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Item 7. Management’s Discussion and Analysis

2025-02-25 compared with 2024-02-26 · 413 added, 273 removed, 874 unchanged (44% of the section changed)

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“Management’s Discussion and Analysis of Results of Operations and Financial Condition,” which was filed with the SEC on February 26, 2024.

Non-GAAP Financial Measures and Reconciliation to GAAP

In addition to evaluating the Corporation’s results of operations in accordance with GAAP, management supplements this evaluation with an analysis of certain non-GAAP financial measures, such as adjusted noninterest income, adjusted income before income taxes, adjusted income tax expense, adjusted effective tax rate, adjusted net income, adjusted net income available to common shareholders, adjusted diluted earnings per common share, adjusted dividend payout ratio, adjusted return on average assets and adjusted return on average equity.

We believe these non-GAAP financial measures are utilized by regulators and market analysts to evaluate the Corporation’s results of operations and financial condition, and therefore such information is useful to investors.

In addition, these non-GAAP financial measures remove the impact of infrequent items that may obscure trends in the Corporation’s underlying performance.

These disclosures should not be viewed as a substitute for financial results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures, which may be presented by other companies.

Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names.

Each presentation below reconciles the “as reported” GAAP measure to the adjusted non-GAAP measure.

Management's Discussion and Analysis

The following table presents adjusted noninterest income, adjusted income before income taxes, adjusted income tax expense, adjusted effective tax rate, adjusted net income, and adjusted net income available to common shareholders:

(Dollars in thousands, except per share amounts)

Years Ended December 31, 2024 2023

Adjusted Noninterest Income:

Noninterest (loss) income, as reported ($27,797) $56,140

Less adjustments:

Realized losses on securities, net (31,047) —

Losses on sale of portfolio loans, net (62,888) —

Net gain on sale of bank-owned operations facility 988 —

Litigation settlement income 2,100 —

Total adjustments, pre-tax (90,847) —

Adjusted noninterest income (non-GAAP)

$63,050 $56,140

Adjusted Income Before Income Taxes:

(Loss) income before income taxes ($38,818) $56,481

total adjustments, pre-tax (90,847) —

Adjusted income before income taxes (non-GAAP)

$52,029 $56,481

Adjust Income Tax Expense:

Income tax (benefit) expense, as reported ($10,759) $8,305

tax on total adjustments (21,920) —

state legislative tax change, net (tax only adjustment) — (3,253)

Total tax adjustments (21,920) (3,253)

Adjusted income tax expense (non-GAAP)

$11,161 $11,558

Adjusted Effective Tax Rate:

Effective tax rate (1)

27.7 % 14.7 %

impact of adjustments (6.2) 5.8

Adjusted effective tax rate (non-GAAP) (2)

21.5 % 20.5 %

Adjusted Net Income:

Net (loss) income, as reported ($28,059) $48,176

total adjustments, after-tax (68,927) 3,253

Adjusted net income (non-GAAP)

$40,868 $44,923

Adjusted Net Income Available to Common Shareholders:

Net (loss) income available to common shareholders, as reported ($28,038) $48,091

total adjustments available to common shareholders, after-tax (68,907) 3,249

Adjusted net income available to common shareholders (non-GAAP)

$40,869 $44,842

(1) Calculated as income tax expense (benefit) divided by income (loss) before income taxes.

(2) Calculated as income tax expense (benefit), adjusted for the tax impact of the adjustments as outlined in the table above, divided by income (loss) before income taxes, adjusted for the pre-tax impact of the adjustments as outlined in the table above.

Management's Discussion and Analysis

The following table presents adjusted diluted earnings per common share and adjusted dividend payout ratio:

(Dollars in thousands, except per share amounts)

Years Ended December 31, 2024 2023

Adjusted Diluted Earnings per Common Share:

Diluted (loss) earnings per common share, as reported (1)

($1.63) $2.82

impact of adjustments 4.00 (0.19)

Adjusted diluted earnings per common share (non-GAAP) (2)

Adjusted Dividend Payout Ratio:

Cash dividends declared per share, as reported $2.24 $2.24

Diluted (loss) earnings per common share, as reported (1.63) 2.82

impact of adjustments 4.00 (0.19)

Adjusted diluted earnings per common share (non-GAAP)

Dividend payout ratio, as reported (3)

(137.4 %) 79.43 %

Adjusted dividend payout ratio (non-GAAP) (4)

94.51 % 85.17 %

(1) Net income (loss) available to common shareholders divided by weighted average diluted common and potential shares outstanding.

(2) Net income (loss) available to common shareholders, adjusted for the after-tax impact of adjustments as outlined in the table above, divided by weighted average diluted common and potential shares outstanding.

(3) Cash dividends declared per share divided by diluted earnings (loss) per common share.

(4) Cash dividends declared per share divided by diluted earnings (loss) per common share, adjusted for the after-tax impact of adjustments as outlined in the table above.

The following table presents adjusted return on average assets and adjusted return on average equity:

(Dollars in thousands)

Years Ended December 31, 2024 2023

Adjusted Return on Average Assets:

Net (loss) income, as reported ($28,059) $48,176

adjustments, after-tax (68,927) 3,253

Adjusted net income (non-GAAP)

40,868 44,923

Total average assets, as reported 7,181,162 6,999,040

Return on average assets (1)

(0.39 %) 0.69 %

Adjusted return on average assets (non-GAAP) (2)

0.57 % 0.64 %

Adjusted Return on Average Equity:

Net (loss) income available to common shareholders, as reported ($28,038) $48,091

adjustments, after-tax (68,907) 3,249

Adjusted net income available to common shareholders (non-GAAP)

40,869 44,842

Total average equity, as reported 479,777 455,044

Return on average equity (3)

(5.84 %) 10.57 %

Adjusted return on average equity (non-GAAP) (4)

8.52 % 9.85 %

(1) Net income (income) loss divided by total average assets.

(2) Net income (loss), adjusted for the after-tax impact of adjustments as outlined in the table above, divided by total average assets.

(3) Net income (loss) available to common shareholders divided by total average equity.

(4) Net income (loss) available to common shareholders, adjusted for the after-tax impact of adjustments as outlined in the table above, divided by total average equity.

Management's Discussion and Analysis

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.

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

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

In January 2024, we opened a new full-service branch in Smithfield, Rhode Island and in September 2024, we opened a new full-service branch in the Olneyville section of Providence.

Common Stock Issued in Public Offering and Balance Sheet Repositioning Transactions

On December 16, 2024, the Corporation completed an underwritten public offering of 2,198,528 shares of its common stock at a public offering price of $34.00 per share, and disclosed that the use of proceeds was expected to include investments in the Bank and Bank balance sheet optimization strategies involving the sale of lower-yielding loans and securities, the purchase of debt securities with current market yields, and the repayment of wholesale funding balances.

The net proceeds received from the offering, after deducting underwriting discounts and commissions and operating expenses payable by the Corporation, were $70.5 million.

On December 20, 2024, the Corporation announced the execution of balance sheet repositioning transactions to support continued organic growth and capital generation.

The Bank sold available for sale debt securities with an amortized cost balance of $409.5 million (fair value of $378.4 million) and a weighted average yield of 2.65% and reinvested $378.4 million into purchases of available for sale debt securities with a weighted average yield of 5.30%.

The sale of debt securities resulted in a net pre-tax realized loss of $31.0 million (after-tax of $23.5 million) that was recognized in the fourth quarter of 2024.

In addition, pursuant to the terms of a sales agreement effective December 30, 2024, the Bank committed to sell residential mortgage loans with an amortized cost balance of $344.6 million and a weighted average rate of approximately 3.02%.

These loans were reclassified to held for sale and written down to a fair value of $281.7 million, resulting in a net pre-tax loss of $62.9 million (after-tax of $47.7 million) that was recognized in the fourth quarter of 2024.

The sale of these loans was completed on January 24, 2025.

The net proceeds received from the equity offering and the loan sale were used to pay down wholesale funding balances in December 2024 and the first quarter of 2025.

Risk Management

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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 Consolidated Financial Statements.

Management's Discussion and Analysis

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

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

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

The risk to earnings arising from movements 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.

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See the “Asset/Liability Management and Interest Rate Risk” section below for additional disclosure.

Management's Discussion and Analysis

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.

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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.

Activities that 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.

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Net interest income $128,448 $137,098 ($8,650) (6 %)

Noninterest income 56,140 62,602 (6,462) (10)

Noninterest (loss) income (27,797) 56,140 (83,937) (150)

Total revenues 100,651 193,238 (92,587) (48)

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Noninterest expense 137,069 133,557 3,512 3

Income before income taxes 56,481 91,170 (34,689) (38)

Income tax expense 8,305 19,489 (11,184) (57)

Net income $48,176 $71,681 ($23,505) (33 %)

(Loss) income before income taxes (38,818) 56,481 (95,299) (169)

Income tax (benefit) expense (10,759) 8,305 (19,064) (230)

Net (loss) income ($28,059) $48,176 ($76,235) (158 %)

Adjusted net income (non-GAAP)

$40,868 $44,923 ($4,055) (9 %)

In 2024, a net loss of $28.1 million was recognized, compared to net income of $48.2 million in 2023.

As further described under the caption “Overview” above, balance sheet repositioning transactions were executed that impacted the 2024 results.

In addition, income of $2.1 million associated with a litigation settlement was recognized in the first quarter of 2024 and a net gain of $988 thousand was recognized on the sale of a bank-owned operations facility in the second quarter of 2024.

In 2023, a state legislative tax change resulted in a net reduction in income tax expense of $3.3 million.

Excluding these items, adjusted net income (non-GAAP) in 2024 was $40.9 million, compared to $44.9 million in 2023, down by $4.1 million, or 9%.

This decrease was primarily attributable to a decline in net interest income and a relatively modest increase in noninterest expenses, partially offset by higher wealth management revenues and mortgage banking revenues.

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

Years Ended December 31, 2024 2023

Diluted earnings per common share $2.82 $4.11

Return on average assets (net income divided by average assets) 0.69 % 1.17 %

Return on average equity (net income available for common shareholders divided by average equity)

Diluted (loss) earnings per common share ($1.63) $2.82

Adjusted diluted earnings per common share (non-GAAP)

Return on average assets (0.39 %) 0.69 %

Adjusted return on average assets (non-GAAP)

0.57 % 0.64 %

Net interest income as a percentage of total revenues 71 % 71 %

Noninterest income as a percentage of total revenues 29 % 29 %

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

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

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

The decline in noninterest income reflected lower wealth management asset-based revenues and lower average AUA balances, attributable to client asset outflows concentrated in the fourth quarter of 2022.

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

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

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

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

Return on average equity (5.84 %) 10.57 %

Adjusted return on average equity (non-GAAP)

8.52 % 9.85 %

Management's Discussion and Analysis

Average Balances/Net Interest Margin - Fully Taxable Equivalent Basis

The following table presents average balance and interest rate information.

The following table presents daily average balance, interest, and yield/rate information, as well as net interest margin on an FTE basis.

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.

Unrealized gains (losses) on available for sale securities, changes in fair value on mortgage loans held for sale, and basis adjustments associated with fair value hedges 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.

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(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 $101,166 $4,975 4.92 % $119,932 $1,624 1.35 % ($18,766) $3,351 3.57 %

Cash and short-term investments $129,119 $6,977 5.40 % $101,166 $4,975 4.92 % $27,953 $2,002 0.48 %

Mortgage loans held for sale 34,040 1,775 5.21 17,384 980 5.64 16,656 795 (0.43)

Taxable debt securities 1,118,092 27,850 2.49 1,185,102 29,059 2.45 (67,010) (1,209) 0.04

Nontaxable debt securities 185 9 4.86 — — — 185 9 4.86

Total securities 1,118,277 27,859 2.49 1,185,102 29,059 2.45 (66,825) (1,200) 0.04

57,286 4,771 8.33 46,880 3,315 7.07 10,406 1,456 1.26

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Commercial loans $916 $946 ($30)

Nontaxable debt securities 1 — 1

Total $917 $946 ($29)

Net Interest Income

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

Prepayment penalty fee income amounted to $272 thousand (or 1 basis point benefit to NIM) and $183 thousand (or no basis point benefit to NIM), respectively, in 2023 and 2022.

Prepayment penalty fee income amounted to $70 thousand (or 0 basis point benefit to NIM) and $272 thousand (or 1 basis point benefit to NIM), respectively, in 2024 and 2023.

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

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

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

As noted in the Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to net interest income) amounted to $1.3 million in 2024, compared to $1.4 million in 2023.

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

FTE net interest income in 2024 amounted to $129.4 million, down by $8.7 million, or 6%, from 2023.

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

Increases in average interest-bearing liability balances, net of increases in average interest-earning assets, reduced net interest income by $4.4 million in 2024.

Increases in funding costs outpaced increases in asset yields, reducing net interest income by $4.3 million.

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NIM was 1.87% in 2024, down by 18 basis points from 2.05% in 2023.

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

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

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

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

Total average securities for 2024 decreased by $66.8 million, or 6%, from the average balance for 2023, primarily due to routine pay downs.

The FTE rate of return on securities was 2.49% in 2024, up by 4 basis points from 2.45% in 2023.

Total average loan balances increased by $195.9 million, or 4%, from the average balance for 2023.

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

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

The yield on total loans in 2024 was 5.37%, up by 34 basis points from 5.03% in 2023, reflecting higher market interest rates in 2024.

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

The Bank utilizes FHLB advances and brokered time deposits as wholesale funding sources.

The average balance of FHLB advances for 2024 increased by $255.7 million, or 24%, compared to the average balance for 2023.

Due to increases in market rates, the average rate paid on such advances in 2024 was 4.92%, up 23 basis points from 4.69% in 2023.

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

Included in total average interest-bearing deposits were wholesale brokered deposits, which decreased by $101.8 million, or 17%, from 2023.

The average rate paid on wholesale brokered deposits in 2024 was 5.22%, up by 46 basis points from 4.76% in 2023.

Management's Discussion and Analysis

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

Average in-market interest-bearing deposits, which excludes wholesale brokered deposits, increased by $132.9 million, or 3%, from the average balance in 2023, with increases in time deposits and interest-bearing demand deposits.

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

The average rate paid on in-market

Management's Discussion and Analysis

interest-bearing deposits in 2024 was 2.96%, up by 62 basis points from 2.34% in 2023.

The average balance of noninterest-bearing demand deposits for 2024 decreased by $113.6 million, or 15%, from the average balance in 2023.

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Interest on interest-earning assets:

Cash, federal funds sold and short-term investments ($291) $3,642 $3,351

Cash and short-term investments $1,480 $522 $2,002

Mortgage loans held for sale 875 (80) 795

Taxable debt securities (1,674) 465 (1,209)

Nontaxable debt securities 9 — 9

Total securities

(1,665) 465 (1,200)

808 648 1,456

Commercial real estate 10,791 5,645 16,436

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The following table presents the provision for credit losses:

(Dollars in thousands)

(Dollars in thousands) Change

Years ended December 31, 2024 2023 $ %

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Provision for credit losses $2,400 $3,200 ($800) (25 %)

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

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

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

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

The provision for credit losses in 2024 reflected specific reserve allocations on individually analyzed nonaccrual commercial loans, as well as the impact of continued, yet subsiding, slowdown in prepayment speeds.

This was partially offset by relatively stable to improving forecasted economic conditions in 2024 and a decline in loan balances that was concentrated in residential real estate and also included the reclassification of loans from portfolio to held for sale.

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

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

Net charge-offs totaled $2.0 million, or 0.04% of average loans, in 2024, compared to net charge-offs of $520 thousand, or 0.01% of average loans, in 2023.

The ACL on loans was $42.0 million, or 0.82% of total loans, at December 31, 2024, compared to $41.1 million, or 0.73% of total loans, at December 31, 2023.

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Income from bank-owned life insurance 3,041 3,488 (447) (13)

Realized losses on securities, net (31,047) — (31,047) —

Losses on the sale of portfolio loans, net (62,888) — (62,888) —

Other income 4,567 1,335 3,232 242

Total noninterest income $56,140 $62,602 ($6,462) (10 %)

Total noninterest (loss) income ($27,797) $56,140 ($83,937) (150 %)

Noninterest Income Analysis

Revenue from wealth management services represented 63% of total noninterest income in 2023, compared to 62% in 2022.

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

Noninterest income amounted to a net loss of $27.8 million in 2024, compared to income of $56.1 million in 2023.

Noninterest income in 2024 was impacted by the recognition of $93.9 million in net realized losses on securities and net losses on the sale of portfolio loans associated with balance sheet repositioning transactions.

In addition, other income in 2024 included income of $2.1 million associated with a litigation settlement and a net gain of $988 thousand recognized on the sale of a bank-owned operations facility.

Excluding the impact of these transactions, adjusted noninterest income (non-GAAP) was $63.1 million in 2024, compared to $56.1 million in 2023, up by $6.9 million, or 12.3%.

Wealth management revenues represent our largest source of noninterest income.

A substantial portion of wealth

Management's Discussion and Analysis

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.

Management's Discussion and Analysis

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

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Total wealth management revenues $39,054 $35,540 $3,514 10 %

Wealth management revenues for 2023 decreased by $3.2 million, or 8%, from 2022, reflecting a decrease in asset-based revenues.

The change in asset-based revenues correlated with the decrease in average AUA balances in 2023.

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

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

Wealth management revenues for 2024 increased by $3.5 million, or 10%, from 2023, reflecting an increase in asset-based revenues.

The change in asset-based revenues correlated with the increase in average AUA balances in 2024.

The average balance of AUA in 2024 increased by 10% from the average balance in 2023.

The end of period AUA balance amounted to $7.1 billion at December 31, 2024, up by $489.4 million, or 7%, from December 31, 2023.

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

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

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

Net investment appreciation & income 902,506 894,990

Net client asset outflows (413,110) (268,574)

Balance at the end of period $7,077,802 $6,588,406

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

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

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

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

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

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

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

Mortgage banking 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:

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

Mortgage banking revenues increased by $4.3 million, or 65%, in 2024.

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

Loan related derivative income from interest rate swap contracts with commercial borrowers decreased by $923 thousand, or 66%, in 2024, reflecting a decline in volume.

Management's Discussion and Analysis

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

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

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

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

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

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

Income from BOLI was down by $447 thousand, or 13%, from 2023, reflecting the recognition of $658 thousand in non-taxable income in 2023 associated with the receipt of life insurance proceeds.

Other income was up by $3.2 million, or 242%, from 2023, primarily due to the receipt of income associated with a litigation settlement and the net gain on the sale of a bank-owned operations facility as mentioned above.

Noninterest Expense

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Noninterest Expense Analysis

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

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

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

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

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

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

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

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

Management's Discussion and Analysis

Salaries and employee benefits expense, the largest component of noninterest expense, increased by $3.8 million, or 5%, from 2023.

This included higher performance-based incentive compensation, merit increases, and lower staffing levels.

Outsourced services expense increased by $1.7 million, or 12%, from 2023.

Equipment expense decreased by $480 thousand, or 11%, from 2023.

Both the increase in outsourced services expense and decline in equipment expense reflected changes to and expansion of services, including software as a service, that are provided by third-party vendors, as well as volume-related increases in third-party costs.

Legal, audit and professional fees decreased by $763 thousand, or 20%, in 2024, reflecting lower legal fees.

FDIC deposit insurance costs for the 2024 increased by $846 thousand, or 18%, from 2023, reflecting the impact of increases in average assets from a year ago and a higher FDIC deposit assessment rate.

Other expenses for 2024 decreased by $1.8 million, or 17%, from 2023.

In 2023, a charitable contribution expense as a $1.0 million contribution was made to Washington Trust’s charitable foundation.

There was no such expense in 2024.

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

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Years ended December 31, 2024 2023

Income tax expense $8,305 $19,489

Income tax (benefit) expense ($10,759) $8,305

Adjusted income tax expense (non-GAAP)

$11,161 $11,558

Effective income tax rate 27.7 % 14.7 %

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

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

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

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

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

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

Adjusted effective income tax rate (non-GAAP)

21.5 % 20.5 %

Blended statutory rate 25.3 % 25.5 %

Management's Discussion and Analysis

The effective tax rates differed from the federal rate of 21%, primarily due to state income tax benefits, tax-exempt income, income from BOLI, and federal tax credits.

The blended statutory rates include the federal income tax rate of 21% and a blended state income tax rate net of a federal tax benefit.

In 2024, the Corporation recognized an income tax benefit of $10.8 million, compared to income tax expense of $8.3 million in 2023.

The effective tax rate for 2024 was 27.7%, compared to a rate 14.7% for 2023.

The year over year comparisons include the impact of the balance sheet repositioning transactions, litigation settlement income and net gain on sale of a bank-owned operations facility in 2024, as well as a net tax expense reduction associated with a state tax legislative change and valuation allowance adjustment in 2023.

Excluding these items, the adjusted effective income tax rate (non-GAAP) increased to 21.5% in 2024 from 20.5% in 2023, reflecting changes in state tax expense, lower levels of income from BOLI and tax-exempt income, and higher excess tax expense associated with the settlement of share-based awards.

The Corporation’s net deferred tax assets amounted to $63.0 million at December 31, 2024, compared to $53.8 million at December 31, 2023.

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

This increase included the establishment of a deferred tax asset associated with the loans that were reclassified to held for sale and written down to fair value in December 2024, as part of the balance sheet repositioning transactions.

This deferred tax asset was realized in January 2025 when the loan sale was completed.

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

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Net interest income for the Commercial Banking segment decreased by $8.6 million, or 6%, from 2023.

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

Management's Discussion and Analysis

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

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 increases in, average interest-earning asset balances.

The provision for credit losses decreased by $800 thousand, or 25%, from 2023.

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

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

Noninterest income derived from the Commercial Banking segment was a loss of $69.6 million, compared to income of $20.0 million in 2023.

Noninterest income in 2024 included net losses recognized on balance sheet repositioning transactions, as well as a net gain recognized on the sale of a bank-owned operations facility.

Excluding these items, the year over year change in Commercial Banking noninterest reflected higher mortgage banking revenues that was partially offset by lower loan related derivative income.

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

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

Management's Discussion and Analysis

Commercial Banking noninterest expenses were up by $5.8 million, or 6%, from 2023, largely reflecting increases in salaries and employee benefits expense, outsourced services, and FDIC deposit insurance costs.

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

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Net income $10,761 $4,303 $6,458 150 %

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

Noninterest income for the Wealth Management Services segment was $41.8 million, up by $5.7 million, or 16%, from 2023, reflecting an increase in asset-based revenues, as well as the receipt of income associated with a litigation settlement.

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

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

Noninterest expenses for the Wealth Management Services segment decreased by $2.3 million, or 8%, compared to 2023, largely reflecting decreases in salaries and employee benefits expense, legal fees, and other expenses.

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

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December 31, 2024 2023 $ %

Cash and due from banks $86,824 $115,492 ($28,668) (25 %)

Total securities 1,000,380 993,928 6,452 1

Mortgage loans held for sale, at lower of cost or market $281,706 $— $281,706 100 %

Available for sale debt securities 916,305 1,000,380 (84,075) (8)

Total loans 5,137,838 5,647,706 (509,868) (9)

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Total shareholders’ equity 499,728 472,686 27,042 6

Total assets amounted to $7.2 billion at December 31, 2023, up by $542.8 million, or 8%, from the end of 2022 due to loan growth.

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

As further disclosed under the caption “Overview,” in December 2024, the Corporation completed an equity offering and announced a subsequent balance sheet repositioning involving the sale of lower-yielding residential mortgage loans and debt securities, the purchase of debt securities with current market yields, and the repayment of wholesale funding balances.

Mortgage loans held for sale at lower of cost or market totaled $281.7 million at December 31, 2024, as loans with an amortized cost balance of $344.6 million that were held in portfolio were reclassified to held for sale as part of the balance sheet repositioning transactions.

These loans were written down to their fair value.

The securities portfolio decreased by $84.1 million, or 8%, 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.

Management's Discussion and Analysis

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

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

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

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

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

Total loans decreased by $509.9 million, or 9%, from the balance at December 31, 2023, largely reflecting a decrease in the residential real estate loan portfolio, which included the reclassification of loans to held for sale associated with the balance sheet repositioning transactions.

Total deposit balances decreased by $232.4 million, or 4%, from the end of 2023, reflecting a decrease in wholesale brokered time deposits that was partially offset by in-market deposit growth.

FHLB advances decreased by $65.0 million, or 5%, from December 31, 2023.

Both FHLB and wholesale brokered time deposits decreased in 2024, reflecting less need for wholesale funding and the use of net proceeds received from December 2024 equity offering to pay down balances.

Shareholders’ equity increased by $27.0 million, or 6%, from the end of 2023, as the net capital raised from the equity offering of $70.5 million and a net increase in the AOCL component of shareholders’ equity were partially offset by a net loss and dividend declarations.

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

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Obligations of U.S.

government agencies and U.S.

government-sponsored enterprises $38,612 4 % $225,742 23 %

$225,742 23 % $199,582 20 %

Mortgage-backed securities issued by U.S.

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855,147 94 753,956 75

Obligations of states and political subdivisions 655 — — —

Individual name issuer trust preferred debt securities 9,221 1 8,793 1

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government-sponsored enterprises.

The securities portfolio increased by $6.5 million, or 1%, from the end of 2022.

This included purchases of U.S.

government agency and U.S.

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

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

As part of the December 2024 balance sheet repositioning transactions, the Bank sold available for sale debt securities with an amortized cost balance of $409.5 million (fair value of $378.4 million) and a weighted average yield of 2.65% and reinvested $378.4 million into purchases of available for sale debt securities with a weighted average yield of 5.30%.

These sales resulted in a net realized pre-tax loss of $31.0 million that was recognized in December 2024.

The carrying value of the securities portfolio decreased by $84.1 million, or 8%, from the end of 2023.

The decrease included $72.1 million of routine pay-downs and maturities of mortgage-backed securities, as well as a temporary decline in the fair value of available for sale debt securities.

As of December 31, 2024, the carrying amount of available for sale debt securities included net unrealized losses of $133.3 million, compared to net unrealized losses of $152.2 million as of December 31, 2023.

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

The decline in unrealized losses in 2024 reflected the impact of the sales of securities mentioned above, as well as net of changes in the fair value of securities.

The net unrealized losses at December 31, 2024 and 2023 were concentrated mortgage-backed securities issued by 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.

government-sponsored enterprises and were primarily attributable to relative changes in market interest rates since the time of purchase.

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

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

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

Total loans amounted to $5.1 billion at December 31, 2024, down by $509.9 million, or 9%, from the end of 2023.

This decline largely reflected a decrease in the residential real estate loan portfolio, which included the reclassification of $344.6 million of loans to held for sale associated with the balance sheet repositioning transactions.

Management's Discussion and Analysis

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

Also, includes a $1.5 million negative basis adjustment associated with fair value hedges at December 31, 2024.

See Note 9 to the Consolidated Financial Statements for additional disclosure.

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

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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 consist of commercial mortgages secured by non-owner occupied 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.

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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.

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

From time to time, commercial loans may be reclassified between CRE and C&I categories, reflecting underlying changes in loans to/from owner occupied from/to non-owner occupied.

Additionally, certain construction loans may be reclassified to C&I when the construction phase is complete and the loan transitions to permanent financing.

Commercial Real Estate Loans

CRE loans totaled $2.2 billion at December 31, 2024, up by $48.1 million, or 2%, from the balance at December 31, 2023.

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

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

In 2024, CRE loan originations and advances amounted to $272.5 million and were partially offset by principal payments.

Construction and development loans included in the CRE loan portfolio amounted to $102.2 million and $214.6 million, respectively, as of December 31, 2024 and 2023.

Shared national credit balances outstanding included in the CRE loan portfolio totaled $84.7 million and $47.4 million, respectively, at December 31, 2024 and 2023.

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

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

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

At December 31, 2024 and December 31, 2023 balances of $63.7 million and $29.0 million, respectively, were included in the pass-rated category of commercial loan credit quality and balances of $21.0 million and $18.4 million, respectively, were included in the classified category.

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

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

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Management's Discussion and Analysis

Management considers the CRE portfolio to be well-diversified with loans across several property types.

As discussed further below, the multi-family property type was the largest segment and represented 11% of total loans at December 31, 2024.

There were no other property types within the CRE portfolio that exceeded 10% of total loans.

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

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CRE Portfolio Segmentation:

Multi-family dwelling $546,694 26 % $469,233 26 %

Multi-family $567,243 26 % $546,694 26 %

Retail 433,146 20 434,913 21

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Hospitality 213,585 10 235,015 11

Healthcare 175,490 8 136,225 7

Commercial mixed use 49,079 2 54,976 3

Healthcare facility 205,858 10 175,490 8

Mixed-use 29,023 1 49,079 2

Other 57,371 3 72,982 4

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

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

Multi-family totaled $567.2 million as of December 31, 2024, and is our largest single CRE segment, representing 26% of the total CRE portfolio.

This segment includes non-owner occupied residential properties consisting of four or more units that are rented to tenants.

At December 31, 2024, the credit quality of the multi-family segment was 100% pass-rated.

Also, there were no nonaccrual loans and all loans in this segment were current with respect to payment terms at December 31, 2024.

In 2024, there continues to be heightened focus in the banking industry on the CRE office sector, given the continuation of remote work and an increase in vacancies across the office market.

As of December 31, 2024, Washington Trust’s CRE office loan segment totaled $289.9 million, or 6% of total loans and 13% of the total CRE loans.

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Furthermore, approximately 68% of the CRE office segment balance of $289.9 million is secured by properties located in suburban areas.

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

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

As of December 31, 2024, 100% 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 84% pass-rated, 3% special mention and 13% classified as of December 31, 2024.

Commercial and Industrial Loans

C&I loans amounted to $542.5 million at December 31, 2024, down by $62.6 million, or 10%, from the balance at December 31, 2023.

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

In 2024, C&I originations, advances and line utilization amounted to $55.2 million and were more than offset by payments.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $71.0 million and $66.3 million, respectively, at December 31, 2024 and 2023.

1 unchanged sentence

Management's Discussion and Analysis

Management considers the C&I portfolio to be well-diversified with loans across several industries.

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

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55,784 10 63,789 11

Manufacturing 54,905 9 60,601 9

Retail trade 43,746 7 56,012 9

Educational services 47,092 9 41,968 7

Retail trade 41,132 8 43,746 7

Manufacturing 32,140 6 54,905 9

Finance and insurance

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

Healthcare and social assistance totaled $126.5 million as of December 31, 2024, and is our largest single C&I segment, representing 23% of the total C&I portfolio.

This segment includes specialty medical practices, elder services, and community and mental health centers.

At December 31, 2024, the credit quality of the healthcare and social assistance segment was 86% pass-rated and 14% was special mention.

Also, there were no nonaccrual loans and all loans in this segment were current with respect to payment terms at December 31, 2024.

Residential Real Estate Loans

The residential real estate loan portfolio represented 41% of total loans at December 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 December 31, 2023, up by $281.5 million, or 12%, from the balance at December 31, 2022.

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

Residential real estate loans held in portfolio amounted to $2.1 billion at December 31, 2024, down by $478.3 million, or 18%, from the balance at December 31, 2023.

This decrease included the reclassification of $344.6 million of loans, with a weighted average rate of 3.02%, to held for sale associated with balance sheet repositioning transactions.

In addition, total origination activity declined and a lower proportion of loans was originated for portfolio in 2024.

Management's Discussion and Analysis

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

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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:

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(2) 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 for balance sheet management purposes.

The table below presents residential real estate loan sales activity:

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

Residential real estate loan origination, refinancing and sales activity decreased in 2023 in response to increases in market interest rates and changes in the housing markets.

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

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The net balance of capitalized servicing rights amounted to $7.7 million and $8.5 million, respectively, as of December 31, 2024 and 2023.

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

The balance of residential mortgage loans

Management's Discussion and Analysis

serviced for others, which are not included in the Consolidated Balance Sheets, amounted to $1.4 billion at December 31, 2024, compared to $1.5 billion at December 31, 2023.

Consumer Loans

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

The consumer loan portfolio represented 7% of total loans at December 31, 2024, compared to 6% at December 31, 2023.

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

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The Bank estimates that approximately 50% 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 $331.8 million at December 31, 2023, up by $30.4 million, or 10%, from December 31, 2022, largely reflecting increases in home equity lines and loans.

The consumer loan portfolio totaled $314.7 million at December 31, 2024, down by $17.1 million, or 5%, from December 31, 2023, largely reflecting decreases in home equity lines and loans.

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $11.6 million and $13.2 million, respectively, at December 31, 2024 and 2023.

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

The purchase of the

Management's Discussion and Analysis

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

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

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

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Best, Moody’s and S&P.

BOLI is included in the Consolidated Balance Sheet at its cash surrender value.

Increases in BOLI’s cash surrender value are reported as a component of noninterest income in the Consolidated Statements of Income.

BOLI is included in the Consolidated Balance Sheets at its cash surrender value.

Increases in BOLI’s cash surrender value are reported as a component of noninterest income in the Consolidated Statements of Income (Loss).

Asset Quality

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

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

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

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

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

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

Management's Discussion and Analysis

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Commercial real estate

$10,053 $32,827

Commercial & industrial

Total commercial

10,568 33,509

Residential Real Estate:

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

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

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

Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $1.6 million in 2024, compared to $3.4 million in 2023.

Interest income attributable to these loans included in the Consolidated Statements of Income (Loss) amounted to approximately $908 thousand and $2.9 million, respectively, in 2024 and 2023.

Management's Discussion and Analysis

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As of December 31, 2024, the composition of nonaccrual loans was 45% commercial and 55% residential and consumer.

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

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

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

These three loans are collateral dependent.

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

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

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

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

All three loans are current with respect to payment terms.

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

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

As of December 31, 2023, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Connecticut and Rhode Island.

Included in total nonaccrual residential real estate loans at

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

Total nonaccrual loans decreased by $21.3 million from the end of 2023, reflecting a decline in nonaccrual commercial real estate loans.

Nonaccrual CRE loans declined by $22.8 million from the balance at December 31, 2023.

This decline was primarily attributable to two loans secured by properties in our primary lending area of southern New England.

One loan, with a carrying value of $13.7 million, was in the healthcare facility segment, returned to accruing status in the first quarter of 2024 and paid off in the third quarter of 2024.

The second loan, with a carrying value of $10.5 million, was in the office segment and was resolved due to the sale of the underlying property to a third party in fourth quarter of 2024.

The payoff received on this CRE office loan was $9.5 million, resulting in a charge-off of $976 thousand being recognized in the fourth quarter of 2024.

As of December 31, 2024, the balance of nonaccrual CRE loans consisted of two collateral dependent loans.

One loan for $6.7 million (net of charge-offs to date of $1.4 million) was modified as a TLM in 2023, and another loan for $3.3 million was placed on nonaccrual status and modified as a TLM in 2024.

Both of these loans are secured by office properties in our

Management's Discussion and Analysis

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

primary lending area of southern New England and are current with respect to payment terms at December 31, 2024.

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), specific reserves of $1.3 million were deemed necessary at December 31, 2024.

Nonaccrual residential real estate mortgage loans amounted to $10.8 million at December 31, 2024, up by $1.1 million from the end of 2023.

As of December 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 December 31, 2024 were two loans purchased for portfolio and serviced by others totaling $535 thousand.

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

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

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

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

The composition of past due loans (loans past due 30 days or more) was 92% residential and consumer and 8% commercial at December 31, 2024 and essentially all residential and consumer at December 31, 2023.

Total past due loans increased by $637 thousand from the end of 2023.

Total past due loans included $6.4 million of nonaccrual loans as of December 31, 2024, compared to $6.9 million of as of December 31, 2023.

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

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

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

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

Management's Discussion and Analysis

Management has identified $28.2 million in potential problem loans at December 31, 2024, compared to $22.9 million at December 31, 2023.

As of December 31, 2024, the balance of potential problem loans largely consisted of two CRE loans secured by office properties in Massachusetts.

At December 31, 2024, these loans were current with respect to payment terms.

Allowance for Credit Losses on Loans

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

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.

The Corporation’s general practice is to identify problem credits early.

To determine if a loan should be charged-off, all possible sources of repayment are analyzed.

Possible sources of repayment include the potential for future cash flows, the value of underlying collateral, and the strength of guarantors.

Full or partial charge-offs are recognized as promptly as practicable when available information confirms that the collection of loan principal is unlikely.

For collateral dependent loans, this confirming information may include an appraisal that reflects a shortfall between the value of the collateral and the carrying value of the loan or a deficiency balance following the sale of the collateral.

Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent 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 Corporation does not recognize a recovery when new appraisals indicate a subsequent increase in value.

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

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Pooled (collectively evaluated) loans (1)

5,122,728 40,417 0.79 5,613,066 40,960 0.73

Total $5,139,319 $41,960 0.82 % $5,647,706 $41,057 0.73 %

(1) The amount reported for pooled loans excludes a $1.5 million negative basis adjustment associated with fair value hedges at December 31, 2024.

See Note 9 to the Consolidated Financial Statements for additional disclosure.

Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors.

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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 $41.1 million at December 31, 2023, up by $3.0 million, or 8%, from the balance at December 31, 2022.

For additional information regarding the ACL methodology, see Note 1 to the Consolidated Financial Statements, as well as disclosure under the caption “Critical Accounting Policies and Estimates.”

The ACL on loans amounted to $42.0 million at December 31, 2024, up by $903 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 0.82% at December 31, 2024, compared to 0.73% at December 31, 2023.

The Corporation recorded a provision for credit losses on loans of $2.9 million in 2024.

This reflected specific reserve allocations on individually analyzed nonaccrual commercial loans, as well as the impact of continued, yet subsiding, slowdown in prepayment speeds.

This was also partially offset by relatively stable to improving forecasted economic conditions in 2024 and a decline in loan balances that was concentrated in residential real estate and also included the reclassification of loans from portfolio to held for sale.

Management's Discussion and Analysis

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

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

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

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

Net charge-offs totaled $2.0 million, or 0.04% of average loans, in 2024, compared to net charge-offs of $520 thousand, or 0.01% of average loans, in 2023.

The charge-offs recognized in 2024 were concentrated in the CRE office portfolio segment.

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

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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 is a participant in the DDM, ICS, and CDARS programs.

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

As a program participant, we receive reciprocal amounts of

Management's Discussion and Analysis

reciprocal amounts of deposits from other participating banks.

deposits from other participating banks.

We consider these reciprocal deposit balances to be in-market deposits as distinguished from traditional wholesale brokered deposits.

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Total in-market deposits 4,818,262 94 4,694,110 88 124,152 3

Wholesale brokered demand deposits — — 31,153 1 (31,153) (100)

Wholesale brokered time deposits 297,538 6 654,050 12 (356,512) (55)

Total wholesale brokered deposits 654,050 12 358,197 8 295,853 83

Total deposits $5,115,800 100 % $5,348,160 100 % ($232,360) (4 %)

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

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

Total deposits amounted to $5.1 billion at December 31, 2024, down by $232.4 million, or 4%, from December 31, 2023, driven by a decline in wholesale brokered time deposits of $356.5 million, or 55%.

See disclosure regarding wholesale funding under the caption “Borrowings” below.

In-market deposits, which exclude wholesale brokered deposits, were up by $124.2 million, or 3%, from the balance at December 31, 2023.

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.

Growing deposits continues to be highly competitive in our market area and demand for higher-cost deposit products is strong.

In 2024, Washington Trust made investments in technology to enhance our customers’ experience, and we remain focused on maintaining and growing depositor relationships.

As of December 31, 2024, in-market deposits were approximately 59% retail and 41% commercial.

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

FHLB advances totaled $1.1 billion at December 31, 2024, down by $65.0 million from the balance at the end of 2023.

For additional information regarding FHLB advances see Note 13 to the Consolidated Financial Statements.

Both FHLB and wholesale brokered time deposits decreased in 2024, reflecting less need for wholesale funding and the use of net proceeds received from the December 2024 equity offering to pay down balances.

See additional discussion under the caption “Overview.”

Liquidity and Capital Resources

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70,286 65,759 27,059

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

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

Available cash liquidity (3)

36,647 54,970 49,727

Unencumbered securities 597,771 680,857 691,893

Total contingent liquidity $1,457,655 $1,888,193 $1,436,974

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(1) As of December 31, 2024, 2023 and 2022, loans with a carrying value of $2.8 billion, $3.4 billion and $2.4 billion, respectively, and securities available for sale with a carrying value of $74.2 million, $94.3 million and $102.1 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of December 31, 2023, 2022 and 2021, loans with a carrying value of $71.0 million, $20.9 million and $8.2 million, respectively.

and securities available for sale with a carrying value of $13.1 million, $12.7 million and $13.5 million, respectively, were pledged to the FRBB resulting in this additional unused borrowing capacity.

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

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

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

(2) As of December 31, 2024, 2023 and 2022, loans with a carrying value of $68.5 million, $71.0 million and $20.9 million, respectively, and securities available for sale with a carrying value of $13.9 million, $13.1 million and $12.7 million, respectively, were pledged to the FRBB resulting in this additional unused borrowing capacity.

(3) Available cash liquidity excludes amounts restricted for collateral purposes and designated for operating needs.

Borrowing capacity at December 31, 2024 was reduced by the reclassification of residential mortgage loan collateral to held for sale as part of the balance sheet repositioning transactions.

On January 24, 2025, the sale of these loans was completed and the cash proceeds received were used to pay down FHLB advances or other wholesale funding balances in the first quarter of 2025.

In addition to the amounts presented above, the Bank also access to a $40.0 million unused line of credit with the FHLB at December 31, 2024, 2023 and 2022.

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

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

Land and premises associated with five branch locations with a total net book value of $4.8 million were reported as held for sale as of December 31, 2024, as the Bank committed to sell these assets and lease them back from the buyers.

The sales-leaseback transactions for four of the locations were completed on January 30, 2025 and the remaining transaction associated with the fifth location is expected to be completed later in 2025.

As a result, the Corporation expects to recognize a net gain on the sale of these assets of approximately $7 million in the Consolidated Statements of Income (Loss) in the first quarter of 2025.

Additionally, the annual lease expense associated with leaseback of these five locations is estimated to be approximately $1 million.

See Note 7 to the Consolidated Financial Statements for additional information related to the leaseback of the assets.

In the first quarter of 2025, the qualified pension plan liability will be settled after plan assets are distributed through a combination of lump sum payments to participants and the purchase of a group annuity contract from a highly-rated insurance company.

This results in a pre-tax non-cash pension settlement charge of approximately $6.4 million, which includes the recognition of pre-tax actuarial losses accumulated in AOCL and the effects of the remeasurement of plan assets and liability upon settlement, being recognized in the Consolidated Statements of Income (Loss) in the first quarter of 2025.

See Note 16 to the Consolidated Financial Statements for additional disclosure regarding the qualified pension plan.

Management's Discussion and Analysis

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

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Capital Resources

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

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

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

Management's Discussion and Analysis

associated with the annual remeasurement of pension plan liabilities.

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

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

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

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

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

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

In December 2024, the Corporation completed an equity offering and disclosed a subsequent balance sheet repositioning involving the sale of lower-yielding loans and debt securities, the purchase of debt securities with current market yields, and the repayment of wholesale funding balances.

Though the sales of lower-yielding loans and securities resulted in a net loss being recognized in 2024, we believe the repositioning will favorably impact future revenues and provide additional capacity for growth and investment.

At December 31, 2024, total shareholders’ equity amounted to $499.7 million, up by $27.0 million from December 31, 2023.

The net capital raised from the equity offering of $70.5 million and an increase of $22.0 million in the AOCL component of shareholders' equity were partially offset by a net loss of $28.1 million and dividend declarations of $39.8 million.

The change in AOCL reflected net changes in the fair value of available for sale debt securities and cash flow hedges.

See Note 19 to the Consolidated Financial Statements for additional disclosure regarding changes in AOCL.

The Corporation declared dividends of $2.24 per share in 2024, unchanged from dividends per share declared in 2023.

The dividend payout ratio was (137.4 %) in 2024, compared to 79.4% in 2023.

The adjusted dividend payout ratio (non-GAAP) was 94.5% in 2024, compared to 85.2% in 2023.

The ratio of total equity to total assets amounted to 7.21% at December 31, 2024, compared to a ratio of 6.56% at December 31, 2023.

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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.

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.

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

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

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The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk.

See Notes 9 and 21 to the Consolidated Financial Statements for additional information.

The ALCO uses income simulation to measure interest rate risk inherent in the Corporation’s 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.

See Note 9 to the Consolidated Financial Statements for additional information.

Management's Discussion and Analysis

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.

The simulations at December 31, 2024 incorporated the reclassification of residential mortgage loans from portfolio to held for sale and the sale of these loans completing in January 2025.

The simulations at December 31, 2024 assume the proceeds from the sale of loans are used to pay down maturing wholesale funding balances.

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.

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

Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment.

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.

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

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

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

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

Management's Discussion and Analysis

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

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

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

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

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

As of December 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.

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

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

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.

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.

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

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

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200 basis point rate decrease (3.78 %) (1.67 %) (6.82 %) 1.53 %

300 basis point rate decrease (5.89 %) (3.73 %) (10.38 %) 1.59 %

100 basis point rate increase (0.16 %) (3.52 %) 0.72 % (6.08 %)

200 basis point rate increase 1.54 % (3.98 %) 4.16 % (7.57 %)

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

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

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

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

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

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

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

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

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

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

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

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

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

Wholesale funds 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.

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.

300 basis point rate increase 3.25 % (4.81 %) 7.55 % (9.21 %)

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

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

As such, the ALCO has modeled deposit shifts out of these low cost categories into higher cost alternatives in the rising rate simulation scenarios presented above.

Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment, as well as due to heightened uncertainty in the banking industry.

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

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

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

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

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 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.

The changes in balance sheet composition reflected the balance sheet repositioning transactions and included a reduction in loans, a lower level of wholesale funding and in-market deposit growth.

Furthermore, additional interest rate management derivative contracts were executed to hedge interest rate risk.

The ALCO estimates that as interest rates change, interest-earning assets would reprice more quickly than interest-bearing liabilities.

In-market deposit rate changes are modeled to lag behind other market interest rates in both pace and magnitude.

The deposit lag assumption was reduced at December 31, 2024 to align with actual experience, as deposit rate changes have more closely followed changes in market interest rates.

In addition, prepayments of loans and securities generally increase as market interest rates decline and decrease as market interest rates rise.

Additionally, the Corporation 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 of December 31, 2023 and 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 December 31, 2024 and 2023 resulting from immediate parallel rate shifts:

(Dollars in thousands)

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Obligations of U.S.

government-sponsored enterprise securities (callable) $8,656 ($17,242)

government agencies and U.S.

government-sponsored enterprises $1,190 ($2,243)

Mortgage-backed securities issued by U.S.

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73,704 (137,523)

Obligations of states and political subdivisions 31 (98)

Trust preferred debt and other corporate debt securities 82 (163)

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

The potential change in market value at December 31, 2024, as compared to the prior year-end reflects the impact of the December 2024 securities transactions associated with the balance sheet repositioning, as well as changes in interest rates.

Impact of Inflation on Changing Prices

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

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

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

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

Recently, the Federal Reserve has paused rate

Management's Discussion and Analysis

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

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

In 2023, the Federal Reserve’s policy response to counter high levels of inflation was to increase its Federal Funds target rate several times, which in turn resulted in higher market interest rates across the economy.

As the inflation rate began to moderate, the Federal Reserve began lowering its Federal Funds target rate in the latter portion of 2024.

While variable-rate assets reprice downward if interest rates decline, interest-bearing liabilities also reprice downward.

Additionally, in a high-rate or rising rate environment, lower cost in-market deposits generally shift into higher cost deposit categories, which puts additional pressure on both net interest income and the net interest margin.

We cannot predict whether or when the Federal Reserve may increase or decrease the Federal Funds rate in the future.

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

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

LIBOR Transition

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

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

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

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

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

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

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

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

Management's Discussion and Analysis

Critical Accounting Policies and Estimates

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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 the Consolidated Statements of Income.

The ACL on loans is established through a provision for credit losses recognized in the Consolidated Statements of Income (Loss).

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

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Management's Discussion and Analysis

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The range of impact was an ACL allocated to the total commercial loan portfolio between $24.3 million and $53.5 million at December 31, 2024.

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

The sensitivity and related range of impact is a hypothetical analysis and is not intended to represent management’s judgments or assumptions of qualitative loss factors that were utilized at December 31, 2024 in estimation of the ACL on loans recognized on the Consolidated Balance Sheets.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis