WASHINGTON TRUST BANCORP INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 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 This report contains statements that are “forward-looking statements.” We may also make forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors, or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “outlook,” “will,” “should,” and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties, and other factors, some of which are beyond our control. These risks, uncertainties, and other factors may cause our actual results, performance, or achievements to be materially different than the anticipated future results, performance, or achievements expressed or implied by the forward-looking statements. Some of the factors that might cause these differences include the following: • changes in general business and economic conditions on a national basis and in the local markets in which we operate; • changes in customer behavior due to political, business, and economic conditions, including inflation and concerns about liquidity; • interest rate changes or volatility, as well as changes in the balance and mix of loans and deposits; • changes in loan demand and collectability; • the possibility that future credits losses are higher than currently expected due to changes in economic assumptions or adverse economic developments; • ongoing volatility in national and international financial markets; • reductions in the market value or outflows of wealth management AUA; • decreases in the value of securities and other assets; • increases in defaults and charge-off rates; • changes in the size and nature of our competition; • changes in legislation or regulation and accounting principles, policies, and guidelines; • operational risks including, but not limited to, changes in information technology, cybersecurity incidents, fraud, natural disasters, war, terrorism, civil unrest, and future pandemics; • regulatory, litigation, and reputational risks; and • changes in the assumptions used in making such forward-looking statements. In addition, the factors described under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC, may result in these differences. You should carefully review all of these factors and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans, and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. Overview Washington Trust offers a full range of financial services, including commercial, residential, and consumer lending, retail and commercial deposit products, and wealth management and trust services through its offices in Rhode Island, Massachusetts, and Connecticut. Our largest source of operating income is net interest income, which is the difference between interest earned on loans and securities and interest paid on deposits and borrowings. In addition, we generate noninterest income from a number of -37- Management's Discussion and Analysis sources, including wealth management services, mortgage banking activities, and deposit services. Our principal noninterest expenses include salaries and employee benefit costs, outsourced services provided by third-party vendors, occupancy and facility-related costs, and other administrative expenses. We continue to leverage our strong regional brand to build market share and remain steadfast in our commitment to provide superior service. We believe the key to future growth is providing customers with convenient in-person service and digital banking solutions. In 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 The Corporation has a comprehensive ERM program through which the Corporation identifies, measures, monitors, and controls current and emerging material risks. The Board of Directors is responsible for oversight of the ERM program. The ERM program enables the aggregation of risk across the Corporation and ensures the Corporation has the tools, programs, and processes in place to support informed decision making, to anticipate risks before they materialize and to maintain the Corporation’s risk profile consistent with its risk strategy. The Board of Directors has approved an ERM Policy that addresses each category of risk. The risk categories include: credit risk, interest rate risk, liquidity risk, price and market risk, compliance risk, strategic and reputation risk, and operational risk. A description of each risk category is provided below. Credit risk represents the possibility that borrowers or other counterparties may not repay loans or other contractual obligations according to their terms due to changes in the financial capacity, ability, and willingness of such borrowers or counterparties to meet their obligations. In some cases, the collateral securing payment of the loans may be sufficient to assure repayment, but in other cases the Corporation may experience significant credit losses which could have an adverse effect on its operating results. The Corporation makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of the real estate and other assets serving as collateral for the repayment of loans. 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 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 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. See the “Asset/Liability Management and Interest Rate Risk” section below for additional disclosure. Liquidity risk is the risk that the Corporation will not have the ability to generate adequate amounts of cash 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. Price and market risk refers to the risk of loss arising from adverse changes in interest rates and other relevant market rates and prices, such as equity prices. Interest rate risk, discussed above, is the most significant market risk to which the Corporation is exposed. The Corporation is also exposed to financial market risk and housing market risk. Compliance risk represents the risk of regulatory sanctions or financial loss resulting from the failure to comply with laws, rules, and regulations and standards of good banking practice. Activities which may expose the Corporation to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, adherence to all applicable laws and regulations, and employment and tax matters. Strategic and reputation risk represent the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, and failure to assess existing and new opportunities and threats in business, markets, and products. -38- Management's Discussion and Analysis 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. A framework approach is utilized to assign responsibility and to ensure that the various business units and activities involved in the risk management life-cycle are effectively integrated. The Corporation has adopted the “three lines of defense” strategy that is an industry best practice for ERM. Business units are the first line of defense in managing risk. They are responsible for identifying, measuring, monitoring, and controlling current and emerging risks. 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. They are responsible for policy setting and for reviewing and challenging the risk management activities of the business units. They collaborate closely with business units on planning and resource allocation with respect to risk management. Internal Audit is a third line of defense. They provide independent assurance to the Board of Directors of the effectiveness of the first and second lines in fulfilling their risk management responsibilities. For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see Part II, Item 1A below and the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC. -39- Management's Discussion and Analysis Results of Operations Summary The following table presents a summarized consolidated statement of operations: (Dollars in thousands) Change Three months ended March 31, 2024 2023 $ % Net interest income $31,665 $37,193 ($5,528) (15 %) Noninterest income 17,163 13,283 3,880 29 Total revenues 48,828 50,476 (1,648) (3) Provision for credit losses 700 800 (100) (13) Noninterest expense 34,363 33,564 799 2 Income before income taxes 13,765 16,112 (2,347) (15) Income tax expense 2,829 3,300 (471) (14) Net income $10,936 $12,812 ($1,876) (15 %) The following table presents a summary of performance metrics and ratios: Three months ended March 31, 2024 2023 Diluted earnings per common share $0.64 $0.74 Return on average assets (net income divided by average assets) 0.61 % 0.77 % Return on average equity (net income available for common shareholders divided by average equity) 9.33 % 11.27 % Net interest income as a percentage of total revenues 65 % 74 % Noninterest income as a percentage of total revenues 35 % 26 % 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. -40- Management's Discussion and Analysis Average Balances / Net Interest Margin - Fully Taxable Equivalent Basis The following table presents average balance and interest rate information. Tax-exempt income is converted to an FTE basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. Unrealized gains (losses) on available for sale securities and changes in fair value on mortgage loans held for sale are excluded from the average balance and yield calculations. Nonaccrual loans, as well as interest recognized on these loans, are included in amounts presented for loans. Three months ended March 31, 2024 2023 Change (Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Assets: 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 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 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 Commercial & industrial 610,747 9,892 6.51 630,778 9,070 5.83 (20,031) 822 0.68 Total commercial 2,751,634 44,112 6.45 2,490,109 34,370 5.60 261,525 9,742 0.85 Residential real estate 2,592,769 26,531 4.12 2,353,266 21,664 3.73 239,503 4,867 0.39 Home equity 310,231 5,004 6.49 286,348 3,759 5.32 23,883 1,245 1.17 Other 19,112 212 4.46 16,405 184 4.55 2,707 28 (0.09) Total consumer 329,343 5,216 6.37 302,753 3,943 5.28 26,590 1,273 1.09 Total loans 5,673,746 75,859 5.38 5,146,128 59,977 4.73 527,618 15,882 0.65 Total interest-earning assets 6,968,502 85,479 4.93 6,502,483 68,990 4.30 466,019 16,489 0.63 Noninterest-earning assets 263,333 241,513 21,820 Total assets $7,231,835 $6,743,996 $487,839 Liabilities and Shareholders’ Equity: Interest-bearing demand deposits (in-market) $506,239 $5,706 4.53 $298,158 $2,639 3.59 $208,081 $3,067 0.94 NOW accounts 720,918 375 0.21 821,590 358 0.18 (100,672) 17 0.03 Money market accounts 1,107,591 10,417 3.78 1,253,141 7,576 2.45 (145,550) 2,841 1.33 Savings accounts 490,268 752 0.62 566,258 314 0.22 (75,990) 438 0.40 Time deposits (in-market) 1,149,442 11,720 4.10 830,574 4,577 2.23 318,868 7,143 1.87 Interest-bearing in-market deposits 3,974,458 28,970 2.93 3,769,721 15,464 1.66 204,737 13,506 1.27 Wholesale brokered demand deposits — — — 16,257 177 4.42 (16,257) (177) (4.42) Wholesale brokered time deposits 699,605 9,077 5.22 427,051 3,948 3.75 272,554 5,129 1.47 Wholesale brokered deposits 699,605 9,077 5.22 443,308 4,125 3.77 256,297 4,952 1.45 Total interest-bearing deposits 4,674,063 38,047 3.27 4,213,029 19,589 1.89 461,034 18,458 1.38 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 22,681 406 7.20 22,681 354 6.33 — 52 0.87 Total interest-bearing liabilities 5,936,689 53,591 3.63 5,279,766 31,569 2.42 656,923 22,022 1.21 Noninterest-bearing demand deposits 664,656 835,298 (170,642) Other liabilities 159,394 168,826 (9,432) Shareholders’ equity 471,096 460,106 10,990 Total liabilities and shareholders’ equity $7,231,835 $6,743,996 $487,839 Net interest income (FTE) $31,888 $37,421 ($5,533) Interest rate spread 1.30 1.88 (0.58) Net interest margin 1.84 2.33 (0.49) -41- Management's Discussion and Analysis Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: (Dollars in thousands) 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 $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 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 $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. Prepayment speeds generally increase as market interest rates decline and decrease as market interest rates rise. Changes in prepayment speeds could increase or decrease the level of net amortization of premiums and discounts, thereby affecting interest income. As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to 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 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. -42- Management's Discussion and Analysis As market interest rates rose, deposit balances shifted from lower cost deposits to higher cost deposits. Average in-market interest-bearing deposits, which excludes wholesale brokered deposits, 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) The following table presents certain information on an FTE basis regarding changes in our interest income and interest expense for the period indicated. The net change attributable to both volume and rate has been allocated proportionately. (Dollars in thousands) Three Months Ended March 31, 2024 vs. 2023 Change Due to Volume Rate Net Change Interest on Interest-Earning Assets: Cash, federal funds sold, and other short-term investments ($291) $417 $126 Mortgage loans held for sale 30 73 103 Taxable debt securities (297) 199 (98) FHLB stock 113 363 476 Commercial real estate 4,143 4,777 8,920 Commercial & industrial (294) 1,116 822 Total commercial 3,849 5,893 9,742 Residential real estate 2,298 2,569 4,867 Home equity 331 914 1,245 Other 30 (2) 28 Total consumer 361 912 1,273 Total loans 6,508 9,374 15,882 Total interest income 6,063 10,426 16,489 Interest on Interest-Bearing Liabilities: Interest-bearing demand deposits (in-market) 2,206 861 3,067 NOW accounts (46) 63 17 Money market accounts (963) 3,804 2,841 Savings accounts (47) 485 438 Time deposits (in-market) 2,215 4,928 7,143 Interest-bearing in-market deposits 3,365 10,141 13,506 Wholesale brokered demand deposits (89) (88) (177) Wholesale brokered time deposits 3,142 1,987 5,129 Wholesale brokered deposits 3,053 1,899 4,952 Total interest-bearing deposits 6,418 12,040 18,458 FHLB advances 2,329 1,183 3,512 Junior subordinated debentures — 52 52 Total interest expense 8,747 13,275 22,022 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 -43- 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) Change Three months ended March 31, 2024 2023 $ % Provision for credit losses on loans $900 $800 $100 13 % Provision for credit losses on unfunded commitments (200) — ($200) (100) Provision for credit losses $700 $800 ($100) (13 %) 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 Noninterest income is an important source of revenue for Washington Trust. The principal categories of noninterest income are shown in the following table: (Dollars in thousands) Change Three months ended March 31, 2024 2023 $ % Noninterest income: Wealth management revenues $9,338 $8,663 $675 8 % Mortgage banking revenues 2,506 1,245 1,261 101 Card interchange fees 1,145 1,132 13 1 Service charges on deposit accounts 685 777 (92) (12) Loan related derivative income 284 (51) 335 657 Income from bank-owned life insurance 739 1,165 (426) (37) Other income 2,466 352 2,114 601 Total noninterest income $17,163 $13,283 $3,880 29 % Noninterest Income Analysis 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 that are not primarily derived from the value of assets. -44- Management's Discussion and Analysis The categories of wealth management revenues are shown in the following table: (Dollars in thousands) Change Three months ended March 31, 2024 2023 $ % Wealth management revenues: Asset-based revenues $9,089 $8,429 $660 8 % Transaction-based revenues 249 234 15 6 Total wealth management revenues $9,338 $8,663 $675 8 % 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 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 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 & 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 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: (Dollars in thousands) Change Three months ended March 31, 2024 2023 $ % Mortgage banking revenues: Realized gains on loan sales, net (1) $1,586 $576 $1,010 175 % Changes in fair value, net (2) 324 86 238 277 Loan servicing fee income, net (3) 596 583 13 2 Total mortgage banking revenues $2,506 $1,245 $1,261 101 % Loans sold to the secondary market (4) $72,644 $29,328 $43,316 148 % (1) Includes gains on loan sales, commission income on loans originated for others, servicing right gains, and gains (losses) on forward loan commitments. (2) Represents fair value changes on mortgage loans held for sale and forward loan commitments. (3) Represents loan servicing fee income, net of servicing right amortization and valuation adjustments. (4) Includes brokered loans (loans originated for others). 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 -45- 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. 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) Change Three months ended March 31, 2024 2023 $ % Noninterest expense: Salaries and employee benefits $21,775 $21,784 ($9) — % Outsourced services 3,780 3,496 284 8 Net occupancy 2,561 2,437 124 5 Equipment 1,020 1,028 (8) (1) Legal, audit, and professional fees 706 896 (190) (21) FDIC deposit insurance costs 1,441 872 569 65 Advertising and promotion 548 408 140 34 Amortization of intangibles 208 212 (4) (2) Other 2,324 2,431 (107) (4) Total noninterest expense $34,363 $33,564 $799 2 % Noninterest Expense Analysis 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. Income Taxes The following table presents the Corporation’s income tax provision and applicable tax rates for the periods indicated: (Dollars in thousands) Three months ended March 31, 2024 2023 Income tax expense $2,829 $3,300 Effective income tax rate 20.6 % 20.5 % -46- 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 The Corporation manages its operations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services. See Note 13 to the Unaudited Consolidated Financial Statements for additional disclosure related to business segments. Commercial Banking The following table presents a summarized statement of operations for the Commercial Banking business segment: (Dollars in thousands) Change Three months ended March 31, 2024 2023 $ % Net interest income $31,665 $37,180 ($5,515) (15 %) Provision for credit losses 700 800 (100) (13) Net interest income after provision for credit losses 30,965 36,380 (5,415) (15) Noninterest income 5,572 4,431 1,141 26 Noninterest expense 27,033 25,466 1,567 6 Income before income taxes 9,504 15,345 (5,841) (38) Income tax expense 1,906 3,087 (1,181) (38) Net income $7,598 $12,258 ($4,660) (38 %) 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 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. -47- 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) Change Three months ended March 31, 2024 2023 $ % Net interest income $— $13 ($13) (100 %) Noninterest income 11,591 8,852 2,739 31 Noninterest expense 7,330 8,098 (768) (9) Income before income taxes 4,261 767 3,494 456 Income tax expense 923 213 710 333 Net income $3,338 $554 $2,784 503 % 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. 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 Summary The following table presents selected financial condition data: (Dollars in thousands) Change March 31, 2024 December 31, 2023 $ % Cash and due from banks $102,136 $86,824 $15,312 18 % Total securities 970,060 1,000,380 (30,320) (3) Total loans 5,685,232 5,647,706 37,526 1 Allowance for credit losses on loans 41,905 41,057 848 2 Total assets 7,249,124 7,202,847 46,277 1 Total deposits 5,347,893 5,348,160 (267) — 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 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. -48- 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. Securities I nvestment security activity is monitored by the Investment Committee, the members of which also sit on the ALCO. Asset and liability management objectives are the primary influence on the Corporation’s investment activities. However, the Corporation also recognizes that there are certain specific risks inherent in investment activities. The securities portfolio is managed in accordance with regulatory guidelines and established internal corporate investment policies that provide limitations on specific risk factors such as market risk, credit risk and concentration, liquidity risk, and operational risk to help monitor risks associated with investing in securities. Reports on the activities conducted by the Investment Committee and the ALCO are presented to the Board of Directors on a regular basis. The Corporation’s securities portfolio is managed to generate interest income, to implement interest rate risk management strategies, and to provide a readily available source of liquidity for balance sheet management. Securities are designated as either available for sale, held to maturity or trading at the time of purchase. The Corporation does not maintain a portfolio of trading securities and does not have securities designated as held to maturity. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. 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. Determination of Fair Value The Corporation uses an independent pricing service to obtain quoted prices. The prices provided by the independent pricing service are generally based on observable market data in active markets. The determination of whether markets are active or inactive is based upon the level of trading activity for a particular security class. Management reviews the independent pricing service’s documentation to gain an understanding of the appropriateness of the pricing methodologies. Management also reviews the prices provided by the independent pricing service for reasonableness based upon current trading levels for similar securities. If the prices appear unusual, they are re-examined and the value is either confirmed or revised. In addition, management periodically performs independent price tests of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of March 31, 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. See Notes 3 and 7 to the Unaudited Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities. Securities Portfolio The carrying amounts of securities held are as follows: (Dollars in thousands) March 31, 2024 December 31, 2023 Amount % of Total Amount % of Total Available for Sale Debt Securities: Obligations of U.S. government-sponsored enterprises $223,910 23 % $225,742 23 % Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 724,770 75 753,956 75 Individual name issuer trust preferred debt securities 8,975 1 8,793 1 Corporate bonds 12,405 1 11,889 1 Total available for sale debt securities $970,060 100 % $1,000,380 100 % -49- 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. government agencies or U.S. government-sponsored enterprises. The securities portfolio decreased by $30.3 million, or 3%, from the end of 2023. 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. 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. government agencies and U.S. government-sponsored enterprises, including mortgage-backed securities, and primarily attributable to relative changes in market interest rates since the time of purchase. See Note 3 to the Unaudited Consolidated Financial Statements for additional information. Loans 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) March 31, 2024 December 31, 2023 Amount % of Total Amount % of Total Commercial: Commercial real estate $2,158,518 38 % $2,106,359 37 % Commercial & industrial 613,376 11 605,072 11 Total commercial 2,771,894 49 2,711,431 48 Residential Real Estate: Residential real estate 2,585,524 45 2,604,478 46 Consumer: Home equity 309,302 5 312,594 6 Other 18,512 1 19,203 — Total consumer 327,814 6 331,797 6 Total loans $5,685,232 100 % $5,647,706 100 % Commercial Loans 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. The Bank also participates in commercial loans originated by other banks. 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 $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. Shared national credits are defined as participation in loans or loan commitments of at least $100.0 million that are shared by three or more banks. Commercial loans fall into two main categories, CRE and C&I loans. CRE loans consist of commercial mortgages secured by real property where the primary source of repayment is derived from rental income associated with the property or the proceeds of the sale, refinancing or permanent financing of the property. CRE loans also include construction loans made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. C&I loans primarily provide working capital, equipment financing, and financing for other business-related purposes. C&I loans are frequently collateralized by equipment, inventory, accounts receivable, and/or general business assets. 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 -50- 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) March 31, 2024 December 31, 2023 Outstanding Balance % of Total Outstanding Balance % of Total Connecticut $832,389 39 % $815,975 39 % Massachusetts 681,803 32 645,736 31 Rhode Island 428,030 19 430,899 20 Subtotal 1,942,222 90 1,892,610 90 All other states 216,296 10 213,749 10 Total $2,158,518 100 % $2,106,359 100 % The following table presents a summary of CRE loans by property type segmentation: (Dollars in thousands) March 31, 2024 December 31, 2023 Outstanding Balance (1) % of Total Outstanding Balance (1) % of Total CRE Portfolio Segmentation: Multi-family $574,284 27 % $546,694 26 % Retail 438,422 20 434,913 21 Industrial and warehouse 325,695 15 307,987 15 Office 284,675 13 284,199 13 Hospitality 225,608 10 235,015 11 Healthcare facility 196,117 9 175,490 8 Mixed-use 52,853 2 49,079 2 Other 60,864 4 72,982 4 Total CRE loans $2,158,518 100 % $2,106,359 100 % Average CRE loan size (2) $5,354 $5,366 Largest individual CRE loan outstanding $65,465 $65,458 (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 -51- 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 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 $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) March 31, 2024 December 31, 2023 Outstanding Balance (1) % of Total Outstanding Balance (1) % of Total C&I Portfolio Segmentation: Healthcare and social assistance $167,491 27 % $166,490 28 % Real estate rental and leasing 71,292 12 70,540 12 Transportation and warehousing 63,664 10 63,789 11 Manufacturing 53,348 9 54,905 9 Retail trade 44,166 7 43,746 7 Educational services 41,566 7 41,968 7 Finance and insurance 37,810 6 33,617 6 Information 22,645 4 22,674 4 Arts, entertainment, and recreation 21,935 4 22,249 4 Accommodation and food services 12,833 2 13,502 2 Professional, scientific, and technical services 8,640 1 7,998 1 Public administration 2,955 — 3,019 — Other 65,031 11 60,575 9 Total C&I loans $613,376 100 % $605,072 100 % Average C&I loan size (2) $868 $844 Largest individual C&I loan outstanding $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 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. -52- Management's Discussion and Analysis The following is a geographic summary of residential real estate loans by property location: (Dollars in thousands) March 31, 2024 December 31, 2023 Amount % of Total Amount % of Total Massachusetts $1,910,010 74 % $1,928,206 74 % Rhode Island 484,401 19 481,289 19 Connecticut 162,523 6 165,933 6 Subtotal 2,556,934 99 2,575,428 99 All other states 28,590 1 29,050 1 Total (1) $2,585,524 100 % $2,604,478 100 % (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. The table below presents residential real estate loan origination activity: (Dollars in thousands) Three months ended March 31, 2024 2023 Amount % of Total Amount % of Total Originations for retention in portfolio (1) $24,474 24 % $109,768 80 % Originations for sale to the secondary market (2) 78,098 76 27,763 20 Total $102,572 100 % $137,531 100 % (1) Includes the full commitment amount of homeowner construction loans. (2) Includes brokered loans (loans originated for others). The table below presents residential real estate loan sales activity: (Dollars in thousands) 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 % Loans sold with servicing rights released (1) 48,587 67 12,214 42 Total $72,644 100 % $29,328 100 % (1) Includes brokered loans (loans originated for others). 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. In addition to managing our interest rate risk position and earnings through the sale of these loans, we are also able to manage our liquidity position through timely sales of residential real estate loans to the secondary market. Loans are sold with servicing retained or released. Loans sold with servicing rights retained result in the capitalization of servicing rights. 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 $8.4 million and $8.5 million, respectively, as of March 31, 2024 and December 31, 2023. The balance of residential -53- 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 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 $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 The Corporation continually monitors the asset quality of the loan portfolio using all available information. In the course of resolving problem loans, the Corporation may choose to modify the contractual terms of certain loans. A loan that has been modified is considered a TLM when the modification is made to a borrower experiencing financial difficulty and the modification has a direct impact to the contractual cash flows. The decision to modify a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection. See Note 4 for additional information regarding TLMs. Nonperforming Assets Nonperforming assets include nonaccrual loans and OREO. The following table presents nonperforming assets and additional asset quality data: (Dollars in thousands) March 31, 2024 December 31, 2023 Commercial: Commercial real estate $18,729 $32,827 Commercial & industrial 668 682 Total commercial 19,397 33,509 Residential Real Estate: Residential real estate 9,722 9,626 Consumer: Home equity 1,591 1,483 Other — — Total consumer 1,591 1,483 Total nonaccrual loans 30,710 44,618 OREO, net 683 683 Total nonperforming assets $31,393 $45,301 Nonperforming assets to total assets 0.43 % 0.63 % Nonperforming loans to total loans 0.54 % 0.79 % Total past due loans to total loans 0.18 % 0.20 % 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 $— $— -54- 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) For the three months ended March 31, 2024 2023 Balance at beginning of period $44,618 $12,846 Additions to nonaccrual status 431 2,570 Loans returned to accruing status (13,764) (110) Loans charged-off (70) (61) Loans transferred to other real estate owned — (683) Payments, payoffs, and other changes (505) (582) Balance at end of period $30,710 $13,980 The following table presents additional detail on nonaccrual loans: (Dollars in thousands) March 31, 2024 December 31, 2023 Days Past Due Days Past Due Current 30-89 90 or More Total Nonaccrual % (1) Current 30-89 90 or More Total Nonaccrual % (1) Commercial: Commercial real estate $18,729 $— $— $18,729 0.87 % $32,827 $— $— $32,827 1.56 % Commercial & industrial 668 — — 668 0.11 682 — — 682 0.11 Total commercial 19,397 — — 19,397 0.70 33,509 — — 33,509 1.24 Residential Real Estate: Residential real estate 5,547 1,122 3,053 9,722 0.38 4,105 3,512 2,009 9,626 0.37 Consumer: Home equity 656 138 797 1,591 0.51 127 621 735 1,483 0.47 Other — — — — — — — — — — Total consumer 656 138 797 1,591 0.49 127 621 735 1,483 0.45 Total nonaccrual loans $25,600 $1,260 $3,850 $30,710 0.54 % $37,741 $4,133 $2,744 $44,618 0.79 % (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 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. -55- 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) March 31, 2024 December 31, 2023 Amount % (1) Amount % (1) Commercial: Commercial real estate $— — % $— — % Commercial & industrial 270 0.04 10 — Total commercial 270 0.01 10 — Residential Real Estate: Residential real estate 6,858 0.27 8,116 0.31 Consumer: Home equity 2,879 0.93 3,196 1.02 Other 32 0.17 23 0.12 Total consumer 2,911 0.89 3,219 0.97 Total past due loans $10,039 0.18 % $11,345 0.20 % (1) Percentage of past due loans to the total loans outstanding within the respective loan class. 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 $5.1 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 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. 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 $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. -56- Management's Discussion and Analysis Allowance for Credit Losses on Loans The ACL on loans is management’s estimate of expected lifetime credit losses on loans carried at amortized cost. The ACL on loans is established through a provision for credit losses recognized in earnings. The ACL on loans is reduced by charge-offs on loans and is increased by recoveries of amounts previously charged off. The Corporation’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely. Full or partial charge-offs on collateral dependent individually analyzed loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan. The Corporation does not recognize a recovery when new appraisals indicate a subsequent increase in value. Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status. New appraisals are generally obtained for nonaccrual loans or when management believes it is warranted. The Corporation has continued to maintain appropriate professional standards regarding the professional qualifications of appraisers and has an internal review process to monitor the quality of appraisals. For residential real estate loans and real estate collateral dependent consumer loans that are in the process of collection, valuations are obtained from independent appraisal firms with values determined on an “as is” basis. The following table presents additional detail on the Corporation’s loan portfolio and associated allowance: (Dollars in thousands) March 31, 2024 December 31, 2023 Loans Related Allowance Allowance / Loans Loans Related Allowance Allowance / Loans Individually analyzed loans $34,245 $— — % $34,640 $97 0.28 % Pooled (collectively evaluated) loans 5,650,987 41,905 0.74 5,613,066 40,960 0.73 Total $5,685,232 $41,905 0.74 % $5,647,706 $41,057 0.73 % Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components. The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics. The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments. The ACL for individually analyzed loans is measured using a DCF method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan was collateral dependent, at the fair value of the collateral. The ACL for pooled loans is measured utilizing a DCF methodology to estimate credit losses for each pooled portfolio segment. The methodology incorporates a probability of default and loss given default framework. Loss given default is estimated based on historical credit loss experience. Probability of default is estimated using a regression model that incorporates econometric factors. Management utilizes forecasted econometric factors with a one-year reasonable and supportable forecast period and one-year straight-line reversion period in order to estimate the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, prepayment speeds, and remaining life of the loan to estimate a reserve for each loan. The sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived. Quantitative loss factors for pooled loans are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. The ACL on loans amounted to $41.9 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. -57- Management's Discussion and Analysis 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. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans; conversely, improving conditions or assumptions could lead to further reductions in the ACL on loans. The following table presents the allocation of the ACL on loans by portfolio segment. The total ACL on loans is available to absorb losses from any segment of the loan portfolio. (Dollars in thousands) March 31, 2024 December 31, 2023 Allocated ACL ACL to Loans Loans to Total Portfolio (1) Allocated ACL ACL to Loans Loans to Total Portfolio (1) Commercial: Commercial real estate $24,856 1.15 % 38 % $24,144 1.15 % 37 % Commercial & industrial 7,620 1.24 11 8,088 1.34 11 Total commercial 32,476 1.17 49 32,232 1.19 48 Residential Real Estate: Residential real estate 8,035 0.31 45 7,403 0.28 46 Consumer: Home equity 1,057 0.34 5 1,048 0.34 6 Other 337 1.82 1 374 1.95 — Total consumer 1,394 0.43 6 1,422 0.43 6 Total ACL on loans at end of period $41,905 0.74 % 100 % $41,057 0.73 % 100 % (1) Percentage of loans outstanding in respective class to total loans outstanding. Sources of Funds Our sources of funds include in-market deposits, wholesale brokered deposits, FHLB advances, other borrowings, and proceeds from the sales, maturities, and payments of loans and investment securities. The Corporation uses funds to originate and purchase loans, purchase investment securities, conduct operations, expand the branch network, and pay dividends to shareholders. Deposits The Corporation offers a wide variety of deposit products to consumer and business customers. Deposits provide an important source of funding for the Bank, as well as an ongoing stream of fee revenue. The Bank is a participant in the DDM program, ICS program, and the CDARS program. The Bank uses these deposit sweep services to place customer and client funds into interest-bearing demand accounts, money market accounts, and/or time deposits issued by other participating banks. Customer and client funds are placed at one or more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a program participant, we receive reciprocal amounts of deposits from other participating banks. We consider these reciprocal deposit balances to be in-market deposits as distinguished from traditional wholesale brokered deposits. -58- Management's Discussion and Analysis The following table presents a summary of deposits: (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 536,923 10 504,959 9 31,964 6 NOW accounts 735,617 14 767,036 14 (31,419) (4) Money market accounts 1,111,510 21 1,096,959 21 14,551 1 Savings accounts 484,678 9 497,223 9 (12,545) (3) Time deposits (in-market) 1,156,516 21 1,134,187 22 22,329 2 Total in-market deposits 4,674,173 87 4,694,110 88 (19,937) — Wholesale brokered time deposits 673,720 13 654,050 12 19,670 3 Total deposits $5,347,893 100 % $5,348,160 100 % ($267) — % 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 $36 thousand at March 31, 2024. The following table presents a summary of the Bank’s uninsured deposits: (Dollars in thousands) March 31, 2024 December 31, 2023 Balance % of Total Deposits Balance % of Total Deposits Uninsured Deposits: Uninsured deposits (1) $1,226,123 23 % $1,260,672 24 % Less: affiliate deposits (2) 89,872 2 92,645 2 Uninsured deposits, excluding affiliate deposits 1,136,251 21 1,168,027 22 Less: fully-collateralized preferred deposits (3) 170,849 3 204,327 4 Uninsured deposits, after exclusions $965,402 18 % $963,700 18 % (1) Determined in accordance with regulatory reporting requirements, which includes affiliate deposits and fully-collateralized preferred deposits. (2) Uninsured deposit balances of Washington Trust Bancorp, Inc. and its subsidiaries that are eliminated in consolidation. (3) Uninsured deposits of states and political subdivisions, which are secured or collateralized as required by state law. Borrowings 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 $1.2 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. -59- Management's Discussion and Analysis Liquidity and Capital Resources Liquidity Management 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 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. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and brokered deposits), cash flows from the investment securities portfolio, and loan repayments. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs, although management has no intention to do so at this time. The Corporation has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management employs stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as usual” cash flows. In management’s estimation, risks are concentrated in two major categories: (1) runoff of in-market deposit balances; and (2) unexpected drawdown of loan commitments. Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our stress test scenarios, therefore, emphasize attempts to quantify deposits at risk over selected time horizons. In addition to these unexpected outflow risks, several other “business as usual” factors enter into the calculation of the adequacy of contingent liquidity including: (1) payment proceeds from loans and investment securities; (2) maturing debt obligations; and (3) maturing time deposits. The Corporation has established collateralized borrowing capacity with the FRBB and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business. Borrowing capacity is impacted by the amount and type of assets available to be pledged. The table below presents a summary of contingent liquidity balances by source: (Dollars in thousands) March 31, 2024 December 31, 2023 Contingent Liquidity: Federal Home Loan Bank of Boston (1) $999,430 $1,086,607 Federal Reserve Bank of Boston (2) 68,549 65,759 Noninterest-bearing cash 52,544 54,970 Unencumbered securities 669,452 680,857 Total contingent liquidity $1,789,975 $1,888,193 Percentage of total contingent liquidity to uninsured deposits 146.0 % 149.8 % Percentage of total contingent liquidity to uninsured deposits, after exclusions 185.4 % 195.9 % (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 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. Contractual Obligations, Commitments, and Off-Balance Sheet Arrangements In the ordinary course of business, the Corporation enters into contractual obligations that require future cash payments. These include payments related to lease obligations, time deposits with stated maturity dates, and borrowings. Also, in the -60- Management's Discussion and Analysis 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. 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 $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 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 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. The Corporation utilizes the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, interest rate contracts, and the pricing and structure of loans and deposits, to manage interest rate risk. The interest rate contracts may include interest rate swaps, caps, and floors. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract. The notional amount of the interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk. See Notes 6 and 16 to the Unaudited Consolidated Financial Statements for additional information. The ALCO uses income simulation to measure interest rate risk inherent in the Corporation’s financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 12-month horizon, a 13- to 24-month horizon, and a 60-month horizon. The simulations assume that the size and general composition of the Corporation’s balance sheet remain static over the simulation horizons, with the exception of certain deposit mix shifts from low cost savings to higher cost time deposits in selected interest rate scenarios. Additionally, the simulations take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency. The ALCO reviews simulation results to determine whether the Corporation’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. As of March 31, 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 -61- 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 March 31, 2024 and December 31, 2023. 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. March 31, 2024 December 31, 2023 Months 1 - 12 Months 13 - 24 Months 1 - 12 Months 13 - 24 100 basis point rate decrease (3.51) % 1.49 % (3.38) % 0.94 % 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) 200 basis point rate increase 3.96 (10.20) 4.16 (7.57) 300 basis point rate increase 7.27 (13.02) 7.55 (9.21) 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 holdings mature or reprice, since cash flow from mortgage-related prepayments and redemption of callable securities would increase as market interest rates fall. The negative exposure in down rate scenarios reflects the insensitivity of certain deposit rates to market interest rate declines as they approach their floors. The positive exposure to falling rates in Year 2 is attributable to continued downward repricing of liabilities as time deposits and wholesale funding are replaced with lower rates as they mature. As of 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. Fixed rate assets would not reprice upward in a rising rate environment. Wholesale funds generally would reprice more quickly and by a greater amount than the repricing of in-market deposits in response to changes in market interest rates. As market rates increase, ALCO modeling assumes that deposits shift from lower cost to higher cost deposits. This assumption reflects historical operating conditions in rising rate cycles. Although asset yields would increase in a rising interest rate environment, the cumulative impact of relative growth in rate-sensitive higher cost deposit categories and wholesale funds suggests that the increase in the Corporation’s cost of funds could result in a relative decline in net interest income in Year 2 compared to an unchanged rate scenario. While the ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future NIM. Over time, the repricing, maturity, and prepayment characteristics of financial instruments and the composition of the Corporation’s balance sheet may change to a different degree than estimated. Simulation -62- 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. Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment, as well as due to heightened uncertainty in the banking industry. This may cause interest rate sensitivity to differ from the results as presented. Another significant simulation assumption is the sensitivity of savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both savings deposit rates and balances are related to changes in short-term interest rates. The relationship between short-term interest rate changes and deposit rate and balance changes may differ from the ALCO’s estimates used in income simulation. It should also be noted that the static balance sheet assumption does not necessarily reflect the Corporation’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior. Mortgage-backed securities and residential real estate loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income. The Corporation also monitors the potential change in market value of its available for sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to the Corporation’s capital position. Results are calculated using industry-standard analytical techniques and securities data. The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of March 31, 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) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 50,442 (96,752) Trust preferred debt and other corporate debt securities (19) 27 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) Critical Accounting Policies and Estimates Estimates and assumptions are necessary in the application of certain accounting policies and procedures and can be susceptible to significant change. Critical accounting policies are defined as those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Corporation’s financial condition or results of operations. Management considers its accounting policy relating to the ACL on loans to be a critical accounting policy. There have been no material changes in the Corporation’s critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Recently Issued Accounting Pronouncements See Note 2 to the Unaudited Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Corporation’s financial statements. -63-