What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2023-11-06 · 277 added, 365 removed, 695 unchanged (48% of the section changed)

1 unchanged sentence

The following discussion should be read in conjunction with the Corporation’s Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2023, and in conjunction with the condensed Unaudited Consolidated Financial Statements and notes thereto included in Item 1 of this report.

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

Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results for the full-year ended December 31, 2024 or any future period.

Forward-Looking Statements

29 unchanged sentences

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

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

In addition, we expect to open a branch in Smithfield, Rhode Island late in the fourth quarter of 2023 and another branch in the Olneyville section of Providence in early 2024.

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

In addition, we plan to open another branch in the Olneyville section of Providence later in 2024.

Risk Management

10 unchanged sentences

Credit risk also exists with respect to investment securities.

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

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

For further discussion regarding credit risk associated with unfunded commitments, see Note 16 to the Unaudited Consolidated Financial Statements.

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

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

Interest rate risk is the risk of loss to earnings due to 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.

1 unchanged sentence

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.

6 unchanged sentences

Management's Discussion and Analysis

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

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.

3 unchanged sentences

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

They are responsible for reporting on and escalating their concerns.

They must report on and escalate their concerns.

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

7 unchanged sentences

The following table presents a summarized consolidated statement of operations:

(Dollars in thousands) Three Months Nine Months

Change Change

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

(Dollars in thousands)

Three months ended March 31, 2024 2023 $ %

Net interest income $31,665 $37,193 ($5,528) (15 %)

7 unchanged sentences

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

Three Months Nine Months

Periods ended September 30, 2023 2022 2023 2022

Three months ended March 31, 2024 2023

Diluted earnings per common share $0.64 $0.74

4 unchanged sentences

Noninterest income as a percentage of total revenues 35 % 26 %

Net income totaled $11.2 million and $35.2 million, respectively, for the three and nine months ended September 30, 2023, compared to $18.7 million and $55.1 million, respectively, for the same periods in 2022.

Results in 2023 were impacted by steep increases in market interest rates and a decline in wealth management 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 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, changes in asset and credit quality and reflected our estimate of forecasted economic conditions.

The increase in noninterest expenses largely reflected increases in FDIC deposit insurance costs and salaries and employee benefits.

Net income totaled $10.9 million for the three months ended March 31, 2024, down by 15%, from the $12.8 million reported for the same period in 2023.

Results in 2024 largely reflected lower net interest income, partially offset by higher noninterest income.

The decline in net interest income in 2024 was driven by higher rates paid on, and increases in, average interest-bearing liability balances, which offset the benefit of higher yields on, and growth in, average interest-earning asset balances.

Noninterest income benefited from a $2.1 litigation settlement received in the first quarter of 2024, as well as higher mortgage banking revenues and wealth management revenues.

There was a modest decline in the provision for credit losses in 2024 as compared to the same period in 2023.

The increase in noninterest expenses largely reflected an increase in FDIC deposit insurance costs.

Management's Discussion and Analysis

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

Three months ended September 30, 2023 2022 Change

Three months ended March 31, 2024 2023 Change

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

Cash, federal funds sold, and short-term investments $78,992 $1,196 6.09 $103,269 $1,070 4.20 ($24,277) $126 1.89

$102,608 $1,344 5.20 $92,708 $503 2.15 $9,900 $841 3.05

Mortgage loans held for sale 15,452 255 6.64 13,132 152 4.69 2,320 103 1.95

Taxable debt securities 1,146,454 7,096 2.49 1,193,852 7,194 2.44 (47,398) (98) 0.05

FHLB stock 46,889 878 7.43 25,377 88 1.38 21,512 790 6.05

53,858 1,073 8.01 46,102 597 5.25 7,756 476 2.76

Commercial real estate 2,140,887 34,220 6.43 1,859,331 25,300 5.52 281,556 8,920 0.91

24 unchanged sentences

FHLB advances

1,239,945 15,138 4.91 1,044,056 11,626 4.52 195,889 3,512 0.39

Junior subordinated debentures

14 unchanged sentences

(Dollars in thousands)

Three months ended September 30, 2023 2022 Change

Commercial loans $241 $317 ($76)

Nine months ended September 30, 2023 2022 Change

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

Cash, federal funds sold and short-term investments $105,025 $3,693 4.70 $128,606 $769 0.80 ($23,581) $2,924 3.90

Mortgage loans held for sale 18,315 725 5.29 29,985 851 3.79 (11,670) (126) 1.50

Taxable debt securities 1,192,536 21,868 2.45 1,106,632 15,209 1.84 85,904 6,659 0.61

FHLB stock 45,605 2,333 6.84 15,745 218 1.85 29,860 2,115 4.99

Commercial real estate 1,931,196 85,626 5.93 1,648,061 43,360 3.52 283,135 42,266 2.41

Commercial & industrial 618,415 28,423 6.14 628,574 19,456 4.14 (10,159) 8,967 2.00

Total commercial 2,549,611 114,049 5.98 2,276,635 62,816 3.69 272,976 51,233 2.29

Residential real estate 2,452,088 69,777 3.80 1,875,175 46,376 3.31 576,913 23,401 0.49

Home equity 293,957 12,355 5.62 257,814 6,753 3.50 36,143 5,602 2.12

Other 17,685 616 4.66 15,995 550 4.60 1,690 66 0.06

Total consumer 311,642 12,971 5.56 273,809 7,303 3.57 37,833 5,668 1.99

Total loans 5,313,341 196,797 4.95 4,425,619 116,495 3.52 887,722 80,302 1.43

Total interest-earning assets 6,674,822 225,416 4.52 5,706,587 133,542 3.13 968,235 91,874 1.39

Noninterest-earning assets 259,334 268,744 (9,410)

Total assets $6,934,156 $5,975,331 $958,825

Liabilities and Shareholders’ Equity:

Interest-bearing demand deposits (in-market) $385,180 $11,788 4.09 $255,014 $1,114 0.58 $130,166 $10,674 3.51

NOW accounts 781,546 1,177 0.20 867,464 492 0.08 (85,918) 685 0.12

Money market accounts 1,208,436 26,807 2.97 1,193,599 3,984 0.45 14,837 22,823 2.52

Savings accounts 534,784 1,065 0.27 570,129 246 0.06 (35,345) 819 0.21

Time deposits (in-market) 971,333 22,417 3.09 800,037 5,997 1.00 171,296 16,420 2.09

Interest-bearing in-market deposits 3,881,279 63,254 2.18 3,686,243 11,833 0.43 195,036 51,421 1.75

Wholesale brokered demand deposits 5,368 177 4.41 17,197 212 1.65 (11,829) (35) 2.76

Wholesale brokered time deposits 579,871 19,931 4.60 396,465 1,677 0.57 183,406 18,254 4.03

Wholesale brokered deposits 585,239 20,108 4.59 413,662 1,889 0.61 171,577 18,219 3.98

Total interest-bearing deposits 4,466,518 83,362 2.50 4,099,905 13,722 0.45 366,613 69,640 2.05

FHLB advances 1,025,788 35,775 4.66 285,590 3,891 1.82 740,198 31,884 2.84

Junior subordinated debentures 22,681 1,132 6.67 22,681 443 2.61 — 689 4.06

Total interest-bearing liabilities 5,514,987 120,269 2.92 4,408,176 18,056 0.55 1,106,811 102,213 2.37

Noninterest-bearing demand deposits 792,706 925,433 (132,727)

Other liabilities 165,021 129,967 35,054

Shareholders’ equity 461,442 511,755 (50,313)

Total liabilities and shareholders’ equity $6,934,156 $5,975,331 $958,825

Net interest income (FTE)

$105,147 $115,486 ($10,339)

Interest rate spread 1.60 2.58 (0.98)

Net interest margin 2.11 2.71 (0.60)

Management's Discussion and Analysis

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

(Dollars in thousands)

Nine months ended September 30, 2023 2022 Change

Three months ended March 31, 2024 2023 Change

Commercial loans $223 $228 ($5)

Net Interest Income

Net interest income, the primary source of our operating income, totaled $33.8 million and $104.4 million, respectively, for the three and nine months ended September 30, 2023, compared to $42.0 million and $114.6 million, respectively, for the same periods in 2022.

Net interest income, the primary source of our operating income, totaled $31.7 million for the three months ended March 31, 2024, compared to $37.2 million for the same period in 2023.

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

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

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

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 $71 thousand (or 0 basis point benefit to NIM) and $245 thousand (or 1 basis point benefit to NIM), respectively, for the three and nine months ended September 30, 2023, compared to $30 thousand (or 0 basis point benefit to NIM) and $168 thousand (or 1 basis point benefit to NIM), respectively, for the same periods in 2022.

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

Prepayment penalty fee income amounted to $20 thousand and $124 thousand, respectively, for the three months ended March 31, 2024 and 2023, and had no basis point benefit to NIM in either period.

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.

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

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

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

As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to interest income) amounted to $1.0 million for the nine months ended September 30, 2023, compared $2.5 million for the same period in 2022.

This included no accelerated amortization of net deferred fee balances on PPP loans forgiven by the SBA in 2023, compared to $21 thousand (or 0 basis points benefit to NIM) and $1.2 million (or 3 basis points benefit to NIM), respectively, for the three and nine months ended September 30, 2022.

FTE net interest income for the three and nine months ended September 30, 2023 amounted to $34.0 million and $105.1 million, respectively, down by $8.4 million and $10.3 million, respectively, from the same periods in 2022.

For the three and nine months ended September 30, 2023, growth in average interest-earning assets net of increased average interest-bearing liability balances contributed approximately $1.4 million and $3.5 million, respectively, of net interest income.

Increases in funding costs outpaced increases in asset yields, reducing net interest income by $9.7 million and $13.8 million, respectively, for the three and nine months ended September 30, 2023.

NIM was 1.97% and 2.11%, respectively, for the three and nine months ended September 30, 2023, compared to 2.82% and 2.71%, respectively, for the same periods in 2022.

As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to net interest income) amounted to $265 thousand for the three months ended March 31, 2024, compared to $324 thousand for the same period in 2023.

FTE net interest income for the three months ended March 31, 2024 amounted to $31.9 million, down by $5.5 million, or 15%, from the same period in 2023.

For the three months ended March 31, 2024, increases in average interest-bearing liability balances, net of increased average interest-earning assets, reduced net income by $2.7 million.

Increases in funding costs outpaced increases in asset yields, reducing net interest income by $2.8 million for the three months ended March 31, 2024.

NIM was 1.84% for the three months ended March 31, 2024, compared to 2.33% for the same period in 2023.

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

Total average securities for the three and nine months ended September 30, 2023 increased by $31.2 million and $85.9 million, respectively, from the average balances for the same periods a year earlier due to purchases of debt securities.

The FTE rate of return on the securities portfolio for the three and nine months ended September 30, 2023 was 2.44% and 2.45%, respectively, compared to 2.09% and 1.84%, respectively, for the same periods in 2022, reflecting the impact of higher market interest rates in 2023.

Total average loan balances for the three and nine months ended September 30, 2023 increased by $834.8 million and $887.7 million, respectively, from the average loan balances for the comparable 2022 periods, largely reflecting growth in average balances of residential real estate and CRE loans.

The yield on total loans for the three and nine months ended

Total average securities for the three months ended March 31, 2024 decreased by $47.4 million, or 4%, from the average balances for the same period a year earlier primarily due to routine pay-downs.

The FTE rate of return on the securities portfolio for the three months ended March 31, 2024 was 2.49%, compared to 2.44% for the same period in 2023.

Total average loan balances for the three months ended March 31, 2024 increased by $527.6 million, or 10%, from the average loan balances for the comparable 2023 period, largely reflecting growth in average balances of CRE and residential real estate loans.

The yield on total loans for the three months ended March 31, 2024 was 5.38%, compared to 4.73% in the corresponding period in 2023.

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

The average balance of FHLB advances for the three months ended March 31, 2024 increased by $195.9 million, or 19%, compared to the average balance for the same period in 2023.

Due to increases in market interest rates, the average rate paid on such advances for the three months ended March 31, 2024 was 4.91%, up 39 basis points from 4.52% for the same period in 2023.

Included in total average interest-bearing deposits were wholesale brokered deposits, which increased by $256.3 million, or 58%, from the same period in 2023.

The average rate paid on wholesale brokered deposits for the three months ended March 31, 2024 was 5.22%, up by 145 basis points from 3.77% for the same period in 2023.

Management's Discussion and Analysis

September 30, 2023 was 5.14% and 4.95%, respectively, compared to 3.87% and 3.52%, respectively, in the corresponding periods in 2022, reflecting higher market interest rates.

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

The average balance of FHLB advances for the three and nine months ended September 30, 2023 increased by $503.6 million and $740.2 million, respectively, compared to the average balances for the same periods in 2022.

Due to increases in market interest rates, the average rate paid on such advances for the three and nine months ended September 30, 2023 was 4.71% and 4.66%, respectively, up from 2.33% and 1.82%, respectively, for the same periods in 2022.

Included in total average interest-bearing deposits were wholesale brokered deposits, which increased by $246.6 million and $171.6 million, respectively, from the same periods in 2022.

Due to increases in market interest rates, the average rate paid on wholesale brokered deposits for the three and nine months ended September 30, 2023 was 5.02% and 4.59%, respectively, compared to 1.26% and 0.61%, respectively, for the same periods in 2022.

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

Average in-market interest-bearing deposits, which excludes wholesale brokered deposits, for the three and nine months ended September 30, 2023 increased by $318.2 million and $195.0 million, respectively, from the average balances for the same periods in 2022, with increases in time deposits and interest-bearing demand deposits.

The average rate paid on in-market interest-bearing deposits for the three and nine months ended September 30, 2023 was 2.57% and 2.18%, respectively, compared to 0.58% and 0.43%, respectively, from the same periods in 2022.

The average balance of noninterest-bearing demand deposits for the three and nine months ended September 30, 2023 decreased by $170.7 million and $132.7 million, respectively, from the average balances for the same periods in 2022.

Management's Discussion and Analysis

Average in-market interest-bearing deposits, which excludes wholesale brokered deposits, for the three months ended March 31, 2024 increased by $204.7 million, or 5%, from the average balances for the same period in 2023, with increases in time deposits and interest-bearing demand deposits.

The average rate paid on in-market interest-bearing deposits for the three months ended March 31, 2024 was 2.93%, up by 127 basis points from 1.66% for the same period in 2023.

The average balance of noninterest-bearing demand deposits for the three months ended March 31, 2024 decreased by $170.6 million from the average balances for the same period in 2023.

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

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

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

2022 Nine Months Ended September 30, 2023 vs.

Change Due to Change Due to

Volume Rate Net Change Volume Rate Net Change

(Dollars in thousands) Three Months Ended March 31, 2024 vs.

Change Due to

Volume Rate Net Change

Interest on Interest-Earning Assets:

Cash, federal funds sold, and other short-term investments ($291) $417 $126

$59 $782 $841 ($166) $3,090 $2,924

Mortgage loans held for sale 30 73 103

Taxable debt securities (297) 199 (98)

FHLB stock 128 662 790 873 1,242 2,115

Commercial real estate 4,143 4,777 8,920

20 unchanged sentences

FHLB advances

2,329 1,183 3,512

Junior subordinated debentures — 52 52

1 unchanged sentence

Net interest income (FTE)

($2,684) ($2,849) ($5,533)

Provision for Credit Losses

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

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

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

The ACL is management’s

Management's Discussion and Analysis

estimate, at the reporting date, of expected lifetime credit losses and includes consideration of current forecasted economic conditions.

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

The following table presents the provision for credit losses:

(Dollars in thousands) Three Months Nine Months

Change Change

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

(Dollars in thousands)

Three months ended March 31, 2024 2023 $ %

Provision for credit losses on loans $900 $800 $100 13 %

1 unchanged sentence

Provision for credit losses $700 $800 ($100) (13 %)

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

Econometric factors have been relatively stable in 2023 and the forecast also reflects a lower probability of a recession, with an anticipation of a “soft-landing” in the event of an economic slowdown.

On a year-to-date basis in 2022 a negative provision was recorded reflecting 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 $30 thousand for the three months ended September 30, 2023, compared to net charge-offs of $54 thousand for the same period in 2022.

For the nine months ended September 30, 2023, net charge-offs totaled $114 thousand, compared to net recoveries of $104 thousand for the same period in 2022.

The ACL on loans was $40.2 million, or 0.72% of total loans, at September 30, 2023, compared to $38.0 million, or 0.74% of total loans, at December 31, 2022.

See additional discussion under the caption “Asset Quality” for further information on the ACL on loans.

The provisions recognized provided for loan growth and were reflective of continued slowdown of loan prepayment speeds and estimated forecasted economic conditions.

The provision recognized in 2023 also included modest additional reserve allocation for commercial loans migrating to nonaccrual status.

Net charge-offs totaled $52 thousand for the three months ended March 31, 2024, compared to net charge-offs of $47 thousand for the same period in 2023.

The ACL on loans was $41.9 million, or 0.74% of total loans, at March 31, 2024, compared to $41.1 million, or 0.73% of total loans, at December 31, 2023.

See additional discussion under the caption “Asset Quality” for further information on asset quality metrics and the ACL on loans.

Noninterest Income

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

(Dollars in thousands) Three Months Nine Months

Change Change

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

(Dollars in thousands)

Three months ended March 31, 2024 2023 $ %

Noninterest income:

11 unchanged sentences

Noninterest Income Analysis

On a year-to-date basis, revenue from wealth management services represented 62% of total noninterest income for both 2023 and 2022.

Revenue from wealth management services represented 54% of total noninterest income for the three months ended March 31, 2024, compared to 65% for the same period in 2023.

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

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

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:

(Dollars in thousands) Three Months Nine Months

Change Change

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

(Dollars in thousands)

Three months ended March 31, 2024 2023 $ %

Wealth management revenues:

2 unchanged sentences

Total wealth management revenues $9,338 $8,663 $675 8 %

Wealth management revenues for the three and nine months ended September 30, 2023 decreased by $577 thousand and $3.5 million, respectively, from the same periods in 2022, reflecting a decrease in asset-based revenues.

Wealth management revenues for the three months ended March 31, 2024 increased by $675 thousand, or 8%, from the same period in 2023, reflecting an increase in asset-based revenues.

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

The average balance of AUA for the three and nine months ended September 30, 2023 decreased by 6% and 13%, respectively, from the average balance for the same periods in 2022.

The end of period AUA balance amounted to $6.1 billion at September 30, 2023.

The average balance of AUA for the three months ended March 31, 2024 increased by 10% from the average balance for the same period in 2023.

The end of period AUA balance amounted to $6.9 billion at March 31, 2024, up by $269.9 million, or 4%, from the end of 2023, reflecting net investment appreciation and income.

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

(Dollars in thousands)

Three Months Nine Months

Periods ended September 30, 2023 2022 2023 2022

Three months ended March 31, 2024 2023

Wealth management assets under administration:

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

Net investment appreciation (depreciation) & income (154,269) (239,762) 391,781 (1,444,785)

Net investment appreciation & income 364,244 286,262

Net client asset (outflows) inflows (94,328) (84,830)

Balance at the end of period $6,858,322 $6,163,422

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 September 30, 2023, cumulative client asset withdrawals associated with the departure of the advisors amounted to $672 million, of which $68 million was withdrawn in the nine months ended September 30, 2023 and $604 million was withdrawn in the fourth quarter of 2022.

The cumulative withdrawals reduced wealth management revenues by approximately $966 thousand and $2.8 million, respectively, in the three and nine months ended September 30, 2023.

We continue to expect that the full-year 2023 decline in revenues associated with these withdrawals will be approximately $3.8 million.

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

On a year-to-date basis, mortgage banking revenues represented 12% of total noninterest income for 2023, compared to 16% for 2022.

Mortgage banking revenues represented 15% of total noninterest income for three months ended March 31, 2024, compared to 9% for the same period in 2023.

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

While loan origination and refinancing activities decreased in response to increases in market interest rates, a larger proportion of loans were originated for sale in 2024.

The composition of mortgage banking revenues and the volume of loans sold to the secondary market are shown in the following table:

Management's Discussion and Analysis

(Dollars in thousands) Three Months Nine Months

Change Change

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

(Dollars in thousands)

Three months ended March 31, 2024 2023 $ %

Mortgage banking revenues:

4 unchanged sentences

Loan servicing fee income, net (3)

533 555 (22) (4) 1,660 1,466 194 13

Total mortgage banking revenues $2,506 $1,245 $1,261 101 %

5 unchanged sentences

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

For the three and nine months ended September 30, 2023, mortgage banking revenues were up by $61 thousand and down by $2.5 million, respectively, compared to the same periods in 2022.

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

On a year-to-date basis, residential real estate loan origination, refinancing and sales activity decreased in response to increases in market interest rates and changes in the housing markets.

For the three months ended March 31, 2024, mortgage banking revenues were up by $1.3 million, or 101%, compared to the same period in 2023.

The increase in mortgage banking revenues was mainly attributable to increases in both sales volume

Management's Discussion and Analysis

and sales yield.

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

Income from BOLI for the nine months ended September 30, 2023, was up by $854 thousand from the same period in 2022, reflecting the recognition of $658 thousand in non-taxable income in 2023 associated with the receipt of life insurance proceeds.

For the nine months ended September 30, 2023, loan related derivative income decreased by $733 thousand from the same period in 2022, reflecting a decrease in commercial borrower interest rate swap transactions.

For the three months ended March 31, 2024, loan related derivative income increased by $335 thousand, or 657%, from the same period in 2023, reflecting an increase in volume.

Income from BOLI for the three months ended March 31, 2024, was down by $426 thousand, or 37%, from the same period in 2023, reflecting the recognition of $476 thousand in non-taxable income in the first quarter of 2023 associated with the receipt of life insurance proceeds.

Other income for the three months ended March 31, 2024 was up by $2.1 million, or 601%, from the same period in 2023, due to the receipt of $2.1 million in the first quarter of 2024 associated with a litigation settlement.

Noninterest Expense

The following table presents noninterest expense comparisons:

(Dollars in thousands) Three Months Nine Months

Change Change

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

(Dollars in thousands)

Three months ended March 31, 2024 2023 $ %

Noninterest expense:

5 unchanged sentences

FDIC deposit insurance costs

1,441 872 569 65

Advertising and promotion 548 408 140 34

3 unchanged sentences

Noninterest Expense Analysis

Salaries and employee benefits expense, the largest component of noninterest expense, for the three and nine months ended September 30, 2023 increased by $13 thousand and $1.0 million, respectively, compared to the same periods in 2022.

Management's Discussion and Analysis

year-to-date basis, the increase largely reflected annual merit increases and higher staffing levels, partially offset by decreases in performance-based compensation accruals.

Outsourced services expense for the three and nine months ended September 30, 2023, increased by $185 thousand and $685 thousand, respectively, compared to the same periods in the prior year, due to changes to and expansion of services provided by third party vendors.

Net occupancy expense for the three and nine months ended September 30, 2023 increased by $153 thousand and $532 thousand, respectively, compared to the same periods in 2022, primarily due to branch expansion.

Legal, audit and professional fees for the three and nine months ended September 30, 2023 increased by $365 thousand and $792 thousand, respectively, compared to the same periods in 2022, reflecting higher legal expenses.

FDIC deposit insurance costs for the three and nine months ended September 30, 2023 increased by $755 thousand and $2.2 million, respectively, compared to the same periods in 2022, reflecting an increase in the FDIC’s deposit assessment rate and growth in assets.

Salaries and employee benefits expense, the largest component of noninterest expense, for the three months ended March 31, 2024 was essentially unchanged compared to the same period in 2023.

Outsourced services expense for the three months ended March 31, 2024, increased by $284 thousand, or 8%, compared to the same period in the prior year, largely reflecting higher third-party costs and volume-related increases.

FDIC deposit insurance costs for the three months ended March 31, 2024 increased by $569 thousand, or 65%, compared to the same period in 2023, reflecting the impact of growth in assets and a higher FDIC deposit assessment rate.

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

(Dollars in thousands)

Three Months Nine Months

Periods ended September 30, 2023 2022 2023 2022

Three months ended March 31, 2024 2023

Income tax expense $2,829 $3,300

Effective income tax rate 20.6 % 20.5 %

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

The decrease in the effective tax rate for the three and nine months ended September 30, 2023 compared to the same periods in 2022 largely reflected an increase in benefits from federal tax credits, tax-exempt income and BOLI income.

The Corporation’s net deferred tax assets amounted to $63.4 million at September 30, 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 2023, largely reflecting increases in deferred tax assets associated with a decline in fair value of securities available for sale that due to changes in market interest rates.

Management's Discussion and Analysis

The effective income tax rates for the three months ended March 31, 2024 and 2023 differed from the federal rate of 21%, primarily due to the benefits of tax-exempt income, income from BOLI, and federal tax credits, partially offset by state income tax expense.

The Corporation’s net deferred tax assets amounted to $56.6 million at March 31, 2024, compared to $53.8 million at December 31, 2023.

Net deferred tax assets increased in 2024, largely reflecting increases in deferred tax assets associated with a decline in fair value of securities available for sale due to changes in market interest rates.

Segment Reporting

1 unchanged sentence

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

Management's Discussion and Analysis

Commercial Banking

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

(Dollars in thousands) Three Months Nine Months

Change Change

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

(Dollars in thousands)

Three months ended March 31, 2024 2023 $ %

Net interest income $31,665 $37,180 ($5,515) (15 %)

7 unchanged sentences

Net income $7,598 $12,258 ($4,660) (38 %)

Net interest income for the Commercial Banking segment for the three and nine months ended September 30, 2023 decreased by $8.3 million and $10.3 million, respectively, from the same periods in 2022.

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

The provision for credit losses for the three and nine months ended September 30, 2023 decreased by $300 thousand and increased by $4.1 million, respectively, from the same periods in 2022.

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

Noninterest income derived from the Commercial Banking segment for the three and nine months ended September 30, 2023 was up by $62 thousand and down by $2.5 million, respectively, from the comparable periods in 2022.

On a year-to-date basis, the decline in Commercial Banking noninterest income in 2023 reflected lower mortgage banking revenues and loan related derivative income, partially offset by higher BOLI income.

Net interest income for the Commercial Banking segment for the three months ended March 31, 2024 decreased by $5.5 million, or 15%, from the same period in 2023.

Net interest income was adversely impacted by higher rates paid on, and increases in, average interest-bearing liability balances, which offset the benefit of higher yields on, and growth in, average interest-earning asset balances.

The provision for credit losses for the three months ended March 31, 2024 decreased by $100 thousand from the same period in 2023.

Noninterest income derived from the Commercial Banking segment for the three months ended March 31, 2024 was up by $1.1 million, or 26%, from the comparable period in 2023.

The increase in Commercial Banking noninterest income reflected higher mortgage banking revenues and loan related derivative income, partially offset by lower BOLI income.

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

Commercial Banking noninterest expenses for the three and nine months ended September 30, 2023 were up by $1.9 million and $6.1 million, respectively, from the same periods in 2022, with the largest increases in FDIC deposit insurance costs, salaries and employee benefits, legal expenses, net occupancy costs and outsourced services.

Commercial Banking noninterest expenses for the three months ended March 31, 2024 were up by $1.6 million, or 6%, from the same period in 2023, with increases in FDIC deposit insurance costs, salaries and employee benefits, and outsourced services.

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

Management's Discussion and Analysis

Wealth Management Services

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

(Dollars in thousands) Three Months Nine Months

Change Change

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

Net interest income (expense) $10 $4 $6 (150 %) $37 ($61) $98 161 %

(Dollars in thousands)

Three months ended March 31, 2024 2023 $ %

Net interest income $— $13 ($13) (100 %)

Noninterest income 11,591 8,852 2,739 31

3 unchanged sentences

Net income $3,338 $554 $2,784 503 %

For the three and nine months ended September 30, 2023, noninterest income derived from the Wealth Management Services segment decreased by $639 thousand and $3.5 million, respectively, from the same periods in 2022, largely reflecting a decrease in asset-based revenues.

For the three months ended March 31, 2024, noninterest income derived from the Wealth Management Services segment increased by $2.7 million, or 31%, from the same period in 2023, reflecting income of $2.1 million associated with a litigation settlement, as well as an increase in asset-based revenues.

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

Management's Discussion and Analysis

For the three and nine months ended September 30, 2023, noninterest expenses for the Wealth Management Services segment decreased by $542 thousand and $498 thousand, respectively, from the comparable periods in 2022, largely reflecting decreases in salaries and employee benefits expense, partially offset by higher legal expenses.

For the three months ended March 31, 2024, noninterest expenses for the Wealth Management Services segment decreased by $768 thousand, or 9%, from the comparable period in 2023, largely reflecting a decrease in salaries and employee benefits expense.

Financial Condition

1 unchanged sentence

(Dollars in thousands) Change

September 30,

2024 December 31,

Cash and due from banks $102,136 $86,824 $15,312 18 %

Total securities 970,060 1,000,380 (30,320) (3)

4 unchanged sentences

FHLB advances

1,240,000 1,190,000 50,000 4

Total shareholders’ equity 466,920 472,686 (5,766) (1)

Total assets amounted to $7.2 billion at September 30, 2023, up by $523.4 million, or 8%, from the end of 2022, largely reflecting loan growth.

The securities portfolio decreased by $34.9 million, or 4%, from the end of 2022, reflecting routine pay-downs on mortgage-backed securities and a decrease in fair value of available for sale securities due to changes in market interest rates, partially offset by purchases of debt securities.

