compared to $7.2 million of as of December 31, 2022.

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Potential problem loans include classified accruing commercial loans that were less than 90 days past due at December 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 or TDRs presented above.

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

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

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

Management has identified three loans associated with two C&I relationships with carrying values totaling $927 thousand as potential problem loans at December 31, 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 increased allowance coverage and provision for credit losses on loans.

Management has identified $22.9 million in potential problem loans at December 31, 2023, compared to $927 thousand at December 31, 2022.

As of December 31, 2023, the balance of potential problem loans largely consisted of two CRE loans secured by office properties in Massachusetts and Connecticut.

At December 31, 2023, these loans were current with respect to payment terms.

Management's Discussion and Analysis

Allowance for Credit Losses on Loans

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

Management's Discussion and Analysis

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

2 unchanged sentences

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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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 $38.0 million at December 31, 2022, down by $1.1 million, or 3%, from the balance at December 31, 2021.

The ACL on loans amounted to $41.1 million at December 31, 2023, up by $3.0 million, or 8%, 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 December 31, 2023, compared to 0.74% at December 31, 2022.

A negative provision for credit losses (or a benefit) of $1.3 million was recognized in earnings in 2022, compared to a negative provision for credit losses (or a benefit) of $4.8 million recognized in earnings in 2021.

Management's Discussion and Analysis

Net recoveries totaled $368 thousand, or 0.01% of average loans, in 2022, compared to net charge-offs of $417 thousand, or 0.01% of average loans, in 2021.

A positive provision for credit losses (or a charge) of $3.2 million was recognized in earnings in 2023.

This reflected loan growth and slowdown of loan prepayment speeds, changes in asset and credit quality, and our current estimate of forecasted economic conditions.

Econometric factors have been stable to improving in 2023 with our forecast reflecting a lower probability of a recession.

Net charge-offs totaled $520 thousand, or 0.01% of average loans, in 2023, compared to net recoveries of $368 thousand, or 0.01% of average loans, in 2022.

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

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Allocated ACL

Loans to Total Portfolio (1) Allocated ACL

Loans to Total Portfolio (1)

Allocated ACL

Loans to Total Portfolio (1)

Commercial real estate $24,144 1.15 % 37 % $18,435 1.01 % 36 %

8 unchanged sentences

$41,057 0.73 % 100 % $38,027 0.74 % 100 %

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

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

Management's Discussion and Analysis

3 unchanged sentences

Balance at beginning of period $38,027 $39,088 $44,106

Adoption of ASC 326

Commercial real estate

12 unchanged sentences

Total recoveries 57 552 246

Net (recoveries) charge-offs (368) 417 1,145

Net charge-offs (recoveries) 520 (368) 417

Provision charged to earnings 3,550 (1,429) (4,601)

Balance at end of period $41,057 $38,027 $39,088

Net (recoveries) charge-offs to average loans (0.01 %) 0.01 % 0.03 %

Net charge-offs (recoveries) to average loans 0.01 % (0.01 %) 0.01 %

Sources of Funds

11 unchanged sentences

The following table presents a summary of deposits:

(Dollars in thousands) Change

December 31, 2022 2021 $ %

(Dollars in thousands) December 31, 2023 December 31, 2022 Balance Change

Amount % of Total Amount % of Total $ %

Noninterest-bearing demand deposits $693,746 13 % $858,953 17 % ($165,207) (19 %)

9 unchanged sentences

Total deposits $5,348,160 100 % $5,018,962 100 % $329,198 7 %

Total deposits amounted to $5.0 billion at December 31, 2022, up by $38.9 million, or 1%, in 2022.

The Bank estimates, in accordance with regulatory reporting requirements, that its uninsured deposits amounted to $1.5 billion at December 31, 2022.

In-market deposits were up by $195.9 million, or 4%, from the balance at December 31, 2021, with growth concentrated in money market accounts, while wholesale brokered deposits were down by $157.0 million, or 30% from December 31, 2022.

Total deposits amounted to $5.3 billion at December 31, 2023, up by $329.2 million, or 7%, from December 31, 2022, largely reflecting increases in wholesale brokered time deposits.

Wholesale brokered deposits increased by $295.9 million, or 83%, from December 31, 2022, as higher levels were utilized to fund balance sheet growth.

In-market deposits, which exclude wholesale brokered deposits, were up by $33.3 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 December 31, 2023, in-market deposits were approximately 60% retail and 40% commercial.

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

The average size of our in-market deposit accounts was approximately $36 thousand at December 31, 2023.

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

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

Balance % of Total Deposits Balance % of Total Deposits

Uninsured Deposits:

Uninsured deposits (1)

$1,260,672 24 % $1,514,900 30 %

affiliate deposits (2)

92,645 2 210,444 4

Uninsured deposits, excluding affiliate deposits 1,168,027 22 1,304,456 26

fully-collateralized preferred deposits (3)

204,327 4 329,868 7

Uninsured deposits, after exclusions $963,700 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.

Management's Discussion and Analysis

The following table presents the amount of time certificates of deposit in denominations of $250 thousand or more at December 31, 2023, maturing during the periods indicated:

6 unchanged sentences

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 $980.0 million at December 31, 2022, up by $835.0 million from the balance at the end of 2021, as higher levels of wholesale funding were utilized to fund balance sheet growth.

FHLB advances totaled $1.2 billion at December 31, 2023, up by $210.0 million from the balance at the end of 2022, as higher levels of wholesale funding were utilized to fund balance sheet growth.

For additional information regarding FHLB advances see Note 13 to the 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 76% of total average assets in 2022.

While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected

Management's Discussion and Analysis

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.

The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 67% of total average assets in the twelve months ended December 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 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.

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

Management's Discussion and Analysis

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

(Dollars in thousands)

December 31, 2023 2022 2021

Additional Funding Capacity:

Contingent Liquidity:

Federal Home Loan Bank of Boston (1)

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65,759 27,059 16,919

Noninterest-bearing cash 54,970 49,727 46,985

Unencumbered investment securities 680,857 691,893 702,963

Total $1,387,247 $2,362,259 $1,585,411

Total contingent liquidity $1,888,193 $1,436,974 $2,409,244

Percentage of total contingent liquidity to uninsured deposits 149.8 % 94.9 % 179.8 %

Percentage of total contingent liquidity to uninsured deposits, after exclusions 195.9 % 147.4 % 239.8 %

(1) As of December 31, 2023, 2022 and 2021, loans with a carrying value of $3.4 billion, $2.4 billion and $2.2 billion, respectively, and securities available for sale with a carrying value of $94.3 million, $102.1 million and $163.2 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

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and securities available for sale with a carrying value of $13.1 million, $12.7 million and $13.5 million, respectively, were pledged to the FRBB 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.

Additional funding capacity available from the FHLB declined by $974.1 million from December 31, 2021 primarily as new advances were utilized to fund asset growth, mainly loans, during the year.

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

In addition to the amounts presented above, the Bank also had access to a $40.0 million unused line of credit with the FHLB at December 31, 2023, 2022 and 2021.

Furthermore, availability of $65.0 million and $215.0 million, respectively, at December 31, 2023 and 2022, was utilized to collateralize an institutional deposit through a standby letter of credit with the FHLB.

The Bank had no such standby letter of credit with the FHLB at December 31, 2021.

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

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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.

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

For additional information on these arrangements and the expected timing of applicable payments as of December 31, 2023 , see the following notes to the Consolidated Financial Statements:

Note 7 for leases, Note 12 for time deposits and Note 13 for borrowings.

Note 7 for leases, Note 12 for time deposits, Note 13 for borrowings and Note 16 for defined benefit pension plans.

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 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

Management's Discussion and Analysis

varying degrees, elements of credit, interest rate and liquidity risk.

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.

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Capital Resources

Total shareholders’ equity amounted to $453.7 million at December 31, 2022, down by $111.1 million from December 31, 2021.

The decline reflected a decrease of $137.8 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.

The decrease in AOCL was partially offset by an increase of $3.8 million associated with the annual remeasurement of pension plan liabilities.

This increase from the annual remeasurement was largely due to an increase in the discount rates used to measure the present value of pension plan liabilities, resulting from higher market interest rates.

The decline in total shareholders’ equity also included $37.9 million in dividend declarations and a net increase in treasury stock balances of $7.6 million.

These decreases were partially offset by net income of $71.7 million.

The Corporation declared dividends of $2.18 per share in 2022, representing an increase of 8 cent per share, or 4%, over last year.

Total shareholders’ equity amounted to $472.7 million at December 31, 2023, up by $19.0 million from December 31, 2022.

This increase was driven by net income of $48.2 million and an increase of $16.6 million in the AOCL component of shareholders' equity.

The change in AOCL reflected increases in the fair value of available for sale debt securities and cash flow hedges primarily attributable to relative changes in market interest rates, partially offset by a decrease that was largely

Management's Discussion and Analysis

associated with the annual remeasurement of pension plan liabilities.

The overall change in total shareholders’ equity also included reductions of $38.3 million for dividend declarations and a $6.6 million increase in treasury stock balances.

The change in treasury stock balances included the repurchase of 200,000 shares in January and February at an average price of $43.70 and a total cost of $8.8 million, under the 2023 Repurchase Program.

The IRA was signed into law in 2022 and imposed an excise tax of 1% on share repurchases made by the Corporation, net of shares issued, effective in 2023.

At December 31, 2023, the Corporation recognized a $73 thousand excise tax liability, which was included in other liabilities, attributable to shares repurchased in 2023, with a corresponding offset to treasury stock on the Consolidated Balance Sheet.

The Corporation declared dividends of $2.24 per share in 2023, representing an increase of 6 cents per share, or 3%, over last year.

The dividend payout ratio (dividends declared per share to diluted earnings per share) was 79.4% in 2023, compared to 53.0% in 2022.

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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 11.58% at December 31, 2023, compared to 12.37% at December 31, 2022.

See Note 14 to the Consolidated Financial Statements for additional discussion regarding shareholders’ equity, including the stock repurchase program and regulatory capital requirements.

See Note 14 to the Consolidated Financial Statements for additional discussion regarding shareholders’ equity.

Asset/Liability Management and Interest Rate Risk

Interest rate risk is the risk of loss to future earnings due to changes in interest rates.

Interest rate risk is the risk to earnings due to changes in interest rates.

The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk.

Periodically, the ALCO reports on the status of liquidity and interest rate risk matters to the Bank’s Board of Directors.

Quarterly, the ALCO reports on the status of liquidity and interest rate risk matters to the Audit Committee.

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.

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See Notes 9 and 21 to the 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 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.

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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.

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

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

Management's Discussion and Analysis

as parallel changes in interest rates of up to 400 basis points.

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

The following table sets forth the estimated change in net interest income from an unchanged rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on- and off-balance sheet financial instruments as of December 31, 2023 and 2022.

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 savings deposits, which are assumed to shift by lesser amounts due to their relative historical insensitivity to market interest rate movements.

Interest rates are assumed to shift by a parallel 100 or 200 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 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.

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100 basis point rate decrease (3.38 %) 0.94 % (1.09 %) 1.55 %

100 basis point rate increase (0.78) (5.45) 3.34 3.91

200 basis point rate decrease (6.82 %) 1.53 % (4.17 %) (5.21 %)

100 basis point rate increase 0.72 % (6.08 %) (0.78 %) (5.45 %)

200 basis point rate increase 4.16 % (7.57 %) 0.35 % (7.65 %)

As of December 31, 2022, the ALCO estimates that the 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.

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 interest 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 9 to the Consolidated Financial Statements for additional information on the termination.

As of December 31, 2023, the ALCO estimates that negative exposure of net interest income in Year 1 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.

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.

The ALCO estimates that the positive exposure of net interest income to falling rates in Year 2 as compared to an unchanged rate scenario results from a more rapid projected relative rate of decline in funding costs than asset yields.

The relative 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 December 31, 2022.

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

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

The positive exposure to falling rates in Year 2 is attributable to continued downward repricing of liabilities as time deposits and wholesale funding are replaced with lower rates as they mature.

As of December 31, 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 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 in-market deposits in response to changes in market interest rates.

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

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 lower 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 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

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.

Management's Discussion and Analysis

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 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, the Federal Reserve reversed policy and increased the target range to 4.25-4.50% as of December 31, 2022.

This policy change has resulted in higher rates on existing deposit products.

It could also cause low-cost balances to shift into higher yielding alternatives in the future, particularly if interest rates continue rise, and 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, which may cause interest rate sensitivity to differ from the results as presented.

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.

The Federal Reserve has recently paused rate hikes and the target range for the Federal Funds rate was 5.25% - 5.50% at December 31, 2023.

The increase of the Federal Funds target rate in recent years 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 ALCOs estimates used in income simulation.

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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Interest rates do not necessarily move in the same direction or in the same magnitude as inflation.

The Federal Reserve’s policy response to counter high levels of inflation has been to increase its Fed Funds target rate, which in turn resulted in higher market interest rates across the economy.

While variable-rate assets would reprice upward if interest rates were to continue to rise, interest-bearing liabilities would also reprice upward.

Additionally, lower-cost in-market deposits could shift into higher-cost deposit

The Federal Reserve’s policy response to counter high levels of inflation has been to increase its Federal Funds target rate, which in turn resulted in higher market interest rates across the economy.

While variable-rate assets would reprice upward if interest rates were to rise, interest-bearing liabilities would also reprice upward.

Additionally, in a high-rate or rising rate environment, lower cost in-market deposits could continue to shift into higher cost deposit categories, which could put additional pressure on both net interest income and the net interest margin as the Corporation experienced in 2023.

Recently, the Federal Reserve has paused rate

Management's Discussion and Analysis

categories in a rising rate environment, which could put pressure on both net interest income and the net interest margin.

hikes, as the increases in the level of inflation experienced in recent years has been somewhat mitigated.

If the Federal Reserve decides to reduce its Federal Funds target rate, variable-rate assets would likely reprice downward more rapidly than interest-bearing liabilities.

For additional discussion on interest due to changes in interest rates, see the caption “Asset/Liability Management and Interest Rate Risk” above.

Furthermore, a prolonged period of inflation could cause wages and other costs to increase.

LIBOR Transition

LIBOR was used extensively as a benchmark for various commercial and financial contracts, including loans, securities, funding sources, interest rate swaps and other derivatives.

The ICE Benchmark Administration, the authorized and regulated administrator of LIBOR, ended publication of remaining LIBOR tenors on June 30, 2023.

Financial services regulators and industry groups collaborated to develop alternate reference rate indices or reference rates, such as SOFR.

SOFR is a backward-looking secured rate as opposed to a forward-looking unsecured rate.

We identified all LIBOR-related contracts and determined which ones would require language to incorporate an alternative reference rate.

We ceased offering new loan contracts that referenced LIBOR, and processed modifications on loans that referenced LIBOR to transition them to a new reference rate.

For derivative contracts, the International Swap Dealers Association (commonly known as "ISDA") developed fallback language for swap agreements and established a protocol to allow counterparties to modify legacy trades to include the new fallback language.

In 2023, the Corporation completed the transition of all contracts (including commercial loans, loan related derivatives, cash flow hedging instruments, and junior subordinated debentures) that previously referenced LIBOR to a new reference rate, primarily SOFR.

Critical Accounting Policies and Estimates

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

pooling loans into portfolio segments for loans that share similar risk characteristics and identifying individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments.

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

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

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

The ACL for pooled loans is measured utilizing a DCF methodology to estimate credit losses for each pooled portfolio segment.

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

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

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

The model utilizes forecasted econometric factors with a one-year reasonable and supportable forecast period and one-year straight-line reversion period in order to estimate the probability of default for each loan portfolio segment.

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

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

Management utilizes forecasted econometric factors with a one-year reasonable and supportable forecast period and one-year straight-line reversion period in order to estimate the probability of default for each loan portfolio segment.

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

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

Management's Discussion and Analysis

The ACL for individually analyzed loans is measured using a DCF method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan was collateral dependent, at the fair value of the collateral.

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

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

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

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In estimating the ACL on loans, management considers the sensitivity of the model and significant judgments and assumptions that could result in an amount that is materially different from management’s estimate.

Given the concentration of ACL allocation to the total commercial portfolio and the significant judgments made by management in deriving the qualitative loss factors, management analyzed the impact that changes in judgments could have.

The range of impact was an ACL allocated to the total commercial loan portfolio between $23.3 million and $53.3 million at December 31, 2023.

The sensitivity and related range of impact is a hypothetical analysis and is not intended to represent management’s judgments or assumptions of qualitative loss factors that were utilized at December 31, 2023 in estimation of the ACL on loans recognized on the Consolidated Balance Sheet.

Management's Discussion and Analysis

If the assumptions underlying the determination of the ACL prove to be incorrect, the ACL may not be sufficient to cover actual loan losses and an increase to the ACL may be necessary to allow for different assumptions or adverse developments.

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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-K

Item 7. Management’s Discussion and Analysis