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Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-02-25 · 708 added, 367 removed, 709 unchanged (60% of the section changed)

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Accounting policies involving significant judgments, estimates and assumptions by management, which have, or could have, a material impact on the Corporation’s consolidated financial statements are considered critical accounting policies.

Management considers the following to be its critical accounting policies:

the determination of allowance for loan losses, the valuation of goodwill and identifiable intangible assets, the assessment of investment securities for impairment and accounting for defined benefit pension plans.

Allowance for Loan Losses

Establishing an appropriate level of allowance for loan losses necessarily involves a high degree of judgment.

The level of the allowance is based on management’s ongoing review of the growth and composition of the loan portfolio, historical loss experience, estimated loss emergence period (the period from the event that triggers the eventual default until the actual loss is recognized with a charge-off), current economic conditions, analysis of asset quality and credit quality levels and trends, the performance of individual loans in relation to contract terms and other pertinent factors.

A methodology is used to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient allowance for loan losses.

The methodology is described below.

Loss allocations are identified for individual loans deemed to be impaired in accordance with GAAP.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will not be able to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.

Impaired loans include nonaccrual loans and loans restructured in a troubled debt restructuring.

Loss allocations for loans deemed to be impaired are measured using a discounted cash flow method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan is collateral dependent, at the fair value of the collateral.

For collateral dependent loans for which repayment is dependent on the sale of the collateral, management adjusts the fair value for estimated costs to sell.

For collateral dependent loans for which repayment is dependent on the operation of the collateral, such as accruing troubled debt restructured loans, estimated costs to sell are not incorporated into the measurement.

Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the property.

For loans that are collectively evaluated, loss allocation factors are derived by analyzing historical loss experience by loan segment over an established look-back period deemed to be relevant to the inherent risk of loss in the portfolios.

Loans are segmented by loan type, collateral type, delinquency status and loan risk rating, where applicable.

These loss allocation factors are adjusted to reflect the loss emergence period.

These amounts are supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by historical loss rates.

As of December 31, 2020, management considers the following to be its critical accounting policies:

the determination of the allowance for credit losses on loans, the valuation of goodwill and identifiable intangible assets, and accounting for defined benefit pension plans.

As a result of the adoption of Accounting Standards Codification (“ASC”) 326 effective January 1, 2020, Washington Trust updated its critical accounting policy for the Allowance of Credit Losses on Loans.

The updated policy is described in detail below.

Allowance for Credit Losses on Loans

The ACL on loans is management’s estimate of expected credit losses over the expected life of the loans at the reporting date.

The ACL on loans is increased through a provision for credit losses recognized in the Consolidated Statements of Income and by recoveries of amounts previously charged-off.

The ACL on loans is reduced by charge-offs on loans.

Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely.

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

The level of the ACL on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.

Historical credit loss experience provides the basis for the calculation of loss given default and the estimation of expected credit losses.

As discussed further below, adjustments to historical information are made for differences in specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, that may not be reflected in historical loss rates.

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

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

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

Pooled loan portfolio segments include commercial real estate (including commercial construction loans), commercial and industrial (including PPP loans), residential real estate (including homeowner construction), home equity and other consumer loans.

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

Individually analyzed loans include nonaccrual commercial loans, reasonably expected TDRs and executed TDRs, as well as certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans.

For loans that are individually analyzed, the ACL is measured using a discounted cash flow (“DCF”) method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan is collateral dependent, at the fair value of the collateral.

Factors management considers when measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due.

For collateral dependent loans for which repayment is to be provided substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell.

For collateral dependent loans for which repayment is to be provided substantially through the operation of the

Management's Discussion and Analysis

collateral, such as accruing TDRs, estimated costs to sell are not incorporated into the measurement.

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

The life of the loan excludes expected extensions, renewals and modifications, unless 1) the extension or renewal options are included in the original or modified contract terms and not unconditionally cancellable by the Corporation, or 2) management reasonably expects at the reporting date that a TDR will be executed with an individual borrower.

The methodology incorporates the probability of default and loss given default, which are identified by default triggers such as past due by 90 or more days, whether a charge-off has occurred, the loan has been placed on nonaccrual status, the loan has been modified in a TDR or the loan is risk-rated as special mention or classified.

The probability of default for the life of the loan is determined by the use of an econometric factor.

Management utilizes the national unemployment rate as an econometric factor with a one-year forecast period and one-year straight-line reversion period to the historical mean of its macroeconomic assumption in order to estimate the probability of default for each loan portfolio segment.

Utilizing a third party regression model, the forecasted national unemployment rate is correlated with the probability of default for each loan portfolio segment.

The DCF methodology combines the probability of default, the loss given default, maturity date and prepayment speeds 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 are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates.

These qualitative risk factors include:

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5) changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or rated loans;

6) changes in the quality of the institution’s loan review system;

6) changes in the quality of the institution’s credit review system;

7) changes in the value of underlying collateral for collateral dependent loans;

8) the existence and effect of any concentrations of credit,

Management's Discussion and Analysis

and changes in the level of such concentrations;

8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations;

and 9) the effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.

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

Adversely different conditions or assumptions could lead to increases in the allowance.

In addition, various regulatory agencies periodically review the allowance for loan losses.

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

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

While significant deterioration in the economic forecast due to the COVID-19 pandemic was estimated in the ACL on loans, continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the ACL.

Deteriorating conditions or assumptions could lead to further increases in the ACL on loans.

In addition, various regulatory agencies periodically review the ACL on loans.

Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination.

As of December 31, 2019 , management believes that the allowance is adequate and consistent with asset quality and delinquency indicators.

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

Valuation of Goodwill and Identifiable Intangible Assets

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Goodwill is not amortized, but is tested for impairment at the reporting unit level, defined as the segment level, at least annually in the fourth quarter or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that an impairment loss has occurred.

In 2020, due to the changes in the macroeconomic environment resulting from the COVID-19 pandemic, management performed an interim impairment assessment on goodwill as of March 31, 2020 in addition to its annual assessment.

In assessing impairment, the Corporation has the option to perform a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount.

If, after assessing the totality of such events or circumstances, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then we would not be required to perform an impairment test.

If, after assessing the totality of such events or circumstances, we

Management's Discussion and Analysis

determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then we would not be required to perform an impairment test.

The quantitative impairment analysis requires a comparison of each reporting unit’s fair value to its carrying value to identify potential impairment.

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Judgment is applied in determining the weightings that are most representative of fair value.

The annual quantitative assessment of goodwill for the two reporting units (Commercial Banking and Wealth Management Services) was performed utilizing a discounted cash flow analysis (“income approach”) and estimates of selected market information (“market approach”).

The annual and interim quantitative assessments of goodwill for the two reporting units (Commercial Banking and Wealth Management Services) were performed utilizing a DCF analysis (“income approach”) and estimates of selected market information (“market approach”).

The income approach measures the fair value of an interest in a business by discounting expected future cash flows to present value.

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The results of the income approach and the market approach were weighted equally.

The results of the 2019 annual quantitative impairment analysis indicated that the remaining fair value significantly exceeded the carrying value for both reporting units.

The results of both the March 31, 2020 and December 31, 2020 quantitative impairment analyses indicated that the remaining fair value significantly exceeded the carrying value for both reporting units.

Intangible assets identified in acquisitions consist of wealth management advisory contracts.

The fair value of intangible assets was estimated using valuation techniques, based on a discounted cash flow analysis.

The fair value of intangible assets was estimated using valuation techniques, based on a DCF analysis.

The value attributed to other intangible assets was based on the time period over which they are expected to generate economic benefits.

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The remaining useful life of the intangible assets that are being amortized is also evaluated to determine whether events and circumstances warrant a revision to the remaining period of amortization.

Management's Discussion and Analysis

The Corporation makes certain estimates and assumptions that affect the determination of the expected future cash flows from the intangible assets.

For intangible assets such as wealth management advisory contracts, these estimates and assumptions include account attrition, market appreciation for wealth management assets under administration and anticipated fee rates, estimated revenue growth, projected costs and other factors.

For intangible assets such as wealth management advisory contracts, these estimates and assumptions include account attrition, market appreciation for wealth management AUA and anticipated fee rates, estimated revenue growth, projected costs and other factors.

Significant changes in these estimates and assumptions could cause a different valuation for these intangible assets.

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

Assessment of Investment Securities for Impairment

Securities available for sale are carried at fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in shareholders’ equity.

The fair values of securities may be based on either quoted market prices or third party pricing services.

When the fair value of an investment security is less than its amortized cost basis, the Corporation assesses whether the decline in value is other-than-temporary.

The Corporation considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.

Evidence considered in this assessment includes the reasons for impairment, the severity and duration of the impairment, changes in the value subsequent to the reporting date, forecasted performance of the issuer, changes in the dividend or interest payment practices of the issuer, changes in the credit rating of the issuer or the specific security and the general market condition in the geographic area or industry in which the issuer operates.

Future adverse changes in market conditions, continued poor operating results of the issuer, projected adverse changes in cash flows, which might impact the collection of all principal and interest related to the security, or other factors could result in further losses that may not be reflected in an investment’s current carrying value, possibly requiring an additional impairment charge in the future.

In determining whether an other-than-temporary impairment has occurred for debt securities, the Corporation compares the present value of cash flows expected to be collected from the security with the amortized cost of the security.

If the present value of expected cash flows is less than the amortized cost of the security, then the entire amortized cost of the security will not be recovered;

that is, a credit loss exists, and an other-than-temporary impairment shall be considered to have occurred.

When an other-than-temporary impairment has occurred, the amount of the other-than-temporary impairment recognized in earnings for a debt security depends on whether the Corporation intends to sell the security or if it is more-likely-than-not that the Corporation will be required to sell the security before recovery of its amortized cost less any current period credit loss.

If the Corporation intends to sell the security or it is more-likely-than-not that it will be required to sell the security before recovery of its amortized cost, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the amortized cost and fair value of the security.

If the Corporation does not intend to sell or it is more-likely-than-not that it will not be required to sell the security before recovery of its amortized cost, the amount of the other-than-temporary impairment related to credit loss shall be recognized in earnings and the noncredit-related portion of the other-than-temporary impairment shall be recognized in other comprehensive income.

There were no other-than-temporary impairment losses recognized for the year ended December 31, 2019 .

Management's Discussion and Analysis

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We continue to leverage our strong regional brand to build market share and remain steadfast in our commitment to provide superior service.

In 2021, we plan to open a new full-service branch in East Greenwich, Rhode Island.

The COVID-19 pandemic has caused an unprecedented disruption to the economy and the communities we serve.

Washington Trust took action to support our customers experiencing financial difficulty due to the COVID-19 pandemic, including loan payment deferment modifications and participation in the SBA’s PPP.

In addition, in the first quarter of 2020, we implemented our business continuity and pandemic plans, which included remote working arrangements for the majority of our workforce, closing our branches and offering drive-through banking or special banking services by appointment only, and promoting social distancing.

In the third quarter of 2020, we briefly reopened our branch lobbies to customers while adhering to social distancing guidelines, before once again closing our branches and offering drive-through banking or special banking services by appointment only in the fourth quarter of 2020.

Remote working arrangements continue for a significant portion of our workforce.

Risk Management

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In some cases, the collateral securing the payment of the loans may be sufficient to assure repayment, but in other cases the Corporation may experience significant credit losses which could have an adverse effect on its operating results.

The Corporation makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of the real estate and other assets serving as collateral for the repayment of loans.

The Corporation makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of

Management's Discussion and Analysis

the real estate and other assets serving as collateral for the repayment of loans.

Credit risk also exists with respect to investment securities.

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For detailed disclosure regarding liquidity management, asset/liability management and interest rate risk, see “Liquidity and Capital Resources” and “Asset/Liability Management and Interest Rate Risk” sections below.

Management's Discussion and Analysis

Price and market risk refers to the risk of loss arising from adverse changes in interest rates and other relevant market rates and prices, such as equity prices.

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The following table presents a summarized consolidated statement of operations:

(Dollars in thousands)

(Dollars in thousands) Change

Years Ended December 31, 2020 2019 $ %

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Income tax expense 19,331 19,061 270 1

Net income $69,829 $69,118 $711 1 %

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

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

13.51 % 14.34 %

Net interest income as a percentage of total revenues 56 % 67 %

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Net income totaled $69.8 million in 2020, compared to $69.1 million in 2019.

Income before income taxes for 2019 increased by $1.5 million , or 2% , from 2018 .

This largely reflected increased mortgage banking activities and loan related derivative transactions, as well as growth in net interest income, partially offset by lower wealth management revenues and increased salaries and employee benefits expense and outsourced services expense.

Management's Discussion and Analysis

Net interest income in 2020 was negatively impacted by the decline in market interest rates, as interest-earning asset yields declined faster than the downward repricing of interest-bearing liabilities.

However, the decline in market interest rates also spurred mortgage origination, refinancing and sales activity, resulting in strong mortgage banking results in 2020.

Our 2020 results also reflected an increase in provision for credit losses due to the estimated impact of the COVID-19 pandemic under the CECL accounting methodology.

Noninterest expenses increased in 2020, largely due to increases in salaries and employee benefits expense, which included volume-related increases in mortgage banking commissions expense.

Average Balances/Net Interest Margin - Fully Taxable Equivalent (“FTE”) Basis

The following table presents average balance and interest rate information.

Tax-exempt income is converted to a fully taxable equivalent (“FTE”) basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit.

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 fair value adjustments on mortgage loans held for sale are excluded from the average balance and yield calculations.

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

Management's Discussion and Analysis

Years ended December 31, 2020 2019

(Dollars in thousands)

Average Balance

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

Cash, federal funds sold and short-term investments $160,427 $459 0.29 % $85,447 $1,667 1.95 %

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Total securities

902,278 20,050 2.22 948,325 26,390 2.78

FHLB stock 45,235 2,240 4.95 47,761 2,855 5.98

Commercial real estate 1,632,460 52,231 3.20 1,481,116 68,193 4.60

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Total commercial

2,399,636 79,641 3.32 2,077,567 96,738 4.66

Residential real estate

1,488,343 55,866 3.75 1,368,824 54,932 4.01

Home equity 277,296 10,032 3.62 286,767 14,011 4.89

Other 18,929 941 4.97 23,153 1,137 4.91

Total consumer

296,225 10,973 3.70 309,920 15,148 4.89

4,184,204 146,480 3.50 3,756,311 166,818 4.44

Total interest-earning assets

5,346,381 170,991 3.20 4,868,772 198,967 4.09

Noninterest-earning assets 358,569 300,549

$5,704,950 $5,169,321

Liabilities and Shareholders’ Equity:

Interest-bearing demand deposits

$159,366 $806 0.51 % $144,836 $2,537 1.75 %

NOW accounts 593,105 368 0.06 469,540 310 0.07

Money market accounts 839,915 5,402 0.64 693,921 7,713 1.11

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Total interest-bearing in-market deposits

2,750,363 19,979 0.73 2,468,348 26,888 1.09

Wholesale brokered time deposits

501,306 5,833 1.16 461,862 10,213 2.21

Total interest-bearing deposits

3,251,669 25,812 0.79 2,930,210 37,101 1.27

FHLB advances 920,704 15,806 1.72 1,015,914 26,168 2.58

Junior subordinated debentures

22,681 641 2.83 22,681 980 4.32

PPPLF borrowings 66,492 233 0.35 — — —

Total interest-bearing liabilities

Non-interest bearing demand deposits

4,261,546 42,492 1.00 3,968,805 64,249 1.62

Noninterest-bearing demand deposits 759,841 615,049

Other liabilities 167,861 104,463

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Total liabilities and shareholders’ equity

$5,704,950 $5,169,321

Net interest income (FTE)

$128,499 $134,718

Interest rate spread 2.20 % 2.47 %

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Nontaxable debt securities — 5

Total $1,055 $1,304

Net Interest Income

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

The analysis of net interest income, net interest margin and the yield on loans may be impacted by the periodic recognition of prepayment penalty income associated with loan payoffs.

For 2019 income associated with loan payoffs and prepayment penalties amounted to $405 thousand, compared to $847 thousand in 2018 .

The analysis of net interest income, net interest margin and the yield on loans may be impacted by the periodic recognition of prepayment penalty fee income associated with loan payoffs.

Prepayment penalty fee income associated with loans payoffs in both 2020 and 2019 was immaterial.

The analysis of net interest income, net interest margin 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.

As market interest rates decline (as they did in the latter portion of 2019), loan prepayments and the receipt of payments on mortgage-backed securities generally increase.

As market interest rates decline (as they did in the latter portion of 2019 and in 2020), loan prepayments and the receipt of payments on mortgage-backed securities generally increase.

This results in accelerated levels of amortization reducing net interest income and may also result in the proceeds having to be reinvested at a lower rate than the loan or mortgage-backed security being prepaid.

As noted in the Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans amounted to $4.5 million in 2019 , up by $1.6 million from 2018 .

FTE net interest income in 2019 amounted to $134.7 million , up by $1.2 million , or 1% , from 2018 .

Growth in average interest-earning assets, net of increased average interest-bearing liability balances, contributed approximately $9.3 million of additional net interest income in 2019.

This was partially offset by higher funding costs out-pacing higher asset yields, which reduced net interest income by $8.1 million in 2019.

Excluding the impact of prepayment penalty income associated with loans payoffs from each period, net interest income for 2019 increased by $1.6 million, or 1%, from 2018 .

In addition, as PPP loans are forgiven by the SBA, unamortized net fee balances are accelerated and amortized into net interest income.

Late in 2020, $18.0 million of PPP loans were forgiven by the SBA.

As a result, the acceleration of net fee balances of $423 thousand was included in interest income and also reported in the net amount of amortization of premiums and discounts on securities and loans in the Consolidated Statements of Cash Flows.

The total net amount of amortization of premiums and discounts on securities and loans in the Consolidated Statements of Cash Flows (a net reduction to net interest income) amounted to $5.7 million in 2020, up by $1.2 million from 2019.

FTE net interest income in 2020 amounted to $128.5 million, down by $6.2 million, or 5%, from 2019.

Growth in average interest-earning assets, net of increased average interest-bearing liability balances, contributed approximately $18.2 million of additional net interest income in 2019, however, this was offset by declines in asset yields out-pacing declines in funding costs, which reduced net interest income by $24.4 million.

The net interest margin was 2.40% in 2020, down by 37 basis points from 2.77% in 2019.

Compression in net interest margin resulted from the upward repricing of liabilities occurring at a faster pace than the increase in asset yields.

Excluding the impact of income associated with loan payoffs and prepayment penalties from each period, the net interest margin was 2.76% in 2019 , down by 23 basis points from 2.99% in 2018 .

Total average securities for 2019 increased by $114.4 million , or 14% , from the average balance for 2018 .

Debt obligations of U.S.

government agencies and U.S.

government-sponsored enterprises, including mortgage-backed securities, totaling $206.3 million and $251.8 million, respectively, were purchased in 2019 and 2018 .

The 2019 purchases had a weighted average yield of 3.12%, while the 2018 purchases had a weighted average yield of 3.59%.

The FTE rate of return on securities was 2.78% in 2019 , up by 15 basis points from 2.63% in 2018 , reflecting purchases of relatively higher yielding debt securities.

Total average loans increased by $272.8 million , or 8% , from the average balance for 2018 , primarily due to growth in average commercial real estate and residential real estate loan balances.

The yield on total loans in 2019 was 4.44% , up by 10 basis points from 4.34% in 2018 .

Excluding the impact of prepayment penalty income associated with loans payoffs from each period, the yield on total loans was 4.43% in 2019 , up by 11 basis points from 4.32% in 2018 .

Yields on LIBOR-based and prime-based loans reflected higher market interest rates.

Compression in net interest margin resulted from the downward repricing of assets, which occurred at a faster pace than the downward repricing of liabilities.

Total average securities for 2020 decreased by $46.0 million, or 5%, from the average balance for 2019, due to timing of reinvestment of security portfolio cash flows.

The FTE rate of return on securities was 2.22% in 2020, down by 56 basis points from 2.78% in 2019, reflecting purchases of relatively lower yielding debt securities and lower market interest rates.

Total average loan balances increased by $427.9 million, or 11%, from the average balance for 2019.

This reflected growth in average commercial loan balances, which included the origination of PPP loans in 2020, as well as growth in average residential real estate loan balances, which included purchases of residential mortgage loans in the latter

Management's Discussion and Analysis

The average balance of FHLB advances for 2019 increased by $161.5 million , or 19% , compared to the average balance for 2018 .

The average rate paid on such advances in 2019 was 2.58% , up by 35 basis points from 2.23% in 2018 , due to relatively higher rates on short-term advances.

portion of 2019 and first quarter of 2020.

The yield on total loans in 2020 was 3.50%, down by 94 basis points from 4.44% in 2019.

Yields on LIBOR-based and prime-based loans reflected lower market interest rates.

The average balance of FHLB advances for 2020 decreased by $95.2 million, or 9%, compared to the average balance for 2019.

The average rate paid on such advances in 2020 was 1.72%, down by 86 basis points from 2.58% in 2019, due to lower rates on short-term advances.

Included in total average interest-bearing deposits were out-of-market brokered time deposits, which increased by $39.4 million, or 9%, from 2019.

The average rate paid on wholesale brokered time deposits in 2019 was 2.21% , up by 43 basis points from 1.78% in 2018 , as maturities were replaced with wholesale brokered time deposits with relatively higher rates.

Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, increased by $177.2 million , or 8% , from the average balance in 2018 , largely due to growth in time deposits.

The average rate paid on in-market interest-bearing deposits in 2019 was 1.09% , up by 37 basis points from 0.72% in 2018 , largely reflecting higher rates paid on promotional time deposits, as well as competitive pricing on money market accounts and interest-bearing demand deposits.

The average rate paid on wholesale brokered time deposits in 2020 was 1.16%, down by 105 basis points from 2.21% in 2019, reflecting lower market interest rates.

Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, increased by $282.0 million, or 11%, from the average balance in 2019, largely due to growth in average lower-cost deposit categories, partially offset by maturities of higher-cost promotion time deposits.

The average rate paid on in-market interest-bearing deposits in 2020 was 0.73%, down by 36 basis points from 1.09% in 2019, largely due to downward repricing of interest-bearing in-market deposits reflecting lower market interest rates.

The average balance of noninterest-bearing demand deposits for 2020 increased by $144.8 million, or 24%, from the average balance for 2019.

See additional disclosure under the caption “Sources of Funds.”

Management's Discussion and Analysis

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

(Dollars in thousands)

Changes Due To

(Dollars in thousands) Changes Due To

Years Ended December 31, 2020 vs.

2019 Volume Rate Net Change

Interest on interest-earning assets:

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Total securities

(1,229) (5,111) (6,340)

FHLB stock (144) (471) (615)

Commercial real estate 6,412 (22,374) (15,962)

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Total commercial

13,512 (30,609) (17,097)

Residential real estate

4,621 (3,687) 934

Home equity (449) (3,530) (3,979)

Other (210) 14 (196)

Total consumer

(659) (3,516) (4,175)

17,474 (37,812) (20,338)

Total interest income

17,720 (45,696) (27,976)

Interest on interest-bearing liabilities:

Interest-bearing demand deposits 231 (1,962) (1,731)

NOW accounts 98 (40) 58

Money market accounts 1,398 (3,709) (2,311)

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Total interest-bearing in-market deposits

751 (7,660) (6,909)

Wholesale brokered time deposits 810 (5,190) (4,380)

Total interest-bearing deposits

1,561 (12,850) (11,289)

FHLB advances (2,274) (8,088) (10,362)

Junior subordinated debentures — (339) (339)

PPPLF borrowings 233 — 233

Total interest expense

(480) (21,277) (21,757)

Net interest income (FTE)

Provision for Loan Losses

The provision for loan losses is based on management’s periodic assessment of the adequacy of the allowance for loan losses which, in turn, is based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics;

$18,200 ($24,419) ($6,219)

Provision for Credit Losses

Effective January 1, 2020, Washington Trust adopted ASC 326, often referred to as CECL, which requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures.

CECL requires that the ACL be calculated based on current expected credit losses over the full remaining expected life of the financial assets and also consider expected future changes in macroeconomic conditions.

See Note 2 to the Consolidated Financial Statements for additional disclosure on the impact of adopting ASC 326.

Prior to January 1, 2020, the provision for loan losses was based on the incurred loss model.