Total loans increased by $501.0 million, or 10%, from the end of 2022, largely due to growth in the residential real estate and commercial loan portfolios.

Total deposits increased by $396.6 million, or 8%, from the end of 2022, with increases in both wholesale brokered deposits and in-market deposits.

FHLB advances increased by $140.0 million, or 14%, from December 31, 2022.

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

Shareholders’ equity decreased by $22.3 million, or 5%, as net income was offset by dividend declarations, a decrease in the AOCL component of shareholders' equity and an increase in treasury stock balances.

The decrease in AOCL reflected a decrease in the fair value of available for sale debt securities that was due to changes in market interest rates.

Total assets amounted to $7.2 billion at March 31, 2024, up by $46.3 million, or 1%, from the end of 2023.

Cash and due from banks increased by 15.3 million.

or 18%, from December 31, 2023, reflecting higher cash balances on deposit at correspondent banks.

The securities portfolio decreased by $30.3 million, or 3%, from the end of 2023, reflecting routine pay-downs on mortgage-backed securities and a decrease in fair value of available for sale securities due to changes in market interest rates.

Total loans increased by $37.5 million, or 1%, from the end of 2023, with the increase concentrated in commercial loans.

Total deposit balances were comparable to the end of 2023 and reflective of a competitive rate environment.

FHLB advances increased by $50.0 million, or 4%, from December 31, 2023, as higher levels of wholesale funding were utilized.

Management's Discussion and Analysis

Shareholders’ equity decreased by $5.8 million, or 1%.

Net income was offset by dividend declarations and a decrease in the AOCL component of shareholders' equity that reflected a decline in the fair value of available for sale securities as noted above.

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

8 unchanged sentences

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

Management's Discussion and Analysis

Determination of Fair Value

6 unchanged sentences

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

As of September 30, 2023 and December 31, 2022, management did not make any adjustments to the prices provided by the pricing service.

As of March 31, 2024 and December 31, 2023, management did not make any adjustments to the prices provided by the pricing service.

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

2 unchanged sentences

The carrying amounts of securities held are as follows:

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

(Dollars in thousands) March 31, 2024 December 31, 2023

Amount % of Total Amount % of Total

10 unchanged sentences

Total available for sale debt securities $970,060 100 % $1,000,380 100 %

The securities portfolio represented 13% of total assets at September 30, 2023, compared to 15% of total assets at December 31, 2022.

Management's Discussion and Analysis

The securities portfolio represented 13% of total assets at March 31, 2024, compared to 14% of total assets at December 31, 2023.

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

3 unchanged sentences

This decrease included $15.3 million of routine pay-downs on mortgage-backed securities and a decrease of $14.7 million (pre-tax) in the fair value of available for sale securities.

These were partially offset by purchases of U.S.

government agency and U.S.

government-sponsored debt securities, including mortgage-backed securities, totaling $60.2 million, with a weighted average yield of 4.98%.

As of September 30, 2023, the carrying amount of available for sale debt securities included net unrealized losses of $211.1 million, compared to net unrealized losses of $172.4 million as of December 31, 2022.

As of March 31, 2024, the carrying amount of available for sale debt securities included net unrealized losses of $167.0 million, compared to net unrealized losses of $152.2 million as of December 31, 2023.

The decrease in fair value of available for sale debt securities from the end of 2023 was primarily concentrated in obligations of U.S.

2 unchanged sentences

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

Total loans amounted to $5.6 billion at September 30, 2023, up by $501.0 million, or 10%, from the end of 2022.

Management's Discussion and Analysis

Total loans amounted to $5.7 billion at March 31, 2024, up by $37.5 million, or 1%, from the end of 2023.

The following is a summary of loans:

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

(Dollars in thousands) March 31, 2024 December 31, 2023

Amount % of Total Amount % of Total

Commercial real estate $2,158,518 38 % $2,106,359 37 %

$2,063,383 37 % $1,829,304 36 %

Commercial & industrial 613,376 11 605,072 11

611,565 11 656,397 13

Total commercial 2,771,894 49 2,711,431 48

1 unchanged sentence

Residential real estate 2,585,524 45 2,604,478 46

2,611,100 47 2,323,002 45

Home equity 309,302 5 312,594 6

19,384 — 15,721 —

Other 18,512 1 19,203 —

Total consumer 327,814 6 331,797 6

Total loans $5,685,232 100 % $5,647,706 100 %

(1) CRE consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans.

Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.

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

(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.

Commercial Loans

The commercial loan portfolio represented 48% of total loans at September 30, 2023.

The commercial loan portfolio represented 49% of total loans at March 31, 2024, compared to 48% of total loans at December 31, 2023.

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

1 unchanged sentence

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

Our participation in commercial loans originated by other banks amounted to $644.1 million and $510.6 million, respectively, at September 30, 2023 and December 31, 2022.

Our participation in commercial loans originated by other banks amounted to $680.1 million and $652.7 million, respectively, at March 31, 2024 and December 31, 2023.

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

6 unchanged sentences

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

C&I loans also include, 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 September 30, 2023, up by $234.1 million, or 13%, from the balance at December 31, 2022.

In 2023, CRE originations and advances of approximately $327 million were partially offset by payments of approximately $108 million.

Included in the net increase in CRE were reclassifications of $15 million from C&I.

Included in the CRE loan portfolio were construction and development loans of $193.3 million and $164.1 million, respectively, as of September 30, 2023 and December 31, 2022.

Shared national credit balances included in the CRE loans totaled $36.0 million and $10.5 million, respectively, at September 30, 2023 and December 31, 2022.

At September 30, 2023, $19.7 million of the balance was included in the pass-rated category of commercial loan credit quality and $16.3 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 contractual payment terms at both September 30, 2023 and December 31, 2022.

C&I loans also include tax-exempt loans made to states and political

Management's Discussion and Analysis

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 $2.2 billion at March 31, 2024, up by $52.2 million, or 2%, from the balance at December 31, 2023.

In 2024, CRE loan advances and originations of $87.3 million were partially offset by payments of approximately $29.1 million and reclassifications of $6.0 million to C&I.

Construction and development loans included in the CRE loan portfolio amounted to $237.7 million and $214.6 million, respectively, as of March 31, 2024 and December 31, 2023.

Unfunded commitments associated with these construction and development loans were $246.5 million and $304.7 million, respectively, at March 31, 2024 and December 31, 2023.

Shared national credit balances outstanding included in the CRE loan portfolio at March 31, 2024 and December 31, 2023, totaled $54.0 million and $47.4 million, respectively.

At March 31, 2024 and December 31, 2023, balances of $34.7 million and $29.0 million, respectively, were included in the pass-rated category of commercial loan credit quality and balances of $19.3 million and $18.4 million, respectively, were included in the classified category.

All of these loans were current with respect to contractual payment terms at both dates.

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

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

(Dollars in thousands) March 31, 2024 December 31, 2023

Outstanding Balance % of Total Outstanding Balance % of Total

6 unchanged sentences

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

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

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

(Dollars in thousands) March 31, 2024 December 31, 2023

Outstanding Balance (1)

% of Total Outstanding Balance (1)

CRE Portfolio Segmentation:

Multi-family dwelling 142 $552,819 27 % 127 $469,233 26 %

Multi-family $574,284 27 % $546,694 26 %

Retail 438,422 20 434,913 21

Office 53 289,011 14 53 257,551 14

Industrial and warehouse 325,695 15 307,987 15

Office 284,675 13 284,199 13

Hospitality 225,608 10 235,015 11

Healthcare 18 168,653 8 17 136,225 7

Commercial mixed use 11 47,984 2 21 54,976 3

Healthcare facility 196,117 9 175,490 8

Mixed-use 52,853 2 49,079 2

Other 60,864 4 72,982 4

5 unchanged sentences

$65,465 $65,458

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 September 30, 2023, Washington Trust’s CRE office loan segment totaled $289.0 million, or 5% of total loans and 14% of the total CRE loans.

(1) Does not include unfunded commitments of $288.2 million and $351.5 million, respectively, as of March 31, 2024 and December 31, 2023.

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

In 2024, there continues to be heightened focus in the banking industry on the CRE office sector, given the continuation of

Management's Discussion and Analysis

remote work and an increase in vacancies across the office market.

As of March 31, 2024, Washington Trust’s CRE office loan segment totaled $284.7 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 $284.7 million is secured by properties located in suburban areas.

As of September 30, 2023, all of the CRE office loans were current with respect to payment terms and 97% of the CRE office segment balance was on accruing status.

Additionally, the credit quality of the CRE office loan segment was 83% pass-rated, 7% special mention-rated and 10% classified as of September 30, 2023.

As of March 31, 2024, 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 83% pass-rated, 2% special mention-rated, and 15% classified as of March 31, 2024.

Commercial and Industrial Loans

C&I loans amounted to $611.6 million at September 30, 2023, down by $44.8 million, or 7%, from the balance at December 31, 2022.

The net reduction in C&I reflected payments of approximately $75 million and reclassifications of $15 million to CRE, partially offset by originations and advances of $45 million.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $65.6 million and $40.9 million, respectively, at September 30, 2023 and December 31, 2022.

All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at both September 30, 2023 and December 31, 2022.

Management's Discussion and Analysis

C&I loans amounted to $613.4 million at March 31, 2024, up by $8.3 million, or 1%, from the balance at December 31, 2023.

C&I originations and advances of $21.2 million were partially offset by payments of $18.9 million.

The net increase in C&I also reflected reclassifications of $6.0 million from CRE.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $68.2 million and $66.3 million, respectively, at March 31, 2024 and December 31, 2023.

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 dates.

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

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

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

(Dollars in thousands) March 31, 2024 December 31, 2023

Outstanding Balance (1)

% of Total Outstanding Balance (1)

C&I Portfolio Segmentation:

4 unchanged sentences

Manufacturing 53,348 9 54,905 9

Educational services 17 44,451 7 19 46,708 7

Retail trade 44,166 7 43,746 7

Educational services 41,566 7 41,968 7

Finance and insurance

14 unchanged sentences

$25,330 $25,324

(1) Does not include unfunded commitments of $355.1 million and $341.9 million, respectively, as of March 31, 2024 and December 31, 2023.

(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 47% of total loans at September 30, 2023.

Residential real estate loans held in portfolio amounted to $2.6 billion at September 30, 2023, up by $288.1 million, or 12%, from the balance at December 31, 2022.

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

The residential real estate loan portfolio represented 45% of total loans at March 31, 2024, compared to 46% of total loans at December 31, 2023.

Residential real estate loans held in portfolio amounted to $2.6 billion at March 31, 2024, down by $19.0 million, or 1%, from the balance at December 31, 2023, as total loan origination activity declined and a lower proportion of loans was originated for portfolio.

Management's Discussion and Analysis

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

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

(Dollars in thousands) March 31, 2024 December 31, 2023

Amount % of Total Amount % of Total

6 unchanged sentences

$2,585,524 100 % $2,604,478 100 %

(1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $54.4 million and $59.9 million, respectively, as of September 30, 2023 and December 31, 2022.

(1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $52.1 million and $53.4 million, respectively, as of March 31, 2024 and December 31, 2023.

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

We also originate residential real estate loans for various investors in a broker capacity, including conventional mortgages and reverse mortgages.

Management's Discussion and Analysis

The table below presents residential real estate loan origination activity:

(Dollars in thousands) Three Months Nine Months

Periods ended September 30, 2023 2022 2023 2022

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

(Dollars in thousands)

Three months ended March 31, 2024 2023

Amount % of Total Amount % of Total

Originations for retention in portfolio (1)

7 unchanged sentences

(Dollars in thousands)

Three Months Nine Months

Periods ended September 30, 2023 2022 2023 2022

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

Three months ended March 31, 2024 2023

Amount % of Total Amount % of Total

Loans sold with servicing rights retained $24,057 33 % $17,114 58 %

3 unchanged sentences

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

On a year-to-date basis, residential real estate loan origination, refinancing and sales activity decreased in response to increases in market interest rates and changes in the housing markets.

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

The proportion of residential real estate loans originated for portfolio has decreased due to balance sheet management purposes.

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

3 unchanged sentences

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

The net balance of capitalized servicing rights amounted to $8.8 million and $9.0 million, respectively, as of September 30, 2023 and December 31, 2022.

The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $1.5 billion as of both September 30, 2023 and December 31, 2022.

The net balance of capitalized servicing rights amounted to $8.4 million and $8.5 million, respectively, as of March 31, 2024 and December 31, 2023.

The balance of residential

Management's Discussion and Analysis

mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $1.5 billion as of both March 31, 2024 and December 31, 2023.

Consumer Loans

The consumer loan portfolio represented 6% of total loans at both March 31, 2024 and December 31, 2023.

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

Home equity lines of credit and home equity loans represented 94% of the total consumer portfolio at September 30, 2023.

Home equity lines of credit and home equity loans represented 94% of the total consumer portfolio at March 31, 2024.

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

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

The consumer loan portfolio totaled $325.1 million at September 30, 2023, up by $23.6 million, or 8%, 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 $13.7 million and $9.6 million, respectively, at September 30, 2023 and December 31, 2022.

Management's Discussion and Analysis

The consumer loan portfolio totaled $327.8 million at March 31, 2024, down by $4.0 million, or 1%, from December 31, 2023, largely reflecting a decrease in home equity lines.

Asset Quality

1 unchanged sentence

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

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

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

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.

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

(Dollars in thousands) September 30,

(Dollars in thousands) March 31,

2024 December 31,

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Total commercial

19,397 33,509

Residential Real Estate:

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

Allowance for credit losses on loans to nonaccrual loans 136.45 % 92.02 %

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

Nonaccrual Loans

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

Management's Discussion and Analysis

Nonaccrual Loans

During the three months ended March 31, 2024, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.

The following table presents the activity in nonaccrual loans:

(Dollars in thousands) Three Months Nine Months

For the periods ended September 30, 2023 2022 2023 2022

(Dollars in thousands)

For the three months ended March 31, 2024 2023

Balance at beginning of period $44,618 $12,846

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The following table presents additional detail on nonaccrual loans:

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

(Dollars in thousands) March 31, 2024 December 31, 2023

Days Past Due Days Past Due

Over 90 Under 90 Total % (1)

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

Commercial real estate $18,729 $— $— $18,729 0.87 % $32,827 $— $— $32,827 1.56 %

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

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

As of September 30, 2023, the composition of nonaccrual loans was 69% commercial and 31% residential and consumer.

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

Total nonaccrual loans increased by $20.8 million from the end of 2022.

Nonaccrual commercial loans increased by $23.3 million from the balance at December 31, 2022, primarily due to two CRE loans that were placed on nonaccrual status in the third quarter of 2023.

As of September 30, 2023, the balance of nonaccrual CRE loans was secured by income-producing properties in Connecticut.

Included in nonaccrual CRE loans at September 30, 2023 was a well-secured collateral dependent loan with a carrying value of $14.0 million that was modified as a TLM in the third quarter of 2023.

The contractual maturity of the loan was extended by 9 months.

Nonaccrual residential real estate mortgage loans decreased by $2.4 million from the end of 2022.

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

Included in total nonaccrual residential real estate loans at September 30, 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.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2024.

As of March 31, 2024, the composition of nonaccrual loans was 63% commercial and 37% residential and consumer.

This compared to 75% commercial and 25% residential and consumer as of December 31, 2023.

Total nonaccrual loans decreased by $13.9 million from the end of 2023, reflecting a decline in nonaccrual commercial real estate loans.

Nonaccrual commercial real estate loans decreased by $14.1 million from the balance at December 31, 2023, primarily due to one loan secured by a healthcare facility that returned to accruing status in the quarter.

As of March 31, 2024, the balance of nonaccrual commercial real estate loans consisted of two collateral dependent loans that are current with respect to payment terms.

These loans were individually assessed for credit impairment and based on the estimated fair value of the collateral less estimated costs to sell (when appropriate), no specific reserves were deemed necessary at March 31, 2024.

Of the total carrying value, $10.8 million is secured by an office property in Massachusetts and $8.0 million is secured by an office property in Connecticut and was modified as a TLM in 2023.

Management's Discussion and Analysis

As of March 31, 2024, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Connecticut, and Rhode Island.

Included in total nonaccrual residential real estate loans at March 31, 2024 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:

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

(Dollars in thousands) March 31, 2024 December 31, 2023

Commercial real estate $— — % $— — %

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

As of September 30, 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% residential and consumer and 13% commercial at December 31, 2022.

As of March 31, 2024, the composition of past due loans (loans past due 30 days or more) was 97% residential and consumer and 3% commercial, compared to 100% residential and consumer and 0% commercial at December 31, 2023.

Total past due loans decreased by $1.3 million from the end of 2023.

Total past due loans included $5.7 million of nonaccrual loans as of September 30, 2023, compared to $7.2 million as of December 31, 2022.

All loans 90 days or more past due at September 30, 2023 and December 31, 2022 were classified as nonaccrual.

Total past due loans included $5.1 million of nonaccrual loans as of March 31, 2024, compared to $6.9 million as of December 31, 2023.

All loans 90 days or more past due at March 31, 2024 and December 31, 2023 were classified as nonaccrual.

Potential Problem Loans

The Corporation classifies certain loans as “substandard,” “doubtful,” or “loss” based on criteria consistent with guidelines provided by banking regulators.

Potential problem loans include classified accruing commercial loans that were less than 90 days past due at September 30, 2023 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future.

Potential problem loans include classified accruing commercial loans that were less than 90 days past due at March 31, 2024 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future.

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

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

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

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

Management has identified $20.1 million in potential problem loans at September 30, 2023, compared to $927 thousand at December 31, 2022.

As of September 30, 2023, the balance of potential problem loans largely consisted of two loans associated with two CRE relationships.

At September 30, 2023, these loans were all current with respect to payment terms.

Management has identified $23.8 million in potential problem loans at March 31, 2024, compared to $22.9 million at December 31, 2023.

The balances of potential problem loans largely consisted of two CRE loans secured by office properties in Massachusetts and Connecticut.

At March 31, 2024 and December 31, 2023, these loans were all current with respect to payment terms.

Management's Discussion and Analysis

Allowance for Credit Losses on Loans

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

Full or partial charge-offs on collateral

Management's Discussion and Analysis

dependent individually analyzed loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.

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

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

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

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

(Dollars in thousands) March 31, 2024 December 31, 2023

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

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

The ACL on loans amounted to $40.2 million at September 30, 2023, up by $2.2 million, or 6%, 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 0.72% at September 30, 2023, compared to 0.74% at December 31, 2022.

The Corporation recorded a provision for credit losses of $500 thousand and $2.0 million, respectively, for the three and nine months ended September 30, 2023.

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

The ACL on loans amounted to $41.9 million at March 31, 2024, up by $848 thousand, or 2%, from the balance at December 31, 2023.

The ACL on loans as a percentage of total loans, also known as the reserve coverage ratio, was 0.74% at March 31, 2024, compared to 0.73% at December 31, 2023.

Management's Discussion and Analysis

Net charge-offs totaled $30 thousand for the three months ended September 30, 2023, compared to net charge-offs of $54 thousand for the same period in 2022.

For the nine months ended September 30, 2023, net charge-offs totaled $114 thousand, compared to net recoveries of $104 thousand for the same period in 2022.

The Corporation recorded a provision for credit losses of $700 thousand for the three months ended March 31, 2024.

This included a provision for credit losses on loans of $900 thousand and a negative provision (or a benefit) for credit losses on unfunded commitments of $200 thousand.

The provision reflected commercial loan growth and a continued, but subsiding, slowdown of loan prepayment speeds, as well as our current estimate of forecasted economic conditions.

Net charge-offs were modest, totaling $52 thousand for the three months ended March 31, 2024 and $47 thousand for the same period in 2023.

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

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

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

(Dollars in thousands) March 31, 2024 December 31, 2023

Allocated ACL

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$41,905 0.74 % 100 % $41,057 0.73 % 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.

Sources of Funds

10 unchanged sentences

The following table presents a summary of deposits:

(Dollars in thousands)

September 30, 2023 December 31, 2022

(Dollars in thousands) March 31, 2024 December 31, 2023 Change in Balance

Amount % of Total Amount % of Total $ %

Noninterest-bearing demand deposits $648,929 12 % $693,746 13 % ($44,817) (6 %)

Interest-bearing demand deposits (in market) 490,217 9 302,044 6

Interest-bearing demand deposits 536,923 10 504,959 9 31,964 6

NOW accounts 735,617 14 767,036 14 (31,419) (4)

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Total in-market deposits 4,674,173 87 4,694,110 88 (19,937) —

Wholesale brokered demand deposits — — 31,153 1

Wholesale brokered time deposits 673,720 13 654,050 12 19,670 3

Total wholesale brokered deposits 668,042 12 358,197 8

Total deposits $5,347,893 100 % $5,348,160 100 % ($267) — %

Total deposits amounted to $5.4 billion at September 30, 2023, up by $396.6 million, or 8%, from December 31, 2022, with increases in wholesale brokered deposits and in-market deposits.

Wholesale brokered deposits increased by $309.8 million, or 87%, 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 $86.8 million, or 2%, 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 September 30, 2023, in-market deposits were approximately 59% retail and 41% commercial.

Total deposits amounted to $5.3 billion at March 31, 2024, essentially unchanged from December 31, 2023.

Wholesale brokered time deposits increased by $19.7 million, or 3%, from December 31, 2023, as higher levels were utilized to fund balance sheet growth.

In-market deposits, which exclude wholesale brokered time deposits, were down by $19.9 million from the balance at December 31, 2023.

In-market deposits continue to shift from relatively lower cost products to higher cost products, due to elevated market interest rates and increased competition.

As of March 31, 2024, in-market deposits were approximately 61% retail and 39% commercial.

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

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

The average size of our in-market deposit accounts was approximately $36 thousand at March 31, 2024.

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

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

(Dollars in thousands) March 31, 2024 December 31, 2023

Balance % of Total Deposits Balance % of Total Deposits

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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 $1.1 billion at September 30, 2023, up by $140.0 million, or 14%, from the balance at the end of 2022, as higher levels were utilized to fund balance sheet growth.

FHLB advances totaled $1.2 billion at March 31, 2024, up by $50.0 million, or 4%, from the balance at the end of 2023, as higher levels of wholesale funding were utilized to fund balance sheet growth.

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

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

The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 67% of total average assets in the nine months ended September 30, 2023.

The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 64% of total average assets in the three months ended March 31, 2024.

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

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(Dollars in thousands)

September 30,

2024 December 31,

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Percentage of total contingent liquidity to uninsured deposits, after exclusions 185.4 % 195.9 %

(1) As of September 30, 2023 and December 31, 2022, loans with a carrying value of $3.0 billion and $2.4 billion, respectively, and securities available for sale with carrying values of $90.0 million and $102.1 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of September 30, 2023 and December 31, 2022, loans with a carrying value of $16.3 million and $20.9 million, respectively, and securities available for sale with a carrying value of $13.2 million and $12.7 million, respectively, were pledged to the FRBB for the discount window resulting in this additional unused borrowing capacity.

In addition to the amounts presented above, the Bank also has access to a $40.0 million unused line of credit with the FHLB.

Furthermore, $115.0 million of availability was utilized as of September 30, 2023 to collateralize an institutional deposit through a standby letter of credit with the FHLB.

(1) As of March 31, 2024 and December 31, 2023, loans with a carrying value of $3.4 billion and $3.4 billion, respectively, and securities available for sale with carrying values of $90.0 million and $94.3 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of March 31, 2024 and December 31, 2023, loans with a carrying value of $71.6 million and $71.0 million, respectively, and securities available for sale with a carrying value of $13.7 million and $13.1 million, respectively, were pledged to the FRBB for the discount window resulting in this additional unused borrowing capacity.

In addition to the amounts presented above, the Bank also has access to a $40.0 million unused line of credit with the FHLB at March 31, 2024 and December 31, 2023.

Furthermore, availability of $66.0 million and $65.0 million, respectively, at March 31, 2024 and December 31, 2023, was utilized to collateralize institutional deposits through standby letters of credit with the FHLB.

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

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

Liquidity remained within target ranges established by the ALCO during the three months ended March 31, 2024.

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

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

Also, in the ordinary course of business, the Corporation engages in a variety of financial transactions that, in accordance with GAAP, are

Management's Discussion and Analysis

not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts.

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

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

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

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

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

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

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

Capital Resources

Total shareholders’ equity amounted to $431.4 million at September 30, 2023, down by $22.3 million from December 31, 2022.

This decrease included $28.8 million in dividend declarations.

In addition, the AOCL component of shareholders' equity decreased by $20.9 million, largely reflecting decreases in the fair value of available for sale debt securities due to changes in market interest rates.

The decrease in shareholders’ equity also included a net increase in treasury stock balances of $7.1 million, which included the repurchase of 200,000 shares in January and February at an average price of $43.70 and a total cost of $8.7 million, under the 2023 Repurchase Program.

The decreases in shareholder’s equity were partially offset by net income of $35.2 million.

The Corporation declared a quarterly dividend of 56 cents per share for the three months ended September 30, 2023, compared to 54 cents per share declared for the same period in 2022.

On a year-to-date basis, dividend declarations totaled $1.68 per share in 2023, compared to $1.62 in 2022.

The ratio of total equity to total assets was 6.01% at September 30, 2023, compared to a ratio of 6.81% at December 31, 2022.

Book value per share was $25.35 at September 30, 2023, compared to $26.40 at December 31, 2022.

The Bancorp and the Bank are subject to various regulatory capital requirements and are considered “well capitalized” with the Bancorp having a total risk-based capital ratio of 11.48% at September 30, 2023, compared to 12.37% at December 31, 2022.

Total shareholders’ equity amounted to $466.9 million at March 31, 2024, down by $5.8 million from December 31, 2023.

Net income of $10.9 million was offset by $9.7 million in dividend declarations and a decline of $7.8 million in the AOCL component of shareholders' equity.

The decline in AOCL largely reflected a decrease in the fair value of available for sale debt securities due to changes in market interest rates.

The Corporation declared a quarterly dividend of 56 cents per share for the three months ended March 31, 2024, unchanged from the 56 cents per share declared for the same period in 2023.

The ratio of total equity to total assets amounted to 6.44% at March 31, 2024, compared to a ratio of 6.56% at December 31, 2023.

Book value per share was $27.41 at March 31, 2024, compared to $27.75 at December 31, 2023.

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 11.62% at March 31, 2024, compared to 11.58% at December 31, 2023.

See Note 10 to the Unaudited 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.

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

Quarterly, the ALCO reports on the status of liquidity and interest rate risk matters to the Corporation’s 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.

8 unchanged sentences

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

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

Management's Discussion and Analysis

different interest rate scenarios.

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

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

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

As of September 30, 2023 and December 31, 2022, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation.

As of March 31, 2024 and December 31, 2023, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation.

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

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

In addition to measuring the change in net interest income as compared to an unchanged rate scenario, the ALCO also measures the trend of

Management's Discussion and Analysis

both net interest income and NIM over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.

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

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

The following table sets forth the estimated change in net interest income from an unchanged rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on- and off-balance sheet financial instruments as of September 30, 2023 and December 31, 2022.

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

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

Interest rates are assumed to shift by parallel rate changes as shown in the table below.

Since market interest rates have risen sharply, management incorporated a down 300 basis point scenario into the tabular presentation below;

an up 300 basis point scenario is also included.

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

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

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

1 unchanged sentence

200 basis point rate decrease (7.11) 2.51 (6.82) 1.53

300 basis point rate decrease (10.81) 3.09 (10.38) 1.59

100 basis point rate increase 0.61 (7.49) 0.72 (6.08)

1 unchanged sentence

300 basis point rate increase 7.27 (13.02) 7.55 (9.21)

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

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

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

As of September 30, 2023, the ALCO estimates that negative exposure of net interest income to falling rates as compared to an unchanged rate scenario results from a more rapid decline in earning asset yields compared to rates paid on deposits.

The relative change in interest rate sensitivity from December 31, 2023, as shown in the above table, was attributable to changes in balance sheet composition and market interest rates.

As of March 31, 2024, 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.

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.

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

Management's Discussion and Analysis

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

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 March 31, 2024, 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.

As mentioned above, 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.

1 unchanged sentence

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

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

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.

2 unchanged sentences

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

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

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

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

During 2022 and into 2023, the Federal Reserve reversed policy and increased the target range to 5.25% - 5.50% as of September 30, 2023.

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

Management's Discussion and Analysis

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 paused rate hikes and the target range for the Federal Funds rate was 5.25% - 5.50% at March 31, 2024.

The increase of the Federal Funds target rate in recent years has resulted in higher rates paid on deposit balances and a shift of low cost balances into higher cost alternatives, which could continue into the future, particularly if interest rates remain elevated.

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.

11 unchanged sentences

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

Management's Discussion and Analysis

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

The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of March 31, 2024 and December 31, 2023 resulting from immediate parallel rate shifts:

(Dollars in thousands)

Security Type Down 100 Basis Points Up 200 Basis Points

Obligations of U.S.

government-sponsored enterprise securities (callable) $8,028 ($16,094)

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Trust preferred debt and other corporate debt securities (19) 27

Total change in market value as of September 30, 2023 $61,978 ($115,081)

Total change in market value as of March 31, 2024 $58,451 ($112,819)

Total change in market value as of December 31, 2023 $59,659 ($117,334)

7 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis