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Item 8. Financial Statements and Supplementary Data

2021-02-25 compared with 2020-02-25 · 1190 added, 847 removed, 1520 unchanged (57% of the section changed)

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The financial statements and supplementary data are contained herein.

Description Page

Management’s Annual Report on Internal Control Over Financial Reporting

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Note 5 - Loans

Note 6 - Allowance for Loan Losses

Note 6 - Allowance for Credit Losses on Loan s

Note 7 - Premises and Equipment

Note 8 - Leases

Note 9 - Goodwill and Intangible Assets

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Note 2 1 - Earnings Per Common Share

Note 21 - Leases

Note 22 - Commitments and Contingencies

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In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Corporation as of December 31, 2019 , the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2019 , and the related notes (collectively referred to as the “financial statements”) and our report dated February 25, 2020 expressed an unqualified opinion.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Corporation as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”) and our report dated February 25, 2021 expressed an unqualified opinion.

Basis for Opinion

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We have audited the accompanying consolidated balance sheet of Washington Trust Bancorp, Inc.

and Subsidiaries (the “Corporation”) as of December 31, 2019 , the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2019 and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2019 , and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

and Subsidiaries (the “Corporation”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Corporation’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework:

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 25, 2021 expressed an unqualified opinion.

Explanatory Paragraph - Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Corporation has changed its method of accounting for credit losses in 2020 due to the adoption of ASC 326.

The adoption of ASC 326 and its subsequent application is also communicated as a critical audit matter below .

Basis for Opinion

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The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses - Allowance for Loans Collectively Evaluated for Impairment.

As described in Notes 1 and 6 to the consolidated financial statements, the Corporation’s 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 for loan losses was $27.0 million at December 31, 2019 , which consists of two components:

the allowance related to loans individually evaluated for impairment, representing $968 thousand and the allowance related to loans collectively evaluated for impairment, representing $26.0 million.

For loans that are collectively evaluated for impairment, loss allocation factors are derived by management’s analysis of 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

Allowance for Credit Losses - Loans

The Corporation adopted ASC 326, Financial Instruments – Credit Losses as of January 1, 2020, using the modified retrospective method.

In doing so, the Corporation recorded a decrease to retained earnings of $6.1 million, net of tax, for the cumulative effect of adopting ASC 326, as noted in the Consolidated Statements of Changes in Shareholders’ Equity, which included $6.5 million for the allowance for credit losses (“ACL”) on loans.

The 2020 provision for credit losses – loans was $11.7 million.

As of December 31, 2020, the ACL on loans was $44.1 million.

The Corporation has disclosed the impact of adoption in Note 2 (see change in accounting principle explanatory paragraph above) to the consolidated financial statements and the allowance for credit losses on loans as of December 31, 2020 is

Report of Independent Registered Public Accounting Firm

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

These qualitative risk factors include:

1) changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;

3) changes in the nature and volume of the portfolio and in the terms of loans;

4) changes in the experience, ability, and depth of lending management and other relevant staff;

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;

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

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.

We identified the allowance for loans collectively evaluated for impairment as a critical audit matter because of the necessary judgment applied by us to evaluate management’s significant estimates and subjective assumptions relating to 1) the determination of the historical loss rates and loss emergence period by segment, 2) the determination of aggregate qualitative adjustments.

disclosed in Notes 1 and 6.

ASC 326 requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost at the reporting date.

The measurement is based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio.

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 includes pooling loans into portfolio segments for loans that share similar risk characteristics.

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

For pooled loans, the Corporation utilizes a discounted cash flow (“DCF”) methodology to estimate credit losses over the expected life of the loan.

The DCF methodology combines the probability of default, the loss given default, maturity date and prepayment speed assumptions to estimate a reserve for each loan.

The loss rates are adjusted by current and forecasted econometric assumptions and return to the mean after the forecasted periods.

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

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

Qualitative loss factors are applied to each portfolio segment with the amounts determined by correlation of credit stress to the maximum loss factors of a peer group’s historical charge-offs.

Changes in these assumptions could have a material effect on the Corporation’s financial results.

We identified auditing the ACL on pooled loans as a critical audit matter because the methodology to determine the estimate of credit losses significantly changed upon adoption of ASC 326, including the application of new accounting policies, the use of subjective judgments for both the quantitative and qualitative calculations and overall changes made to the loss estimation models.

Performing audit procedures to evaluate the implementation and subsequent application of ASC 326 for loans involved a high degree of auditor judgment and required significant effort, including the need to involve more experienced audit personnel and valuation specialists .

The primary procedures we performed to address this critical audit matter included:

Testing the effectiveness of controls over the evaluation of the allowance related to loans collectively evaluated for impairment, including controls addressing:

Data inputs, judgments and calculations used to determine the historical loss rates and loss emergence period.

• Testing the effectiveness of controls over the evaluation of the ACL on the pooled loans, including controls addressing:

◦ The selection and application of new accounting policies.

◦ Data inputs, judgments and calculations used to determine the loss factors.

◦ Information technology general controls and application controls.

◦ Problem loan identification and delinquency monitoring.

Management’s review of the qualitative and quantitative analysis related to the qualitative risk factors.

Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the allowance for loans collectively evaluated for impairment, which included:

◦ Management’s review of the qualitative factors.

• Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the ACL on pooled loans, which included:

◦ Evaluating the appropriateness of the Corporation’s accounting policies, judgments and elections involved in adoption of ASC 326.

◦ Testing the mathematical accuracy of the calculation.

Evaluation of the reasonableness of management’s judgments related to the historical loss experience, and estimated loss emergence period, including the evaluation of triggering events related to default and actual losses.

The evaluation of triggering events included evaluation of management's assessment of problem loan identification and delinquencies.

Evaluation of reasonableness of management’s judgments related to qualitative adjustments to determine if they are calculated to conform with management’s policies and were consistently applied period over period.

◦ Utilizing internal valuation specialists to perform procedures to evaluate the relevance of the econometric loss driver.

◦ Evaluating the reasonableness of management’s judgments related to the probability of default, loss given default, including the evaluation of triggering events related to default and actual losses.

◦ Evaluating the reasonableness of management’s judgments related to qualitative adjustments to determine if they are calculated to conform with management’s policies and were consistently applied from the point of adoption to year end.

Our evaluation considered the weight of evidence from internal and external sources and loan portfolio performance.

Analytically evaluating the allowance related to loans collectively evaluated for impairment by loan segment year over year for reasonableness.

We have served as the Corporation’s auditor since 2019.

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Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Washington Trust Bancorp, Inc.

and Subsidiaries (the Corporation) as of December 31, 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two‑year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2018, and the results of its operations and its cash flows for each of the years in the two‑year period ended December 31, 2018, in conformity with U.S.

We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows of Washington Trust Bancorp, Inc.

and Subsidiaries (the Corporation) for the year ended December 31, 2018, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with U.S.

generally accepted accounting principles.

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These consolidated financial statements are the responsibility of the Corporation’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

We have served as the Corporation’s auditor from 1973 to 2019.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion .

We served as the Corporation’s auditor from 1973 to 2019.

Providence, Rhode Island

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(Dollars in thousands, except par value)

December 31, 2020 2019

Cash and due from banks $ 194,143 $ 132,193

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Mortgage loans held for sale, at fair value

Available for sale debt securities, at fair value

Held to maturity debt securities, at amortized cost (fair value $10,316 at December 31, 2018)

Total securities

61,614 27,833

Available for sale debt securities, at fair value (amortized cost $ 881,570 ;

net of allowance for credit losses on securities of $ 0 at December 31, 2020)

894,571 899,490

Federal Home Loan Bank stock, at cost 30,285 50,853

Less allowance for loan losses

Total loans 4,195,990 3,892,999

allowance for credit losses on loans 44,106 27,014

Net loans 4,151,884 3,865,985

Premises and equipment, net 28,870 28,700

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Investment in bank-owned life insurance 84,193 82,490

Goodwill 63,909 63,909

Identifiable intangible assets, net 6,305 7,218

Other assets 159,749 100,934

Total assets $ 5,713,169 $ 5,292,659

Noninterest-bearing deposits $ 832,287 $ 609,924

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authorized 60,000,000 shares;

issued and outstanding 17,363,455 shares in 2019 and 17,302,037 in 2018

17,363,457 shares issued and 17,265,337 shares outstanding at December 31, 2020 and 17,363,455 shares issued and outstanding at December 31, 2019

Paid-in capital 125,610 123,281

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Accumulated other comprehensive loss ( 7,391 ) ( 11,237 )

Treasury stock, at cost;

98,120 shares at December 31, 2020

Total shareholders’ equity 534,195 503,492

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Interest expense:

Deposits 25,812 37,101 24,175

Federal Home Loan Bank advances 15,806 26,168 19,073

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Net interest income 127,444 133,414 132,290

Provision for loan losses

Net interest income after provision for loan losses

Provision for credit losses 12,342 1,575 1,550

Net interest income after provision for credit losses 115,102 131,839 130,740

Noninterest income:

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Net realized losses on securities — ( 53 ) —

Other income 3,100 1,245 1,339

Total noninterest income 99,442 67,080 62,114

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Net occupancy 8,023 7,821 7,891

Equipment 3,831 4,081 4,312

Legal, audit and professional fees 3,747 2,535 2,427

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Amortization of intangibles 914 943 979

Debt prepayment penalties 1,413 — —

Change in fair value of contingent consideration — — ( 187 )

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Income tax expense 19,331 19,061 18,260

Net income $ 69,829 $ 69,118 $ 68,432

Net income available to common shareholders $ 69,678 $ 68,979 $ 68,288

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and Subsidiaries

Consolidated Statements of Comprehensive Income

(Dollars in thousands)

Consolidated Statements of Comprehensive Income (Dollars in thousands)

Years ended December 31, 2020 2019 2018

Net income $ 69,829 $ 69,118 $ 68,432

Other comprehensive income (loss), net of tax:

Net change in fair value of available for sale debt securities

6,655 19,988 ( 9,228 )

Net change in fair value of cash flow hedges

( 654 ) ( 984 ) 619

Net change in defined benefit plan obligations

( 2,155 ) ( 1,932 ) 3,810

Total other comprehensive income (loss), net of tax

3,846 17,072 ( 4,799 )

Total comprehensive income $ 73,675 $ 86,190 $ 63,633

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(Dollars and shares in thousands)

Outstanding Common

Stock Paid-in

Capital Retained

Earnings Accumulated

Comprehensive

(Loss) Income

Balance at January 1, 2017

Total other comprehensive income, net of tax

(Loss) Income Treasury

Balance at December 31, 2017 17,227 $ 1,077 $ 117,961 $ 317,756 ($ 23,510 ) $ — $ 413,284

Net income — — — 68,432 — — 68,432

Total other comprehensive loss, net of tax — — — ( 4,799 ) — ( 4,799 )

Cash dividends declared ($ 1.76 per share)

— — — ( 30,664 ) — — ( 30,664 )

Share-based compensation — — 2,602 — — — 2,602

Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered

Reclassification of income tax effects due to the adoption of ASU 2018-02

75 4 ( 675 ) — — — ( 671 )

Balance at December 31, 2018 17,302 $ 1,081 $ 119,888 $ 355,524 ($ 28,309 ) $ — $ 448,184

Total other comprehensive loss, net of tax

Cumulative effect of change in accounting principle - ASC 842 — — — 722 — — 722

Net income — — — 69,118 — — 69,118

Total other comprehensive income, net of tax — — — 17,072 — 17,072

Cash dividends declared ($ 2.00 per share)

— — — ( 35,001 ) — — ( 35,001 )

Share-based compensation — — 3,124 — — — 3,124

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Balance at December 31, 2019 17,363 $ 1,085 $ 123,281 $ 390,363 ($ 11,237 ) $ — $ 503,492

Cumulative effect of change in accounting principle

Cumulative effect of change in accounting principle - ASC 326 — — — ( 6,108 ) — — ( 6,108 )

Net income — — — 69,829 — — 69,829

Total other comprehensive income, net of tax — — — 3,846 — 3,846

Cash dividends declared ($ 2.05 per share)

— — — ( 35,838 ) — — ( 35,838 )

Share-based compensation — — 3,766 — — — 3,766

Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 27 — ( 1,437 ) — — 967 ( 470 )

Treasury stock purchased under the 2019 Stock Repurchase Program ( 125 ) — — — — ( 4,322 ) ( 4,322 )

Balance at December 31, 2020 17,265 $ 1,085 $ 125,610 $ 418,246 ($ 7,391 ) ($ 3,355 ) $ 534,195

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Cash flows from operating activities:

Net income $ 69,829 $ 69,118 $ 68,432

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses

Provision for credit losses 12,342 1,575 1,550

Depreciation of premises and equipment 3,176 3,291 3,282

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Amortization of intangibles 914 943 979

Goodwill impairment

Share–based compensation 3,766 3,124 2,602

Tax benefit from stock option exercises and other equity awards

Deferred income tax (benefit) expense

Tax (expense) benefit from stock option exercises and other equity awards

( 103 ) 248 496

Deferred income tax benefit ( 3,130 ) ( 1,491 ) ( 63 )

Income from bank-owned life insurance ( 2,491 ) ( 2,354 ) ( 2,196 )

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Change in fair value of contingent consideration liability — — ( 187 )

Decrease in operating lease right-of-use assets

Decrease in operating lease liabilities

(Increase) decrease in operating lease right-of-use assets

( 2,729 ) 2,131 —

Increase (decrease) in operating lease liabilities

2,856 ( 1,992 ) —

Increase in other assets ( 57,730 ) ( 27,961 ) ( 7,456 )

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Available for sale debt securities:

Other ( 149,899 ) ( 27,520 ) ( 76,264 )

Proceeds from sales of:

Available for sale debt securities:

Other — 11,877 —

Maturities, calls and

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Available for sale debt securities:

Other 176,000 108,306 7,301

Held to maturity debt securities:

Mortgage-backed — — 2,029

(Purchases) remittance of Federal Home Loan Bank stock

Net redemption (purchases) of Federal Home Loan Bank stock 20,568 ( 4,785 ) ( 5,551 )

Net increase in loans ( 241,418 ) ( 154,502 ) ( 306,299 )

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Purchases of bank-owned life insurance — — ( 5,000 )

Proceeds from sale of equity investment in real estate limited partnership 1,400 — —

Proceeds from surrender of bank-owned life insurance 787 326 —

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and Subsidiaries

Consolidated Statements of Cash Flows – (continued)

(Dollars in thousands)

Consolidated Statements of Cash Flows – (continued) (Dollars in thousands)

Years ended December 31, 2020 2019 2018

Cash flows from financing activities:

Net (decrease) increase in deposits

Net increase (decrease) in deposits 879,471 ( 25,166 ) 281,341

Proceeds from Federal Home Loan Bank advances 1,988,500 1,982,000 2,040,000

Repayment of Federal Home Loan Bank advances ( 2,536,105 ) ( 1,791,258 ) ( 1,880,634 )

Proceeds from Payment Protection Program Lending Facility 200,628 — —

Repayment of Payment Protection Program Lending Facility ( 200,628 ) — —

Payment of contingent consideration liability — — ( 1,217 )

Treasury stock purchased ( 4,322 ) — —

Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered ( 470 ) 273 ( 671 )

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Net cash provided by financing activities 291,575 131,660 409,507

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents 63,813 44,980 10,552

Cash and cash equivalents at beginning of year 138,455 93,475 82,923

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Loans transferred to property acquired through foreclosure or repossession 313 2,000 3,074

In conjunction with the adoption of ASU 2016-02 as detailed in Note 2 to the Consolidated Financial Statements, the following assets and liabilities were recognized:

In conjunction with the adoption of ASC 842, the following assets and liabilities were recognized:

Operating lease right-of-use assets — 28,923 —

Operating lease liabilities — 30,853 —

In conjunction with the adoption of ASU 2017-12 as detailed in Note 2 to the Consolidated Financial Statements, the following qualifying debt securities classified as held to maturity were transferred to available for sale:

In conjunction with the adoption of ASC 815, the following qualifying debt securities classified as held to maturity were transferred to available for sale:

Fair value of debt securities transferred from held to maturity to available for sale — 10,316 —

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Actual results could differ from those estimates.

Material estimates that are particularly susceptible to change are the determination of the allowance for loan losses, the valuation of goodwill and identifiable intangible assets, the assessment of investment securities for impairment and the accounting for defined benefit pension plans.

Material estimates that are particularly susceptible to change are the determination of the allowance for credit losses on loans, the valuation of goodwill and identifiable intangible assets and the accounting for defined benefit pension plans.

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.

Short-term Investments

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Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost.

Investments not classified as held to maturity are classified as available for sale.

Securities not classified as held to maturity are classified as available for sale.

Securities available for sale consist of debt securities that are available for sale to respond to changes in market interest rates, liquidity needs, changes in funding sources and other similar factors.

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Changes in fair value of available for sale securities, net of applicable income taxes, are reported as a separate component of shareholders’ equity.

Washington Trust does not have a trading portfolio.

Washington Trust does not currently have securities designated as held to maturity and also does not maintain a trading portfolio.

Premiums and discounts are amortized and accreted over the term of the securities on a method that approximates the level yield method.

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Realized gains or losses from sales of securities are recorded on the trade date and are determined using the specific identification method.

Notes to Consolidated Financial Statements – (continued)

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

Effective January 1, 2020, the Corporation adopted the provisions of ASC 326 and modified its accounting policy for the assessment of available for sale debt securities for impairment, as further described below.

The Corporation has made an accounting policy election to exclude accrued interest from the amortized cost basis of debt securities and reports accrued interest in other assets in the Consolidated Balance Sheets.

The Corporation also excludes accrued interest from the estimate of credit losses on debt securities.

A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain.

Accrued interest for a debt security placed on nonaccrual is reversed against interest income.

There were no debt securities on nonaccrual status as of December 31, 2020 and December 31, 2019 and, therefore there was no accrued interest related to debt securities reversed against interest income for 2020 and 2019.

For available for sale debt securities in an unrealized loss position, management first assesses whether the Corporation intends to sell, or if it is likely that the Corporation will be required to sell the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit losses charge to earnings.

For debt securities available for sale that do not meet either of these criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, management considers both quantitative and qualitative factors.

A substantial portion of available for sale debt securities held by the Corporation are obligations issued by U.S.

government agency and U.S.

government-sponsored enterprises, including mortgage-backed securities.

These securities are either explicitly or implicitly guaranteed by the U.S.

government, are highly rated by major credit rating agencies and have a long history of no credit losses.

For these securities, management takes into consideration the long history of no credit losses and other factors to assess the risk of nonpayment even if the U.S.

government were to default.

As such, the Corporation utilized a zero credit loss estimate for these securities.

For available for sale debt securities that are not guaranteed by U.S.

government agencies and U.S.

government-sponsored enterprises, such as individual name issuer trust preferred debt securities and corporate bonds, management utilizes a third party credit modeling tool based on observable market data, which assists management in identifying any potential credit risk associated with these available for sale debt securities.

This model estimates probability of default, loss given default and exposure at default for each security.

In addition, qualitative factors are also considered, including the extent to which fair value is less than amortized cost, changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.

If a credit loss exists based on the results of this assessment, an ACL (contra asset) is recorded, limited by the amount that the fair value is less than the amortized cost basis.

Any impairment that has not been recorded through an ACL is considered market-related and is recognized in other comprehensive income, net of taxes.

Changes in the ACL on available for sale debt securities are recorded as provision for (or reversal of) credit losses.

Losses are charged against the ACL when management believes the uncollectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Prior to January 1, 2020, the accounting policy on the assessment of available for sale debt securities for impairment was based on an other-than-temporary assessment.

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

The Corporation considered whether evidence indicating the cost of the investment was recoverable outweighed evidence to the contrary.

Evidence considered in this assessment included 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 conditions in the geographic area or industry of the issuer.

Notes to Consolidated Financial Statements – (continued)

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.

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.

The credit loss component of an other-than-temporary impairment write-down for debt securities is recorded in earnings while the remaining portion of the impairment loss is recognized, net of tax, in other comprehensive income provided that the Corporation does not intend to sell the underlying debt security and it is more-likely-than-not that the Corporation would not have to sell the debt security prior to recovery of the unrealized loss, which may be to maturity.

If the Corporation intended to sell any securities with an unrealized loss or it is more-likely-than-not that the Corporation would be required to sell the investment securities before recovery of their amortized cost basis, then the entire unrealized loss would be recorded in earnings.

In determining whether an other-than-temporary impairment had occurred for debt securities, the Corporation compared 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 was less than the amortized cost of the security, then the entire amortized cost of the security would not be recoverable;

that is, a credit loss and an other-than-temporary impairment would have occurred.

The credit loss component of an other-than-temporary impairment write-down for debt securities would have been recorded in earnings while the remaining portion of the impairment loss would have been recognized, net of tax, in other comprehensive income provided that the Corporation did not intend to sell the underlying debt security and it was more-likely-than-not that the Corporation would not have to sell the debt security prior to recovery of the unrealized loss.

If the Corporation intended to sell any securities with an unrealized loss or it was more-likely-than-not that the Corporation would have to sell the investment securities before recovery of their amortized cost basis, then the entire unrealized loss would have been recorded in earnings.

Federal Home Loan Bank Stock

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Residential mortgage loans originated and intended for sale in the secondary market are classified as held for sale.

Accounting Standards Codification (“ASC”) 825, “Financial Instruments” allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis that may otherwise not be required to be measured at fair value under other accounting standards.

ASC 825, “Financial Instruments” allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis that may otherwise not be required to be measured at fair value under other accounting standards.

The Corporation has elected the fair value option for mortgage loans held for sale in order to better match changes in fair values of the loans with changes in the fair value of the derivative forward sale commitment contracts used to economically hedge them.

Changes in the fair value of mortgage loans held for sale accounted for under the fair value option are recorded in earnings and are partially offset by changes in fair value of forward sale commitments.

These changes in fair value are included in mortgage banking revenues.

Gains and losses on residential loan sales are recognized at the time of sale and included in mortgage banking revenues.

Changes in the fair value of mortgage loans held for sale accounted for under the fair value option are included in mortgage banking revenues.

Gains and losses on residential loan sales are recognized at the time of sale and are included in mortgage banking revenues.

Upfront fees and costs related to mortgage loans held for sale for which the fair value option was elected are recognized in mortgage banking revenues as received / incurred and are not deferred.

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Fair value is based on a valuation model that incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, ancillary income, prepayment speeds, and default rates and losses.

Mortgage servicing rights are included in other assets.

Mortgage servicing rights are amortized as an offset to mortgage banking revenues over the period of estimated net servicing income.

They are periodically evaluated for impairment based on their fair value.

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

Mortgage servicing rights are periodically evaluated for impairment based on their fair value.

Impairment is measured on an aggregated basis by stratifying the rights based on homogeneous characteristics such as note rate and loan type.

The fair value is estimated based on the present value of expected cash flows, incorporating

Notes to Consolidated Financial Statements – (continued)

assumptions for discount rate, prepayment speed and servicing cost.

The fair value is estimated based on the present value of expected cash flows, incorporating assumptions for discount rate, prepayment speed and servicing cost.

Any impairment is recognized through a valuation allowance and as a reduction to mortgage banking revenues.

Notes to Consolidated Financial Statements – (continued)

Portfolio Loans

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Troubled Debt Restructured Loans

Loans are considered to be troubled debt restructurings when the Corporation has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered.

A loan that has been modified or renewed is considered to be a troubled debt restructuring (“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.

These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions.

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Restructuring of a loan in lieu of 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.

Loans which 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.

Impaired Loans

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 are evaluated on an individual basis and include nonaccrual loans and loans restructured in a troubled debt restructuring.

Allowance for Loan Losses

The allowance for loan losses is management’s best estimate of the risk of loss 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

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.

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.

The Corporation has elected to account for eligible loan modifications under Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), as amended by the Coronavirus Response and Relief Supplemental Appropriations Act (the “CRRSA Act”).

To be eligible, a loan modification must be (1) related to the COVID-19 pandemic;

(2) executed on a loan that was not more than 30 days past due as of December 31, 2019;

and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) January 1, 2022.

Eligible loan modifications are not required to be classified as TDRs and are not reported as past due provided that they are performing in accordance with the modified terms.

Interest income will continue to be recognized unless the loan is placed on nonaccrual status in accordance with the nonaccrual loans accounting policy.

Notes to Consolidated Financial Statements – (continued)

charged-off, and is reduced by charge-offs on loans.

Individually Analyzed Loans and Impaired Loans

Individually analyzed loans / impaired loans are individually assessed for credit impairment.

With the adoption of ASC 326 effective January 1, 2020, individually analyzed loans include nonaccrual commercial loans, reasonably expected TDRs, executed TDRs, and certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans.

A TDR is considered reasonably expected no later than the point when management concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession to avoid a default.

Prior to January 1, 2020, impaired loans included nonaccrual loans and executed TDRs.

Allowance for Credit Losses on Loans

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

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 the purposes of establishing a sufficient allowance for loan losses.

The methodology includes:

(1) the identification of loss allocations for individual loans deemed to be impaired and (2) 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.

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.

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.

Effective January 1, 2020, the Corporation adopted the provisions of ASC 326 and modified its accounting policy for the ACL on loans, as further described below.

The Corporation has made an accounting policy election to exclude accrued interest from the amortized cost basis of loans and reports accrued interest in other assets in the Consolidated Balance Sheets.

The Corporation also excludes accrued interest from the estimate of 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 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 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 collateral, such as accruing TDRs, estimated costs to sell are not incorporated into the measurement.

Management may also

Notes to Consolidated Financial Statements – (continued)

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 collateral.

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;

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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.

The allowance is an estimate, and ultimate losses may vary from management’s estimate.

Changes in the estimate are recorded in the results of operations in the period in which they become known, along with provisions for estimated losses incurred during that period.

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

Prior to January 1, 2020, the allowance for loan losses was based on an incurred loss methodology and represented management’s estimate of the risk of loss inherent in the loan portfolio as of the balance sheet date.

The level of the allowance was 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 was recognized with a charge-off), 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 was used to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for the purposes of establishing a sufficient allowance for loan losses.

The methodology included:

(1) the identification of loss allocations for individual loans deemed to be impaired and (2) 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 believed were not adequately represented by historical loss experience.

Notes to Consolidated Financial Statements – (continued)

Loss allocations for loans deemed to be impaired were 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 was collateral dependent, at the fair value of the collateral.

For loans that were collectively evaluated, loss allocation factors were 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 were segmented by loan type, collateral type, delinquency status and loan risk rating, where applicable.

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

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

The qualitative risk factors were the same as those considered under the ASC 326 accounting policy described above.

Allowance for Credit Losses on Unfunded Commitments

The Corporation adopted the provisions of ASC 326 effective January 1, 2020 and modified its accounting policy for the ACL on unfunded commitments.

The ACL on unfunded commitments is management’s estimate of expected credit losses over the expected contractual term (or life) in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation.

Unfunded commitments for home equity lines of credit and commercial demand loans are considered unconditionally cancellable for regulatory capital purposes and, therefore, are excluded from the calculation to estimate the ACL on unfunded commitments.

For each portfolio, estimated loss rates and funding factors are applied to the corresponding balance of unfunded commitments.

For each portfolio, the estimated loss rates applied to unfunded commitments are the same quantitative and qualitative loss rates applied to the corresponding on-balance sheet amounts in determining the ACL on loans.

The estimated funding factor applied to unfunded commitments represents the likelihood that the funding will occur and is based upon the Corporation’s average historical utilization rate for each portfolio.

The ACL on unfunded commitments is included in other liabilities in the Consolidated Balance Sheets.

The ACL on unfunded commitments is adjusted through a provision for credit losses recognized in the Consolidated Statements of Income.

Premises and Equipment

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Depreciation for financial reporting purposes is calculated on the straight-line method over the estimated useful lives of assets.

Leasehold improvements are depreciated over the shorter of the lease terms or the estimated useful lives of the improvements.

Expected terms include lease renewal options to the extent that the exercise of such renewals is reasonably assured.

Notes to Consolidated Financial Statements – (continued)

Leasehold improvements are depreciated over the shorter of the expected lease terms or the estimated useful lives of the improvements.

Expected lease terms include lease renewal options to the extent that the exercise of such renewals is reasonably assured.

Expenditures for major additions and improvements are capitalized while the costs of current maintenance and repairs are charged to operating expenses.

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The Corporation has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception.

Prior to January 1, 2019, operating leases were accounted for under ASC 840, Leases, and were considered off-balance sheet commitments as neither an asset or liability was recognized in the Consolidated Balance Sheets.

Effective January 1, 2019, the Corporation adopted the provisions of ASC 842, Leases, as further disclosed in Note 2.

ASC 842 requires operating leases to be recorded on the balance sheet, through the recognition of an operating lease right-of-use asset (“ROU”) and an operating lease liability at the commencement date of the new lease.

The Corporation adopted the provisions of ASC 842, Leases, effective January 1, 2019.

ASC 842 requires operating leases to be recorded on the balance sheet, through the recognition of an operating lease right-of-use (“ROU”) asset and an operating lease liability at the commencement date of the new lease.

ROU assets represent a right to use an underlying asset for the contractual lease term.

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The Corporation’s leases do not provide an implicit interest rate, therefore the Corporation uses its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine the present value of operating lease liabilities.

Notes to Consolidated Financial Statements – (continued)

The Corporation’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately.

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Operating lease terms include options to extend when it is reasonably certain that the Corporation will exercise such options, determined on a lease-by-lease basis.

Under both ASC 840 and ASC 842, rental expense for operating leases is recognized on a straight-line basis over the lease term.

Variable lease components, such as consumer price index adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

Bank-Owned Life Insurance

The investment in BOLI represents the cash surrender value of life insurance policies on the lives of certain employees who have provided positive consent allowing the Bank to be the beneficiary of such policies.

Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income taxes.

The financial strength of the insurance carrier is reviewed prior to the purchase of BOLI and annually thereafter.

Goodwill and Identifiable Intangible Assets

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Intangible assets are amortized over their estimated lives using a method that approximates the amount of economic benefits that are realized by the Corporation.

Notes to Consolidated Financial Statements – (continued)

Intangible assets with definite lives are tested for impairment whenever events or circumstances occur that indicate that the carrying amount may not be recoverable.

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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.

Notes to Consolidated Financial Statements – (continued)

Impairment of Long - Lived Assets Other than Goodwill

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Loans that are substantively repossessed include only those loans for which the Corporation has obtained control of the collateral, but has not completed legal foreclosure proceedings.

Bank-Owned Life Insurance

Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income taxes.

The financial strength of the insurance carrier is reviewed prior to the purchase of BOLI and annually thereafter.

Investment in Real Estate Limited Partnerships

The Bank has a 99.9 % ownership interest in three real estate limited partnerships that renovate, own and operate three low-income housing complexes.

The Bank neither actively participates nor has a controlling interest in these limited partnerships.

The Bank has investments in real estate limited partnerships that renovate, own and operate low-income housing complexes.

The Bank neither actively participates nor has a controlling interest in the real estate limited partnerships.

The carrying value of these investments is recorded in other assets on the Consolidated Balance Sheets.

Investments made prior to January 1, 2015 are accounted for under the equity method of accounting.

Net losses generated by the partnership are recorded as a reduction to the Bank’s investment and as a reduction of other noninterest income in the Consolidated Statements of Income.

Tax credits generated by the partnerships are recorded as a reduction in the income tax provision in the year they are allowed for tax reporting purposes.

The results of operations of the real estate limited partnerships are periodically reviewed to determine if the partnership generates sufficient operating cash flow to fund its current obligations.

In addition, the current value of the underlying properties is compared to the outstanding debt obligations.

If it is determined that the investment is permanently impaired, the carrying value would be written down to the estimated realizable value.

Investments made after January 1, 2015 are accounted for using the proportional amortization method.

Investments in real estate limited partnerships are accounted for using the proportional amortization method.

Unfunded commitments for future capital contributions are recognized and recorded in other liabilities on the Consolidated Balance Sheets.

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In addition, operating losses and tax credits generated by the partnership are also recorded as a reduction to income tax expense.

Notes to Consolidated Financial Statements – (continued)

Transfers and Servicing of Assets and Extinguishments of Liabilities

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Wealth Management Assets Under Administration

Assets under administration represent assets held in a fiduciary or agency capacity for wealth management clients and are not included in the Consolidated Balance Sheets, as these are not assets of the Corporation.

AUA represents assets held in a fiduciary or agency capacity for wealth management clients and are not included in the Consolidated Balance Sheets, as these are not assets of the Corporation.

Revenue from Contracts with Customers

Prior to January 1, 2018, fee revenue such as wealth management revenues and service charges on deposit accounts were recognized when earned or to the extent services were completed.

Effective January 1, 2018, the Corporation adopted the provisions of ASC 606, Revenue from Contracts with Customers.

ASC 606 provides a revenue recognition framework for contracts with customers unless those contracts are within the scope of other accounting standards.

ASC 606, Revenue from Contracts with Customers, provides a revenue recognition framework for contracts with customers unless those contracts are within the scope of other accounting standards.

Revenue from contracts with customers is measured based on the consideration specified in the contract with a customer.

The Corporation recognizes revenue from contracts with customers when it satisfies its performance obligations.

The Corporation recognizes revenue from contracts with customers when it satisfies its performance

Notes to Consolidated Financial Statements – (continued)

The performance obligations are generally satisfied as services are rendered and can either be satisfied at a point in time or over time.

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Asset-based revenues include trust and investment management fees that are earned based upon a percentage of asset values under administration.

Transaction-based revenues include financial planning fees, tax preparation fees, commissions and other service fees.

Transaction-based revenues include tax preparation fees, commissions and other service fees.

Fee revenue from service charges on deposit accounts represent the service charges assessed to customers who hold deposit accounts at the Bank.

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The amortization of contract cost assets is recorded within salaries and employee benefits expense in the Consolidated Statements of Income.

Notes to Consolidated Financial Statements – (continued)

Pension Costs

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Grant date fair value for stock options is estimated using the Black-Scholes option-pricing model.

Awards of nonvested share units and nonvested performance share units are valued at the fair market value of the Bancorp’s common stock as of the award date.

Awards of nonvested share units and nonvested performance share units are valued at the fair market value of the Bancorp’s

Notes to Consolidated Financial Statements – (continued)

common stock as of the award date.

Nonvested performance share unit compensation expense is based on the most recent performance assumption available and is adjusted as assumptions change.

Forfeitures are recognized when they occur.

Excess tax benefits (expenses) related to stock option exercises, settlement of other equity awards and dividends paid on nonvested share awards are recorded as a decrease (increase) to income tax expense.

Excess tax benefits (expenses) on the settlement of share-based awards are reflected in the Consolidated Statements of Cash Flows as an operating activity.

When available, vested equity awards are issued from treasury stock.

Excess tax benefits (expenses) result when tax return deductions differ from recognized share-based compensation cost that are determined using the grant-date fair value approach for financial statement purposes.

Excess tax benefits (expenses) related to the settlement of share-based awards are recorded as a decrease (increase) to income tax expense.

Excess tax benefits (expenses) on the settlement of share-based awards are reported in the Consolidated Statements of Cash Flows as an operating activity.

Dividends on nonvested share units are nonforfeitable and paid quarterly in conjunction with dividends declared and paid to common shareholders.

Dividends on nonvested performance share units are accrued based on the most recent performance assumptions available and paid upon the issuance of the award, once vested.

Income tax expense is determined based on the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

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The amounts in the Corporate unit include activity not related to the segments.

The methodologies and organizational hierarchies that define the business segments are periodically reviewed and revised.

Results may be restated, when necessary, to reflect changes in organizational structure or allocation methodology.

Any changes in estimates and allocations that may affect the reported results of any business segment will not affect the consolidated financial position or results of operations of the Corporation as a whole.

Management uses certain methodologies to allocate income and expenses to the business lines.

The methodologies are periodically reviewed and revised.

Results may be restated, when necessary, to reflect changes in organizational structure or allocation methodology.

A funds transfer pricing (“FTP”) methodology is used to assign interest income and interest expense to each interest-earning asset and interest-bearing liability on a matched maturity funding basis.

The matched maturity funding concept considers the origination

Notes to Consolidated Financial Statements – (continued)

date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated.

The matched maturity funding concept considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated.

Loans are assigned a FTP rate for funds used and deposits are assigned a FTP rate for funds provided.

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Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect on common shares outstanding, using the treasury stock method.

Notes to Consolidated Financial Statements – (continued)

Comprehensive Income

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When a cash flow hedge is discontinued, but the hedged cash flows or forecasted transaction is still expected to occur, changes in value that were accumulated in other comprehensive income (loss) are amortized or accreted into earnings over the same periods that the hedged transactions will affect earnings.

Notes to Consolidated Financial Statements – (continued)

Fair Value Measurements

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Accounting Standards Adopted in 2020

Leases - Topic 842

Accounting Standards Update No.

2016-02, “Leases” (“ASU 2016-02”), was issued in February 2016 and provides revised guidance related to the accounting and reporting of leases.

ASU 2016-02 requires lessees to recognize most leases on the balance sheet.

The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee depends on its classification as a finance or operating lease.

ASU 2016-02 requires a modified retrospective transition, with a package of practical expedients that entities may elect to apply.

In January 2018, Accounting Standards Update No.

2018-01, “Leases (Topic 842):

Land Easement Practical Expedient for Transition to Topic 842” was issued to address concerns about the costs and complexity of complying with the transition provisions of ASU 2016-02.

In July 2018, Accounting Standards Update No.

2018-10, “Codification Improvements to Topic 842, Leases” was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02.

Also in July 2018, Accounting Standards Update No.

2018-11, “Targeted Improvements” (“ASU 2018-11”) was issued and allows for an optional transition method in which the provisions of Topic 842 would be applied upon the adoption date and would not have to be retroactively applied to the earliest reporting period presented in the consolidated financial statements.

The Corporation used this optional transition method for the adoption of Topic 842.

In December 2018, Accounting Standards Update No.

2018-20, “Leases (Topic 842) Narrow-Scope Improvement for Lessors” was issued to address lessors’ concerns about sales taxes and other similar taxes collected from lessees, certain lessor costs, and recognition of variable payments for contracts with lease and non-lease components.

These ASUs were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.

The project team that was assembled to address the changes pursuant to Topic 842 identified and reviewed all in scope lease agreements.

The Corporation rents premises used in business operations under non-cancelable operating leases, which as of December 31, 2018 were not reflected in its Consolidated Balance Sheets.

The Corporation has no finance leases.

The Corporation adopted Topic 842 “Leases” effective January 1, 2019 and has applied the guidance to all operating leases within the scope of Topic 842 at that date.

The Corporation elected to adopt the package of practical expedients, which among other things, does not require reassessment of lease classification.

Upon adoption, the Corporation recognized $ 28.9 million in operating lease right-of-use-assets, $ 30.9 million in operating lease liabilities, a reduction in rent-related liabilities of $ 2.9 million , a reduction of net deferred tax assets of $ 222 thousand and a cumulative effect adjustment (net of taxes) that increased beginning retained earnings by $ 722 thousand in the Consolidated Balance Sheets.

The cumulative effect adjustment represented the recognition of unamortized deferred gains associated with two leases.

There was no change to the timing in recognition of operating lease rent expense in the Corporation’s consolidated financial statements associated with leases.

In March 2019, Accounting Standards Update No.

2019-01, “Leases (Topic 842) Codification Improvements” (“ASU 2019-01”) was issued to address lessors’ concerns about determining fair value of underlying leased assets and presentation issues in the statement of cash flows for sales-type and direct financing leases.

ASU 2019-01 also clarified for both lessees and lessors that transition disclosures related to Topic 250 were not required for annual periods are also not required for interim periods.

ASU 2019-01 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted.

The Corporation early adopted this ASU 2019-01 effective January 1, 2019 and it did not have a material impact on the Corporation’s consolidated financial statements.

Derivatives and Hedging - Topic 815

Accounting Standards Update No.

2017-12, “Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), was issued in August 2017 to better align financial reporting for hedging activities with the economic objectives of those activities.

ASU 2017-12 was effective for fiscal years beginning after December 15,

Notes to Consolidated Financial Statements – (continued)

2018, with early adoption, including adoption in an interim period, permitted.

In addition, ASU 2017-12 also permitted the reclassification of eligible securities from the held to maturity classification to the available for sale classification.

The Corporation adopted the provisions of ASU 2017-12 on January 1, 2019 using a modified retrospective transition method.

As permitted by ASU 2017-12, qualifying 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.

An unrealized loss of $ 75 thousand (net of taxes) was recognized in the accumulated other comprehensive income component of shareholders’ equity at the date of adoption.

The adoption of ASU 2017-12 did not have a material impact on the Corporation’s consolidated financial statements.

Accounting Standards Update No.

2018-16, “Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes” (“ASU 2018-16”), was issued in October 2018 to permit the use of the Overnight Index Swap rate based on the Secured Overnight Financing Rate as a U.S.

benchmark interest rate for hedge accounting purposes under Topic 815 in addition to existing benchmark interest rates that are currently used for hedge accounting.

ASU 2018-16 was effective for fiscal years beginning after December 15, 2018, and interim periods with those fiscal years.

The provisions required prospective application for qualifying new or re-designated hedging relationships entered into on or after the date of adoption.

The Corporation adopted the provisions of ASU 2018-16 on January 1, 2019 and it did not have a material impact on the Corporation’s consolidated financial statements.

Accounting Standards Pending Adoption

Financial Instruments - Credit Losses - Topic 326

Accounting Standards Update No.

2016-13, “Financial Instruments - Credit Losses” (“ASU 2016-13”), was issued in June 2016.

ASU 2016-13 requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost, as well as off-balance sheet credit exposures at the reporting date.

Financial Instruments - Credit Losses - ASC 326

ASU 2016-13 was issued in June 2016 and 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 at the reporting date.

In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration.

ASU 2016-13 provides for a modified retrospective transition, resulting in a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective, except for debt securities for which an other-than-temporary impairment has previously been recognized.

For these debt securities, a prospective transition approach will be adopted in order to maintain the same amortized cost prior to and subsequent to the effective date of ASU 2016-13.

This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019.

The Corporation will adopt ASU 2016-13, including the subsequent ASUs issued to clarify Topic 326 (“Topic 326”), on January 1, 2020.

In April 2019, Accounting Standards Update No.

2019-04, “Codification Improvements to Topic 326 Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” was issued to provide additional clarification on the scope and disclosure requirements of Topic 326.

This ASU includes provisions related to accounting policy elections that can be made by the entity related to accrued interest receivable and expected prepayments on financial assets, the inclusion of recoveries in estimating the allowance for credit losses (“ACL”) and consideration of contract extension and renewals when determining the contractual term.

This ASU also provides clarification on the tabular vintage disclosures related to line-of-credit arrangements that convert term loans.

In November 2019, Accounting Standards Update No.

2019-11, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses” was issued to further additional clarification on the adoption of Topic 326.

The effective dates of these ASUs are the same as the effective date of ASU 2016-13.

The Corporation assembled a cross-functional project team that met regularly to address the additional data requirements, to determine the approach for implementation and to identify new internal controls over enhanced accounting processes for estimating the ACL.

This included assessing the adequacy of existing loan and loss data, as well as assessing models for default and loss estimates.

The Corporation has completed the development of its ACL methodology.

To estimate the ACL for loans and off-balance sheet credit exposures, such as unfunded loan commitments, the Corporation will utilize a discounted cash flow model that contains additional assumptions to calculate credit losses over the estimated life of financial assets and off-balance sheet credit exposures and will include the impact of forecasted economic conditions.

The estimate is expected to include

In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased

Notes to Consolidated Financial Statements – (continued)

a one-year reasonable and supportable forecast period and thereafter a one-year reversion period to the historical mean of its macroeconomic assumption.

The estimate will also include qualitative factors that may not be reflected in quantitatively derived results to ensure that the ACL reflects a reasonable estimate of current expected credit losses.

Based on the credit quality of our existing available for sale debt securities portfolio, which primarily consists of obligations of U.S.

government agency and U.S.

government-sponsored enterprise securities, including mortgage-backed securities, the Corporation does not expect the adoption of ASU 2016-13, as it relates to debt securities, to be significant.

For available for sale debt securities with unrealized losses, credit losses will be recognized as an allowance rather than a reduction in the amortized cost of the securities.

As a result, improvements to estimated credit losses will be recognized immediately in earnings rather than as interest income over time.

The project team completed limited “trial” runs and analytical reviews through the year ended December 31, 2019.

The Corporation expects to complete independent model validation and to finalize its documentation of ACL processes and controls in the first quarter of 2020.

Upon adoption of Topic 326 on January 1, 2020, the Corporation currently expects to recognize a total increase in the ACL for loans (a contra-asset) and in the ACL for off-balance sheet credit exposures (a liability) in the range of $ 5.5 million to $ 8.5 million , an increase in its net deferred tax assets in the range of $ 1.3 million to $ 2.0 million , and a one-time cumulative-effect adjustment that decreases retained earnings in the range of $ 4.2 million to $ 6.5 million (net of tax).

The Corporation also plans to elect the regulatory capital transition relief issued by the FDIC to provide banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital resulting from the adoption of Topic 326.

The adoption of Topic 326 is not expected to have a material impact on the Corporation’s and the Bank’s regulatory capital.

Fair Value Measurement - Topic 820

financial assets with credit deterioration.

For available for sale debt securities with unrealized losses, ASC 326 requires credit losses to be recognized as an allowance rather than a reduction in the amortized cost of the securities.

As a result, improvements to estimated credit losses are recognized immediately in earnings rather than as interest income over time.

ASU 2016-13 provides for a modified retrospective transition, resulting in a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective.

This ASU was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019.

The Corporation adopted ASU 2016-13, including the subsequent ASUs issued to clarify ASC 326, on January 1, 2020.

This included assessing the adequacy of existing loan and loss data, assessing models for default and loss estimates, conducting limited “trial” runs and analytical reviews through December 31, 2019, and completing independent model validation and documentation of ACL processes and controls in the first quarter of 2020.

Upon adoption of ASC 326 on January 1, 2020, the ACL for loans (a contra-asset) increased by $ 6.5 million and the ACL for unfunded commitments (a liability) increased by $ 1.5 million, as compared to December 31, 2019.

The increases in the ACL on loans and unfunded commitments upon adoption resulted in a one-time cumulative-effect adjustment that decreased retained earnings by $ 6.1 million, net of deferred tax balances of $ 1.9 million.

The Corporation elected the five-year phase-in option, provided by regulatory guidance issued by the Federal Deposit Insurance Corporation (the “FDIC”) in March 2020, which delays the estimated impact of ASC 326 on regulatory capital for the first two years and then phases it in over a three-year period beginning in 2022.

See Note 13 for additional disclosure on regulatory capital.

Fair Value Measurement - ASC 820

Accounting Standards Update No.

2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), was issued in August 2018 to modify the disclosure requirements related to fair value.

ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted, including adoption in an interim period.

Certain provisions under ASU 2018-13 require prospective application, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption.

The Corporation will adopt ASU 2018-13 on January 1, 2020 and this ASU is not expected to have a material impact on the Corporation’s consolidated financial statements.

Compensation - Retirement Benefits - Topic 715

ASU 2018-13 was effective for fiscal years beginning after December 15, 2019.

Certain provisions under ASU 2018-13 required prospective application, while other provisions required retrospective application to all periods presented in the consolidated financial statements upon adoption.

The Corporation adopted the provisions of ASU 2018-13 effective January 1, 2020 and the adoption did not have a material impact on the Corporation’s consolidated financial statements.

Compensation - Retirement Benefits - ASC 715

Accounting Standards Update No.

2 unchanged sentences

The provisions under ASU 2018-14 are required to be applied retrospectively.

The adoption of ASU 2018-14 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Intangibles - Goodwill and Other - Internal-Use Software - Topic 350

The Corporation adopted the provisions of ASU 2018-13 effective December 31, 2020 and the adoption did not have a material impact on the Corporation’s consolidated financial statements.

Intangibles - Goodwill and Other - Internal-Use Software - ASC 350

Accounting Standards Update No.

2 unchanged sentences

All costs in the preliminary and post-implementation project stages are expensed as incurred, while certain costs within the application development stage are capitalized.

The provisions under ASU 2018-15 can either be applied retrospectively or prospectively.

ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted, including adoption in an interim period.

The Corporation will adopt ASU 2018-15 on January 1, 2020 on a prospective basis.

ASU 2018-15 is not expected to have a material impact on the Corporation’s consolidated financial statements.

ASU 2018-15 was effective for fiscal years beginning after December 15, 2019.

Effective January 1, 2020, the Corporation adopted the provisions of ASU 2018-15 prospectively, as permitted, and the adoption did not have a material impact on the Corporation’s consolidated financial statements.

Notes to Consolidated Financial Statements – (continued)

Income Taxes - Topic 745

Reference Rate Reform - ASC 848

Accounting Standards Update No.

2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), was issued in December 2019 to simplify the accounting for income taxes.

2020-04, “Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), was issued in March 2020 to ease the potential burden in accounting for recognizing the effects of reference rate reform on financial reporting.

Such challenges include the accounting and operational implications for contract modifications and hedge accounting.

The provisions in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to certain contracts, including loan and debt agreements, hedging relationships and other transactions affected by reference rate reform.

These provisions apply to contract modifications that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

Qualifying modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification would be considered "minor" so that any existing unamortized deferred loan origination fees and costs would carry forward and continue to be amortized.

ASU 2020-04 also provides numerous optional expedients for hedge accounting.

ASU 2020-04 is effective as of March 12, 2020, and applies to contract modifications and amendments made as of the beginning of the reporting period that includes or is subsequent to March 12, 2020, and applies through December 31, 2022.

In addition, ASU 2021-01, “Reference Rate Reform - Scope (“ASU 2021-01”), was issued in January 2021 to clarify certain optional expedients in ASC 848 related to contract modifications associated with derivatives hedge accounting.

The clarifications specify that the expedients apply to derivative instruments that use an interest rate for margining, discounting or contract price alignment that is modified as a result of reference rate reform.

ASU 2021-01 is effective immediately for all entities and the provisions can be applied to contract modification retrospectively as of March 12, 2020 or on a prospective basis to new modifications through December 31, 2022, the end of the effective period of this ASU.

The optional expedients in both ASU 2020-04 and ASU 2021-01 cannot be applied to contract modifications within the scope of ASC 848 that are made after December 31, 2022.

Effective October 1, 2020, the Corporation adopted the provisions of these ASUs on a prospective basis for all eligible contract modifications.

The adoption did not have a material impact on the Corporation’s consolidated financial statements.

Accounting Standards Pending Adoption

Income Taxes - ASC 745

Accounting Standards Update No.

2019-12, “Income Taxes - Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), was issued in December 2019 to simplify the accounting for income taxes.

ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted.

Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective application through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption.

The Corporation is currently evaluating the effect that this ASU will have on the Corporation’s consolidated financial statements.

The adoption of ASU 2019-12 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Receivables - ASC 310

Accounting Standards Update No.

2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs” (“ASU 2020-08”), was issued in October 2020 to provide further clarification and update the previously issued guidance in ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20:

Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”).

ASU 2017-08 shortened the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date.

The Corporation early adopted the provisions of ASU 2017-08, effective January 1, 2017.

ASU 2020-08 requires that at each reporting period, to the extent that the amortized cost of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess premium shall be amortized to the next call date.

ASU 2020-08 is effective for fiscal years ending after December 15, 2020 and early adoption is not permitted.

The provisions under ASU 2020-08 are required to be applied prospectively.

The adoption of ASU 2020-08 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Notes to Consolidated Financial Statements – (continued)

Note 3 - Cash and Due from Banks

The Bank maintains certain average reserve balances to meet the requirements of the Board of Governors of the FRB.

Cash and due from banks includes cash on hand, cash items in process of collection, cash on deposit at the Federal Reserve Bank of Boston (“FRB”) and other correspondent banks and cash pledged to derivative counterparties.

The Bank maintains certain average reserve balances to meet the requirements of the FRB.

Some or all of these reserve requirements may be satisfied with vault cash.

Reserve balances amounted to $ 27.9 million and $ 21.6 million , respectively, at December 31, 2019 and 2018 and were included in cash and due from banks in the Consolidated Balance Sheets.

As of December 31, 2019 and 2018 , cash and due from banks includes interest-bearing deposits in other banks of $ 83.4 million and $ 33.7 million , respectively.

Effective March 26, 2020, the FRB reduced the reserve requirement ratios to zero percent to eliminate the need for depository institutions, such as the Bank, to maintain balances in accounts at the FRB to satisfy reserve requirements.

At December 31, 2019, the reserve balance was $ 27.9 million and was included in cash and due from banks in the Consolidated Balance Sheets.

As of December 31, 2020 and 2019, cash and due from banks included interest-bearing deposits in other banks of $ 138.4 million and $ 83.4 million, respectively.

See Note 14 for additional disclosure regarding cash collateral pledged to derivative counterparties.

Note 4 - Securities

The following tables present the amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of securities by major security type and class of security:

Adoption of ASC 326

Effective January 1, 2020, the Corporation adopted the provisions of ASC 326 using the modified retrospective method.

Therefore, prior period comparative information has not been adjusted and continues to be reported under the GAAP in effect prior to the adoption of ASC 326.

There was no ACL on available for sale debt securities recognized upon the adoption of ASC 326.

Available for Sale Debt Securities

The following table presents the amortized cost, gross unrealized holding gains, gross unrealized holding losses, ACL on securities and fair value of securities by major security type and class of security:

(Dollars in thousands)

December 31, 2019

Amortized Cost

Unrealized Gains

Unrealized Losses

December 31, 2020 Amortized Cost Unrealized Gains Unrealized Losses Allowance for Credit Losses Fair Value

Available for Sale Debt Securities:

1 unchanged sentence

government-sponsored enterprises

$ 131,186 $ 628 ($ 145 ) $ — $ 131,669

Mortgage-backed securities issued by U.S.

1 unchanged sentence

government-sponsored enterprises

725,890 14,942 ( 527 ) — 740,305

Individual name issuer trust preferred debt securities

13,341 — ( 672 ) — 12,669

Corporate bonds

11,153 — ( 1,225 ) — 9,928

Total available for sale debt securities $ 881,570 $ 15,570 ($ 2,569 ) $ — $ 894,571

Total securities

Notes to Consolidated Financial Statements – (continued)

The following table presents the amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of securities by major security type and class of security:

(Dollars in thousands)

December 31, 2018

Amortized Cost

Unrealized Gains

Unrealized Losses

December 31, 2019 Amortized Cost Unrealized Gains Unrealized Losses Fair Value

Available for Sale Debt Securities:

1 unchanged sentence

government-sponsored enterprises

$ 157,255 $ 626 ($ 233 ) $ 157,648

Mortgage-backed securities issued by U.S.

1 unchanged sentence

government-sponsored enterprises

Obligations of states and political subdivisions

713,553 8,491 ( 2,964 ) 719,080

Individual name issuer trust preferred debt securities

13,324 — ( 745 ) 12,579

Corporate bonds

11,141 — ( 958 ) 10,183

Total available for sale debt securities $ 895,273 $ 9,117 ($ 4,900 ) $ 899,490

Held to Maturity Debt Securities:

Mortgage-backed securities issued by U.S.

government agencies and U.S.

government-sponsored enterprises

Total held to maturity debt securities

Total securities

As discussed in Note 2 , on January 1, 2019, the Corporation adopted ASU 2017-12.

An unrealized loss of $ 75 thousand (net of taxes) was recognized in the accumulated other comprehensive income component of shareholders’ equity at the date of adoption.

Notes to Consolidated Financial Statements – (continued)

Accrued interest receivable on available for sale debt securities totaled $ 2.4 million and $ 2.9 million, respectively, as of December 31, 2020 and 2019.

At December 31, 2020 and 2019, securities with a fair value of $ 291.9 million and $ 431.9 million, respectively, were pledged as collateral for FHLB borrowings, potential borrowings with the FRB, certain public deposits and for other purposes.

4 unchanged sentences

Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)

December 31, 2019

Amortized Cost

(Dollars in thousands) Available for Sale

December 31, 2020 Amortized Cost Fair Value

Due in one year or less $ 128,971 $ 131,519

Due after one year to five years

350,859 357,148

Due after five years to ten years

277,148 279,859

Due after ten years

124,592 126,045

Total securities

Included in the above table are available for sale debt securities with an amortized cost balance of $ 180.4 million and a fair value of $ 179.1 million at December 31, 2019 that are callable at the discretion of the issuers.

Final maturities of the callable securities range from 4 months to 17 years, with call features ranging from 1 month to 2 years.

Other-Than-Temporary Impairment Assessment

Management assesses whether the decline in fair value of investment securities is other-than-temporary on a regular basis.

Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer.

Management evaluates impairments in value both qualitatively and quantitatively to assess whether they are other-than-temporary.

$ 881,570 $ 894,571

Included in the above table are debt securities with an amortized cost balance of $ 154.4 million and a fair value of $ 152.9 million at December 31, 2020 that are callable at the discretion of the issuers.

Final maturities of the callable securities range from 3 years to 16 years, with call features ranging from 1 month to 2 years.

The following table summarizes amounts relating to sales of securities:

(Dollars in thousands)

For the periods ended December 31, 2020 2019 2018

Proceeds from sales $ — $ 11,877 $ —

Gross realized gains $ — $ — $ —

Gross realized losses — ( 53 ) —

Net realized losses on securities $ — ($ 53 ) $ —

Assessment of Available for Sale Debt Securities for Impairment

Management assesses the decline in fair value of investment securities on a regular basis.

Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, vol atility of earnings of a specific issuer, or deterioration in credit quality of the issuer.

Management evaluates both qualitative and quantitative factors to assess whether an impairment exists.

Notes to Consolidated Financial Statements – (continued)

The following tables summarize temporarily impaired securities, segregated by length of time the securities have been in a continuous unrealized loss position:

(Dollars in thousands)

Less than 12 Months

12 Months or Longer

December 31, 2019

(Dollars in thousands) Less than 12 Months 12 Months or Longer Total

December 31, 2020 # Fair

Value Unrealized

Losses # Fair

Value Unrealized

Losses # Fair

Value Unrealized

Obligations of U.S.

government-sponsored enterprises

6 $ 63,856 ($ 145 ) — $ — $ — 6 $ 63,856 ($ 145 )

Mortgage-backed securities issued by U.S.

1 unchanged sentence

government-sponsored enterprises

16 107,283 ( 527 ) — — — 16 107,283 ( 527 )

Individual name issuer trust preferred debt securities

— — — 5 12,669 ( 672 ) 5 12,669 ( 672 )

Corporate bonds — — — 3 9,928 ( 1,225 ) 3 9,928 ( 1,225 )

Total temporarily impaired securities

(Dollars in thousands)

Less than 12 Months

12 Months or Longer

December 31, 2018

22 $ 171,139 ($ 672 ) 8 $ 22,597 ($ 1,897 ) 30 $ 193,736 ($ 2,569 )

(Dollars in thousands) Less than 12 Months 12 Months or Longer Total

December 31, 2019 # Fair

Value Unrealized

Losses # Fair

Value Unrealized

Losses # Fair

Value Unrealized

Obligations of U.S.

government-sponsored enterprises

3 $ 20,364 ($ 136 ) 3 $ 49,902 ($ 97 ) 6 $ 70,266 ($ 233 )

Mortgage-backed securities issued by U.S.

1 unchanged sentence

government-sponsored enterprises

4 41,150 ( 56 ) 23 216,804 ( 2,908 ) 27 257,954 ( 2,964 )

Individual name issuer trust preferred debt securities

— — — 5 12,579 ( 745 ) 5 12,579 ( 745 )

Corporate bonds — — — 3 10,183 ( 958 ) 3 10,183 ( 958 )

Total temporarily impaired securities

Further deterioration in credit quality of the underlying issuers of the securities, deterioration in the condition of the financial services industry, worsening of the current economic environment, or additional declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods, and the Corporation may incur write-downs.

7 $ 61,514 ($ 192 ) 34 $ 289,468 ($ 4,708 ) 41 $ 350,982 ($ 4,900 )

Further deterioration in credit quality of the underlying issuers of the securities, deterioration in the condition of the financial services industry, worsening of the current economic environment, or additional declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as credit losses, and the Corporation may incur write-downs.

Obligations of U.S.

7 unchanged sentences

government-sponsored enterprises.

Management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality.

The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at December 31, 2020.

Management believes that the unrealized losses on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality.

Management expects to recover the entire amortized cost basis of these securities.

Furthermore, the Corporation does not intend to sell these securities and it is not more-likely-than-not that the Corporation will be required to sell these securities before recovery of their cost basis, which may be maturity.

Therefore, management does not consider these investments to be other-than-temporarily impaired at December 31, 2019 .

Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity.

Therefore, no ACL on securities was recorded at December 31, 2020.

Individual Name Issuer Trust Preferred Debt Securities

Included in debt securities in an unrealized loss position at December 31, 2020 were five trust preferred securities issued by four individual companies in the banking sector.

Management believes the unrealized losses on these holdings are primarily attributable to changes in the investment spreads and interest rates and not changes in the credit quality of the issuers of the debt securities.

Based on the information available through the filing date of this report, all individual name issuer trust preferred debt securities held in our portfolio continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers.

As of December 31, 2019 , individual name issuer trust preferred

Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the

Notes to Consolidated Financial Statements – (continued)

debt securities with an amortized cost of $ 2.0 million and unrealized losses of $ 161 thousand were rated below investment grade by Standard & Poors, Inc.

Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information.

issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information.

As of December 31, 2020, there were two individual name issuer trust preferred debt securities with an amortized cost of $ 4.0 million and unrealized losses of $ 266 thousand that were rated below investment grade by Standard & Poors, Inc.

We noted no additional downgrades to below investment grade between December 31, 2020 and the filing date of this report.

Based on this review, management concluded that it expects to recover the entire amortized cost basis of these securities.

Therefore, management does not consider these investments to be other-than-temporarily impaired at December 31, 2019 .

Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates and not material changes in the credit quality of the issuers of the debt securities.

Management expects to recover the entire amortized cost basis of these securities.

Therefore, no ACL on securities was recorded at December 31, 2020.

Corporate Bonds

At December 31, 2019 , the Corporation had three corporate bond holdings with unrealized losses totaling $ 958 thousand .

At December 31, 2020, the Corporation had three corporate bond holdings with unrealized losses totaling $ 1.2 million.

These investment grade corporate bonds were issued by large corporations in the financial services industry.

Management believes the unrealized losses on these bonds are a function of the changes in the investment spreads and interest rate movements and not changes in the credit quality of the issuers of the debt securities.

The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at December 31, 2020.

Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates and not changes in the credit quality of the issuers of the debt securities.

Management expects to recover the entire amortized cost basis of these securities.

Therefore, management does not consider these investments to be other-than-temporarily impaired at December 31, 2019 .

The following table summarizes amounts relating to sales of securities:

(Dollars in thousands)

For the periods ended December 31,

Proceeds from sales

Gross realized gains

Gross realized losses

Net realized losses on securities

Notes to Consolidated Financial Statements – (continued)

Therefore, no ACL on securities was recorded at December 31, 2020.

Note 5 - Loans

2 unchanged sentences

December 31, 2020 2019

December 31, 2018

Commercial real estate (1)

$ 1,633,024 $ 1,547,572

Commercial & industrial (2)

817,408 585,289

Total commercial 2,450,432 2,132,861

1 unchanged sentence

Residential real estate (3)

1,467,312 1,449,090

259,185 290,874

19,061 20,174

Total consumer 278,246 311,048

Total loans (5)

$ 4,195,990 $ 3,892,999

(1) Commercial real estate (“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) Commercial & industrial (“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 $ 199.8 million of PPP loans as of December 31, 2020.

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

1 unchanged sentence

(5) Includes net unamortized loan origination costs of $ 1.5 million and $ 5.3 million, respectively, at December 31, 2020 and 2019 and net unamortized premiums on purchased loans of $ 787 thousand and $ 995 thousand, respectively, at December 31, 2020 and 2019.

As of December 31, 2019 and 2018 , loans amounting to $ 2.1 billion and $ 2.0 billion , respectively, were pledged as collateral to the FHLB under a blanket pledge agreement and to the FRB for the discount window.

Accrued interest receivable on loans totaled $ 11.3 million and $ 11.0 million, respectively, as of December 31, 2020

Notes to Consolidated Financial Statements – (continued)

and December 31, 2019.

As of both December 31, 2020 and 2019, loans amounting to $ 2.1 billion were pledged as collateral to the FHLB under a blanket pledge agreement and to the FRB for the discount window.

See Note 12 for additional disclosure regarding borrowings.

As disclosed in Note 1, the Corporation has elected to account for eligible loan modifications under Section 4013 of the CARES Act, as amended by the CRRSA Act.

Eligible loan modifications are not required to be classified as TDRs and are not reported as past due provided that they are performing in accordance with the modified terms.

Interest income will continue to be recognized unless the loan is placed on nonaccrual status in accordance with the nonaccrual loans accounting policy disclosed in Note 1.

In 2020, we executed loan payment deferment 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.

See additional disclosure regarding TDRs below.

As of December 31, 2020, Washington Trust has active loan payment deferment modifications on 136 loans totaling $ 244.7 million.

Concentrations of Credit Risk

2 unchanged sentences

The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in the Corporation’s market area.

Notes to Consolidated Financial Statements – (continued)

Past Due Loans

1 unchanged sentence

The following tables present an aging analysis of past due loans, segregated by class of loans:

(Dollars in thousands)

Days Past Due

December 31, 2019

Total Past Due

(Dollars in thousands) Days Past Due

December 31, 2020 30-59 60-89 Over 90 Total Past Due Current Total Loans

Commercial real estate

$ 265 $ — $ — $ 265 $ 1,632,759 $ 1,633,024

Commercial & industrial

1 2 — 3 817,405 817,408

Total commercial 266 2 — 268 2,450,164 2,450,432

1 unchanged sentence

Residential real estate

4,466 701 5,172 10,339 1,456,973 1,467,312

894 129 644 1,667 257,518 259,185

23 7 88 118 18,943 19,061

Total consumer 917 136 732 1,785 276,461 278,246

(Dollars in thousands)

Days Past Due

December 31, 2018

Total Past Due

Total loans $ 5,649 $ 839 $ 5,904 $ 12,392 $ 4,183,598 $ 4,195,990

Notes to Consolidated Financial Statements – (continued)

(Dollars in thousands) Days Past Due

December 31, 2019 30-59 60-89 Over 90 Total Past Due Current Total Loans

Commercial real estate

$ 830 $ — $ 603 $ 1,433 $ 1,546,139 $ 1,547,572

Commercial & industrial

1 — — 1 585,288 585,289

Total commercial 831 — 603 1,434 2,131,427 2,132,861

1 unchanged sentence

Residential real estate

4,574 2,155 4,700 11,429 1,437,661 1,449,090

971 729 996 2,696 288,178 290,874

42 — 88 130 20,044 20,174

Total consumer 1,013 729 1,084 2,826 308,222 311,048

Total loans $ 6,418 $ 2,884 $ 6,387 $ 15,689 $ 3,877,310 $ 3,892,999

Included in past due loans as of December 31, 2020 and 2019, were nonaccrual loans of $ 8.5 million and $ 11.5 million, respectively.

All loans 90 days or more past due at December 31, 2020 and 2019 were classified as nonaccrual.

Notes to Consolidated Financial Statements – (continued)

Impaired Loans

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

The Corporation identifies loss allocations for impaired loans on an individual loan basis.

The following is a summary of impaired loans:

Nonaccrual Loans

The following is a summary of nonaccrual loans, segregated by class of loans:

(Dollars in thousands)

Recorded Investment (1)

Unpaid Principal

Related Allowance

No Related Allowance Recorded

December 31, 2020 2019

Commercial real estate

3 unchanged sentences

Residential real estate

11,981 14,297

Total consumer 1,216 1,851

With Related Allowance Recorded

Total nonaccrual loans $ 13,197 $ 17,408

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

For nonaccrual loans with a carrying value of $ 3.0 million as of December 31, 2020, no ACL was deemed necessary.

As of December 31, 2020 and December 31, 2019, nonaccrual loans secured by one- to four-family residential property amounting to $ 3.4 million and $ 5.8 million, respectively, were in process of foreclosure.

Nonaccrual loans of $ 4.7 million and $ 5.9 million, respectively, were current as to the payment of principal and interest at December 31, 2020 and December 31, 2019.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2020.

Notes to Consolidated Financial Statements – (continued)

The following table presents interest income recognized on nonaccrual loans segregated by loan class:

(Dollars in thousands) Interest Income Recognized

Year ended December 31, 2020

Commercial real estate $ —

3 unchanged sentences

Residential real estate 379

Home equity 35

Total consumer 35

Total impaired loans

Residential real estate

Total impaired loans

The recorded investment in impaired loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs.

For accruing impaired loans (troubled debt restructurings for which management has concluded that the collectibility of the loan is not in doubt), the recorded investment also includes accrued interest.

Notes to Consolidated Financial Statements – (continued)

The following table presents the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class:

Troubled Debt Restructurings

The recorded investment in TDRs consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs.

For accruing TDRs, the recorded investment also includes accrued interest.

The following table presents the recorded investment in TDRs and certain other information related to TDRs:

(Dollars in thousands)

Average Recorded Investment

Interest Income Recognized

December 31, 2020 2019

Accruing TDRs $ 13,418 $ 377

Nonaccrual TDRs 2,345 492

Total TDRs $ 15,763 $ 869

Specific reserves on TDRs included in the ACL on loans $ 159 $ 97

Additional commitments to lend to borrowers with TDRs $ — $ —

Notes to Consolidated Financial Statements – (continued)

The following table presents loans modified as a TDR:

(Dollars in thousands) Outstanding Recorded Investment

# of Loans Pre-Modifications Post-Modifications

Years ended December 31, 2020 2019 2020 2019 2020 2019

Commercial real estate

3 — $ 1,798 $ — $ 1,798 $ —

Commercial & industrial

5 — 6,844 — 6,844 —

Total commercial 8 — 8,642 — 8,642 —

1 unchanged sentence

Residential real estate

11 — 5,943 — 5,943 —

4 — 873 — 873 —

Total consumer 4 — $ 873 $ — $ 873 $ —

Nonaccrual Loans

The following is a summary of nonaccrual loans, segregated by class of loans:

Total 23 — $ 15,458 $ — $ 15,458 $ —

The following table presents information on how loans were modified as a TDR:

(Dollars in thousands)

Years ended December 31, 2020 2019

Below-market interest rate concession $ — $ —

Payment deferral 7,704 —

Maturity / amortization concession — —

Interest only payments 6,384 —

Combination (1)

Total $ 15,458 $ —

(1) Loans included in this classification were modified with a combination of any two of the concessions listed in this table.

The following table presents information on TDRs modified within the previous 12 months for which there was a payment default:

(Dollars in thousands) # of Loans Recorded Investment

Years ended December 31, 2020 2019 2020 2019

Commercial real estate 1 — $ 850 $ —

Commercial & industrial — — — —

Residential real estate:

Residential real estate 2 — 1,299 —

Home equity 2 — 118 —

Other — — — —

Total 5 — $ 2,267 $ —

Notes to Consolidated Financial Statements – (continued)

Individually Analyzed Loans

Effective January 1, 2020, individually analyzed loans include nonaccrual commercial loans, reasonably expected TDRs, executed TDRs, and certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans.

As of December 31, 2020, the carrying value of individually analyzed loans amounted to $ 18.3 million, of which $ 8.4 million were considered collateral dependent.

For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date.

The following table presents the carrying value of collateral dependent individually analyzed loans as of December 31, 2020:

(Dollars in thousands) Carrying Value Related Allowance

Commercial real estate (1)

Commercial & industrial (2)

Total commercial 2,243 —

1 unchanged sentence

Residential real estate (3)

Home equity (3)

Total consumer 254 183

Total nonaccrual loans

Accruing loans 90 days or more past due

As of December 31, 2019 and 2018 , loans secured by one- to four-family residential property amounting to $ 5.8 million and $ 761 thousand , respectively, were in process of foreclosure.

Nonaccrual loans of $ 5.9 million and $ 3.1 million , respectively, were current as to the payment of principal and interest as of December 31, 2019 and 2018 .

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

Troubled Debt Restructurings

The recorded investment in troubled debt restructurings consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs, at the time of the restructuring.

For accruing troubled debt restructured loans, the recorded investment also includes accrued interest.

The recorded investment in troubled debt

Total $ 8,444 $ 221

(1) Secured by income-producing property.

(2) Secured by business assets.

(3) Secured by one- to four-family residential properties.

Notes to Consolidated Financial Statements – (continued)

restructurings was $ 869 thousand and $ 5.6 million , respectively, at December 31, 2019 and 2018 .

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

In 2019 , there were no loans modified as a troubled debt restructuring.

In 2018 , there was one commercial and industrial loan modified as a troubled debt restructuring with a pre-modification and post-modification recorded investment of $ 608 thousand .

This troubled debt restructuring included a combination of concessions pertaining to maturity and interest only payment terms.

In 2019 , there were no payment defaults on troubled debt restructured loans modified within the previous 12 months.

In 2018 , payment defaults on troubled debt restructured loans modified within the previous 12 months occurred on one loan with a carrying value of $ 608 thousand at the time of default.

As of December 31, 2019 , there were no significant commitments to lend additional funds to borrowers whose loans were restructured.

Prior to January 1, 2020, impaired loans individually analyzed for impairment included nonaccrual loans and executed TDRs.

The following is a summary of impaired loans as of December 31, 2019:

(Dollars in thousands) Recorded Investment (1)

Unpaid Principal Related Allowance

No Related Allowance Recorded

Residential Real Estate:

Residential real estate $ 13,968 $ 14,803 $ —

1,471 1,472 —

Total consumer 1,559 1,560 —

Subtotal 15,527 16,363 —

With Related Allowance Recorded

Commercial real estate

$ 603 $ 926 $ —

Commercial & industrial

Total commercial 1,260 1,583 580

Residential Real Estate:

Residential real estate 687 714 95

Total consumer 310 309 293

Subtotal 2,257 2,606 968

Total impaired loans $ 17,784 $ 18,969 $ 968

Commercial $ 1,260 $ 1,583 $ 580

Residential real estate 14,655 15,517 95

Consumer 1,869 1,869 293

Total impaired loans $ 17,784 $ 18,969 $ 968

(1) The recorded investment in impaired loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs.

For accruing impaired loans (TDRs for which management has concluded that the collectability of the loan is not in doubt), the recorded investment also includes accrued interest.

Notes to Consolidated Financial Statements – (continued)

As required under the GAAP in effect prior to the adoption of ASC 326, the following table presents the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class:

(Dollars in thousands) Average Recorded Investment

Interest Income Recognized

Years ended December 31, 2019 2018 2019 2018

Commercial real estate

$ 864 $ 1,050 $ 1 $ —

Commercial & industrial

2,149 5,403 106 259

Total commercial

3,013 6,453 107 259

Residential real estate:

Residential real estate

11,575 9,645 473 393

1,466 1,182 58 52

Total consumer 1,534 1,251 60 57

Totals $ 16,122 $ 17,349 $ 640 $ 709

Credit Quality Indicators

8 unchanged sentences

Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity.

Lesser stature loans have an acceptable level of credit quality but exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, secondary sources of repayment, or performance inconsistency or may be in an industry or of a loan type known to have a higher degree of risk.

Lesser stature loans have an acceptable level of credit quality, but may exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, performance or may be in an industry or of a loan type known to have a higher degree of risk.

These weaknesses may be mitigated by secondary sources of repayment, including SBA guarantees.

Special Mention - Loans with potential weaknesses that deserve management’s close attention.

6 unchanged sentences

The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectability.

A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty.

A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but

Notes to Consolidated Financial Statements – (continued)

the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty.

A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined.

1 unchanged sentence

The Corporation’s procedures call for loan ratings and classifications to be revised whenever information becomes available that indicates a change is warranted.

On a quarterly basis, management reviews the criticized loan portfolio, which generally consists of commercial loans that are risk-rated special mention or worse, and other selected loans.

On a quarterly basis, management reviews the watched asset list, which generally consists of commercial loans that are risk-rated 6 or worse, highly leveraged transaction loans, high-volatility commercial real estate and other selected loans.

Management’s review focuses on the current status of the loans and strategies to improve the credit.

An annual loan review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications.

An annual credit review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications.

This review is supplemented with selected targeted internal reviews of the commercial loan portfolio.

Residential and Consumer

Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type.

In addition, other techniques are utilized to monitor indicators of credit deterioration in the residential real estate loans and home equity consumer loans.

Among these techniques is the periodic tracking of loans with an updated Fair Isaac Corporation (“FICO”) score and an estimated loan to value (“LTV”) ratio.

LTV is estimated based on such factors as the location, the original LTV ratio, and the date of origination of the loan and do not reflect actual appraisal amounts.

The results of these analyses and other credit review procedures, including selected targeted internal reviews, are taken into consideration in the determination of qualitative loss factors for residential real estate and home equity consumer credits.

Notes to Consolidated Financial Statements – (continued)

The following table presents the commercial loan portfolio, segregated by category of credit quality indicator:

(Dollars in thousands)

The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment as of December 31, 2020:

(Dollars in thousands) Term Loans Amortized Cost by Origination Year

2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Revolving Loans Converted to Term Loans Total

$ 283,341 $ 353,875 $ 260,917 $ 236,310 $ 136,490 $ 249,359 $ 10,333 $ 2,386 $ 1,533,011

Special Mention

756 20,235 39,387 16,222 11,318 10,367 771 — 99,056

957 — — — — — — — 957

285,054 374,110 300,304 252,532 147,808 259,726 11,104 2,386 1,633,024

293,493 95,775 98,146 56,792 44,445 91,128 95,817 1,296 776,892

Special Mention

1,123 722 3,210 6,839 3,141 14,853 3,806 56 33,750

403 — — — — 6,363 — — 6,766

295,019 96,497 101,356 63,631 47,586 112,344 99,623 1,352 817,408

Residential Real Estate:

Residential real estate:

463,477 253,228 146,839 155,976 128,139 309,314 — — 1,456,973

238 1,698 1,310 886 110 6,097 — — 10,339

Total residential real estate

463,715 254,926 148,149 156,862 128,249 315,411 — — 1,467,312

9,838 6,771 3,898 1,474 1,217 3,955 219,085 11,280 257,518

— 35 24 — — 186 310 1,112 1,667

Total home equity

9,838 6,806 3,922 1,474 1,217 4,141 219,395 12,392 259,185

5,214 2,241 1,237 1,544 548 7,850 308 1 18,943

19 1 — — 88 7 3 — 118

5,233 2,242 1,237 1,544 636 7,857 311 1 19,061

Total Loans $ 1,058,859 $ 734,581 $ 554,968 $ 476,043 $ 325,496 $ 699,479 $ 330,433 $ 16,131 $ 4,195,990

Consistent with industry practice, Washington Trust may renew commercial loans at or immediately prior to their maturity.

In the table above, renewals subject to full credit evaluation before being granted are reported as originations in the period renewed.

Notes to Consolidated Financial Statements – (continued)

As required under the GAAP in effect prior to the adoption of ASC 326, the following table presents the commercial loan portfolio, segregated by category of credit quality indicator as of December 31, 2019:

(Dollars in thousands)

Pass Special Mention Classified

Commercial real estate

$ 1,546,139 $ 830 $ 603

Commercial & industrial

549,416 24,961 10,912

Total commercial $ 2,095,555 $ 25,791 $ 11,515

Residential and Consumer

Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type.

For non-impaired residential real estate and consumer loans, the Corporation assigns loss allocation factors to each respective loan type.

Other techniques are utilized to monitor indicators of credit deterioration in the residential real estate loans and consumer loan portfolios.

Among these techniques is the periodic tracking of loans with an updated Fair Isaac Corporation (“FICO”) score and an estimated loan to value (“LTV”) ratio.

LTV ratio is determined via statistical modeling analyses.

The indicated LTV levels are estimated based on such factors as the location, the original LTV ratio, and the date of origination of the loan and do not reflect actual appraisal amounts.

The results of these analyses and other loan review procedures, including selected targeted internal reviews, are taken into consideration in the determination of loss allocation factors for residential real estate and home equity consumer credits.

The following table presents the residential and consumer loan portfolios, segregated by category of credit quality indicator:

As required under the GAAP in effect prior to the adoption of ASC 326, the following table presents the residential and consumer loan portfolios, segregated by category of credit quality indicator as of December 31, 2019:

(Dollars in thousands)

As of December 31, 2019 Current Past Due

Residential Real Estate:

Residential real estate $ 1,437,661 $ 11,429

288,178 2,696

Total consumer $ 308,222 $ 2,826

Notes to Consolidated Financial Statements – (continued)

Loan Servicing Activities

1 unchanged sentence

The following table presents an analysis of loan servicing rights:

(Dollars in thousands)

Loan Servicing

(Dollars in thousands) Loan Servicing

Rights Valuation

Allowance Total

Balance at December 31, 2017 $ 3,613 $ — $ 3,613

Loan servicing rights capitalized 905 — 905

Amortization ( 867 ) — ( 867 )

Balance at December 31, 2018 3,651 — 3,651

Loan servicing rights capitalized 902 — 902

Amortization ( 1,027 ) — ( 1,027 )

Balance at December 31, 2019 3,526 — 3,526

Loan servicing rights capitalized 6,569 — 6,569

Amortization ( 2,507 ) — ( 2,507 )

Increase in impairment reserve — ( 154 ) ( 154 )

Balance at December 31, 2020 $ 7,588 ($ 154 ) $ 7,434

Notes to Consolidated Financial Statements – (continued)

The following table presents estimated aggregate amortization expense related to loan servicing assets:

5 unchanged sentences

Loans serviced for others are not included in the Consolidated Balance Sheets.

The following table presents the balance of loans serviced for others by type of loan:

(Dollars in thousands)

Residential mortgages

Commercial loans

Notes to Consolidated Financial Statements – (continued)

Note 6 - Allowance for Loan Losses

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

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.

The methodology includes:

The following table presents the activity in the allowance for loan losses for the year ended December 31, 2019 :

The following table presents the balance of loans serviced for others by loan portfolio:

(Dollars in thousands)

Total Commercial

December 31, 2020 2019

Residential real estate $ 1,231,201 $ 586,996

Total Consumer

Commercial 155,935 159,948

Total $ 1,387,136 $ 746,944

Notes to Consolidated Financial Statements – (continued)

Note 6 - Allowance for Credit Losses on Loans

Adoption of ASC 326

Effective January 1, 2020, the Corporation adopted the provisions of ASC 326 using the modified retrospective method.

Therefore, prior period comparative information has not been adjusted and continues to be reported under the GAAP in effect prior to the adoption of ASC 326.

As a result of adopting ASC 326, the Corporation increased the ACL on loans by $6.5 million on January 1, 2020.

The following table presents the activity in the ACL on loans for the year ended December 31, 2020:

(Dollars in thousands) Commercial Consumer

CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total

Beginning Balance

$ 14,741 $ 3,921 $ 18,662 $ 6,615 $ 1,390 $ 347 $ 1,737 $ 27,014

Adoption of ASC 326 3,405 3,029 6,434 221 ( 106 ) ( 48 ) ( 154 ) 6,501

Charge-offs ( 356 ) ( 586 ) ( 942 ) ( 99 ) ( 224 ) ( 52 ) ( 276 ) ( 1,317 )

Recoveries 51 24 75 20 52 25 77 172

Provision 4,224 5,840 10,064 1,285 188 199 387 11,736

Ending Balance

$ 22,065 $ 12,228 $ 34,293 $ 8,042 $ 1,300 $ 471 $ 1,771 $ 44,106

The following table presents the activity in the allowance for loan losses for the year ended December 31, 2019:

(Dollars in thousands)

Total Commercial

Residential Real Estate

Total Consumer

(Dollars in thousands) Commercial Consumer

CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total

Beginning Balance

$ 15,381 $ 5,847 $ 21,228 $ 3,987 $ 1,603 $ 254 $ 1,857 $ 27,072

Charge-offs ( 1,028 ) ( 21 ) ( 1,049 ) ( 486 ) ( 390 ) ( 95 ) ( 485 ) ( 2,020 )

Recoveries 125 168 293 — 72 22 94 387

Provision 263 ( 2,073 ) ( 1,810 ) 3,114 105 166 271 1,575

Ending Balance

$ 14,741 $ 3,921 $ 18,662 $ 6,615 $ 1,390 $ 347 $ 1,737 $ 27,014

The following table presents the activity in the allowance for loan losses for the year ended December 31, 2018:

(Dollars in thousands)

Total Commercial

Residential Real Estate

Total Consumer

(Dollars in thousands) Commercial Consumer

CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total

Beginning Balance

$ 12,729 $ 5,580 $ 18,309 $ 5,427 $ 2,412 $ 340 $ 2,752 $ 26,488

Charge-offs ( 627 ) ( 10 ) ( 637 ) ( 250 ) ( 193 ) ( 107 ) ( 300 ) ( 1,187 )

Recoveries 25 119 144 21 29 27 56 221

Provision 3,254 158 3,412 ( 1,211 ) ( 645 ) ( 6 ) ( 651 ) 1,550

Ending Balance

$ 15,381 $ 5,847 $ 21,228 $ 3,987 $ 1,603 $ 254 $ 1,857 $ 27,072

Notes to Consolidated Financial Statements – (continued)

The following table presents the Corporation’s loan portfolio and associated allowance for loan losses by portfolio segment and by impairment methodology:

(Dollars in thousands)

December 31, 2019

December 31, 2018

As required under the GAAP in effect prior to the adoption of ASC 326, the following table presents the Corporation’s loan portfolio and associated allowance for loan losses by portfolio segment and by impairment methodology as of December 31, 2019:

(Dollars in thousands) Loans Related

Loans Individually Evaluated for Impairment

4 unchanged sentences

Residential real estate 14,654 95

Home equity 1,763 291

Total consumer 1,869 293

Subtotal 17,783 968

Loans Collectively Evaluated for Impairment

Commercial real estate

1,546,969 14,741

Commercial & industrial

584,632 3,341

Total commercial

2,131,601 18,082

Residential Real Estate:

Residential real estate 1,434,436 6,520

Home equity 289,111 1,099

Other 20,068 345

Total consumer 309,179 1,444

Notes to Consolidated Financial Statements – (continued)

Subtotal 3,875,216 26,046

Total $ 3,892,999 $ 27,014

Note 7 - Premises and Equipment

1 unchanged sentence

(Dollars in thousands)

December 31, 2020 2019

Land $ 5,921 $ 5,921

Premises and improvements 42,510 40,982

1 unchanged sentence

Total premises and equipment 73,400 71,663

Less accumulated depreciation

accumulated depreciation 44,530 42,963

Total premises and equipment, net $ 28,870 $ 28,700

Depreciation of premises and equipment amounted to $ 3.2 million, $ 3.3 million and $ 3.3 million, respectively, for the years ended December 31, 2020, 2019, and 2018.

Notes to Consolidated Financial Statements – (continued)

Note 8 - Leases

The Corporation has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception.

Operating lease ROU assets amounted to $ 29.5 million and $ 26.8 million, respectively, as of December 31, 2020 and 2019.

Operating lease liabilities totaled $ 31.7 million and $ 28.9 million, respectively, as of December 31, 2020 and 2019.

As of December 31, 2020, there were no operating leases that had not yet commenced, compared to one operating lease that had not yet commenced as of December 31, 2019.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $ 4.0 million, $ 3.8 million and $ 3.7 million, respectively, for the years ended December 31, 2020, 2019 and 2018.

Variable lease components, such as consumer price index adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

The following table presents information regarding the Corporation’s operating leases:

At December 31, 2020 2019

Weighted average discount rate 3.34 % 3.67 %

Range of lease expiration dates 7 months - 20 years

4 months - 21 years

Range of lease renewal options

1 year - 5 years

Weighted average remaining lease term

13.4 years 14.0 years

The following table presents the undiscounted annual lease payments under the terms of the Corporation’s operating leases at December 31, 2020, including a reconciliation to the present value of operating lease liabilities recognized in the Consolidated Balance Sheets:

(Dollars in thousands)

Years ending December 31:

2026 and thereafter 22,046

Total operating lease payments (1)

interest 8,468

Present value of operating lease liabilities (2)

(1) Includes $ 2.1 million related to options to extend lease terms that are reasonably certain of being exercised.

(2) Includes short-term operating lease liabilities of $ 2.9 million.

The following table presents the components of total lease expense and operating cash flows:

(Dollars in thousands)

Year ended December 31, 2020 2019

Lease Expense:

Operating lease expense $ 3,921 $ 3,724

Variable lease expense 56 49

Total lease expense (1)

$ 3,977 $ 3,773

Cash paid reducing operating lease liabilities $ 3,791 $ 3,586

(1) Included in net occupancy expenses in the Consolidated Income Statement.

Notes to Consolidated Financial Statements – (continued)

Note 9 - Goodwill and Intangible Assets

1 unchanged sentence

(Dollars in thousands)

December 31, 2020 2019

Commercial Banking Segment $ 22,591 $ 22,591

Wealth Management Services Segment 41,318 41,318

Balance at December 31, 2018

Total goodwill $ 63,909 $ 63,909

The balance of goodwill in the Commercial Banking segment arose from the acquisition of First Financial Corp.

2 unchanged sentences

(Dollars in thousands)

December 31, 2020 2019

Gross carrying amount $ 20,803 $ 20,803

Accumulated amortization 14,498 13,585

Net amount $ 6,305 $ 7,218

The balance of intangible assets at December 31, 2020 includes wealth management advisory contracts resulting from the 2005 acquisition of Weston Financial and the 2015 acquisition of Halsey.

1 unchanged sentence

The wealth management advisory contracts resulting from the acquisition of Halsey are being amortized on a straight-line basis over a 15 -year life.

Amortization expense for the years ended December 31, 2019 , 2018 , and 2017 , amounted to $ 943 thousand , $ 979 thousand and $ 1.0 million , respectively.

Notes to Consolidated Financial Statements – (continued)

Amortization expense for the years ended December 31, 2020, 2019, and 2018, amounted to $ 914 thousand, $ 943 thousand and $ 979 thousand, respectively.

The following table presents estimated annual amortization expense for intangible assets at December 31, 2020:

2 unchanged sentences

2026 and thereafter 2,184

Notes to Consolidated Financial Statements – (continued)

Note 10 - Income Taxes

3 unchanged sentences

Current Tax Expense:

$ 19,248 $ 17,298 $ 15,460

3,213 3,254 2,863

Total current tax expense

22,461 20,552 18,323

Deferred Tax (Benefit) Expense:

Total deferred (benefit) tax expense

( 2,375 ) ( 1,294 ) 63

( 755 ) ( 197 ) ( 126 )

Total deferred tax (benefit) expense ( 3,130 ) ( 1,491 ) ( 63 )

Total income tax expense $ 19,331 $ 19,061 $ 18,260

2 unchanged sentences

Years ended December 31, 2020 2019 2018

(Dollars in thousands)

(Dollars in thousands) Amount Rate Amount Rate Amount Rate

Tax expense at Federal statutory rate $ 18,724 21.0 % $ 18,518 21.0 % $ 18,205 21.0 %

(Decrease) increase in taxes resulting from:

Increase (decrease) in taxes resulting from:

State income tax expense, net of federal tax benefit

1,995 2.2 2,417 2.7 2,162 2.5

Tax-exempt income, net

Dividends received deduction

Share-based compensation

( 803 ) ( 0.9 ) ( 814 ) ( 0.9 ) ( 809 ) ( 0.9 )

( 523 ) ( 0.6 ) ( 494 ) ( 0.6 ) ( 461 ) ( 0.5 )

Investment in low-income housing limited partnership ( 118 ) ( 0.1 ) — — — —

Federal tax credits

( 93 ) ( 0.1 ) ( 364 ) ( 0.4 ) ( 364 ) ( 0.4 )

Dividends received deduction

( 28 ) — ( 36 ) — ( 45 ) ( 0.1 )

Change in fair value of contingent consideration

State income tax expense, net of federal tax benefit

Adjustment to net deferred tax assets for enacted changes in federal tax law

— — — — ( 39 ) ( 0.1 )

Share-based compensation

92 0.1 ( 221 ) ( 0.3 ) ( 444 ) ( 0.5 )

85 0.1 55 0.1 55 0.1

Total income tax expense $ 19,331 21.7 % $ 19,061 21.6 % $ 18,260 21.1 %

The Tax Act was signed into law in 2017.

The enactment of the Tax Act required companies to revalue deferred tax assets and liabilities in light of the new federal income tax rate.

As a result, in 2017 the Corporation’s net deferred tax assets were written down by $ 6.2 million , with a corresponding increase to income tax expense.

The majority of the provisions of the Tax Act became effective on January 1, 2018.

The provisions that impacted the Corporation included the reduction

Notes to Consolidated Financial Statements – (continued)

of the corporate income tax rate from 35% to 21%, changes to the deductibility of certain meals and entertainment expenses, and changes to the deductibility of executive compensation.

The Tax Act also accelerated expensing of certain depreciable property for assets placed in service after September 27, 2017 and before January 1, 2023.

The following table presents the approximate tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities:

(Dollars in thousands)

December 31, 2020 2019

Deferred Tax Assets:

Allowance for loan losses

Allowance for credit losses on loans $ 10,585 $ 6,348

Operating lease liabilities

Defined benefit pension obligations

Deferred compensation

Deferred loan origination fees

Defined benefit pension obligations

Share-based compensation

Net unrealized losses on available for sale debt securities

Deferred tax assets

32,481 23,585

Deferred Tax Liabilities:

Net unrealized gains on available for sale debt securities

Amortization of intangibles

Operating lease right-of-use assets

( 7,085 ) ( 6,296 )

Deferred loan origination costs

( 4,321 ) ( 4,084 )

Net unrealized gains on available for sale debt securities

( 3,120 ) ( 991 )

Loan servicing rights

( 1,784 ) ( 829 )

Amortization of intangibles

( 1,513 ) ( 1,696 )

Depreciation of premises and equipment ( 1,215 ) ( 669 )

( 1,253 ) ( 719 )

Deferred tax liabilities

( 20,291 ) ( 15,284 )

Net deferred tax asset $ 12,190 $ 8,301

Effective January 1, 2019 the Corporation adopted ASC 842.

As a result, the Corporation recognized a deferred tax asset related to operating lease liabilities and a corresponding deferred tax liability related to operating lease right-of-use assets.

Prior to adoption, the tax effect of the temporary difference related to operating lease rent expense was presented net within other deferred tax assets.

The Corporation’s net deferred tax asset is included in other assets in the Consolidated Balance Sheets.

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federal income and state tax examinations by tax authorities for years before 2017.

Notes to Consolidated Financial Statements – (continued)

Note 11 - Deposits

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(Dollars in thousands)

December 31, 2020 2019

Noninterest-bearing demand deposits $ 832,287 $ 609,924

Interest-bearing demand deposits 174,290 159,938

NOW accounts 698,706 520,295

Money market accounts 910,167 765,899

1 unchanged sentence

Time deposits (1)

1,296,396 1,069,323

Total deposits $ 4,378,353 $ 3,498,882

Includes wholesale brokered time deposits.

(1) Includes wholesale brokered time deposit balances of $ 591,541 and $ 284,842 , respectively, as of December 31, 2020 and December 31, 2019.

Notes to Consolidated Financial Statements – (continued)

The following table presents scheduled maturities of time certificates of deposit:

(Dollars in thousands)

Scheduled Maturity

Weighted Average Rate

(Dollars in thousands) Scheduled Maturity Weighted Average Rate

Years ending December 31:

2021 $ 977,912 0.77 %

2022 222,300 1.30

2023 35,026 1.90

2024 18,736 1.64

2025 42,422 1.17

2026 and thereafter — —

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Time certificates of deposit in denominations of $250 thousand or more totaled $ 134.9 million and $ 147.3 million, respectively, at December 31, 2020 and 2019.

Notes to Consolidated Financial Statements – (continued)

Note 12 - Borrowings

Federal Home Loan Bank Advances

Advances payable to FHLB amounted to $ 1.1 billion and $ 950.7 million , respectively, at December 31, 2019 and 2018 .

As of December 31, 2019 and 2018 , the Bank had access to a $ 40.0 million unused line of credit with the FHLB and also had remaining available borrowing capacity of $ 535.0 million and $ 628.5 million , respectively.

Advances payable to FHLB amounted to $ 593.9 million and $ 1.1 billion, respectively, at December 31, 2020 and 2019.

The Bank pledges certain qualified investment securities and loans as collateral to the FHLB.

As of December 31, 2020 and 2019, the Bank had access to a $ 40.0 million unused line of credit with the FHLB and also had remaining available borrowing capacity of $ 969.7 million and $ 535.0 million, respectively.

The following table presents maturities and weighted average interest rates on FHLB advances outstanding as of December 31, 2020:

(Dollars in thousands)

(Dollars in thousands) Scheduled

Maturity Weighted

2021 $ 517,222 0.71 %

2022 813 5.12

2023 856 5.12

2024 35,900 2.52

2025 2,751 5.03

2026 and thereafter 36,317 3.13

Total $ 593,859 1.00 %

Notes to Consolidated Financial Statements – (continued)

Advances payable to FHLB include short-term advances with original maturity due dates of one year or less.

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In accordance with GAAP, the trusts are treated as unconsolidated subsidiaries.

On August 29, 2005, Trust I issued $ 8.3 million of capital securities (“Trust I Capital Securities”) in a private placement of trust preferred securities.

The Trust I Capital Securities mature in September 2035, are redeemable at the Bancorp’s option and require quarterly distributions by Trust I to the holder of the Trust I Capital Securities equal to the three-month LIBOR rate plus 1.45 % .

The Bancorp has guaranteed the Trust I Capital Securities and, to the extent not paid by Trust I, accrued and unpaid distributions on the Trust I Capital Securities, as well as the redemption price payable to the Trust I Capital Securities holders.

The proceeds of the Trust I Capital Securities, along with proceeds from the issuance of common securities by Trust I to the Bancorp, were used to purchase $ 8.3 million of the Bancorp’s junior subordinated deferrable interest notes (the “Trust I Debentures”) and constitute the primary asset of Trust I.

Like the Trust I Capital Securities, the Trust I Debentures bear interest at a rate equal to the three-month LIBOR rate plus 1.45 % .

The Trust I Debentures mature on September 15, 2035, but may be redeemed at par at the Bancorp’s option, subject to the approval of the applicable banking regulator to the extent required under applicable guidelines or policies.

The $ 8.3 million of junior subordinated debentures associated with Trust I bear interest at a rate equal to the three-month LIBOR rate plus 1.45 % and mature on September 15, 2035.

The $ 14.4 million of junior subordinated debentures associated with Trust II bear interest at a rate equal to the three-month LIBOR rate plus 1.45 % and mature on November 23, 2035.

The debentures may be redeemed at par at the Bancorp’s option, subject to the approval of the applicable banking regulator to the extent required under applicable guidelines or policies.

See Note 13 for additional discussion of the regulatory capital treatment of trust preferred securities.

Notes to Consolidated Financial Statements – (continued)

On August 29, 2005, Trust II issued $ 14.4 million of capital securities (“Trust II Capital Securities”) in a private placement of trust preferred securities.

The Trust II Capital Securities mature in November 2035, are redeemable at the Bancorp’s option and require quarterly distributions by Trust II to the holder of the Trust II Capital Securities, at a rate equal to the three-month LIBOR rate plus 1.45 % .

The Bancorp has guaranteed the Trust II Capital Securities and, to the extent not paid by Trust II, accrued and unpaid distributions on the Trust II Capital Securities, as well as the redemption price payable to the Trust II Capital Securities holders.

The proceeds of the Trust II Capital Securities, along with proceeds from the issuance of common securities by Trust II to the Bancorp, were used to purchase $ 14.4 million of the Bancorp’s junior subordinated deferrable interest notes (the “Trust II Debentures”) and constitute the primary asset of Trust II.

Like the Trust II Capital Securities, the Trust II Debentures bear interest at a rate equal to the three-month LIBOR rate plus 1.45 % .

The Trust II Debentures mature on November 23, 2035, but may be redeemed at par at the Bancorp’s option, subject to the approval of the applicable banking regulator to the extent required under applicable guidelines or policies.

Note 13 - Shareholders' Equity

Stock Repurchase Program

On December 2, 2019, the Bancorp’s Board of Directors adopted a new Stock Repurchase Program.

The Stock Repurchase Program, which replaces the Corporation’s 2006 stock repurchase plan, authorizes the repurchase of up to 850,000 shares, or approximately 5 % , of the Corporation’s outstanding common stock.

On December 1, 2020, the Bancorp’s Board of Directors adopted a new Stock Repurchase Program (the “2020 Repurchase Program”).

The 2020 Repurchase Program authorizes the repurchase of up to 850,000 shares, or approximately 5 %, of the Corporation’s outstanding common stock.

This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations.

The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities.

The Stock Repurchase Program expires on October 31, 2020 and may be modified, suspended, or discontinued at any time.

As of December 31, 2019 , no shares have been repurchased under the 2019 Stock Repurchase Program.

The 2020 Repurchase Program expires on October 31, 2021 and may be modified, suspended, or discontinued at any time.

As of December 31, 2020, no shares have been repurchased under the 2020 Repurchase Program.

The Corporation’s 2019 Stock Repurchase Program (the “2019 Repurchase Program”) authorized the repurchase of up to 850,000 shares, or approximately 5 %, of the Corporation’s outstanding common stock.

The 2019 Repurchase Program expired October 31, 2020.

As of the date of expiration, 124,863 shares had been repurchased under the 2019 Repurchase Program, totaling $ 4.3 million, at an average price of $ 34.61 .

The primary source of liquidity for the Bancorp is dividends received from the Bank.

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The FDIC and the FRB have the authority to use their enforcement powers to prohibit a bank or bank holding company, respectively, from paying dividends if, in their opinion, the payment of dividends would constitute an unsafe or unsound practice.

Under the most restrictive of these requirements, the Bank could have declared aggregate additional dividends of $ 257.1 million as of December 31, 2019 .

Dividends paid by the Bank to the Bancorp amounted to $ 43.1 million and $ 36.8 million, respectively, for the years ended December 31, 2020 and 2019.

Reserved Shares

2 unchanged sentences

The Bancorp and the Bank are subject to various regulatory capital requirements administered by the FRB and the FDIC, respectively.

Regulatory authorities can initiate certain mandatory actions if Bancorp or the Bank fail to meet minimum capital requirements, which could have a direct material effect on the Corporation’s financial statements.

Regulatory authorities can initiate certain mandatory actions if the Bancorp or the Bank fail to meet minimum capital requirements, which could have a direct material effect on the Corporation’s financial statements.

Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices.

3 unchanged sentences

The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios, as well as the corresponding minimum and well capitalized regulatory amounts and ratios that were in effect during the respective periods:

(Dollars in thousands)

For Capital Adequacy

To Be “Well Capitalized” Under Prompt Corrective Action Regulations

(Dollars in thousands) Actual For Capital Adequacy

Purposes To Be “Well Capitalized” Under Prompt Corrective Action Regulations

Amount Ratio Amount Ratio Amount Ratio

December 31, 2020

Total Capital (to Risk-Weighted Assets):

$ 539,496 13.51 % $ 319,532 8.00 % N/A N/A

534,288 13.38 319,503 8.00 $ 399,379 10.00 %

Tier 1 Capital (to Risk-Weighted Assets):

503,791 12.61 239,649 6.00 N/A N/A

498,583 12.48 239,627 6.00 319,503 8.00

Common Equity Tier 1 Capital (to Risk-Weighted Assets):

481,792 12.06 179,737 4.50 N/A N/A

498,583 12.48 179,721 4.50 259,596 6.50

Tier 1 Capital (to Average Assets):

503,791 8.95 225,209 4.00 N/A N/A

498,583 8.86 225,126 4.00 281,407 5.00

December 31, 2019

Total Capital (to Risk-Weighted Assets):

494,603 12.94 305,728 8.00 N/A N/A

490,993 12.85 305,693 8.00 382,116 10.00

Tier 1 Capital (to Risk-Weighted Assets):

467,296 12.23 229,296 6.00 N/A N/A

463,686 12.13 229,270 6.00 305,693 8.00

Common Equity Tier 1 Capital (to Risk-Weighted Assets):

445,298 11.65 171,972 4.50 N/A N/A

463,686 12.13 171,952 4.50 248,375 6.50

Tier 1 Capital (to Average Assets):

467,296 9.04 206,682 4.00 N/A N/A

463,686 8.98 206,596 4.00 258,245 5.00

(1) Leverage ratio.

In addition to the minimum regulatory capital required for capital adequacy purposes outlined in the table above, the Corporation is required to maintain a minimum capital conservation buffer, in the form of common equity, in order to avoid restrictions on capital distributions and discretionary bonuses.

The required amount of the capital conservation buffer was 1.875% on January 1, 2018.

The capital conservation buffer increased another 0.625% on January 1, 2019, reaching the full requirement of 2.50%.

The Corporation’s capital levels exceeded the minimum regulatory capital requirement plus the capital conversation buffer as of December 31, 2019 .

In addition to the minimum regulatory capital required for capital adequacy purposes outlined in the table above, the Corporation is required to maintain a minimum capital conservation buffer, in the form of common equity, of 2.50% in order to avoid restrictions on capital distributions and discretionary bonuses.

The Corporation’s capital levels exceeded the minimum regulatory capital requirements plus the capital conservation buffer at December 31, 2020 and December 31, 2019.

The Bancorp owns the common stock of two capital trusts, which have issued trust preferred securities.

In accordance with GAAP, the capital trusts are treated as unconsolidated subsidiaries.

At both December 31, 2019 and 2018 , $ 22.0 million in trust preferred securities were included in the Tier 1 Capital of the Corporation for regulatory capital reporting purposes pursuant to the Federal Reserve’s capital adequacy guidelines.

At both December 31, 2020 and December 31, 2019, $ 22.0 million in trust preferred securities were included in the Tier 1 Capital of the Corporation for regulatory capital reporting purposes pursuant to the FRB’s capital adequacy guidelines.

Notes to Consolidated Financial Statements – (continued)

As discussed in Note 2, in accordance with regulatory capital rules, the Corporation elected an option to delay the estimated impact of ASC 326 on its regulatory capital over a two-year deferral and subsequent three-year transition period ending December 31, 2024.

As a result, capital ratios and amounts as of December 31, 2020 exclude the impact of the increased ACL on loans and unfunded loan commitments attributed to the adoption of ASC 326, adjusted for an approximation of the after-tax provision for credit losses attributable to ASC 326 relative to the incurred loss methodology during the deferral period.

The cumulative difference at the end of the deferral period will then be phased-in to regulatory capital over a three-year transition period beginning in 2022.

Note 14 - Derivative Financial Instruments

11 unchanged sentences

Cash Flow Hedging Instruments

As of December 31, 2019 and 2018 , the Bancorp had two interest rate caps with a total notional amount of $ 22.7 million that were designated as cash flow hedges to hedge the interest rate risk associated with our variable rate junior subordinated debentures.

As of December 31, 2020, the Bancorp had no interest rate cap contracts.

As of December 31, 2019, the Bancorp had two interest rate caps with a total notional amount of $ 22.7 million that were designated as cash flow hedges to hedge the interest rate risk associated with our variable rate junior subordinated debentures.

For both interest rate caps, the Bancorp obtained the right to receive the difference between 3-month LIBOR and a 4.5 % strike.

The caps mature in 2020.

During 2020, both of the interest rate cap contracts matured.

As of December 31, 2020 and 2019, the Bank had two interest rate swap contracts with a total notional amount of $ 60.0 million that were designated as cash flow hedges to hedge the interest rate risk associated with short-term variable rate FHLB advances.

The interest rate swaps mature in 2021 and 2023.

As of December 31, 2019 and 2018 , the Bank had three interest rate floor contracts with a total notional amount of $ 300.0 million that were designated as cash flow hedges to hedge the interest rate risk associated with a pool of variable rate commercial loans.

As of December 31, 2020, the Bank had no interest rate floor contracts.

As of December 31, 2019, the Bank had three interest rate floor contracts with a total notional amount of $ 300.0 million.

These contracts were designated as cash flow hedges to hedge the interest rate risk associated with a pool of variable rate commercial loans.

The Bank obtained the right to receive the difference between 1-month LIBOR and a 1.0 % strike for each of the interest rate floors.

The floors mature in 2020.

During 2020, the three interest rate floor contracts matured.

The changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized.

3 unchanged sentences

The interest rate swap contracts with commercial loan borrowers allow them to convert variable-rate loan payments to fixed-rate loan payments.

When we enter into an interest rate swap contract with a commercial loan borrower, we simultaneously enter into a “mirror” swap contract with a third party.

When the Corporation enters into an interest rate swap contract with a commercial loan borrower, it simultaneously enters into a “mirror” swap contract with a third party.

The third party exchanges the client’s fixed-rate loan payments for variable-rate loan payments.

We retain the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans.

The Corporation retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans.

Notes to Consolidated Financial Statements – (continued)

As of December 31, 2020 and 2019, Washington Trust had interest rate swap contracts with commercial loan borrowers with notional amounts of $ 991.0 million and $ 813.5 million, respectively, and equal amounts of “mirror” swap contracts with third-party financial institutions.

4 unchanged sentences

These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings.

Notes to Consolidated Financial Statements – (continued)

Under a risk participation-out agreement, a derivative asset, the Corporation participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower for a fee paid to the participating bank.

1 unchanged sentence

As of December 31, 2020, the notional amounts of the risk participation-out agreements and risk participation-in agreements were $ 61.6 million and $ 92.7 million, respectively, compared to $ 61.2 million and $ 72.9 million, respectively, as of December 31, 2019.

Foreign Exchange Contracts

Foreign exchange contracts represent contractual commitments to buy or sell a foreign currency on a future date at a specified price.

As of December 31, 2019 , the Corporation did not have any foreign exchange contracts.

As of December 31, 2018 , the notional amount of foreign exchange contracts was $ 2.8 million .

The Corporation used foreign exchange contracts on a limited basis to reduce its exposure to fluctuations in currency exchange rates associated with a commercial loan denominated in a foreign currency.

Foreign exchange contracts are not designated as hedges and therefore changes in fair value are recognized in earnings.

The changes in fair value on the foreign exchange contracts substantially offset the foreign currency translation gains and losses on the related commercial loan.

Mortgage Loan Commitments

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The following table presents the fair values of derivative instruments in the Corporation’s Consolidated Balance Sheets:

(Dollars in thousands)

Asset Derivatives

Liability Derivatives

Balance Sheet Location

(Dollars in thousands) Derivative Assets Derivative Liabilities

Fair Value Fair Value

Balance Sheet Location Dec 31,

2019 Balance Sheet Location Dec 31,

Derivatives Designated as Cash Flow Hedging Instruments:

Interest rate risk management contracts:

Interest rate caps

Other liabilities

Interest rate swaps

Other liabilities

Interest rate floors

Other liabilities

Interest rate caps Other assets $ — $ — Other liabilities $ — $ —

Interest rate swaps Other assets — — Other liabilities 1,958 730

Interest rate floors Other assets — 3 Other liabilities — —

Derivatives not Designated as Hedging Instruments:

Loan related derivative contracts:

Interest rate swaps with customers

Other liabilities

Mirror swaps with counterparties

Other liabilities

Risk participation agreements

Other liabilities

Foreign exchange contracts

Other liabilities

Interest rate swaps with customers Other assets 75,804 27,736 Other liabilities 68 358

Mirror swaps with counterparties Other assets 67 351 Other liabilities 76,248 27,819

Risk participation agreements Other assets 22 1 Other liabilities 2 1

Mortgage loan commitments:

Interest rate lock commitments

Other liabilities

Forward sale commitments

Other liabilities

Interest rate lock commitments Other assets 7,202 1,097 Other liabilities — —

Forward sale commitments Other assets — 30 Other liabilities 2,914 827

Gross amounts 83,095 29,218 81,190 29,735

Less amounts offset in Consolidated Balance Sheets (1)

Net amounts presented in Consolidated Balance Sheets

Less collateral pledged (2)

amounts offset ( 1)

67 354 67 354

Derivative balances, net of offset 83,028 28,864 81,123 29,381

collateral pledged (2)

— — 74,698 27,105

Net amounts $ 83,028 $ 28,864 $ 6,425 $ 2,276

(1) Interest rate risk management contracts and loan related derivative contracts with counterparties are subject to master netting arrangements.

2 unchanged sentences

The following tables present the effect of derivative instruments in the Corporation’s Consolidated Statements of Changes in Shareholders’ Equity and Consolidated Statements of Income:

(Dollars in thousands)

Gain (Loss) Recognized in Other Comprehensive Income, Net of Tax

(Dollars in thousands) Gain (Loss) Recognized in Other Comprehensive Income, Net of Tax

Years ended December 31, 2020 2019 2018

2 unchanged sentences

Interest rate caps

$ 89 $ 52 $ 30

Interest rate swaps

( 893 ) ( 1,232 ) 515

Interest rate floors

Total ($ 654 ) ($ 984 ) $ 619

For derivatives designated as cash flow hedging instruments, see Note 20 for additional disclosure pertaining to the amounts and location of reclassifications from accumulated other comprehensive income (loss) into earnings.

Notes to Consolidated Financial Statements – (continued)

(Dollars in thousands)

Amount of Gain (Loss)

(Dollars in thousands) Amount of Gain (Loss)

Recognized in Income on Derivatives

Years ended December 31,

Statement of Income Location

Years ended December 31, Statement of Income Location 2020 2019 2018

Derivatives not Designated as Hedging Instruments:

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Mortgage banking revenues ( 10,769 ) ( 1,818 ) 997

Total ($ 672 ) $ 2,464 $ 3,319

Note 15 - Fair Value Measurements

1 unchanged sentence

Items recorded at fair value on a recurring basis include securities available for sale, mortgage loans held for sale and derivatives.

Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights.

Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent individually analyzed / impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights.

These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets.

12 unchanged sentences

The Corporation has elected the fair value option for mortgage loans held for sale to better match changes in fair value of the loans with changes in the fair value of the forward sale commitment contracts used to economically hedge them.

Notes to Consolidated Financial Statements – (continued)

The following table presents a summary of mortgage loans held for sale accounted for under the fair value option:

(Dollars in thousands)

December 31, 2020 2019

Aggregate fair value $ 61,614 $ 27,833

Aggregate principal balance

59,313 27,168

Difference between fair value and principal balance $ 2,301 $ 665

Notes to Consolidated Financial Statements – (continued)

Changes in fair value of mortgage loans held for sale accounted for under the fair value option election amounted to a decrease of $ 167 thousand in 2019 , compared to a decrease of $ 45 thousand for 2018 .

These amounts were partially offset in earnings by the changes in fair value of forward sale commitments used to economically hedge them.

The changes in fair value are reported as a component of mortgage banking revenues in the Consolidated Statements of Income.

Changes in fair value of mortgage loans held for sale accounted for under the fair value option election (“fair value option adjustments”) are included in mortgage banking revenues in the Consolidated Statements of Income.

Fair value option adjustments amounted to $ 1.6 million and $ 167 thousand, respectively, in 2020 and 2019.

There were no mortgage loans held for sale 90 days or more past due as of December 31, 2020 and 2019.

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This category includes obligations of U.S.

government-sponsored enterprises, including mortgage-backed securities, obligations of states and political subdivisions, individual name issuer trust preferred debt securities and corporate bonds.

government-sponsored enterprises, including mortgage-backed securities, individual name issuer trust preferred debt securities and corporate bonds.

Debt securities not actively traded whose fair value is determined through the use of cash flows utilizing inputs that are unobservable are classified as Level 3.

2 unchanged sentences

The fair value of mortgage loans held for sale is estimated based on current market prices for similar loans in the secondary market and therefore are classified as Level 2 assets.

Collateral Dependent Impaired Loans

The fair value of collateral dependent loans that are deemed to be impaired is determined based upon the fair value of the underlying collateral.

Collateral Dependent Individually Analyzed / Impaired Loans

The fair value of collateral dependent loans that are individually analyzed or were previously deemed impaired is determined based upon the appraised fair value of the underlying collateral.

Such collateral primarily consists of real estate and, to a lesser extent, other business assets.

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.

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

Internal valuations are utilized to determine the fair value of other business assets.

Collateral dependent impaired loans are categorized as Level 3.

For collateral dependent loans that are expected to be repaid substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell.

Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the collateral.

Internal valuations may be utilized to determine the fair value of other business assets.

Collateral dependent individually analyzed / impaired loans are categorized as Level 3.

Loan Servicing Rights

Loans sold with the retention of servicing result in the recognition of loan servicing rights.

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

Loan servicing rights are evaluated quarterly for impairment based on their fair value.

Impairment exists if the carrying value exceeds the estimated fair value.

Impairment is measured on an aggregated basis by stratifying the loan servicing rights based on homogeneous characteristics such as note rate and loan type.

The fair value is estimated using an independent valuation model that estimates the present value of expected cash flows, incorporating assumptions for discount rates and prepayment rates.

Any impairment is recognized through a valuation allowance and as a reduction to mortgage banking revenues.

Loan servicing rights are categorized as Level 3.

Notes to Consolidated Financial Statements – (continued)

Property Acquired Through Foreclosure or Repossession

Property acquired through foreclosure or repossession included in other assets in the Consolidated Balance Sheets is adjusted to fair value less costs to sell upon transfer out of loans through a charge to allowance for loan losses.

Subsequently, it is carried at the lower of carrying value or fair value less costs to sell.

2 unchanged sentences

Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.

Interest rate cap, swap and floor contracts are traded in over-the-counter markets where quoted market prices are not readily available.

Interest rate caps, swaps and floors are traded in over-the-counter markets where quoted market prices are not readily available.

Fair value measurements are determined using independent pricing models that utilize primarily market observable inputs, such as swap rates of different maturities and LIBOR rates.

The Corporation also evaluates the credit risk of its counterparties as well as that of the Corporation.

The Corporation evaluates the credit risk of its counterparties, as well as that of the Corporation.

Accordingly, factors such as the likelihood of default by the Corporation and its counterparties, its net exposures and remaining contractual life are considered in determining if any fair value adjustments related to credit risk are required.

Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position, if any.

Although the Corporation has determined that the majority of the inputs used to value its interest rate swap, cap and floor contracts fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with interest rate contracts and risk participation agreements utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood

Notes to Consolidated Financial Statements – (continued)

of default by the Corporation and its counterparties.

However, as of December 31, 2019 and 2018 , the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.

The Corporation has determined that the majority of the inputs used to value its derivative positions fall within Level 2 of the fair value hierarchy.

However, the credit valuation adjustments utilize Level 3 inputs.

As of December 31, 2020 and 2019, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives.

As a result, the Corporation has classified its derivative valuations in their entirety as Level 2.

4 unchanged sentences

As a result, the Corporation has classified its interest rate lock commitments as Level 2.

Contingent Consideration Liability

A contingent consideration liability was recognized upon the completion of the Halsey Associates, Inc.

acquisition on August 1, 2015 representing the estimated present value of future earn-outs to be paid based on the future revenue growth of the acquired business during the five-year period following the acquisition.

As of December 31, 2019, earn-out periods associated with this contingent consideration liability have ended.

The fair value measurement was based upon unobservable inputs;

therefore, the contingent liability was classified within Level 3 of the fair value hierarchy.

The unobservable inputs included probability estimates regarding the likelihood of achieving revenue growth targets and the discount rates utilized the discounted cash flow calculations applied to the estimated earn-outs to be paid.

The contingent consideration liability was remeasured to fair value at each reporting period taking into consideration changes in those unobservable inputs.

Changes in the fair value of the contingent consideration liability were included in noninterest expenses in the Consolidated Statements of Income.

Notes to Consolidated Financial Statements – (continued)

Items Recorded at Fair Value on a Recurring Basis

The following tables present the balances of assets and liabilities reported at fair value on a recurring basis:

(Dollars in thousands)

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

(Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets

(Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

December 31, 2020

2 unchanged sentences

government-sponsored enterprises

$ 131,669 $ — $ 131,669 $ —

Mortgage-backed securities issued by U.S.

1 unchanged sentence

government-sponsored enterprises

740,305 — 740,305 —

Individual name issuer trust preferred debt securities

12,669 — 12,669 —

Corporate bonds

9,928 — 9,928 —

Mortgage loans held for sale 61,614 — 61,614 —

3 unchanged sentences

Total liabilities at fair value on a recurring basis $ 81,123 $ — $ 81,123 $ —

Notes to Consolidated Financial Statements – (continued)

(Dollars in thousands)

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

(Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets

(Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

December 31, 2019

2 unchanged sentences

government-sponsored enterprises

$ 157,648 $ — $ 157,648 $ —

Mortgage-backed securities issued by U.S.

1 unchanged sentence

government-sponsored enterprises

Obligations of states and political subdivisions

719,080 — 719,080 —

Individual name issuer trust preferred debt securities

12,579 — 12,579 —

Corporate bonds

10,183 — 10,183 —

Mortgage loans held for sale 27,833 — 27,833 —

3 unchanged sentences

Total liabilities at fair value on a recurring basis $ 29,381 $ — $ 29,381 $ —

It is the Corporation’s policy to review and reflect transfers between Levels as of the financial statement reporting date.

There were no transfers in and/or out of Level 1, 2 or 3 during the years ended December 31, 2019 and 2018 .

The contingent consideration liability is a Level 3 liability remeasured at fair value on a recurring basis.

The following table presents the change in the contingent consideration liability, which is included in other liabilities in the Consolidated Balance Sheets.

(Dollars in thousands)

Years ended December 31,

Beginning Balance

Change in fair value

Ending Balance

Notes to Consolidated Financial Statements – (continued)

Items Recorded at Fair Value on a Nonrecurring Basis

The following table presents the carrying value of assets held at December 31, 2020, which were written down to fair value during the year ended December 31, 2020:

(Dollars in thousands)

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

Collateral dependent impaired loans

Property acquired through foreclosure or repossession

(Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets

(Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

Collateral dependent individually analyzed loans $ 1,720 $ — $ — $ 1,720

Loan servicing rights 7,434 — — 7,434

Total assets at fair value on a nonrecurring basis $ 9,154 $ — $ — $ 9,154

Notes to Consolidated Financial Statements – (continued)

The allowance for loan losses on collateral dependent impaired loans amounted to $ 871 thousand at December 31, 2019 .

In 2019 , a write-down valuation adjustment of $ 1.0 million on property acquired through foreclosure or repossession was recognized and included in other noninterest expenses in the Consolidated Statements of Income.

The following table presents the carrying value of assets held at December 31, 2019, which were written down to fair value during the year ended December 31, 2019:

(Dollars in thousands)

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

(Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets

(Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

Collateral dependent impaired loans $ 1,448 $ — $ — $ 1,448

1 unchanged sentence

Total assets at fair value on a nonrecurring basis $ 2,557 $ — $ — $ 2,557

The allowance for loan losses on collateral dependent impaired loans amounted to $ 24 thousand at December 31, 2018 .

In 2018 , a write-down valuation adjustment of $ 1.0 million on property acquired through foreclosure or repossession was recognized and included in other noninterest expenses in the Consolidated Statements of Income.

Notes to Consolidated Financial Statements – (continued)

The following tables present valuation techniques and unobservable inputs for assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value:

(Dollars in thousands)

Valuation Technique

Unobservable Input

Range of Inputs Utilized (Weighted Average)

(Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range of Inputs Utilized (Weighted Average)

December 31, 2020

Collateral dependent impaired loans

Appraisals of collateral

Discount for costs to sell

0% - 20% (5%)

Appraisal adjustments (1)

0% - 100% (67%)

Property acquired through foreclosure or repossession

Appraisals of collateral

Discount for costs to sell

Collateral dependent individually analyzed loans $ 1,720 Appraisals of collateral Discount for costs to sell 0 % - 25 % ( 11 %)

Appraisal adjustments 0 % - 100 % ( 15 %)

Management may adjust appraisal values to reflect market value declines or other discounts resulting from its knowledge of the property.

(Dollars in thousands)

Valuation Technique

Unobservable Input

Range of Inputs Utilized (Weighted Average)

Loan servicing rights

7,434 Discounted Cash Flow Discount Rate 10 % - 14 % ( 10 %)

Prepayment rates 18 % - 42 % ( 21 %)

(Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range of Inputs Utilized (Weighted Average)

December 31, 2019

Collateral dependent impaired loans

Appraisals of collateral

Discount for costs to sell

0% - 10% (10%)

$ 1,448 Appraisals of collateral Discount for costs to sell 0 % - 20 % ( 5 %)

Appraisal adjustments 0 % - 100 % ( 67 %)

0% - 100% (2%)

Property acquired through foreclosure or repossession

Appraisals of collateral

Discount for costs to sell

1,109 Appraisals of collateral Discount for costs to sell 12 %

Appraisal adjustments 22 %

12% - 28% (20%)

Management may adjust appraisal values to reflect market value declines or other discounts resulting from its knowledge of the property.

Notes to Consolidated Financial Statements – (continued)

Valuation of Financial Instruments

1 unchanged sentence

The tables exclude financial instruments for which the carrying value approximates fair value such as cash and cash equivalents, FHLB stock, accrued interest receivable, bank-owned life insurance, non-maturity deposits and accrued interest payable.

(Dollars in thousands)

Carrying Amount

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

(Dollars in thousands) Carrying Amount Total

Fair Value Quoted Prices in Active Markets for Identical Assets

(Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

December 31, 2020

Financial Assets:

Loans, net of allowance for loan losses

Loans, net of allowance for credit losses on loans $ 4,151,884 $ 4,114,628 $ — $ — $ 4,114,628

Financial Liabilities:

2 unchanged sentences

Junior subordinated debentures 22,681 19,422 — 19,422 —

(Dollars in thousands)

Carrying Amount

Quoted Prices in Active Markets for Identical Assets

Significant Other Observable Inputs

Significant Unobservable Inputs

Notes to Consolidated Financial Statements – (continued)

(Dollars in thousands) Carrying Amount Total

Fair Value Quoted Prices in Active Markets for Identical Assets

(Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

December 31, 2019

Financial Assets:

Held to maturity debt securities

Loans, net of allowance for loan losses $ 3,865,985 $ 3,869,192 $ — $ — $ 3,869,192

3 unchanged sentences

Junior subordinated debentures 22,681 19,628 — 19,628 —

Notes to Consolidated Financial Statements – (continued)

Note 16 - Revenue from Contracts with Customers

2 unchanged sentences

Years ended December 31, 2020 2019 2018

(Dollars in thousands)

(Dollars in thousands) Revenue (1)

ASC 606 Revenue (2)

4 unchanged sentences

Asset-based wealth management revenues

34,363 34,363 35,806 35,806 37,343 37,343

Transaction-based wealth management revenues

1,091 1,091 1,042 1,042 998 998

Total wealth management revenues

35,454 35,454 36,848 36,848 38,341 38,341

Mortgage banking revenues

47,377 — 14,795 — 10,381 —

Card interchange fees

4,287 4,287 4,214 4,214 3,768 3,768

Service charges on deposit accounts

2,742 2,742 3,684 3,684 3,628 3,628

Loan related derivative income

3,991 — 3,993 — 2,461 —

Income from bank-owned life insurance

2,491 — 2,354 — 2,196 —

Net realized losses on securities

— — ( 53 ) — — —

3,100 2,669 1,245 1,184 1,339 1,329

Total noninterest income 99,442 45,152 67,080 45,930 62,114 47,066

2 unchanged sentences

(2) Revenue from contracts with customers in scope of ASC 606.

Notes to Consolidated Financial Statements – (continued)

The following table presents revenue from contracts with customers based on the timing of revenue recognition:

4 unchanged sentences

Service charges on deposit accounts 2,103 2,850 2,802

Other income 2,494 989 958

Revenue recognized over time:

Wealth management revenues

35,454 36,848 38,341

Service charges on deposit accounts

4 unchanged sentences

Contract liabilities are recognized as revenue over the life of the contract as the performance obligations are satisfied.

The balances of contract

Notes to Consolidated Financial Statements – (continued)

liabilities were insignificant at both December 31, 2019 and 2018 and were included in other liabilities in the Consolidated Balance Sheets.

The balances of contract liabilities were insignificant at both December 31, 2020 and 2019 and were included in other liabilities in the Consolidated Balance Sheets.

For commissions and incentives that are in scope of ASC 606, such as those paid to employees in our wealth management services and commercial banking segments in order to obtain customer contracts, contract cost assets are established.

The contract cost assets are capitalized and amortized over the estimated useful life that the asset is expected to generate benefits.

The carrying value of contract cost assets amounted to $ 905 thousand at December 31, 2019 , compared to $ 458 thousand at December 31, 2018 and were included in other assets in the Consolidated Balance Sheets.

The carrying value of contract cost assets amounted to $ 1.5 million at December 31, 2020, compared to $ 905 thousand at December 31, 2019 and were included in other assets in the Consolidated Balance Sheets.

Note 17 - Employee Benefits

3 unchanged sentences

The defined benefit pension plans were previously amended to freeze benefit accruals after a 10 -year transition period ending in December 2023.

The qualified pension plan is funded on a current basis, in compliance with the requirements of ERISA.

The qualified pension plan is funded on a current basis, in compliance with the requirements of Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

Pension benefit costs and benefit obligations incorporate various actuarial and other assumptions, including discount rates, mortality, rates of return on plan assets and compensation increases.

Washington Trust evaluates these assumptions annually.

Notes to Consolidated Financial Statements – (continued)

The following table presents the plans’ projected benefit obligations, fair value of plan assets and funded (unfunded) status:

(Dollars in thousands)

Non-Qualified

(Dollars in thousands) Qualified

Pension Plan Non-Qualified

Retirement Plans

2 unchanged sentences

Benefit obligation at beginning of period

$ 83,141 $ 73,380 $ 16,438 $ 14,626

2,164 2,037 170 126

Interest cost

Actuarial loss (gain)

2,505 2,967 465 563

Actuarial loss 10,378 10,453 1,803 2,028

Benefits paid

( 3,334 ) ( 5,546 ) ( 903 ) ( 905 )

Administrative expenses

( 112 ) ( 150 ) — —

Benefit obligation at end of period

94,742 83,141 17,973 16,438

Change in Plan Assets:

Fair value of plan assets at beginning of period

93,749 86,180 — —

Actual return on plan assets

11,626 13,265 — —

Employer contributions

Benefits paid

( 3,334 ) ( 5,546 ) ( 903 ) ( 905 )

Administrative expenses

( 112 ) ( 150 ) — —

Fair value of plan assets at end of period

101,929 93,749 — —

Funded (unfunded) status at end of period $ 7,187 $ 10,608 ($ 17,973 ) ($ 16,438 )

1 unchanged sentence

The unfunded status of the non-qualified defined benefit retirement plans was $ 18.0 million and $ 16.4 million, respectively, at December 31, 2020 and December 31, 2019 and was included in other liabilities in the Consolidated Balance Sheets.

Notes to Consolidated Financial Statements – (continued)

The non-qualified retirement plans provide for the designation of assets in rabbi trusts.

Securities available for sale and other short-term investments designated for this purpose, with the carrying value of $ 13.7 million and $ 14.3 million are included in the Consolidated Balance Sheets at December 31, 2020 and 2019, respectively.

The following table presents components of accumulated other comprehensive income related to the qualified pension plan and non-qualified retirement plans, on a pre-tax basis:

(Dollars in thousands)

Non-Qualified

The following table presents the amounts included in accumulated other comprehensive income (“AOCI”) related to the qualified pension plan and non-qualified retirement plans:

(Dollars in thousands) Qualified

Pension Plan Non-Qualified

Retirement Plans

At December 31, 2020 2019 2020 2019

Net actuarial loss

Prior service credit

Total pre-tax amounts recognized in accumulated other comprehensive income

Net actuarial loss included in AOCI, pre-tax $ 12,051 $ 10,343 $ 8,648 $ 7,405

The accumulated benefit obligation for the qualified pension plan was $ 87.9 million and $ 76.6 million at December 31, 2020 and 2019, respectively.

The accumulated benefit obligation for the non-qualified retirement plans amounted to $ 16.4 million and $ 14.9 million at December 31, 2020 and 2019, respectively.

Notes to Consolidated Financial Statements – (continued)

The following table presents components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss), on a pre-tax basis:

(Dollars in thousands)

Non-Qualified

(Dollars in thousands) Qualified

Pension Plan Non-Qualified

Retirement Plans

2 unchanged sentences

Service cost (1)

$ 2,164 $ 2,037 $ 2,244 $ 170 $ 126 $ 108

Interest cost (2)

2,505 2,967 2,715 465 563 475

Expected return on plan assets (2)

( 4,538 ) ( 4,495 ) ( 5,272 ) — — —

Amortization of prior service credit (2)

— ( 16 ) ( 23 ) — — ( 1 )

Recognized net actuarial loss (2)

1,582 792 1,496 560 408 411

Net periodic benefit cost

1,713 1,285 1,160 1,195 1,097 993

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (on a pre-tax basis):

Net loss (gain)

1,708 890 ( 4,342 ) 1,244 1,620 ( 663 )

Prior service credit

— 16 23 — — 1

Recognized in other comprehensive income (loss)

1,708 906 ( 4,319 ) 1,244 1,620 ( 662 )

Total recognized in net periodic benefit cost and other comprehensive income (loss)

$ 3,421 $ 2,191 ($ 3,159 ) $ 2,439 $ 2,717 $ 331

(1) Included in salaries and employee benefits expense in the Consolidated Statements of Income.

(2) Included in other expenses in the Consolidated Statements of Income.

For the qualified pension plan, net losses of $ 1.6 million will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost during the year 2020 .

There are no estimated prior service credits to be amortized in 2020 for the qualified pension plan.

For the non-qualified retirement plans, net losses of $ 559 thousand will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost during the year 2020 .

There are no estimated prior service credits to be amortized in 2020 for the non-qualified retirement plans.

Notes to Consolidated Financial Statements – (continued)

The following table presents the measurement date and weighted-average assumptions used to determine benefit obligations at December 31, 2020 and 2019:

Non-Qualified Retirement Plans

Measurement date

Pension Plan Non-Qualified Retirement Plans

2020 2019 2020 2019

Measurement date Dec 31, 2020 Dec 31, 2019 Dec 31, 2020 Dec 31, 2019

Discount rate 2.71 % 3.42 % 2.50 % 3.30 %

1 unchanged sentence

The following table presents the measurement date and weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31, 2020, 2019 and 2018:

Qualified Pension Plan

Non-Qualified Retirement Plans

Measurement date

Qualified Pension Plan Non-Qualified Retirement Plans

2020 2019 2018 2020 2019 2018

Measurement date Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2019 Dec 31, 2018 Dec 31, 2017

Equivalent single discount rate for benefit obligations

3.42 % 4.38 % 3.69 % 3.30 % 4.28 % 3.58 %

Equivalent single discount rate for service cost

3.54 4.44 3.76 3.62 4.48 3.79

Equivalent single discount rate for interest cost

3.07 4.12 3.42 2.93 3.98 3.22

Expected long-term return on plan assets

5.75 5.75 6.75 N/A N/A N/A

Rate of compensation increase

3.75 3.75 3.75 3.75 3.75 3.75

The expected long-term rate of return on plan assets is based on what the Corporation believes is realistically achievable based on the types of assets held by the plan and the plan’s investment practices.

The assumption is updated annually, taking into account the asset allocation, historical asset return trends on the types of assets held and the current and expected economic conditions.

The assumption is updated annually, taking into account the asset allocation, historical asset return trends on the types of assets held and

Notes to Consolidated Financial Statements – (continued)

the current and expected economic conditions.

Future decreases in the long-term rate of return assumption on plan assets would increase pension costs and, in general, may increase the requirement to make funding contributions to the plans.

1 unchanged sentence

The discount rate assumption for defined benefit pension plans is reset on the measurement date.

Discount rates are selected for each plan by matching expected future benefit payments stream to a yield curve based on a selection of high-

quality fixed-income debt securities.

Discount rates are selected for each plan by matching expected future benefit payments stream to a yield curve based on a selection of high-quality fixed-income debt securities.

Future decreases in discount rates would increase the present value of pension obligations and increase our pension costs, while future increases in discount rates would have the opposite effect.

2 unchanged sentences

This approach provides a more precise measurement of service and interest cost by improving the correlation between projected benefit cash flows and their corresponding spot rates.

Notes to Consolidated Financial Statements – (continued)

The following tables present the fair values of the qualified pension plan’s assets:

(Dollars in thousands)

Fair Value Measurements Using

December 31, 2019

Fair Value Measurements Using Assets at

December 31, 2020 Level 1 Level 2 Level 3

Cash and cash equivalents $ 14,427 $ — $ — $ 14,427

4 unchanged sentences

Common stocks 17,150 — — 17,150

Mutual funds 29,365 — — 29,365

Total plan assets $ 60,942 $ 40,987 $ — $ 101,929

(Dollars in thousands)

Fair Value Measurements Using

December 31, 2018

Fair Value Measurements Using Assets at

December 31, 2019 Level 1 Level 2 Level 3

Cash and cash equivalents $ 9,902 $ — $ — $ 9,902

1 unchanged sentence

government-sponsored enterprises

— 28,615 — 28,615

Obligations of states and political subdivisions — 2,998 — 2,998

1 unchanged sentence

Common stocks 14,593 — — 14,593

Mutual funds 27,608 — — 27,608

Total plan assets $ 52,103 $ 41,646 $ — $ 93,749

3 unchanged sentences

This category includes cash and cash equivalents, as well as common stocks and mutual funds which are exchange-traded.

Notes to Consolidated Financial Statements – (continued)

Level 2 securities in the qualified pension plan include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose values are determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

3 unchanged sentences

As of December 31, 2020 and 2019, the qualified pension plan did not have any securities in the Level 3 category.

Notes to Consolidated Financial Statements – (continued)

The following table presents the asset allocations of the qualified pension plan, by asset category:

December 31, 2020 2019

Asset Category:

2 unchanged sentences

Equity securities (2)

Total 100.0 % 100.0 %

(1) Includes obligations of U.S.

government agencies and U.S.

government-sponsored enterprises, obligations of states and political subdivisions and corporate bonds.

(2) Includes common stocks and mutual funds.

The assets of the qualified defined benefit pension plan trust (the “Pension Trust”) are managed to ensure that all present and future benefit obligations are met as they come due.

1 unchanged sentence

As benefit accruals under the qualified plan will be frozen on December 31, 2023, asset allocations have been and will continue to be refined.

Cash inflow is typically comprised of investment income from portfolio holdings and Bank contributions, while cash outflow is for the purpose of paying plan benefits and certain plan expenses.

Cash inflow is typically composed of investment income from portfolio holdings and employer contributions, while cash outflow is for the purpose of paying plan benefits and certain plan expenses.

As early as possible each year, the trustee is advised of the projected schedule of employer contributions and estimations of benefit payments.

1 unchanged sentence

The assets of the Pension Trust should be protected by substantial diversification of investments, providing exposure to a wide range of quality investment opportunities in various asset classes, with a high degree of liquidity.

Fixed income bond investments will typically be limited to investment grade securities in the top four categories used by the major credit rating agencies.

High yield bond funds may be used to provide exposure to this asset class as a diversification tool.

In order to reduce the volatility of the annual rate of return of the bond portfolio, attention will be given to the maturity structure of the portfolio in the light of money market conditions and interest rate forecasts.

Fixed income securities will typically be limited to investment grade securities in the top four categories used by the major credit rating agencies.

High yield fixed income securities may be used to provide exposure to this asset class as a diversification tool.

In order to reduce the volatility of the annual rate of return of the fixed income security portfolio, attention will be given to the maturity structure of the portfolio in the light of money market conditions and interest rate forecasts.

The assets of the Pension Trust will typically have a laddered maturity structure, avoiding large concentrations in any single year.

Equity holdings provide opportunities for dividend and capital appreciation returns.

Holdings will be appropriately diversified by maintaining broad exposure to large-, mid- and small-cap stocks as well as international equities.

Investment selection and mix of equity holdings should be influenced by forecasts of economic activity, corporate profits and allocation among different segments of the economy while ensuring efficient diversification.

The fair value of equity securities of any one issuer will not be permitted to exceed 10 % of the total fair value of equity holdings of the Pension Trust.

Equity securities provide opportunities for dividend and capital appreciation returns.

Equity securities will be appropriately diversified by maintaining broad exposure to large-, mid- and small-cap stocks as well as international equities.

Investment selection and mix of equity securities should be influenced by forecasts of economic activity, corporate profits and allocation among different segments of the economy while ensuring efficient diversification.

The fair value of equity securities of any one issuer will not be permitted to exceed 10 % of the total fair value of equity securities of the Pension Trust.

Notes to Consolidated Financial Statements – (continued)

Contributions

2 unchanged sentences

In addition, the Corporation expects to contribute $ 896 thousand in benefit payments to the non-qualified retirement plans in 2021.

Notes to Consolidated Financial Statements – (continued)

Estimated Future Benefit Payments

The following table presents the benefit payments, which reflect expected future service, as appropriate, expected to be paid:

(Dollars in thousands)

Non-Qualified

(Dollars in thousands) Qualified

Pension Plan Non-Qualified

Retirement Plans

Years ending December 31, 2021 $ 5,608 $ 896

2022 4,255 886

2023 4,804 881

2024 4,830 874

2025 6,096 871

2026 and thereafter 27,942 4,460

2 unchanged sentences

Total employer matching contributions under this plan amounted to $ 2.8 million, $ 2.7 million and $ 2.5 million in 2020, 2019 and 2018, respectively.

Other Incentive Plans

The Corporation maintains several non-qualified incentive compensation plans.

Substantially all employees participate in one of the incentive compensation plans.

Incentive plans provide for annual or more frequent payments based on individual, business line and/or corporate performance targets.

Total incentive based compensation in 2019 , 2018 and 2017 amounted to $ 16.7 million , $ 16.1 million and $ 16.9 million , respectively.

In general, the terms of incentive plans are subject to annual renewal and may be terminated at any time by the Compensation Committee of the Board of Directors.

Deferred Compensation Plan

7 unchanged sentences

Note 18 - Share-Based Compensation Arrangements

Washington Trust’s share-based compensation plans are described below.

The 2013 Stock Option and Incentive Plan (the “2013 Plan”) was approved by shareholders on April 23, 2013.

1 unchanged sentence

The 2013 Plan permits the granting of stock options and other equity incentives to officers, employees, directors and other key persons.

The 2003 Stock Incentive Plan (the “2003 Plan”) was amended and restated and approved by shareholders in April 2009.

Under the 2003 Plan, as amended and restated, the maximum number of shares of Bancorp’s common stock to be issued was 1,200,000 shares and the number of shares that could be issued in the form of awards other than stock options or stock appreciation rights was 400,000 .

The 2003 Plan permitted the granting of stock options and other equity incentives to officers, employees, directors and other key persons until the 2003 Plan’s expiration on April 28, 2019.

The exercise price of each stock option may not be less than the fair market value of the Bancorp’s common stock on the date of grant, and options shall have a term of no more than ten years.

Stock options are designated as either non-qualified or incentive stock options.

In general, the stock option price is payable in cash, by the delivery of shares of common stock already owned by the grantee, or a combination thereof.

With respect only to non-qualified stock option grants issued under the 2013 Plan, the exercise may also be accomplished by withholding the exercise price from the number of shares that would otherwise be delivered upon a cash exercise of the option.

Performance share awards are granted in order to provide certain key employees of the Corporation the opportunity to earn shares of common stock, the number of which is determined pursuant to, and subject to the attainment of, performance goals during a specified measurement period.

The number of shares vested and earned will be contingent upon the Corporation’s attainment of certain performance measures as detailed in the performance share award agreements.

Vesting of stock options and share awards may accelerate or may be subject to proportional vesting if there is a change in control, disability, retirement or death (as defined in the 2013 Plan and the 2003 Plan).

Vesting of stock options and share awards may accelerate or may be subject to proportional vesting if there is a change in control, disability, retirement or death (as defined in the 2013 Plan).

The following table presents share-based compensation expense and the related income tax benefits recognized in the Consolidated Statements of Income for stock options, nonvested share units and nonvested performance share units:

3 unchanged sentences

Related income tax benefits (1)

Includes $ 248 thousand , $ 496 thousand , and $ 508 thousand , respectively, of excess tax benefits recognized upon the settlement of share-based compensation awards in 2019 , 2018 and 2017 .

As of December 31, 2019 , there was $ 5.0 million of total unrecognized compensation cost related to share-based compensation arrangements, including stock options, nonvested share units and performance share units granted under the Plans.

$ 801 $ 982 $ 1,108

(1) Includes $ 103 thousand of excess tax expenses recognized upon the settlement of share-based compensation awards in 2020.

Includes $ 248 thousand and $ 496 thousand, respectively, of excess tax benefits recognized upon the settlement of share-based compensation awards in 2019 and 2018.

As of December 31, 2020, there was $ 5.2 million of total unrecognized compensation cost related to share-based compensation arrangements, including stock options, nonvested share units and nonvested performance share units granted under the Plans.

That cost is expected to be recognized over a weighted average period of 1.93 years.

Stock Options

The exercise price of each stock option may not be less than the fair market value of the Bancorp’s common stock on the date of grant, and options shall have a term of no more than ten years.

Stock options are designated as either non-qualified or incentive stock options.

In general, the stock option price is payable in cash, by the delivery of shares of common stock already owned by the grantee, or a combination thereof.

With respect to non-qualified stock option grants issued under the 2013 Plan, the exercise may also be accomplished by withholding the exercise price from the number of shares that would otherwise be delivered upon a cash exercise of the option.

Washington Trust uses historical data to estimate stock option exercise and employee departure behavior in the option-pricing model.

3 unchanged sentences

Treasury yield curve in effect at the date of grant.

Notes to Consolidated Financial Statements – (continued)

The following presents the assumptions used in determining the grant date fair value of the stock option awards granted to certain key employees:

2020 2019 2018

Options granted 81,530 61,800 47,950

5 unchanged sentences

Weighted average grant-date fair value $ 5.75 $ 7.44 $ 9.74

Notes to Consolidated Financial Statements – (continued)

The following table presents a summary of the status of Washington Trust’s stock options outstanding as of and for the year ended December 31, 2020:

Number of Stock Options

Weighted Average Exercise Price

Weighted Average Remaining Contractual Term (Years)

Aggregate Intrinsic Value (000’s)

Number of Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (000’s)

Beginning of period 248,815 $ 45.38

Granted 81,530 32.23

Exercised ( 4,100 ) 17.52

Forfeited or expired — —

5 unchanged sentences

The following table presents additional information concerning options outstanding and options exercisable at December 31, 2020:

Options Outstanding

Options Exercisable

Exercise Price Ranges

Weighted Average

Remaining Life (Years)

Weighted Average

Exercise Price

Number of Shares

Weighted Average

Options Outstanding Options Exercisable

Exercise Price Ranges Number of

Shares Weighted Average

Remaining Life (Years) Weighted Average

Exercise Price Number of Shares Weighted Average

Exercise Price

$ 20.01 to $ 30.00

$20.01 to $25.00

$25.01 to $30.00

$30.01 to $35.00

$35.01 to $40.00

$40.01 to $45.00

22,015 1.14 22.89 22,015 22.89

$ 30.01 to $ 40.00

123,405 7.82 33.57 41,875 36.17

$ 40.01 to $ 50.00

93,050 7.79 45.83 31,250 40.25

$ 50.01 to $ 60.00

Notes to Consolidated Financial Statements – (continued)

The total intrinsic value of stock options exercised during the years ended December 31, 2019 , 2018 and 2017 was $ 580 thousand , $ 833 thousand and $ 1.0 million , respectively.

87,775 7.34 56.24 39,825 58.05

Total 326,245 7.23 $ 42.44 134,965 $ 41.40

The total intrinsic value of stock options exercised during the years ended December 31, 2020, 2019 and 2018 was $ 46 thousand, $ 580 thousand and $ 833 thousand, respectively.

Nonvested Share Units

In 2019 , 2018 and 2017 , the Corporation granted to directors and certain key employees 26,070 , 13,430 and 15,900 nonvested share units, respectively, with 3 - to 5 -year cliff vesting.

In 2020, 2019 and 2018, the Corporation granted to directors and certain key employees 27,385 , 26,070 and 13,430 share units, respectively, with 3 - to 5 -year cliff vesting.

Notes to Consolidated Financial Statements – (continued)

The following table presents a summary of the status of Washington Trust’s nonvested share units as of and for the year ended December 31, 2020:

Number of Shares

Weighted Average Grant Date Fair Value

Number of Shares Weighted Average Grant Date Fair Value

Beginning of period 53,890 $ 52.01

Granted 27,385 35.38

Vested ( 15,160 ) 53.39

Forfeited — —

End of period 66,115 $ 44.80

1 unchanged sentence

The Corporation granted performance share units to certain key employees providing the opportunity to earn shares of common stock over a 3 - to 5 -year performance period.

The number of shares vested and earned will be contingent upon the Corporation’s attainment of certain performance measures as detailed in the performance share award agreements.

The following table presents a summary of the performance share unit awards as of December 31, 2020:

Grant Date Fair Value per Share

Weighted Average Current Performance Assumption

Expected Number of Shares

Grant Date Fair Value per Share Weighted Average Current Performance Assumption Expected Number of Shares

Performance share units awarded in:

2020 $ 34.22 140 % 65,632

2019 52.84 148 % 46,320

2018 54.25 150 % 44,415

Total 156,367

The following table presents a summary of the status of Washington Trust’s performance share units as of and for the year ended December 31, 2020:

Number of Shares

Weighted Average Grant Date Fair Value

Number of Shares Weighted Average Grant Date Fair Value

Beginning of period 108,964 $ 53.16

Granted 71,007 35.70

Vested ( 23,604 ) 51.85

Forfeited — —

End of period 156,367 $ 45.43

8 unchanged sentences

cash management activities;

and direct banking activities, which include the operation of ATMs, telephone and internet banking services and customer support and sales.

and direct banking activities, which include the operation of ATMs, telephone banking, internet banking and mobile banking services and customer support and sales.

Wealth Management Services

Wealth Management Services includes investment management;

financial planning;

holistic financial planning services;

personal trust and estate services, including services as trustee, personal representative, custodian and guardian;

and settlement of decedents’ estates.

Institutional trust services are also provided, including fiduciary services.

settlement of decedents’ estates;

and institutional trust services, including custody and fiduciary services.

Corporate includes the Treasury Unit, which is responsible for managing the wholesale investment portfolio and wholesale funding needs.

2 unchanged sentences

(Dollars in thousands)

Year ended December 31, 2019

Year ended December 31, 2020 Commercial

Banking Wealth

Services Corporate Consolidated

Net interest income (expense) $ 128,600 ($ 141 ) ($ 1,015 ) $ 127,444

Provision for loan losses

Net interest income (expense) after provision for loan losses

Provision for credit losses 12,342 — — 12,342

Net interest income (expense) after provision for credit losses 116,258 ( 141 ) ( 1,015 ) 115,102

Noninterest income 61,463 35,454 2,525 99,442

3 unchanged sentences

Total noninterest expenses 79,669 28,779 16,936 125,384

Income before income taxes

Income tax expense

Income (loss) before income taxes 98,052 6,534 ( 15,426 ) 89,160

Income tax expense (benefit) 21,216 1,746 ( 3,631 ) 19,331

Net income (loss) $ 76,836 $ 4,788 ($ 11,795 ) $ 69,829

Total assets at period end $ 4,501,875 $ 74,958 $ 1,136,336 $ 5,713,169

2 unchanged sentences

(Dollars in thousands)

Year ended December 31, 2018

Year ended December 31, 2019 Commercial

Banking Wealth

Services Corporate Consolidated

Net interest income (expense) $ 112,414 ($ 438 ) $ 21,438 $ 133,414

8 unchanged sentences

Income tax expense 15,189 2,308 1,564 19,061

Net income $ 54,360 $ 6,608 $ 8,150 $ 69,118

Total assets at period end $ 4,070,594 $ 74,990 $ 1,147,075 $ 5,292,659

1 unchanged sentence

(Dollars in thousands)

Year ended December 31, 2017

Year ended December 31, 2018 Commercial

Banking Wealth

Services Corporate Consolidated

Net interest income (expense) $ 106,668 ($ 334 ) $ 25,956 $ 132,290

8 unchanged sentences

Income tax expense 13,149 2,577 2,534 18,260

Net income $ 48,216 $ 7,707 $ 12,509 $ 68,432

Total assets at period end $ 3,804,021 $ 71,254 $ 1,135,491 $ 5,010,766

4 unchanged sentences

(Dollars in thousands)

Year ended December 31, 2019

Pre-tax Amounts

Year ended December 31, 2020 Pre-tax Amounts Income Taxes Net of Tax

Securities available for sale:

Changes in fair value of available for sale debt securities

Net losses on securities reclassified into earnings (1)

$ 8,784 $ 2,129 $ 6,655

Net (gains) losses on securities reclassified into earnings — — —

Net change in fair value of available for sale debt securities 8,784 2,129 6,655

1 unchanged sentence

Changes in fair value of cash flow hedges

( 2,003 ) ( 482 ) ( 1,521 )

Net cash flow hedge losses reclassified into earnings (1)

1,136 269 867

Net change in the fair value of cash flow hedges ( 867 ) ( 213 ) ( 654 )

1 unchanged sentence

Defined benefit plan obligation adjustment

( 5,093 ) ( 1,197 ) ( 3,896 )

Amortization of net actuarial losses (2)

2,141 400 1,741

Amortization of net prior service credits (2)

1 unchanged sentence

Total other comprehensive income $ 4,965 $ 1,119 $ 3,846

The pre-tax amount is reported as net realized losses on securities in the Consolidated Statements of Income.

(1) The pre-tax amounts are included in interest expense on FHLB advances, interest expense on junior subordinated debentures and interest and fees on loans in the Consolidated Statements of Income.

1 unchanged sentence

(Dollars in thousands)

Year ended December 31, 2018

Pre-tax Amounts

Year ended December 31, 2019 Pre-tax Amounts Income Taxes Net of Tax

Securities available for sale:

Changes in fair value of available for sale debt securities

Net (gains) losses on securities reclassified into earnings

$ 26,074 $ 6,127 $ 19,947

Net losses on securities reclassified into earnings (1)

Net change in fair value of available for sale debt securities 26,127 6,139 19,988

1 unchanged sentence

Changes in fair value of cash flow hedges

( 1,444 ) ( 339 ) ( 1,105 )

Net cash flow hedge losses reclassified into earnings (2)

2 unchanged sentences

Defined benefit plan obligation adjustment

( 3,710 ) ( 872 ) ( 2,838 )

Amortization of net actuarial losses (3)

1,200 282 918

Amortization of net prior service credits (3)

( 16 ) ( 4 ) ( 12 )

Net change in defined benefit plan obligations ( 2,526 ) ( 594 ) ( 1,932 )

Total other comprehensive loss $ 22,316 $ 5,244 $ 17,072

(1) The pre-tax amount is reported as net realized losses on securities in the Consolidated Statements of Income.

(2) The pre-tax amounts are included in interest expense on FHLB advances, interest expense on junior subordinated debentures and interest and fees on loans in the Consolidated Statements of Income.

2 unchanged sentences

(Dollars in thousands)

Year ended December 31, 2017

Pre-tax Amounts

Year ended December 31, 2018 Pre-tax Amounts Income Taxes Net of Tax

Securities available for sale:

Changes in fair value of available for sale debt securities

($ 12,063 ) ($ 2,835 ) ($ 9,228 )

Net (gains) losses on securities reclassified into earnings

6 unchanged sentences

Defined benefit plan obligation adjustment

3,098 729 2,369

Amortization of net actuarial losses (2)

1,907 448 1,459

Amortization of net prior service credits (2)

( 24 ) ( 6 ) ( 18 )

Net change in defined benefit plan obligations 4,981 1,171 3,810

2 unchanged sentences

(2) The pre-tax amounts are included in other expenses in the Consolidated Statements of Income.

Notes to Consolidated Financial Statements – (continued)

The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax:

(Dollars in thousands)

Net Unrealized (Losses) Gains on Available For Sale Debt Securities

Net Unrealized Gains (Losses) on Cash Flow Hedges

Defined Benefit Pension Plan Adjustment

(Dollars in thousands) Net Unrealized Gains on Available For Sale Debt Securities Net Unrealized (Losses) Gains on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total

Balance at December 31, 2019 $ 3,226 ($ 793 ) ($ 13,670 ) ($ 11,237 )

Other comprehensive income (loss) before reclassifications

6,655 ( 1,521 ) ( 3,896 ) 1,238

Amounts reclassified from accumulated other comprehensive income

— 867 1,741 2,608

Net other comprehensive income (loss)

Balance at December 31, 2019

(Dollars in thousands)

Net Unrealized Losses on Available For Sale Debt Securities

Net Unrealized (Losses) Gains on Cash Flow Hedges

Defined Benefit Pension Plan Adjustment

Balance at December 31, 2017

Other comprehensive (loss) income before reclassifications

Amounts reclassified from accumulated other comprehensive income

Net other comprehensive (loss) income

6,655 ( 654 ) ( 2,155 ) 3,846

Balance at December 31, 2020 $ 9,881 ($ 1,447 ) ($ 15,825 ) ($ 7,391 )

(Dollars in thousands)

Net Unrealized (Losses) Gains on Available For Sale Debt Securities

Net Unrealized Losses on Cash Flow Hedges

Defined Benefit Pension Plan Adjustment

(Dollars in thousands) Net Unrealized (Losses) Gains on Available For Sale Debt Securities Net Unrealized Gains (Losses) on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total

Balance at December 31, 2018 ($ 16,762 ) $ 191 ($ 11,738 ) ($ 28,309 )

1 unchanged sentence

Amounts reclassified from accumulated other comprehensive income

41 121 906 1,068

Net other comprehensive income (loss) 19,988 ( 984 ) ( 1,932 ) 17,072

Reclassification of income tax effects due to the adoption of ASU 2018-02

Balance at December 31, 2019 $ 3,226 ($ 793 ) ($ 13,670 ) ($ 11,237 )

Notes to Consolidated Financial Statements – (continued)

(Dollars in thousands) Net Unrealized Losses on Available For Sale Debt Securities Net Unrealized (Losses) Gains on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total

Balance at December 31, 2017 ($ 7,534 ) ($ 428 ) ($ 15,548 ) ($ 23,510 )

Other comprehensive (loss) income before reclassifications ( 9,228 ) 488 2,369 ( 6,371 )

Amounts reclassified from accumulated other comprehensive income

— 131 1,441 1,572

Net other comprehensive (loss) income ( 9,228 ) 619 3,810 ( 4,799 )

Balance at December 31, 2018 ($ 16,762 ) $ 191 ($ 11,738 ) ($ 28,309 )

Note 21 - Earnings per Common Share

3 unchanged sentences

Earnings per common share - basic:

Less dividends and undistributed earnings allocated to participating securities

Net income $ 69,829 $ 69,118 $ 68,432

dividends and undistributed earnings allocated to participating securities ( 152 ) ( 139 ) ( 144 )

Net income available to common shareholders

$ 69,677 $ 68,979 $ 68,288

Weighted average common shares 17,282 17,331 17,272

1 unchanged sentence

Earnings per common share - diluted:

Less dividends and undistributed earnings allocated to participating securities

Net income $ 69,829 $ 69,118 $ 68,432

dividends and undistributed earnings allocated to participating securities ( 151 ) ( 139 ) ( 144 )

Net income available to common shareholders

$ 69,678 $ 68,979 $ 68,288

Weighted average common shares 17,282 17,331 17,272

1 unchanged sentence

Weighted average diluted common shares

17,402 17,414 17,391

Earnings per common share - diluted $ 4.00 $ 3.96 $ 3.93

Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 223,506 , 100,643 and 55,821 , respectively, for the years ended December 31, 2020, 2019 and 2018.

Notes to Consolidated Financial Statements – (continued)

Note 21 - Leases

The Corporation adopted the provisions of ASC 842 on January 1, 2019.

Upon adoption, operating lease ROU assets totaling $ 28.9 million and operating lease liabilities totaling $ 30.9 million were recognized in our Consolidated Balance Sheets for leases that existed at the adoption date, based on the present value of lease payments over the remaining lease term.

The weighted average discount rate used to discount operating lease liabilities at December 31, 2019 was 3.67 % .

As of December 31, 2019 , the Corporation has one lease that has not yet commenced.

At December 31, 2019 , lease expiration dates ranged from 4 months to 21 years, with additional renewal options on certain leases ranging from 1 to 5 years.

At December 31, 2019 , the weighted average remaining lease term for the Corporation’s operating leases was 14.0 years.

Rental expense for operating leases amounted to $ 3.8 million for 2019 , compared to $ 3.7 million for 2018 .

The following table presents the undiscounted annual lease payments under the terms of the Corporation’s operating leases at December 31, 2019 , including a reconciliation to the present value of operating lease liabilities recognized in the Corporation’s Consolidated Balance Sheets:

(Dollars in thousands)

Years ending December 31:

2025 and thereafter

Total operating lease payments (1)

Less interest

Present value of operating lease liabilities (2)

Includes $ 2.4 million related to options to extend lease terms that are reasonably certain of being exercised.

Includes short-term operating lease liabilities of $ 2.5 million .

The following table presents the components of total lease expense and operating cash flows:

(Dollars in thousands)

Year ended December 31,

Lease Expense:

Operating lease expense

Variable lease expense

Total lease expense (1)

Cash paid reducing operating lease liabilities

Included in net occupancy expenses in the Consolidated Income Statement.

Notes to Consolidated Financial Statements – (continued)

The following table presents the minimum annual lease payments under the terms of these leases, exclusive of renewal provisions at December 31, 2018 :

(Dollars in thousands)

Years ending December 31:

2024 and thereafter

Total minimum lease payments

At December 31, 2018 , lease expiration dates ranged from 5 months to 22 years, with additional renewal options on certain leases ranging from 1 to 5 years.

Note 22 - Commitments and Contingencies

Adoption of ASC 326

As disclosed in Note 2, ASC 326 requires the measurement of expected lifetime credit losses for unfunded commitments that are considered off-balance sheet credit exposures.

The Corporation adopted the provisions of ASC 326 effective January 1, 2020 using the modified retrospective method.

Therefore, the prior period comparative information has not been adjusted and continues to be reported under the GAAP in effect prior to the adoption of ASC 326.

As a result of adopting ASC 326, the Corporation recognized an increase in the ACL on unfunded commitments of $ 1.5 million on January 1, 2020.

Financial Instruments with Off-Balance Risk

1 unchanged sentence

These financial instruments include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts.

These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Corporation’s Consolidated Balance Sheets.

The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers, commitments to extend credit and financial guarantees are similar to those used for loans.

The interest rate swaps with other counterparties are generally subject to bilateral collateralization terms.

The following table presents the contractual and notional amounts of financial instruments with off-balance sheet risk:

(Dollars in thousands)

Financial instruments whose contract amounts represent credit risk:

Commitments to extend credit:

Commercial loans

Home equity lines

Standby letters of credit

Financial instruments whose notional amounts exceed the amount of credit risk:

Mortgage loan commitments:

Interest rate lock commitments

Forward sale commitments

Loan related derivative contracts:

Interest rate swaps with customers

Mirror swaps with counterparties

Risk participation-in agreements

Foreign exchange contracts

Interest rate risk management contracts:

Interest rate swaps

See Note 13 for additional disclosure pertaining to derivative financial instruments.

These instruments involve, to varying

Notes to Consolidated Financial Statements – (continued)

degrees, elements of credit risk in excess of the amount recognized in the Corporation’s Consolidated Balance Sheets.

The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

Financial Instruments Whose Contract Amounts Represent Credit Risk (Unfunded Commitments)

Commitments to Extend Credit

10 unchanged sentences

Most standby letters of credit extend for one year.

The maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered totaled $13.7 million and $7.7 million , as of December 31, 2019 and 2018 , respectively.

At December 31, 2019 and 2018 , there were no liabilities to beneficiaries resulting from standby letters of credit.

The maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered totaled $ 11.7 million and $ 13.7 million, respectively, as of December 31, 2020 and December 31, 2019.

At December 31, 2020 and December 31, 2019, there were no liabilities to beneficiaries resulting from standby letters of credit.

Fee income on standby letters of credit was insignificant for the years ended December 31, 2020, 2019 and 2018.

At December 31, 2019 and 2018 , a substantial portion of the standby letters of credit were supported by pledged collateral.

A substantial portion of the standby letters of credit were supported by pledged collateral.

The collateral obtained is determined based on management’s credit evaluation of the customer.

Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required.

Financial Instruments Whose Notional Amounts Exceed the Amount of Credit Risk

Mortgage Loan Commitments

2 unchanged sentences

Both interest rate lock commitments and forward sale commitments are derivative financial instruments.

Loan Related Derivative Contracts

The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers are similar to those used for loans.

The interest rate swaps with other counterparties are generally subject to bilateral collateralization terms.

The following table presents the contractual and notional amounts of financial instruments with off-balance sheet risk:

Notes to Consolidated Financial Statements – (continued)

(Dollars in thousands)

December 31, 2020 2019

Financial instruments whose contract amounts represent credit risk:

Commitments to extend credit:

Commercial loans

$ 453,493 $ 471,338

Home equity lines

319,744 295,687

89,078 88,613

Standby letters of credit 11,709 13,710

Financial instruments whose notional amounts exceed the amount of credit risk:

Mortgage loan commitments:

Interest rate lock commitments

167,671 51,439

Forward sale commitments

279,653 94,829

Loan related derivative contracts:

Interest rate swaps with customers

991,002 813,458

Mirror swaps with counterparties

991,002 813,458

Risk participation-in agreements

92,717 72,866

Interest rate risk management contracts:

Interest rate swaps

60,000 60,000

See Note 14 for additional disclosure pertaining to derivative financial instruments.

The ACL on unfunded commitments amounted to $ 2.4 million at December 31, 2020, compared to $ 293 thousand at December 31, 2019.

The activity in the ACL on unfunded commitments for the year ended December 31, 2020 is presented below:

(Dollars in thousands) Commercial Consumer

CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total

Beginning Balance $ 136 $ 144 $ 280 $ 6 $ — $ 7 $ 7 $ 293

Adoption of ASC 326 817 626 1,443 34 — 6 6 1,483

Provision ( 46 ) 632 586 14 — 6 6 606

Ending Balance $ 907 $ 1,402 $ 2,309 $ 54 $ — $ 19 $ 19 $ 2,382

Other Contingencies

The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business.

Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated financial position or results of operations of the Corporation.

Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated balance sheets or statements of income of the Corporation.

When selling a residential real estate mortgage loan or acting as originating agent on behalf of a third party, Washington Trust generally makes various representations and warranties.

2 unchanged sentences

In the event of a breach of these representations and warranties, Washington Trust may be required to either repurchase the residential real estate mortgage loan (generally at unpaid principal balance plus accrued interest) with the identified defects or indemnify (“make-whole”) the investor for its losses.

Notes to Consolidated Financial Statements – (continued)

In the case of a repurchase, the Corporation will bear any subsequent credit loss on the residential real estate mortgage loan.

4 unchanged sentences

Any change in the estimate is recorded in mortgage banking revenues in the Consolidated Statements of Income.

Notes to Consolidated Financial Statements – (continued)

Note 23 - Parent Company Financial Statements

1 unchanged sentence

The Statements of Changes in Shareholders’ Equity for the parent company only are identical to the Consolidated Statements of Changes in Shareholders’ Equity and are therefore not presented.

Balance Sheets

(Dollars in thousands, except par value)

Balance Sheets (Dollars in thousands, except par value)

December 31, 2020 2019

Cash on deposit with bank subsidiary $ 1,658 $ 1,838

Investment in subsidiaries at equity value:

Bank 550,986 521,969

Non-bank 1,904 1,882

Dividends receivable from bank subsidiary 11,836 9,575

Other assets 124 232

Total assets $ 566,508 $ 535,496

Junior subordinated debentures $ 22,681 $ 22,681

5 unchanged sentences

authorized 60,000,000 shares;

issued and outstanding 17,363,455 shares in 2019 and 17,302,037 in 2018

17,363,457 shares issued and 17,265,337 shares outstanding at December 31, 2020 and 17,363,455 shares issued and outstanding at December 31, 2019

Paid-in capital 125,610 123,281

1 unchanged sentence

Accumulated other comprehensive loss ( 7,391 ) ( 11,237 )

Treasury stock, at cost;

98,120 shares at December 31, 2020

Total shareholders’ equity 534,195 503,492

1 unchanged sentence

Notes to Consolidated Financial Statements – (continued)

Statements of Income

(Dollars in thousands)

Statements of Income (Dollars in thousands)

Years ended December 31, 2020 2019 2018

Dividends from subsidiaries:

Bank $ 43,139 $ 36,796 $ 32,394

Non-bank 17 27 24

Total income 43,156 36,823 32,418

Interest on junior subordinated debentures 641 980 869

1 unchanged sentence

Change in fair value of contingent consideration — — ( 187 )

Other 349 337 324

Total expenses 1,200 1,464 1,193

1 unchanged sentence

Income tax benefit 248 301 284

Income before equity in undistributed earnings (losses) of subsidiaries

Equity in undistributed earnings (losses) of subsidiaries:

Statements of Cash Flows

(Dollars in thousands)

Income before equity in undistributed earnings of subsidiaries 42,204 35,660 31,509

Equity in undistributed earnings of subsidiaries:

Bank 27,603 33,445 36,876

Non-bank 22 13 47

Net income $ 69,829 $ 69,118 $ 68,432

Statements of Cash Flows (Dollars in thousands)

Years ended December 31, 2020 2019 2018

Cash flow from operating activities:

Cash flows from operating activities:

Net income $ 69,829 $ 69,118 $ 68,432

Adjustments to reconcile net income to net cash provided by operating activities:

Equity in undistributed (earnings) losses of subsidiaries:

Equity in undistributed earnings of subsidiaries:

Bank ( 27,603 ) ( 33,445 ) ( 36,876 )

Non-bank ( 22 ) ( 13 ) ( 47 )

(Increase) decrease in dividend receivable ( 2,261 ) ( 1,813 ) 8

(Increase) decrease in other assets

Decrease (increase) in other assets 109 ( 43 ) 70

(Decrease) increase in accrued expenses and other liabilities ( 31 ) ( 15 ) 17

Change in fair value of contingent consideration liability — — ( 187 )

Tax benefit from stock option exercises and other equity awards

Tax (expense) benefit from stock option exercises and other equity awards ( 103 ) 248 496

Other, net 193 ( 195 ) ( 465 )

Net cash provided by operating activities 40,111 33,842 31,448

1 unchanged sentence

Payment of contingent consideration liability — — ( 1,217 )

Treasury stock purchased ( 4,322 ) — —

Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered ( 470 ) 273 ( 671 )

7 unchanged sentences

(Dollars and shares in thousands, except per share amounts)

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

2020 First Quarter Second Quarter Third Quarter Fourth Quarter

Interest and dividend income $ 47,116 $ 42,612 $ 40,834 $ 39,374

1 unchanged sentence

Net interest income 32,602 30,945 31,654 32,243

Provision for loan losses

Net interest income after provision for loan losses

Provision for credit losses 7,036 2,200 1,325 1,781

Net interest income after provision for credit losses 25,566 28,745 30,329 30,462

Noninterest income 19,927 26,320 25,468 27,727

2 unchanged sentences

Income tax expense 3,139 5,547 5,131 5,514

Net income $ 11,901 $ 21,040 $ 18,322 $ 18,566

Net income available to common shareholders $ 11,869 $ 21,000 $ 18,285 $ 18,524

6 unchanged sentences

(Dollars and shares in thousands, except per share amounts)

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

2019 First Quarter Second Quarter Third Quarter Fourth Quarter

Interest and dividend income $ 50,194 $ 50,559 $ 49,527 $ 47,383

7 unchanged sentences

Income tax expense 4,842 4,662 5,236 4,321

Net income $ 17,495 $ 17,273 $ 18,814 $ 15,536

Net income available to common shareholders $ 17,461 $ 17,238 $ 18,778 $ 15,502

7 unchanged sentences

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data