The incurred loss model was based on management’s periodic assessment of the adequacy of the ACL on loans which, in turn, was based on

Management's Discussion and Analysis

such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics;

the levels of nonperforming loans, past due loans and net charge-offs, both current and historic;

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and regulatory guidelines.

The provision for loan losses is charged against earnings in order to maintain an allowance for loan losses that reflects management’s best estimate of probable losses inherent in the loan portfolio at the balance sheet date.

Loan loss provisions charged to earnings in both 2019 and 2018 amounted to $1.6 million .

These provisions were based on management’s assessment of loss exposure, as well as loan loss allocations commensurate with growth and changes in the loan portfolio and credit quality.

Management's Discussion and Analysis

Net charge-offs totaled $1.6 million , or 0.04% of average loans, in 2019 , compared to net charge-offs of $966 thousand , or 0.03% of average loans, in 2018 .

The allowance for loan losses was $27.0 million , or 0.69% of total loans, at December 31, 2019 , compared to $27.1 million , or 0.74% of total loans, at December 31, 2018 .

See additional discussion under the caption “Asset Quality” for further information on the allowance for loan losses.

The provision for loan losses was charged against earnings in order to maintain an allowance that reflected management’s best estimate of probable losses inherent in the loan portfolio at the balance sheet date.

Provisions for credit losses charged to earnings in 2020 and 2019 amounted to $12.3 million and $1.6 million, respectively.

In addition to the change in accounting methodology described above, the increase in the provision was attributable to expected losses related the COVID-19 pandemic and also reflected loan growth and changes in the underlying portfolio.

Estimating an appropriate level of ACL in loans necessarily involves a high degree of judgment and continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the ACL.

Net charge-offs totaled $1.1 million, or 0.03% of average loans, in 2020, compared to net charge-offs of $1.6 million, or 0.04% of average loans, in 2019.

The ACL on loans was $44.1 million, or 1.05% of total loans, at December 31, 2020, compared to an allowance for loan losses of $27.0 million, or 0.69% of total loans, at December 31, 2019.

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

Noninterest Income

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

(Dollars in thousands)

(Dollars in thousands) Change

Years Ended December 31, 2020 2019 $ %

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Net realized losses on securities — (53) 53 100

Other income 3,100 1,245 1,855 149

Total noninterest income $99,442 $67,080 $32,362 48 %

Noninterest Income Analysis

Revenue from wealth management services is our largest source of noninterest income, representing 55% of total noninterest income in 2019 , compared to 62% in 2018 .

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

Revenue from wealth management services represented 36% of total noninterest income in 2020, compared to 55% in 2019.

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

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

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

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

Management's Discussion and Analysis

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

(Dollars in thousands)

(Dollars in thousands) Change

Years Ended December 31, 2020 2019 $ %

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Wealth management revenues for 2020 decreased by $1.4 million, or 4%, from 2019, due to a decline in asset-based revenues.

Management's Discussion and Analysis

The following table presents the changes in wealth management assets under administration:

The decrease in asset-based revenues was directionally consistent with a decline in the average balance of AUA in 2020.

The following table presents the changes in wealth management AUA:

(Dollars in thousands) 2020 2019

Wealth management assets under administration (AUA):

Wealth management AUA:

Balance at the beginning of period $6,235,801 $5,910,814

Net investment (depreciation) appreciation & income

Net client asset flows

Net investment appreciation & income 774,265 1,119,826

Net client asset outflows (143,329) (836,722)

Balance at the end of period $6,866,737 $6,235,801

(1) Represents the classification of certain non-fee generating assets as AUA due to a reporting change in the fourth quarter of 2019.

Wealth management assets under administration (“AUA”) totaled $6.2 billion at December 31, 2019 , up by $325.0 million , or 5% , from December 31, 2018 , due to financial market appreciation and the addition of new accounts.

The average balance of AUA for 2019 decreased by $135.2 million, or 2%, from the average balance for 2018.

Wealth management AUA and related asset-based revenues have been adversely impacted by client outflows largely associated with the departures of certain client-facing personnel in the first quarter of 2018 and two senior counselors at the end of the second quarter of 2019.

Wealth management AUA totaled $6.9 billion at December 31, 2020, up by $630.9 million, or 10%, from December 31, 2019, reflecting net investment appreciation partially offset by net client asset outflows in 2020.

AUA and related asset-based revenues were adversely impacted by client outflows in the second half of 2019, which was largely associated with the departures of two senior counselors in June 2019.

The average balance of AUA in 2020 decreased by 1% from the average balance in 2019.

Mortgage banking revenues represented 48% of total noninterest income in 2020, compared to 22% for 2019.

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

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

(Dollars in thousands)

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

(Dollars in thousands) Change

Years Ended December 31, 2020 2019 $ %

Mortgage banking revenues:

Gains and commissions on loan sales, net (1)

Realized gains on loan sales, net (1)

$42,008 $13,978 $28,030 201 %

Unrealized gains, net (2)

5,998 354 5,644 1,594

Loan servicing fee income, net (3)

(629) 463 (1,092) (236)

Total mortgage banking revenues $47,377 $14,795 $32,582 220 %

Loans sold to the secondary market (4)

Includes gains on loan sales, commission income on loans originated for others, servicing right gains, fair value adjustments on mortgage loans held for sale, and fair value adjustments and gains on forward loan commitments.

$1,139,761 $591,172 $548,589 93 %

(1) Includes gains on loan sales, commission income on loans originated for others, servicing right gains, and gains (losses) on forward loan commitments.

(2) Represents fair value adjustments on mortgage loans held for sale and forward loan commitments.

(3) Represents loan servicing fee income, net of servicing right amortization and valuation adjustments.

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

Mortgage banking revenues in 2019 increased by $4.4 million , or 43% , from 2018 , reflecting higher sales volume and an increase in the sales yield on loans sold to the secondary market.

Mortgage origination and sales activity increased in 2019 in response to declines in market interest rates.

Loan related derivative income in 2019 increased by $1.5 million , or 62% , from 2018 , reflecting higher transactional volume due to increased commercial loan borrower demand for interest rate swap transactions.

Management's Discussion and Analysis

Mortgage banking revenues in 2020 increased by $32.6 million, or 220%, from 2019, primarily due to an increase in net realized gains associated with mortgage banking activities.

Net realized gains rose due to increases in both sales volume and sales yield on loans sold to the secondary market.

Mortgage loans sold to the secondary market totaled $1.1 billion in 2020 compared to $591.2 million in 2019.

As noted in the above table, mortgage banking revenues also include net unrealized gains and net loan servicing fee income.

Net unrealized gains and losses correlate to changes in the mortgage pipeline and corresponding changes in the fair value of mortgage loan commitments.

Net loan servicing fee income associated with loans sold with servicing retained, declined in 2020, largely due to increased amortization of servicing rights resulting from higher prepayment speeds on the serviced mortgage portfolio.

Mortgage origination, refinancing and sales activity increased year-over-year in response to declines in market interest rates.

Service charges on deposit accounts decreased by $942 thousand, or 26%, from 2019, primarily due to lower overdraft activity and related fee income.

Other income increased by $1.9 million, or 149%, from 2019.

Included in other income for 2020 was a gain of $1.4 million associated with the sale of our limited partnership interest in a low-income housing tax credit investment.

Noninterest Expense

The following table presents noninterest expense comparisons:

(Dollars in thousands)

(Dollars in thousands) Change

Years Ended December 31, 2020 2019 $ %

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Net occupancy 8,023 7,821 202 3

Equipment 3,831 4,081 (250) (6)

Legal, audit and professional fees 3,747 2,535 1,212 48

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Amortization of intangibles 914 943 (29) (3)

Change in fair value of contingent consideration

Debt prepayment penalties 1,413 — 1,413 —

Other 9,376 9,849 (473) (5)

Total noninterest expense $125,384 $110,740 $14,644 13 %

Noninterest Expense Analysis

Salaries and employee benefits expense for 2019 increased by $3.5 million , or 5% , from 2018 , largely reflecting annual merit increases and volume-related increases in mortgage banking commission expense, partially offset by lower wealth management compensation costs associated with the departure of personnel.

Salaries and employee benefits expense was also impacted by one-time incentives bonuses of approximately $450 thousand that were recognized in the first quarter of 2018.

There were no such one-time bonuses recognized in 2019.

Outsourced services for 2019 increased by $1.9 million , or 22% , from 2018 .

Equipment expense for 2019 decreased by $231 thousand , or 5% , from 2018 .

Both the increase in outsourced services and the decline in equipment expense reflects changes to, and the expansion of, services provided by third party vendors, including software application processing and operational services, as well as volume-related increases in third party processing costs.

The year over year comparison of this expense category was also impacted by a one-time third party vendor credit of $300 thousand that was received and recognized as a reduction to outsourced services expense in 2018.

FDIC deposit insurance costs for 2019 decreased by $994 thousand , or 62% , from 2018 , due to $1.1 million of FDIC assessment credits recognized in 2019.

No additional FDIC assessment credits remain available to us, as the credits awarded were fully utilized in the fourth quarter of 2019.

Salaries and employee benefits expense for 2020 increased by $10.1 million, or 14%, from 2019, largely reflecting volume-related increases in mortgage banking commissions expense, higher staffing levels, annual merit increases, and increases in performance-based compensation expense.

These were partially offset by increases in deferred labor costs (a contra expense) associated with portfolio loan originations.

Outsourced services expense for 2020 increased by $1.3 million, or 12%, from 2019, reflecting volume-related increases in third party processing costs and the expansion of services provided by third party vendors.

Legal, audit and professional fees for 2020 increased by $1.2 million, or 48%, from 2019, reflecting increased costs associated with various legal and consulting matters.

FDIC deposit insurance costs for 2020 increased by $1.2 million, or 194%, from 2019, due to $1.1 million of FDIC assessment credits that were recognized in 2019.

Debt prepayment penalty expense totaled $1.4 million in 2020, resulting from paying off $13.6 million in higher-yielding FHLB advances.

There were no such expenses incurred in 2019.

Management's Discussion and Analysis

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

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Effective income tax rate 21.7 % 21.6 %

The effective tax rates differed from the federal rate of 21.0%, primarily due to state income tax expense, partially offset by the benefits of tax-exempt income, income from bank-owned life insurance (“BOLI”), federal tax credits and the recognition of excess tax benefits associated with the settlement of share-based awards.

The increase in the effective tax rate in 2019 reflected an increase in state income tax expense and a reduction in excess tax benefits on the settlement of share-based awards.

Management's Discussion and Analysis

The effective tax rates differed from the federal rate of 21%, primarily due to state income tax expense, offset by the benefits of tax-exempt income and income from bank-owned life insurance BOLI.

The Corporation’s net deferred tax assets amounted to $12.2 million at December 31, 2020, compared to $8.3 million at December 31, 2019.

The Corporation has determined that a valuation allowance is not required for any of the deferred tax assets since it is more-likely-than-not that these assets will be realized primarily through future reversals of existing taxable temporary differences or by offsetting projected future taxable income.

Net deferred tax assets decreased in 2019, reflecting an increase in the deferred tax liability associated with higher net unrealized gains on debt securities available for sale recorded as a component of other comprehensive income.

Net deferred tax assets increased in 2020, largely reflecting an increase in the deferred tax asset associated with the ACL on loans.

See Note 10 to the Consolidated Financial Statements for additional information regarding income taxes.

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

(Dollars in thousands)

(Dollars in thousands) Change

Years Ended December 31, 2020 2019 $ %

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Provision for loan losses 12,342 1,575 10,767 684

Net interest income after provision for loan losses

Net interest income after provision for credit losses 116,258 110,839 5,419 5

Noninterest income 61,463 27,857 33,606 121

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Income tax expense 21,216 15,189 6,027 40

Net interest income for the Commercial Banking segment increased by $5.7 million , or 5% , from 2018 , reflecting growth in and relatively higher yields on loans, partially offset by higher cost of funds on in-market deposits.

Noninterest income derived from the Commercial Banking segment increased by $6.3 million , or 30% , from 2018 , largely reflecting higher mortgage banking revenues and loan related derivative income.

Net income $76,836 $54,360 $22,476 41 %

Net interest income for the Commercial Banking segment increased by $16.2 million, or 14%, from 2019, reflecting growth in loans partially offset by lower yields on loans due to declines in market interest rates.

Provisions for credit losses charged to earnings in 2020 and 2019 amounted to $12.3 million and $1.6 million, respectively.

In addition to the change in accounting methodology described above under the caption “Provision for Credit Losses,” the increase reflected expected losses related the COVID-19 pandemic, as well as loan growth and changes in the underlying portfolio.

Management's Discussion and Analysis

Noninterest income derived from the Commercial Banking segment increased by $33.6 million, or 121%, from 2019, largely reflecting higher mortgage banking revenues and a gain of $1.4 million associated with the 2020 sale of our limited partnership interest in a low-income housing tax credit investment..

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

Commercial Banking noninterest expenses were up by $3.9 million , or 6% , from 2018 , reflecting increases in salaries and employee benefits and outsourced services expenses, partially offset by lower FDIC deposit insurance costs.

Commercial Banking noninterest expenses were up by $10.5 million, or 15%, from 2019, reflecting increases in salaries and employee benefits, FDIC deposit insurance costs, outsourced services and legal expenses.

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

Management's Discussion and Analysis

Wealth Management Services

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

(Dollars in thousands)

(Dollars in thousands) Change

Years Ended December 31, 2020 2019 $ %

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Income tax expense 1,746 2,308 (562) (24)

Noninterest income for the Wealth Management Services segment was down by $1.5 million , or 4% , compared to 2018 , See further discussion of wealth management revenues under the caption “Noninterest Income” above.

Noninterest expenses for the Wealth Management Services segment decreased by $221 thousand , or 1% , compared to 2018 , largely reflecting lower salaries and employee benefits expense, partially offset by higher outsourced services expenses.

Net income $4,788 $6,608 ($1,820) (28 %)

Noninterest income for the Wealth Management Services segment decreased by $1.4 million, or 4%, compared to 2019, due to a decline in asset-based revenues.

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

Noninterest expenses for the Wealth Management Services segment increased by $1.3 million, or 5%, compared to 2019, including increases in salaries and employee benefits, legal and outsourced services expenses.

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

The following table presents a summarized statement of operations for the Corporate unit:

(Dollars in thousands)

(Dollars in thousands) Change

Years Ended December 31, 2020 2019 $ %

Net interest income

Net interest (expense) income ($1,015) $21,438 ($22,453) (105 %)

Noninterest income 2,525 2,367 158 7

Noninterest expense 16,936 14,091 2,845 20

Income before income taxes

Income tax expense

(Loss) income before income taxes (15,426) 9,714 (25,140) (259)

Income tax (benefit) expense (3,631) 1,564 (5,195) (332)

Net (loss) income ($11,795) $8,150 ($19,945) (245 %)

Net interest income for the Corporate unit was down by $22.5 million, or 105%, compared to 2019.

Higher wholesale funding costs were partially offset by increased interest income on debt securities resulting from growth in and relatively higher yields on investment securities.

Noninterest expense for the Corporate unit increased by $914 thousand , or 7% , from 2018 , reflecting increases in salaries and employee benefits expense.

Lower interest income on securities, resulting from a decline in average balances of securities and lower yields on securities, was partially offset by lower wholesale funding costs.

The decline in net interest income for the Corporate unit reflected unfavorable net funds transfer pricing allocations with the Commercial Banking segment as the downward repricing of assets occurred at a faster pace than the repricing of liabilities.

Noninterest expense for the Corporate unit increased by $2.8 million, or 20%, from 2019.

Included in noninterest expense in 2020 was debt prepayment penalty expense of $1.4 million.

There was no such expense incurred in 2019.

Management's Discussion and Analysis

Excluding the debt prepayment penalty expense, the remaining increase in noninterest expense from 2019 included increases in salaries and benefits, legal and other professional fees and outsourced services.

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

Financial Condition

The following table presents selected financial condition data:

(Dollars in thousands)

(Dollars in thousands) Change

December 31, 2020 2019 $ %

Cash and due from banks $194,143 $132,193 $61,950 47 %

Total securities 894,571 899,490 (4,919) (1)

Allowance for loan losses

Total loans 4,195,990 3,892,999 302,991 8

Allowance for credit losses on loans 44,106 27,014 17,092 63

Total assets 5,713,169 5,292,659 420,510 8

Total deposits 4,378,353 3,498,882 879,471 25

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Total assets amounted to $5.7 billion at December 31, 2020, up by $420.5 million, or 8%, from the end of 2019.

Included in the increase in total assets was the recognition of operating lease right-of-use assets totaling $28.9 million due to the adoption of ASU 2016-02 on January 1, 2019 as disclosed in Note 2 to the Consolidated Financial Statements.

The remaining increase in total assets reflected increases in total loans and the balance of cash and due from banks, partially offset by a decrease in total securities.

The increase in cash and due from banks was largely due to increased levels of cash collateral pledged to derivative counterparties.

This reflected growth in total loans and an increase in the balance of cash and due from banks.

The cash and due from banks balance rose largely due to increased levels of cash collateral pledged to derivative counterparties.

See Note 14 to the Consolidated Financial Statements for additional disclosure regarding derivative financial instruments.

Total deposits decreased by $25.2 million , or 1% , and FHLB advances increased by $190.7 million , or 20% , from December 31, 2018 .

Shareholders’ equity amounted to $503.5 million at December 31, 2019 , up by $55.3 million , or 12% , from the balance at the end of 2018 .

As of December 31, 2019 , the Bancorp and the Bank were “well capitalized.” See Note 12 to the Consolidated Financial Statements for additional discussion on regulatory capital requirements.

The ACL on loans increased by $17.1 million, or 63%, from the end of 2019.

This largely reflected the adoption of the ASC 326 effective January 1, 2020 and the estimated impact of the COVID-19 pandemic.

See additional disclosure in the Asset Quality section under the caption “Allowance for credit losses on loans.”

Total deposits increased by $879.5 million, or 25%, reflecting increases in both in-market deposits and wholesale brokered time deposits.

FHLB advances decreased by $547.6 million, or 48%, from December 31, 2019.

Shareholders’ equity amounted to $534.2 million at December 31, 2020, up by $30.7 million, or 6%, from the balance at December 31, 2019.

I nvestment security activity is monitored by the Investment Committee, the members of which also sit on the Asset/Liability Committee (“ALCO”).

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Securities are designated as either available for sale, held to maturity or trading at the time of purchase.

The Corporation has not maintained a portfolio of trading securities.

The Corporation does does not maintain a portfolio of trading securities.

As of December 31, 2020 and December 31, 2019, the Corporation did not have securities designated as held to maturity.

Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements.

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

Debt securities held to maturity are reported at amortized cost.

Management's Discussion and Analysis

Determination of Fair Value

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Management also reviews the prices provided by the independent pricing service for reasonableness based upon current trading levels for similar securities.

If the prices appear unusual, they are re-examined and the value is either confirmed

Management's Discussion and Analysis

If the prices appear unusual, they are re-examined and the value is either confirmed or revised.

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

As of December 31, 2019 and 2018 , the management did not make any adjustments to the prices provided by the pricing service.

As of December 31, 2020 and 2019, management did not make any adjustments to the prices provided by the pricing service.

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

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(Dollars in thousands)

December 31, 2020 2019 2018

Amount % Amount % Amount %

Available for Sale Debt Securities:

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government-sponsored enterprises

$131,669 15 % $157,648 18 % $242,683 26 %

Mortgage-backed securities issued by U.S.

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government-sponsored enterprises

740,305 83 719,080 80 660,793 72

Obligations of states and political subdivisions — — — — 937 —

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(Dollars in thousands)

December 31, 2020 2019 2018

Amount % Amount % Amount %

Held to Maturity Debt Securities:

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government-sponsored enterprises

$— — % $— — % $10,415 100 %

Total held to maturity debt securities $— — % $— — % $10,415 100 %

The decline in total securities was due to a higher level of principal pay-downs on mortgage-backed securities, and calls and maturities of debt securities in 2019 in response to the decline in market interest rates in the latter half of 2019.

As disclosed in Note 2 to the Consolidated Financial Statements, on January 1, 2019, the Corporation adopted the provisions of ASU 2017-12.

As permitted by ASU 2017-12, debt securities classified as held to maturity with an amortized cost of $10.4 million and a fair value of $10.3 million were reclassified to available for sale upon the adoption date.

The securities portfolio stood at $894.6 million as of December 31, 2020, or 16% of total assets, compared to $899.5 million as of December 31, 2019, or 17% or total assets.

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government-sponsored enterprises.

As of December 31, 2019 the net unrealized gain position on securities available for sale amounted to $4.2 million compared to a net unrealized loss position of $22.0 million on securities available for sale and held to maturity as of December 31, 2018 .

These net positions included gross unrealized losses of $4.9 million and $24.4 million , respectively, as of December 31, 2019 and December 31, 2018 .

The decrease in gross unrealized losses in 2019 was primarily concentrated in obligations of U.S.

government agencies and U.S.

government-sponsored enterprises, including mortgage-

As of December 31, 2020, the net unrealized gain position on available for sale debt securities amounted to $13.0 million, compared to $4.2 million as of December 31, 2019.

These net positions included gross unrealized losses of $2.6 million and $4.9 million, respectively, of as December 31, 2020 and December 31, 2019.

Management's Discussion and Analysis

backed securities, and largely attributable to relative changes in interest rates since the time of purchase.

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

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Yields on tax- exempt obligations are not computed on a tax equivalent basis.

(Dollars in thousands)

December 31, 2019

Within 1 Year

After 10 Years

(Dollars in thousands) December 31, 2020

Within 1 Year 1-5 Years 5-10 Years After 10 Years Totals

Available for Sale Debt Securities:

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Amortized cost

$806 $41,896 $88,484 $— $131,186

Weighted average yield

2.15 % 2.58 % 1.30 % — % 1.72 %

Mortgage-backed securities issued by U.S.

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Amortized cost

128,165 308,963 172,044 116,718 725,890

Weighted average yield

2.49 2.34 2.13 1.71 2.22

Individual name issuer trust preferred debt securities:

Amortized cost

— — 13,341 — 13,341

Weighted average yield

— — 0.82 — 0.82

Corporate bonds:

Amortized cost

— — 3,279 7,874 11,153

Weighted average yield

— — 0.84 1.34 1.19

Total available for sale debt securities:

Amortized cost

$128,971 $350,859 $277,148 $124,592 $881,570

Weighted average yield

2.49 % 2.37 % 1.79 % 1.69 % 2.11 %

Fair value $131,519 $357,148 $279,859 $126,045 $894,571

Federal Home Loan Bank Stock

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Based on the capital adequacy and the liquidity position of the FHLB, management believes there is no impairment related to the carrying amount of its FHLB stock as of December 31, 2020.

Total loans amounted to $3.9 billion at December 31, 2019 , up by $212.6 million , or 6% , from the end of 2018 , largely due to increases in the commercial and residential real estate loan portfolios.

Total loans amounted to $4.2 billion at December 31, 2020, up by $303.0 million, or 8%, from the end of 2019, largely due to originations of PPP loans within the commercial and industrial portfolio.

Management's Discussion and Analysis

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(Dollars in thousands)

December 31, 2020 2019 2018 2017 2016

Amount % Amount % Amount % Amount % Amount %

Commercial real estate (1)

$1,633,024 39 % $1,547,572 40 % $1,392,408 38 % $1,210,495 36 % $1,195,557 37 %

Commercial & industrial (2)

817,408 19 585,289 15 620,704 17 612,334 18 576,109 18

Total commercial 2,450,432 58 2,132,861 55 2,013,112 55 1,822,829 54 1,771,666 55

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Residential real estate (3)

1,467,312 35 1,449,090 37 1,360,387 37 1,227,248 36 1,122,748 35

259,185 6 290,874 7 280,626 8 292,467 9 301,472 9

19,061 1 20,174 1 26,235 — 31,527 1 38,485 1

Total consumer 278,246 7 311,048 8 306,861 8 323,994 10 339,957 10

Commercial real estate (“CRE”) consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans.

Total loans $4,195,990 100 % $3,892,999 100 % $3,680,360 100 % $3,374,071 100 % $3,234,371 100 %

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

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

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

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

C&I also includes PPP loans.

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

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An analysis of the maturity and interest rate sensitivity of the Corporation’s loan portfolio as of December 31, 2020 follows:

(Dollars in thousands)

Total Commercial

Residential Real Estate (2)

Total Consumer

(Dollars in thousands) Commercial Consumer

C&I Total Commercial Residential Real Estate (2)

Home Equity Other Total Consumer Total

Amounts due in:

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After five years 618,647 241,800 860,447 1,257,272 243,877 6,876 250,753 2,368,472

Total $1,633,024 $817,408 $2,450,432 $1,467,312 $259,185 $19,061 $278,246 $4,195,990

Interest rate terms on amounts due after one year:

Predetermined rates

$136,034 $372,118 $508,152 $379,803 $26,234 $14,709 $40,943 $928,898

Variable or adjustable rates

1,256,420 325,874 1,582,294 1,048,398 229,522 1,763 231,285 2,861,977

(1) Includes construction and development loans that will convert to repayment terms following the construction period and will be reclassified to either the commercial real estate or commercial & industrial category.

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

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

Management's Discussion and Analysis

contractually due in any particular period.

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

Management's Discussion and Analysis

Washington Trust continues to work with and support our customers experiencing financial difficulty due to the COVID-19 pandemic.

In 2020, we executed loan payment deferral modifications on 636 loans totaling $717.4 million.

The majority of these modifications qualified as eligible loan modifications under Section 4013 of the CARES Act, as amended, and therefore, were not required to be classified as TDRs and were not reported as past due.

As of December 31, 2020, we have active loan payment deferment modifications, or “deferments”, on 136 loans totaling $244.7 million, or 6% of total loans excluding PPP loans.

As of February 19, 2021, we have active deferments on 92 loans totaling $185.9 million, or 5% of the balance of total loans excluding PPP loans at December 31, 2020.

Management continues to actively monitor the deferments and loan portfolios in certain industry segments that it considers “at risk” of significant impact.

Deferment extensions are prudently underwritten and have resulted in loan risk rating downgrades when warranted.

Management considers deferments when estimating the ACL.

Loss exposure within these industries is mitigated by a number of factors such as collateral values, LTV ratios, and other key indicators, however, some degree of credit loss is expected and has been incorporated into the allowance for credit loss recognition under the CECL accounting methodology.

Commercial Loans

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

Our participation in commercial loans originated by other banks amounted to $399.7 million at December 31, 2019 , compared to $406.4 million at December 31, 2018 .

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

Shared national credits are defined as participations in loans or loan commitments of at least $100.0 million that are shared by three or more banks.

Our participation in commercial loans originated by other banks amounted to $408.8 million and $399.7 million, respectively, at December 31, 2020 and December 31, 2019.

Our participation in commercial loans originated by other banks also includes shared national credits, which are defined as participation in loans or loan commitments of at least $100 million that are shared by three or more banks.

Commercial loans fall into two major categories, commercial real estate and commercial and industrial loans.

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Commercial and industrial loans are frequently collateralized by equipment, inventory, accounts receivable, and/or general business assets.

A significant portion of the Bank’s commercial and industrial loans is also collateralized by real estate.

Commercial and industrial 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.

A portion of the Bank’s commercial and industrial loans is also collateralized by real estate.

Commercial and industrial loans also include PPP loans that are fully guaranteed by the U.S.

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

Commercial Real Estate Loans

Commercial real estate loans totaled $1.5 billion at December 31, 2019 , up by $155.2 million , or 11% , from the balance at December 31, 2018 .

Included in commercial real estate loans were construction and development loans of $211.5 million and $190.9 million , respectively, as of December 31, 2019 and 2018 .

In 2019 , commercial real estate loan originations and advances totaled approximately $355 million, which were partially offset by payoffs and paydowns.

Commercial real estate loans are secured by a variety of property types, with approximately 90% of the total at December 31, 2019 composed of multi-family dwellings, retail facilities, office buildings, lodging, healthcare facilities, industrial and warehouse and commercial mixed use properties.

The average loan balance outstanding in this portfolio was $3.1 million and the largest individual commercial real estate loan outstanding was $26.0 million as of December 31, 2019 .

The following table presents a geographic summary of commercial real estate loans, including commercial construction, by property location.

(Dollars in thousands)

December 31, 2019

December 31, 2018

CRE loans totaled $1.6 billion at December 31, 2020, up by $85.5 million, or 6%, from the balance at December 31, 2019.

Included in CRE loans were construction and development loans of $111.2 million and $211.5 million, respectively, as of December 31, 2020 and December 31, 2019.

In 2020, CRE loan originations and advances totaled approximately $270 million, which were partially offset by payoffs and pay-downs.

Management's Discussion and Analysis

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

(Dollars in thousands) December 31, 2020 December 31, 2019

Outstanding Balance % of Total Outstanding Balance % of Total

Connecticut $649,919 40 % $616,484 40 %

Massachusetts 468,947 29 458,029 30

Rhode Island 431,133 26 394,929 25

Subtotal 1,549,999 95 1,469,442 95

All other states 83,025 5 78,130 5

Commercial and Industrial Loans

Commercial and industrial loans amounted to $585.3 million at December 31, 2019 , down by $35.4 million , or 6% , from the balance at December 31, 2018 .

In 2019 , payoffs, paydowns and lower line utilization were partially offset by approximately $64 million of loan originations and advances.

Total $1,633,024 100 % $1,547,572 100 %

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

(Dollars in thousands) December 31, 2020 December 31, 2019

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

CRE Portfolio Segmentation:

Multi-family dwelling 137 $524,874 32 % 123 $430,502 28 %

Retail 136 339,569 21 110 314,661 20

Office 73 290,756 18 78 294,910 19

Hospitality 40 157,720 10 32 128,867 8

Healthcare 15 109,321 7 16 110,409 7

Industrial and warehouse 28 97,055 6 25 82,432 5

Commercial mixed use 22 42,405 2 48 73,895 5

Other 38 71,324 4 70 111,896 8

Total CRE loans

489 $1,633,024 100 % 502 $1,547,572 100 %

Average CRE loan size

$3,340 $3,083

Largest individual CRE loan outstanding

$32,200 $25,962

The following table presents a summary of CRE loan deferments by industry segmentation:

(Dollars in thousands) February 19, 2021 December 31, 2020

Count Balance % of Outstanding Balance (1)

CRE Deferments by Segment:

Hospitality 14 $61,054 39 % 20 $83,073 53 %

Retail 3 20,600 6 5 39,781 12

Healthcare 1 18,307 17 2 22,305 20

Office 1 1,833 1 2 2,457 1

Commercial mixed use — — — 1 637 2

Multi-family dwelling — — — 1 364 —

Other 7 27,786 39 7 27,785 39

Total CRE deferments

26 $129,580 8 % 38 $176,402 11 %

(1) Percent of respective outstanding portfolio segment balance as of December 31, 2020.

Management's Discussion and Analysis

Shared national credit balances outstanding included in the commercial and industrial loan portfolio totaled $52.3 million at December 31, 2019 .

As of February 19, 2021, we have active deferments on 26 CRE loans totaling $129.6 million, which represented 8% of the total CRE portfolio at December 31, 2020.

While various industries have and will continue to experience adverse effects as a result of the COVID-19 pandemic, management currently considers the following CRE industry segments to be “at-risk” of significant impact:

• The retail segment consisted of 136 loans with balances totaling $339.6 million at December 31, 2020, representing 21% of the total CRE portfolio.

Our retail properties generally have single tenant drugstores or strong anchor tenants, often national grocery store chains.

At February 19, 2021, we have active deferments on 3 retail loans totaling $20.6 million, which represented 6% of this segment’s balance at December 31, 2020.

• The hospitality segment consisted of 40 loans with balances totaling $157.7 million at December 31, 2020, representing 10% of the total CRE portfolio.

We generally underwrite this segment at an LTV of 65% or less.

Our hospitality properties are largely limited service properties with no restaurants and limited meeting space.

This segment also includes leisure travel properties that are located on the New England coastline.

At February 19, 2021, we have active deferments on 14 hospitality loans totaling $61.1 million, which represented 39% of this segment’s balance at December 31, 2020.

• The healthcare segment consisted of 15 loans with balances totaling $109.3 million at December 31, 2020, representing 7% of the total CRE portfolio.

This segment is composed of assisted living, nursing homes and continuing care retirement communities.

At February 19, 2021, we have an active deferment on 1 healthcare loan of $18.3 million, which represented 17% of this segment’s balance at December 31, 2020.

Commercial and Industrial Loans

C&I loans amounted to $817.4 million at December 31, 2020, up by $232.1 million, or 40%, from the balance at December 31, 2019.

In 2020, C&I loan originations amounted to $302 million and were concentrated in PPP loans.

Originations were partially offset by payoffs and pay-downs, including $18 million of PPP loans that were forgiven by the SBA.

As of December 31, 2020, there were 1,706 PPP loans with a carrying value of $199.8 million included in the C&I portfolio.

The average PPP loan size was $117 thousand.

Net unamortized loan origination fees on PPP loans amounted to $3.9 million at December 31, 2020.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $43.8 million at December 31, 2020.

All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at December 31, 2020.

The commercial and industrial portfolio includes loans to a variety of business types, with approximately 90% of the total at December 31, 2019 composed of loans to business sectors such as health care/social assistance, educational services, manufacturing, owner-occupied and other real estate, retail trade, professional, scientific and technical, entertainment and recreation, finance and insurance, other services, public administration, transportation and warehousing.

The average loan balance outstanding in this portfolio was $636 thousand and the largest individual commercial and industrial loan outstanding was $19.0 million as of December 31, 2019 .

Management's Discussion and Analysis

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

(Dollars in thousands) December 31, 2020 December 31, 2019

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

C&I Portfolio Segmentation:

Healthcare and social assistance 253 $200,217 24 % 86 $138,857 24 %

Manufacturing 146 88,802 11 65 53,561 9

Owner occupied and other real estate 268 74,309 9 157 46,033 8

Educational services 53 64,969 8 22 56,556 10

Retail 192 63,895 8 75 43,386 7

Accommodation and food services 271 47,020 6 64 16,562 3

Professional, scientific and technical

265 39,295 5 66 37,599 6

Entertainment and recreation

91 29,415 4 35 30,807 5

32 28,394 3 11 22,162 4

Finance and insurance

106 26,244 3 57 28,501 5

Transportation and warehousing

42 24,061 3 23 20,960 4

Public administration

26 23,319 3 23 25,107 4

772 107,468 13 225 65,198 11

Total C&I loans

2,517 $817,408 100 % 909 $585,289 100 %

Average C&I loan size

Largest individual C&I loan outstanding

$19,500 $19,001

The C&I portfolio as of December 31, 2020 included PPP loans.

The following table presents a summary of PPP loans by industry segmentation:

(Dollars in thousands) December 31, 2020

Count Outstanding Balance % of Total

PPP Loans by Segment:

Healthcare and social assistance 173 $47,354 24 %

Accommodation and food services 209 23,678 12

Manufacturing 89 23,321 12

Professional, scientific and technical

220 20,031 10

Retail 134 12,107 6

Educational services 32 9,681 5

Owner occupied and other real estate 115 9,241 5

Entertainment and recreation

Finance and insurance

Transportation and warehousing

Public administration

573 43,961 21

Total PPP loans (included in the C&I loan portfolio)

1,706 $199,780 100 %

As PPP loans are forgiven by the SBA, unamortized net fee balances are accelerated and amortized into net interest income.

In 2020, $18.0 million of PPP loans were forgiven by the SBA and as a result, acceleration of net fee

Management's Discussion and Analysis

balances of $423 thousand was included in interest income in 2020.

From January 1, 2021 through February 19, 2021, additional PPP loans with principal balances totaling $26.7 million were forgiven by the SBA and as a result, acceleration of net fee balances of $521 thousand was included in interest income in 2021.

Also in January 2021, Washington Trust began participating in PPP-2.

As of February 19, 2021, we have originated 706 PPP-2 loans with principal balances totaling $67.8 million.

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

(Dollars in thousands) February 19, 2021 December 31, 2020

Count Balance % of Outstanding Balance, excl PPP loans (1)

C&I Deferments by Segment:

Healthcare and social assistance 5 $19,774 13 % 5 $19,620 13 %

Accommodation and food services

1 2,836 12 2 2,889 12

Transportation and warehousing

4 1,120 5 4 1,120 5

Manufacturing 2 947 1 2 947 1

Entertainment and recreation

3 554 2 3 560 2

Owner occupied and other real estate 1 326 1 1 326 1

4 7,623 12 4 7,673 12

Total C&I deferments

20 $33,180 5 % 21 $33,135 5 %

(1) Percent of respective outstanding portfolio segment balance, excluding PPP loans, as of December 31, 2020.

As of February 19, 2021, we have active deferments on 20 C&I loans totaling $33.2 million, which represented 5% of the total C&I portfolio (excluding PPP loans) at December 31, 2020.

Healthcare and social assistance totaled $200.2 million as of December 31, 2020 and is our largest single C&I industry segment, representing 24% of the total C&I portfolio.

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

At February 19, 2021, we have active deferments on 5 healthcare and social assistance loans of $19.8 million, which represented 13% of this industry segment’s balances (excluding PPP loans) as of December 31, 2020.

It is possible that there will be further disruption in this industry segment.

While various industries have and will continue to experience adverse effects as a result of the COVID-19 pandemic, management currently considers the following C&I industry segments to be “at-risk” of significant impact:

• The accommodation and food services industry segment consisted of 271 loans with balances totaling $47.0 million as of December 31, 2020, representing 6% of the total C&I portfolio.

At February 19, 2021, we have an active deferment on 1 accommodation and food services loan of $2.8 million, which represented 12% of this industry segment’s balance (excluding PPP loans) at December 31, 2020.

The deferment was executed for a restaurant.

• The entertainment and recreation industry segment consisted of 91 loans with balances totaling $29.4 million as of December 31, 2020, representing 4% of the total C&I portfolio.

This industry segment consists largely of golf courses and marinas.

At February 19, 2021, we have active deferments on 3 entertainment and recreation industry loans totaling $554 thousand, which represented 2% of this industry segment’s balance (excluding PPP loans) at December 31, 2020.

The deferments were executed for a gym and a recreational facility.

Residential Real Estate Loans

The residential real estate loan portfolio represented 35% of total loans at December 31, 2020.

Management's Discussion and Analysis

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

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Years ended December 31, 2020 2019

Amount % of Total Amount % of Total

Originations for retention in portfolio (1)

$502,120 30 % $347,390 37 %

Originations for sale to the secondary market (2)

Includes brokered loan (loans originated for others).

1,171,906 70 598,103 63

Total $1,674,026 100 % $945,493 100 %

(1) Includes the full commitment amount of homeowner construction loans.

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

The table below presents residential real estate loan sales activity:

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Years ended December 31, 2020 2019

Amount % of Total Amount % of Total

Loans sold with servicing rights retained $849,467 75 % $96,160 16 %

Loans sold with servicing rights released (1)

Includes brokered loan (loans originated for others).

290,294 25 495,012 84

Total $1,139,761 100 % $591,172 100 %

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

Residential real estate loan origination, refinancing and sales activity increased year-over-year in response to declines in market interest rates.

Loans are sold with servicing retained or released.

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The net balance of capitalized servicing rights amounted to $7.4 million and $3.5 million, respectively, as of December 31, 2020 and 2019.

The balance of residential mortgage loans serviced for others, which are not included in the Consolidated Balance Sheets, amounted to $587.0 million and $588.5 million , respectively, as of December 31, 2019 and 2018 .

The balance of residential mortgage loans serviced for others, which are not included in the Consolidated Balance Sheets, amounted to $1.2 billion and $587.0 million, respectively, as of December 31, 2020 and 2019.

Residential real estate loans held in portfolio amounted to $1.5 billion at December 31, 2020, up by $18.2 million, or 1%, from the balance at December 31, 2019.

During 2019, the Corporation purchased $60.6 million of residential real estate mortgage loans from other financial institutions.

These purchases were concentrated in the fourth quarter of 2019 and the loans were individually evaluated to Washington Trust’s underwriting standards and are predominantly secured by

In 2020, Washington Trust purchased $51.1 million of residential real estate mortgage loans with a weighted average yield of 3.38% from another financial institution.

These loans were individually evaluated to Washington Trust’s underwriting standards and predominantly secured by properties in Massachusetts.

Management's Discussion and Analysis

properties located in Massachusetts.

While year over year total residential loan origination volumes were higher, a lower percentage of them were originated for retention in portfolio during 2019 , compared to 2018 .

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

(Dollars in thousands)

December 31, 2019

December 31, 2018

(Dollars in thousands) December 31, 2020 December 31, 2019

Amount % of Total Amount % of Total

Massachusetts

$994,800 68 % $932,726 64 %

Rhode Island 331,713 23 356,392 25

122,102 8 140,574 10

Subtotal 1,448,615 99 1,429,692 99

All other states 18,697 1 19,398 1

Includes residential mortgage loans purchased from other financial institutions totaling $151.8 million and $112.9 million , respectively, as of December 31, 2019 and 2018 .

$1,467,312 100 % $1,449,090 100 %

(1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $131.8 million and $151.8 million, respectively, as of December 31, 2020 and 2019.

As of February 19, 2021, we have active deferments on 39 residential real estate loans totaling $22.4 million, which represented 2% of the total residential real estate portfolio balance as of December 31, 2020.

The average size of residential real estate loans with active deferments as of February 19, 2021 was approximately $574 thousand and these loans have an estimated LTV ratio of 54%.

Consumer Loans

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

The consumer loan portfolio totaled $311.0 million at December 31, 2019 , up by $4.2 million , or 1% , from December 31, 2018 .

Home equity lines and home equity loans represented 94% of the total consumer portfolio at December 31, 2019 .

The Bank estimates that approximately 65% of the combined home equity line and home equity loan balances are first lien positions or subordinate to other Washington Trust mortgages.

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $12.8 million and $17.6 million , respectively, at December 31, 2019 and 2018 .

The consumer loan portfolio totaled $278.2 million at December 31, 2020, down by $32.8 million, or 11%, from December 31, 2019.

Home equity lines of credit and home equity loans represented 93% of the total consumer portfolio at December 31, 2020.

The Bank estimates that approximately 60% of the combined home equity lines of credit and home equity loan balances are first lien positions or subordinate to other Washington Trust mortgages.

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $10.0 million and $12.8 million, respectively, at December 31, 2020 and December 31, 2019.

As of February 19, 2021, we have active deferments on 7 consumer loans totaling $738 thousand, which represented 0.3% of the total consumer portfolio balance as of December 31, 2020.

Investment in Bank-Owned Life Insurance

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

The Audit Committee oversees various systems and procedures performed by management for monitoring the credit quality of the loan portfolio, conducting a loan review program, maintaining the integrity of the loan rating system and determining the adequacy of the allowance for loan losses.

The Audit Committee also approves the policy and methodology for establishing the allowance for loan losses.

These committees report the results of their respective oversight functions to the Board of Directors.

The Audit Committee oversees various systems and procedures performed by management for monitoring the credit quality of the loan portfolio, conducting a credit review program, maintaining the integrity of the loan rating system and determining the adequacy of the ACL.

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

These committees report the results of their respective oversight functions to

Management's Discussion and Analysis

the Board of Directors.

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

Nonperforming Assets

Nonperforming assets include nonaccrual loans and property acquired through foreclosure or repossession.

Management's Discussion and Analysis

Nonperforming assets include nonaccrual loans and property acquired through foreclosure or repossession (“OREO”).

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

(Dollars in thousands)

December 31, 2020 2019 2018 2017 2016

Commercial real estate

$— $603 $925 $4,954 $7,811

Commercial & industrial

— 657 — 283 1,337

Total commercial

— 1,260 925 5,237 9,148

Residential Real Estate:

Residential real estate

11,981 14,297 9,346 9,414 11,736

1,128 1,763 1,436 544 1,058

88 88 — 16 116

Total consumer

1,216 1,851 1,436 560 1,174

Total nonaccrual loans 13,197 17,408 11,707 15,211 22,058

Property acquired through foreclosure or repossession, net

— 1,109 2,142 131 1,075

Total nonperforming assets $13,197 $18,517 $13,849 $15,342 $23,133

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

Total nonperforming assets increased by $4.7 million from December 31, 2018 .

This included a net increase of $5.0 million in nonaccrual residential real estate loans and a decrease of $1.0 million in property acquired through foreclosure.

At December 31, 2019 , property acquired through foreclosure consisted of one commercial property.

Total nonperforming assets decreased by $5.3 million from December 31, 2019.

This included a $4.2 million decrease in nonaccrual loans and a $1.1 million decrease in OREO.

The decrease in OREO reflected sales of three properties essentially at their carrying value during 2020.

At December 31, 2020, there were no properties held in OREO.

Nonaccrual Loans

During 2019 , the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.

In addition, there were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2019 .

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

Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection.

Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful.

When loans are placed on nonaccrual status, interest previously accrued but not collected is reversed against current period income.

Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income, depending on management’s assessment of the ultimate collectability of the loan.

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

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

Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $1.2 million in 2019 , compared to $759 thousand in 2018 .

During 2020, 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 $844 thousand in 2020, compared to $1.2 million in 2019.

Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $416 thousand and $516 thousand, respectively, in 2020 and 2019.

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The following table presents additional detail on nonaccrual loans:

(Dollars in thousands)

December 31, 2019

December 31, 2018

Days Past Due

(Dollars in thousands) December 31, 2020 December 31, 2019

Days Past Due Days Past Due

Over 90 Under 90 Total % (1)

Commercial real estate

$— $— $— — % $603 $— $603 0.04 %

Commercial & industrial

— — — — — 657 657 0.11

Total commercial

— — — — 603 657 1,260 0.06

Residential Real Estate:

Residential real estate

5,172 6,809 11,981 0.82 4,700 9,597 14,297 0.99

Home equity 644 484 1,128 0.44 996 767 1,763 0.61

Other 88 — 88 0.46 88 — 88 0.44

Total consumer 732 484 1,216 0.44 1,084 767 1,851 0.60

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As of December 31, 2020, the composition of nonaccrual loans was 100% residential and consumer and 0% commercial, compared to 93% and 7%, respectively, as of December 31, 2019.

Total nonaccrual loans increased by $5.7 million from the end of 2018 , largely due to an increase in nonaccrual residential real estate mortgage loans.

Nonaccrual residential real estate mortgage loans amounted to $14.3 million at December 31, 2019 , up by $5.0 million from the end of 2018 .

Nonaccrual residential real estate mortgage loans amounted to $12.0 million at December 31, 2020, down by $2.3 million from the end of 2019.

As of December 31, 2020, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Rhode Island and Connecticut.

Included in total nonaccrual residential real estate loans at December 31, 2019 were five loans purchased for portfolio and serviced by others amounting to $1.5 million.

Included in total nonaccrual residential real estate loans at December 31, 2020 were four loans purchased for portfolio and serviced by others amounting to $1.3 million.

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

Troubled Debt Restructurings

Loans are considered restructured in a troubled debt restructuring when the Corporation has granted concessions, that it otherwise would not have considered, to a borrower experiencing financial difficulties.

These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest.

The decision to restructure a loan,

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

A loan that has been modified or renewed is considered to be a TDR when two conditions are met:

1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or a transaction with similar credit risk characteristics.

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

Management's Discussion and Analysis

versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection.

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan.

TDRs are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan.

Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status.

Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.

Troubled debt restructurings are reported as such for at least one year from the date of the restructuring.

In years after the restructuring, troubled debt restructured loans are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement.

TDRs are reported as such for at least one year from the date of the restructuring.

In years after the restructuring, TDRs are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is performing in accordance with their modified contractual terms for a reasonable period of time.

As of December 31, 2020, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

The following table sets forth information on troubled debt restructured loans as of the dates indicated.

The amounts below consist of unpaid principal balance, net of partial charge-offs and unamortized deferred loan origination fees and costs.

See Note 5 to the Consolidated Financial Statements for disclosure regarding the Corporation’s election to account for eligible loan modifications under Section 4013 of the CARES Act, as amended.

Loan modifications that did not qualify for the TDR accounting relief provided under the CARES Act were classified as TDRs.

The following table sets forth information on TDRs as of the dates indicated.

The amounts below consist of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs.

Accrued interest is not included in the carrying amounts set forth below.

See Note 5 to the Consolidated Financial Statements for additional information.

(Dollars in thousands)

Accruing troubled debt restructured loans

Nonaccrual troubled debt restructured loans

Total troubled debt restructured loans

Total troubled debt restructured loans decreased by $4.8 million from the end of 2018 , due to the payoff of one accruing commercial and industrial loan that occurred in the second quarter of 2019.

The allowance for loan losses included specific reserves for troubled debt restructurings of $97 thousand and $103 thousand , respectively, at December 31, 2019 and 2018 .

(Dollars in thousands) December 31, 2020 December 31, 2019

Count Amount Count Amount

Accruing TDRs

Commercial real estate

3 $1,792 — $—

Commercial & industrial

Total commercial

Residential Real Estate:

Residential real estate

8 3,932 1 358

Total consumer

Accruing TDRs 20 13,340 2 376

Nonaccrual TDRs

Residential Real Estate:

Residential real estate

5 2,273 3 492

Total consumer

Nonaccrual TDRs 6 2,345 3 492

Total TDRs 26 $15,685 5 $868

TDRs amounted to $15.7 million, up by $14.8 million from the end of 2019.

As of December 31, 2020, the composition of TDRs was 55% commercial and 45% residential and consumer, compared to 0% and 100%, respectively, as of December 31, 2019.

Management's Discussion and Analysis

The ACL included specific reserves for TDRs of $159 thousand and $97 thousand, respectively, at December 31, 2020 and 2019.

Past Due Loans

1 unchanged sentence

(Dollars in thousands)

December 31, 2020 2019

Commercial real estate

$265 0.02 % $1,433 0.09 %

Commercial & industrial

Total commercial

268 0.01 1,434 0.07

Residential Real Estate:

Residential real estate

10,339 0.70 11,429 0.79

1,667 0.64 2,696 0.93

118 0.62 130 0.64

Total consumer

1,785 0.64 2,826 0.91

Total past due loans $12,392 0.30 % $15,689 0.40 %

1 unchanged sentence

As of December 31, 2020, the composition of past due loans (loans past due 30 days or more) was 98% residential and consumer and 2% commercial, compared to 91% and 9%, respectively, at December 31, 2019.

Total past due loans increased by $2.1 million from the end of 2018 , with increases of $909 thousand in residential real estate loans, $804 thousand in consumer loans and $354 thousand in commercial loans.

Total past due loans decreased by $3.3 million from the end of 2019.

Total past due loans included $8.5 million of nonaccrual loans as of December 31, 2020, compared to $11.5 million of as of December 31, 2019.

2 unchanged sentences

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

Potential problem loans consist of classified accruing commercial loans that were less than 90 days past due at December 31, 2019 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future.

These loans are not included in the amounts of nonaccrual or restructured loans presented above.

Management cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans.

Potential problem loans include classified accruing commercial loans that were less than 90 days past due at December 31, 2020 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future.

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

They are assessed for loss exposure using the methods described in Note 5 to the Consolidated Financial Statements under the caption “Credit Quality Indicators.” Management cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans.

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

Management has identified approximately $10.3 million in potential problem loans at December 31, 2019 , compared to $14.9 million at December 31, 2018 .

As of December 31, 2019 , substantially all of the balance of potential problem loans consisted of three commercial relationships.

At December 31, 2019 , these three commercial relationships were all current with respect to payment terms.

Potential problem loans are assessed for loss exposure using the methods described in Note 5 to the Consolidated Financial Statements under the caption “Credit Quality Indicators.”

Allowance for Loan Losses

Establishing an appropriate level of allowance for loan losses necessarily involves a high degree of judgment.

The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient allowance for loan losses.

See additional discussion regarding the allowance for loan losses under the caption “Critical Accounting Policies and Estimates” and in Note 6 to the Consolidated Financial Statements.

There were no potential problem loans at December 31, 2020, compared to $6.4 million in potential problem loans at September 30, 2020.

The balance of potential problem loans at September 30, 2020 consisted of two commercial and industrial loan relationships.

In the fourth quarter of 2020, the loans were restructured and classified as TDRs.

Management's Discussion and Analysis

The allowance for loan losses is management’s best estimate of probable incurred losses inherent in the loan portfolio as of the balance sheet date.

The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged-off, and is reduced by charge-offs on loans.

The status of nonaccrual loans, past due loans and performing loans were all taken into consideration in the assessment of the adequacy of the allowance for loans losses.

In addition, the balance and trends of credit quality indicators, including the commercial loan categories of Pass, Special Mention and Classified, are integrated into the process used to determine the allocation of loss exposure.

See Note 5 to the Consolidated Financial Statements under the caption “Credit Quality Indicators” for additional information.

Management believes that the level of allowance for loan losses at December 31, 2019 is adequate and consistent with asset quality and credit quality indicators.

Management will continue to assess the adequacy of the allowance for loan losses in accordance with its established policies.

In addition and as a result of the COVID-19 pandemic, management has also enhanced monitoring of loan portfolios in certain industry segments that have been or could be potentially be “at-risk” of significant impact.

See additional disclosure under the caption “ Commercial Loans” within the Financial Condition section.

Allowance for Credit Losses on Loans

The ACL on loans is management’s estimated valuation allowance at each reporting date in accordance with GAAP.

The ACL on loans is increased through a provision for credit losses recognized in the Consolidated Statements of Income and by recoveries of amounts previously charged-off.

The ACL on loans is reduced by charge-offs on loans.

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

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

The Corporation does not recognize a recovery when an updated appraisal indicates 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.

Updates to appraisals are generally obtained for troubled or nonaccrual loans or when management believes it is warranted.

Updates to appraisals are generally obtained for TDRs or 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 estimation of loan loss exposure inherent in the loan portfolio includes, among other procedures, the identification of loss allocations for individual loans deemed to be impaired;

and the application of loss allocation factors for non-impaired loans based on historical loss experience and estimated loss emergence period, with adjustments for various exposures that management believes are not adequately represented by historical loss experience.

See additional disclosure under the caption “Critical Accounting Policies.”

Impaired loans include nonaccrual loans and loans restructured in a troubled debt restructuring.

The following is a summary of impaired loans by measurement type:

(Dollars in thousands)

Collateral dependent impaired loans (1)

Impaired loans measured on discounted cash flow method (2)

Total impaired loans

Net of partial charge-offs of $911 thousand and $289 thousand , respectively, at December 31, 2019 and 2018 .

Net of partial charge-offs of $285 thousand and $85 thousand , respectively, at December 31, 2019 and 2018 .

Various loan loss allowance coverage ratios are affected by the timing and extent of charge-offs, particularly with respect to impaired collateral dependent loans.

For such loans, the Bank generally recognizes a partial charge-off equal to the identified loss exposure;

therefore, the remaining allocation of loss is minimal.

Effective January 1, 2020, the ACL on loans is management’s estimate of expected credit losses over the expected life of the loans at the reporting date.

Prior to January 1, 2020, the ACL was management’s estimate of the risk of loss inherent in the loan portfolio as of the reporting date.

See additional discussion regarding the ACL on loans under the caption “Critical Accounting Policies and Estimates” and the adoption of ASC 326 in Note 2 to the Consolidated Financial Statements.

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

(Dollars in thousands) December 31, 2020 December 31, 2019

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

Individually analyzed loans $18,252 $379 2.08 % $17,783 $968 5.44 %

Pooled (collectively evaluated) loans 4,177,738 43,727 1.05 3,875,216 26,046 0.67

Total $4,195,990 $44,106 1.05 % $3,892,999 $27,014 0.69 %

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

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

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

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

In 2020, the ACL for individually analyzed loans was 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.

In 2020, the ACL for pooled loans was measured utilizing a DCF methodology to estimate credit losses for each pooled portfolio segment.

The methodology incorporates the probability of default and loss given default.

Management utilizes the national unemployment rate as an econometric factor with a one-year forecast period and

Management's Discussion and Analysis

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

one-year straight-line reversion period to its historical mean in order to estimate the probability of default for each loan portfolio segment.

Utilizing a third party regression model, the forecasted national unemployment rate is correlated with the probability of default for each loan portfolio segment.

The DCF methodology combines the probability of default, the loss given default, maturity date and prepayment speeds 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 $44.1 million at December 31, 2020, up by $17.1 million, or 63%, from the balance at December 31, 2019.

Upon adoption of ASC 326 on January 1, 2020, Washington Trust's ACL on loans increased by $6.5 million, or 24%.

Provisions for credit losses charged to earnings in 2020 and 2019 amounted to $12.3 million and $1.6 million, respectively.

In addition to the change in accounting methodology described above, the increase in the provision was attributable to anticipated losses related the COVID-19 pandemic and also reflected loan growth and changes in the underlying portfolio.

Net charge-offs totaled $1.1 million, or 0.03% of average loans, in 2020, compared to net charge-offs of $1.6 million, or 0.04% of average loans, in 2019.

The ACL on loans was 1.05% of total loans, at December 31, 2020, compared to 0.69% of total loans, at December 31, 2019.

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

Continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects will continue to affect the accounting for credit losses.

It also is possible that asset quality could worsen, expenses associated with collection efforts could increase and loan charge-offs could increase.

The following table presents the ACL on loans by portfolio segment.

(Dollars in thousands) December 31, 2020 December 31, 2019

Allocated ACL ACL to Loans Allocated ACL ACL to Loans

Commercial real estate $22,065 1.35 % $14,741 0.95 %

Commercial & industrial 12,228 1.50 3,921 0.67

Total commercial 34,293 1.40 18,662 0.87

Residential Real Estate:

Residential real estate 8,042 0.55 6,615 0.46

Home equity 1,300 0.50 1,390 0.48

Other 471 2.47 347 1.72

Total consumer 1,771 0.64 1,737 0.56

Total allowance for credit losses on loans at end of period $44,106 1.05 % $27,014 0.69 %

Management's Discussion and Analysis

The following table presents the allocation of the ACL on loans.

The allocation below is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of any future loss trends.

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

(Dollars in thousands)

December 31, 2020 2019 2018 2017 2016

December 31, 2018

Related Allowance

Allowance / Loans

Related Allowance

Allowance / Loans

Impaired loans individually evaluated for impairment

Loans collectively evaluated for impairment

A loan loss provision totaling $1.6 million was charged to earnings in both 2019 and 2018 .

These provisions were based on management's assessment of loss exposure, as well as loan loss allocations commensurate with growth and changes in the loan portfolio, including changes in asset quality and credit quality metrics.

Net charge-offs were $1.6 million , or 0.04% of average loans in 2019 , compared to $966 thousand , or 0.03% , of average loans in 2018 .

As of December 31, 2019 , the allowance for loan losses was $27.0 million , or 0.69% of total loans, compared to $27.1 million , or 0.74% of total loans, at December 31, 2018 .

The reduction in the overall ratio of the allowance for loan losses to total loans largely reflects a decrease in estimated loss exposure on loans collectively evaluated for impairment, as evidenced by improvement in commercial loan portfolio credit quality indicators.

See Note 5 the Consolidated Financial Statements.

Commercial real estate $22,065 39 % $14,741 40 % $15,381 38 % $12,729 36 % $11,166 37 %

Commercial & industrial 12,228 19 3,921 15 5,847 17 5,580 18 6,992 18

Total commercial 34,293 58 18,662 55 21,228 55 18,309 54 18,158 55

Residential Real Estate:

Residential real estate 8,042 35 6,615 37 3,987 37 5,427 36 5,252 35

Home Equity 1,300 6 1,390 7 1,603 8 2,412 9 1,889 9

Other 471 1 347 1 254 — 340 1 705 1

Total Consumer 1,771 7 1,737 8 1,857 8 2,752 10 2,594 10

Balance at end of period $44,106 100 % $27,014 100 % $27,072 100 % $26,488 100 % $26,004 100 %

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

Management's Discussion and Analysis

The following table reflects the activity in the allowance for loan losses during the years presented:

The following table reflects the activity in the ACL on loans during the years presented:

(Dollars in thousands)

December 31, 2020 2019 2018 2017 2016

Balance at beginning of period $27,014 $27,072 $26,488 $26,004 $27,069

Adoption of ASC 326 6,501 — — — —

Commercial real estate

356 1,028 627 1,867 5,816

Commercial & industrial

586 21 10 336 759

Total commercial

942 1,049 637 2,203 6,575

Residential real estate:

Residential real estate

99 486 250 74 200

224 390 193 79 147

52 95 107 106 90

Total consumer

276 485 300 185 237

Total charge-offs 1,317 2,020 1,187 2,462 7,012

Commercial real estate

51 125 25 82 56

Commercial & industrial

24 168 119 169 156

Total commercial

75 293 144 251 212

Residential real estate:

Residential real estate

20 — 21 39 11

52 72 29 33 37

25 22 27 23 37

Total consumer

77 94 56 56 74

Total recoveries 172 387 221 346 297

3 unchanged sentences

Net charge-offs to average loans 0.03 % 0.04 % 0.03 % 0.06 % 0.21 %

Management's Discussion and Analysis

The following table presents the allocation of the allowance for loan losses.

The allocation below is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of any future loss trends.

The total allowance is available to absorb losses from any segment of the loan portfolio.

(Dollars in thousands)

Commercial real estate

Commercial & industrial

Total commercial

Residential Real Estate:

Residential real estate

Total Consumer

Balance at end of period

Percentage of loans outstanding in respective category to the total loans outstanding.

Sources of Funds

4 unchanged sentences

The Bank is a participant in the Demand Deposit Marketplace program, Insured Cash Sweep program and the Certificate of Deposit Account Registry Service program.

The Bank uses these deposit sweep services to place customer and client funds into interest-bearing demand accounts, money market accounts, and/or time deposits issued by other participating banks.

The Bank uses these deposit sweep services to place

Management's Discussion and Analysis

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.

1 unchanged sentence

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

Management's Discussion and Analysis

The following table presents a summary of deposits:

(Dollars in thousands)

(Dollars in thousands) Change

December 31, 2020 2019 $ %

Noninterest-bearing demand deposits $832,287 $609,924 $222,363 36 %

Interest-bearing demand deposits 174,290 159,938 14,352 9

NOW accounts 698,706 520,295 178,411 34

Money market accounts 910,167 765,899 144,268 19

4 unchanged sentences

Total deposits $4,378,353 $3,498,882 $879,471 25 %

Total deposits amounted to $3.5 billion at December 31, 2019 , down by $25.2 million , or 1% , in 2019 .

This included a decrease of $192.2 million in out-of-market brokered time deposits.

Total deposits amounted to $4.4 billion at December 31, 2020, up by $879.5 million, or 25%, in 2020.

This included an increase of $306.7 million in out-of-market brokered time deposits.

Excluding out-of-market brokered time deposits, in-market deposits were up by $572.8 million, or 18%, from the balance at December 31, 2019.

Growth in in-market deposits was largely due to increases in money market and NOW account balances.

FHLB Advances

FHLB advances are used to meet short-term liquidity needs and also to fund loan growth and additions to the securities portfolio.

FHLB advances totaled $1.1 billion at December 31, 2019 , up by $190.7 million from the balance at the end of 2018 , largely due to a shift in the use of wholesale funding sources from brokered time deposits to FHLB advances during 2019 .

In October 2019, FHLB advances totaling $78.8 million were modified to lower interest rates and the maturities of these advances were extended.

Original maturity dates ranging from 2021 to 2023 were modified to 2024 to 2026.

The original weighted average interest rate was 3.52% and was revised to 2.76% .

Growth in in-market deposits included increases across all deposit categories, except in-market time deposits.

In-market time deposits decreased in 2020, reflecting maturities of higher yielding promotional time certificates of deposit.

The continued economic uncertainty resulting from the COVID-19 pandemic has caused a shift in consumer habits to save in liquid deposit accounts.

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 $593.9 million at December 31, 2020, down by $547.6 million from the balance at the end of 2019.

In 2020, Washington Trust began participating in the FRB’s PPPLF.

PPPLF extends credit to depository institutions at a fixed interest rate of 0.35%.

Only PPP loans can be pledged as collateral to access the facility.

The maturity date of the PPPLF borrowings matches the maturity date of the pledged PPP loans.

There were no PPPLF borrowings outstanding at December 31, 2020.

Liquidity and Capital Resources

6 unchanged sentences

The Corporation has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity.

Management employs stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as usual” cash flows.

Management employs stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as

Management's Discussion and Analysis

usual” cash flows.

In management’s estimation, risks are concentrated in two major categories:

9 unchanged sentences

Borrowing capacity is impacted by the amount and type of assets available to be pledged.

Management's Discussion and Analysis

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

(Dollars in thousands)

December 31, 2020 2019

Additional Funding Capacity:

Federal Home Loan Bank of Boston (1)

$969,735 $534,990

Federal Reserve Bank of Boston (2)

20,678 24,686

Unencumbered investment securities 594,998 461,850

As of December 31, 2019 and 2018, loans with a carrying value of $2.1 billion and $2.0 billion , respectively.

and securities available for sale with a carrying value of $271.4 million and $236.7 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

Total $1,585,411 $1,021,526

(1) As of December 31, 2020 and 2019, loans with a carrying value of $2.1 billion and $2.1 billion, respectively, and securities available for sale with a carrying value of $128.6 million and $271.4 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of December 31, 2020 and 2019, loans with a carrying value of $12.6 million and $16.6 million, respectively.

4 unchanged sentences

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

Net cash provided by operating activities amounted to $73.4 million in 2019 , which was generated by net income of $69.1 million and adjustments to reconcile net income to net cash provided by operating activities.

Net cash used in investing activities totaled $160.1 million in 2019 , reflecting outflows to fund loan growth and purchases of loans and purchases of debt securities.

These outflows were partially offset by net inflows from maturities, calls, sales and principal payments of securities.

For 2019 , net cash provided by financing activities amounted to $131.7 million , largely due to net increases in FHLB advances, partially offset by the payment of dividends to shareholders and a net decrease in total deposits.

Net cash provided by operating activities amounted to $36.5 million in 2020.

Net income of $69.8 million was offset by mortgage banking related adjustments to reconcile net income to net cash used in operating activities.

Net cash used in investing activities totaled $264.2 million in 2020, reflecting outflows to fund the increase in and purchases of loans, as well as purchases of debt securities.

These outflows were partially offset by net inflows from maturities, calls and principal payments of securities.

In 2020, net cash provided by financing activities amounted to $291.6 million, with net increases in deposits, partially offset by a net decrease in FHLB advances, the payment of dividends to shareholders and treasury stock purchases.

See the Corporation’s Consolidated Statements of Cash Flows for further information about sources and uses of cash.

1 unchanged sentence

Total shareholders’ equity amounted to $534.2 million at December 31, 2020, up by $30.7 million from December 31, 2019.

This increase included net income of $69.1 million and an increase of $17.1 million in the accumulated comprehensive income component of shareholders’ equity (“AOCI”), partially offset by $35.0 million for dividend declarations.

The increase in AOCI was primarily due to an increase in the fair value of available for sale debt securities.

This increase included net income of $69.8 million, partially offset by $35.8 million in dividend declarations.

The Corporation declared dividends of $2.05 per share in 2020, representing an increase of 5 cents per share, or 3%, over last year.

Changes in shareholders’ equity also included a net increase of $3.8 million in the AOCI component of shareholders’ equity.

The net increase in AOCI reflected an increase in the fair value of available for sale debt securities, partially offset by a $3.9 million charge to AOCI associated with the annual remeasurement of pension plan liabilities.

This charge was largely due to a decline in the discount rate used to measure the present value of pension plan liabilities as a result of a reduction in market interest rates in 2020.

Management's Discussion and Analysis

Reductions to retained earnings of $6.1 million due to the adoption of ASC 326, as well as a net increase in treasury stock of $3.4 million were also included in changes in shareholders’ equity.

The ratio of total equity to total assets amounted to 9.35% at December 31, 2020, compared to a ratio of 9.51% at December 31, 2019.

Book value per share at December 31, 2019 and 2018 amounted to $29.00 and $25.90 , respectively.

Book value per share was $30.94 at December 31, 2020, compared to $29.00 at December 31, 2019.

The Bancorp and the Bank are subject to various regulatory capital requirements and are considered “well capitalized,” with a total risk-based capital ratio of 13.51% at December 31, 2020, compared to 12.94% at December 31, 2019.

See Note 12 to the Consolidated Financial Statements for additional discussion of regulatory capital requirements.

Management's Discussion and Analysis

See Note 13 to the Consolidated Financial Statements for additional discussion of regulatory capital requirements and the Corporation’s election of the option provided by regulatory guidance to delay the estimated impact of ASC 326 on regulatory capital.

Contractual Obligations and Commitments

1 unchanged sentence

The following tables summarize our contractual cash obligations and other commitments at December 31, 2020:

(Dollars in thousands)

Payments Due by Period

(Dollars in thousands) Payments Due by Period

Total Less Than

1-3 Years 3-5 Years After

Contractual Obligations:

FHLB advances (2)

$593,859 $517,222 $1,669 $38,651 $36,317

Junior subordinated debentures 22,681 — — — 22,681

5 unchanged sentences

See Note 12 to the Consolidated Financial Statements for additional information.

(Dollars in thousands)

Amount of Commitment Expiration – Per Period

(Dollars in thousands) Amount of Commitment Expiration – Per Period

Total Less Than

1 Year 1-3 Years 3-5 Years After

Other Commitments:

3 unchanged sentences

Interest rate lock commitments

167,671 167,671 — — —

Forward sale commitments

279,653 279,653 — — —

Loan related derivative contracts (1) :

Interest rate swaps with customers

991,002 10,583 194,283 220,199 565,937

Mirror swaps with counterparties

991,002 10,583 194,283 220,199 565,937

Risk participation-in agreements

92,717 — 9,370 20,130 63,217

Interest rate risk management contracts (1) :

Interest rate swaps

60,000 40,000 20,000 — —

Total commitments $3,456,069 $817,210 $450,692 $563,613 $1,624,554

(1) Amounts presented represent notional amounts.

Management's Discussion and Analysis

Off-Balance Sheet Arrangements

28 unchanged sentences

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

Management's Discussion and Analysis

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

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

Management's Discussion and Analysis

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, 2020 and 2019.

2 unchanged sentences

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

December 31, 2019

December 31, 2018

Months 1 - 12

Months 13 - 24

Months 1 - 12

Months 13 - 24

December 31, 2020 December 31, 2019

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

100 basis point rate decrease (2.05%) (4.73%) (3.71%) (5.57%)

8 unchanged sentences

The ALCO’s estimate of interest rate risk exposure to rising rate environments, including those involving changes to the shape of the yield curve, incorporates certain assumptions regarding the shift in deposit balances from low-cost core savings categories to higher-cost deposit categories, which has characterized a shift in funding mix during the past rising interest rate cycles.

The relative changes in interest rate sensitivity from December 31, 2018 to December 31, 2019 as shown in the above table, were attributable to several factors, including a higher absolute level of market interest rates and a relative increase in the proportion of wholesale funding and promotional time deposit balances.

Interest rate risk modeling assumes that wholesale funding sources are more sensitive to changes in market interest rates than core deposits.

Furthermore, the amount of time deposits scheduled to mature during the 13-24 month time period has increased, as compared to the prior period, as a result of our recent deposit promotions.

Our modeling assumption is that these time deposit maturities will reprice at higher rates during rising rate scenarios.

The relative change in interest rate sensitivity for declining rates from December 31, 2019 as shown in the above table was attributable to a lower absolute level of market interest rates with certain rates and yields reaching floors or zero in declining rate scenarios.

The relative increase in interest rate sensitivity for rising rates from December 31, 2019 was attributable to a relative increase in the proportion of low-cost core deposits to total sources of funds.

Interest rate risk modeling assumes that core deposits reprice more slowly and by a lesser amount than the repricing of wholesale funding in response to changes in market interest rates.

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 net interest margin.

1 unchanged sentence

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

The banking industry attracted and retained low-cost core savings deposits during the low interest rate cycle that lasted several years.

The ALCO recognizes that a portion of these increased levels of low-cost balances could continue to shift into higher yielding alternatives in the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above.

As market interest rates have declined, the banking industry has attracted low-cost core savings deposits.

The ALCO recognizes that a portion of these increased levels of low-cost balances could shift into higher yielding alternatives in

Management's Discussion and Analysis

the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above.

Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment, which may cause interest rate sensitivity to differ from the results as presented.

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

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

Management's Discussion and Analysis

term interest rates.

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

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

8 unchanged sentences

(Dollars in thousands)

Security Type

Down 100 Basis Points

Up 200 Basis Points

Security Type Down 100 Basis Points Up 200 Basis Points

Obligations of U.S.

3 unchanged sentences

government-sponsored enterprises

12,490 (59,220)

Trust preferred debt and other corporate debt securities (99) 179

4 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis