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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-04 · 373 added, 487 removed, 743 unchanged (54% of the section changed)

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The following discussion should be read in conjunction with the Corporation’s Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2020, and in conjunction with the condensed Unaudited Consolidated Financial Statements and notes thereto included in Item 1 of this report.

Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results for the full-year ended December 31, 2020 or any future period.

Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results for the full-year ended December 31, 2021 or any future period.

Forward-Looking Statements

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the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations;

the length and extent of the economic contraction as a result of the COVID-19 pandemic;

continued deterioration in local, regional, national or international economic conditions or conditions affecting the banking or financial services industries, financial capital markets and the customers and communities we serve;

changes in consumer behavior due to changing political, business and economic conditions, including increased unemployment, or legislative or regulatory initiatives;

changes in consumer behavior due to changing political, business and economic conditions, or legislative or regulatory initiatives;

the possibility that future credits losses are higher than currently expected due to changes in economic assumptions or adverse economic developments;

volatility in national and international financial markets;

reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits;

reductions in net interest income resulting from interest rate changes or volatility as well as changes in the balance and mix of loans and deposits;

reductions in the market value or outflows of wealth management assets under administration;

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reductions in loan demand;

changes in loan collectibility, increases in defaults and charge-off rates;

changes in loan collectability, increases in defaults and charge-off rates;

changes in the size and nature of our competition;

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

As of September 30, 2020, management considers the following to be its critical accounting policies:

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

Management considers the following to be its critical accounting policies:

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

See our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for a description of the Corporation’s critical accounting policies for the valuation of goodwill and identifiable intangible assets and accounting for defined benefit pension plans.

Given the composition and nature of the Corporation’s investment security portfolio, management no longer considers the assessment of investment securities for impairment as a critical accounting policy.

As a result of the adoption of Topic 326 effective January 1, 2020, Washington Trust updated its critical accounting policy for the Allowance of Credit Losses on Loans.

The updated policy is described in detail below.

Management's Discussion and Analysis

Management updated its critical accounting policy for the allowance for credit losses on loans in the first quarter of 2021 as the result of incorporating additional econometric factors in the determination of the probability of default for each loan portfolio segment.

The updated policy is presented below.

Allowance for Credit Losses on Loans

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

The allowance for credit losses (“ACL") on loans is management’s estimate of expected credit losses over the expected life of the loans at the reporting date.

In accordance with the ACL policy, the methodology is reviewed no less than annually.

The ACL on loans is established through a provision for credit losses recognized in the Unaudited 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.

Management's Discussion and Analysis

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

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

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

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

For loans that are individually analyzed, the ACL is measured using a discounted cash flow 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.

Pooled loan portfolio segments include commercial real estate (including commercial construction loans), commercial and industrial (including Paycheck Protection Program (“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 troubled debt restructurings (“TDRs”) and executed TDRs, as well as certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans.

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

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

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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 collateral.

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

The life of the loan excludes expected extensions, renewal 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.

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 the extension or renewal options are included in the original or modified contract terms and not unconditionally cancellable by the Corporation.

The methodology incorporates a probability of default and loss given default framework.

Default triggers include the loan has become past due by 90 or more days, 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.

Loss given default is estimated based on historical credit loss experience.

Probability of default is estimated utilizing a regression model that incorporates econometric factors.

These factors are selected based on the correlation of the factor to historical credit losses for each portfolio segment.

The national unemployment rate (“NUR”) and gross domestic product (“GDP”) econometric factors are utilized for the commercial real estate and other consumer loan portfolio segments;

the NUR and national home price index (“HPI”) econometric factors are utilized for the residential real estate and home equity portfolio segments;

and the NUR econometric factor is utilized for the commercial & industrial loan portfolio segment.

To estimate the probability of default, the model utilizes forecasted econometric factors over a one-year reasonable and supportable forecast period.

After the forecast period, the model reverts to the historical mean of the respective econometric factor and the associated probability of default on a straight-line basis over a one-year reversion period.

The DCF methodology combines the probability of default, the loss given default, prepayment speeds and the remaining life of the loan to estimate a reserve for each loan.

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

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(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 collectibility of the portfolio, including the condition of various market segments;

(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;

(5) changes in the volume and severity of past due loans,

Management's Discussion and Analysis

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 credit review system;

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

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

and 9) the effect of other

Management's Discussion and Analysis

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

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.

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.

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

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

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

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

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

In July 2020, we reopened our branch lobbies to customers while adhering to social distancing guidelines.

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

On March 27, 2020, the CARES Act was enacted to address the economic effects of the COVID-19 pandemic.

The CARES Act initially appropriated $349 billion for “paycheck protection loans” through the PPP.

The amount appropriated was subsequently increased to $659 billion.

Loans under the PPP that meet SBA requirements may be forgiven in certain circumstances, and are 100% guaranteed by SBA.

As of September 30, 2020, there were 1,770 PPP loans totaling $216.8 million included in our commercial and industrial loan portfolio.

PPP loans are fully guaranteed by the U.S.

government, have either a two-year or five-year term and earn interest at a rate of 1%.

We currently expect a significant portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.

In conjunction with the PPP, the FRB has created the PPPLF, a lending facility for qualified financial institutions.

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

The PPPLF extends credit to depository institutions at a fixed interest rate of 0.35% with maturity terms matching the maturity date of the pledged PPP loans.

In the second quarter of 2020, Washington Trust began participating in PPPLF and as of September 30, 2020, PPPLF borrowings amounted to $105.7 million.

The CARES Act also provided TDR accounting relief.

From March 1, 2020 through the earlier of December 31, 2020 or 60 days after the termination date of the National Emergency, a financial institution may elect to suspend the requirements under GAAP for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR, including impairment accounting.

This TDR relief applies for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019.

Financial institutions are required to maintain

Management's Discussion and Analysis

records of the volume of loans involved in modifications to which TDR relief is applicable.

Washington Trust has made this election.

Through September 30, 2020, we have executed loan payment deferment modifications on 617 loans totaling $685.4 million.

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

As of September 30, 2020, we have active deferrals on 253 loans totaling $418.2 million, or 10% of total loans excluding PPP loans.

As of November 2, 2020, we have active deferrals on 146 loans totaling $252.9 million, or 6% of total loans excluding PPP loans.

COVID-19 Pandemic Related

On March 11, 2021, the American Rescue Plan Act (“ARP”) was signed into law providing an additional $1.9 trillion in COVID-19 economic relief.

The ARP included provisions on aid to state and local governments, hard-hit industries and communities, additional direct stimulus payments to qualifying individuals, additional funding for the Small Business Administration’s (“SBA’s”) PPP and other provisions.

PPP loans are 100% guaranteed by the SBA.

In the first quarter of 2021, we originated 1,058 PPP loans with principal balances totaling approximately $97 million and we processed SBA forgiveness on approximately 700 PPP loans with principal balances totaling $66 million.

As of March 31, 2021, the carrying value of PPP loans amounted to $228.6 million and included net unamortized loan origination fee balances of $5.7 million.

On May 4, 2021, the SBA announced that PPP funding has been exhausted and that it has stopped accepting applications from most lenders.

As of this date, the carrying value of PPP loans held in our commercial and industrial portfolio totaled approximately $208 million, down from the end of first quarter due to additional loans being forgiven by the SBA.

A significant portion of this remaining balance is expected to ultimately be forgiven by the SBA in accordance with the terms of the program.

See additional disclosure regarding PPP loans under the heading “Commercial & Industrial Loans” in the Financial Condition section.

Risk Management

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The Board of Directors is responsible for oversight of the ERM program.

The ERM program enables the aggregation of risk across the Corporation and ensures the Corporation has the tools, programs and processes in place to support informed decision making, to anticipate risks before they materialize and to maintain the Corporation’s risk profile consistent with its risk strategy.

The ERM program enables the aggregation of risk across the Corporation and ensures the Corporation has the tools, programs and processes in place to support informed

Management's Discussion and Analysis

decision making, to anticipate risks before they materialize and to maintain the Corporation’s risk profile consistent with its risk strategy.

The Board of Directors has approved an enterprise risk management policy that addresses each category of risk.

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

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

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

Credit risk also exists with respect to investment securities.

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A framework approach is utilized to assign responsibility and to ensure that the various business units and activities involved in the risk management life-cycle are effectively integrated.

The Corporation has adopted the “three lines of defense” concept that is an industry best practice for

Management's Discussion and Analysis

The Corporation has adopted the “three lines of defense” strategy that is an industry best practice for ERM.

Business units are the first line of defense in managing risk.

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For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC.

Management's Discussion and Analysis

Results of Operations

The following table presents a summarized consolidated statement of operations:

(Dollars in thousands) Three Months Nine Months

Change Change

For the periods ended September 30, 2020 2019 $ % 2020 2019 $ %

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

Net interest income $32,871 $32,602 $269 1 %

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

Three Months Nine Months

For the periods ended September 30, 2020 2019 2020 2019

Three months ended March 31, 2021 2020

Diluted earnings per common share $1.17 $0.68

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Noninterest income as a percentage of total revenues 44 % 38 %

Net income totaled $18.3 million and $51.3 million, respectively, for the three and nine months ended September 30, 2020, compared to $18.8 million and $53.6 million, respectively, for the same periods in 2019.

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

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

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

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

Net income totaled $20.5 million for the three months ended March 31, 2021, up by $8.6 million, or 72%, from the same period in 2020.

These results reflected higher levels of noninterest income and a reduction in the provision for credit losses, partially offset by an increase in noninterest expenses.

Noninterest income increased due primarily to strong mortgage banking results and growth in wealth management revenues.

A negative provision for credit losses (or a benefit) was recognized in the first quarter of 2021 as a result of improvement in forecasted economic conditions and continued stable asset quality metrics.

Noninterest expenses increased largely due to debt prepayment penalty expense recognized in the first quarter of 2021 on the prepayment of FHLB advances.

Management's Discussion and Analysis

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

Three months ended September 30, 2020 2019 Change

Three months ended March 31, 2021 2020 Change

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

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Taxable debt securities 915,864 3,242 1.44 905,293 5,833 2.59 10,571 (2,591) (1.15)

Nontaxable debt securities — — — 75 3 15.87 (75) (3) (15.87)

Total securities

906,977 4,870 2.14 920,985 6,321 2.72 (14,008) (1,451) (0.58)

FHLB stock 28,867 133 1.87 51,962 640 4.95 (23,095) (507) (3.08)

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22,681 94 1.68 22,681 213 3.78 — (119) (2.10)

PPPLF borrowings 180,128 159 0.35 — — — 180,128 159 0.35

Total interest-bearing liabilities

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(Dollars in thousands)

Three months ended September 30, 2020 2019 Change

Commercial loans $248 $323 ($75)

Nontaxable debt securities — 2 (2)

Total $248 $325 ($77)

Nine months ended September 30, 2020 2019 Change

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

Cash, federal funds sold and short-term investments $156,296 $424 0.36 $75,333 $1,232 2.19 $80,963 ($808) (1.83)

Mortgage loans held for sale 48,570 1,193 3.28 28,379 878 4.14 20,191 315 (0.86)

Taxable debt securities 905,692 16,181 2.39 972,511 20,550 2.83 (66,819) (4,369) (0.44)

Nontaxable debt securities — — — 602 24 5.33 (602) (24) (5.33)

Total debt securities 905,692 16,181 2.39 973,113 20,574 2.83 (67,421) (4,393) (0.44)

FHLB stock 49,236 1,826 4.95 48,185 2,162 6.00 1,051 (336) (1.05)

Commercial real estate 1,623,612 40,326 3.32 1,461,736 51,702 4.73 161,876 (11,376) (1.41)

Commercial & industrial 749,905 20,214 3.60 603,143 21,972 4.87 146,762 (1,758) (1.27)

Total commercial 2,373,517 60,540 3.41 2,064,879 73,674 4.77 308,638 (13,134) (1.36)

Residential real estate 1,492,589 42,660 3.82 1,358,606 41,099 4.04 133,983 1,561 (0.22)

Home equity 281,488 7,802 3.70 284,657 10,757 5.05 (3,169) (2,955) (1.35)

Other 19,171 716 4.99 24,017 887 4.94 (4,846) (171) 0.05

Total consumer 300,659 8,518 3.78 308,674 11,644 5.04 (8,015) (3,126) (1.26)

Total loans 4,166,765 111,718 3.58 3,732,159 126,417 4.53 434,606 (14,699) (0.95)

Total interest-earning assets 5,326,559 131,342 3.29 4,857,169 151,263 4.16 469,390 (19,921) (0.87)

Noninterest-earning assets 357,133 292,702 64,431

Total assets $5,683,692 $5,149,871 $533,821

Liabilities and Shareholders’ Equity:

Interest-bearing demand deposits $158,594 $725 0.61 $144,306 $1,959 1.82 $14,288 ($1,234) (1.21)

NOW accounts 569,283 253 0.06 462,856 228 0.07 106,427 25 (0.01)

Money market accounts 818,530 4,439 0.72 668,330 5,534 1.11 150,200 (1,095) (0.39)

Savings accounts 402,243 195 0.06 365,911 204 0.07 36,332 (9) (0.01)

Time deposits (in-market) 752,443 10,571 1.88 795,559 11,900 2.00 (43,116) (1,329) (0.12)

Total interest-bearing in-market deposits 2,701,093 16,183 0.80 2,436,962 19,825 1.09 264,131 (3,642) (0.29)

Wholesale brokered time deposits 471,771 4,997 1.41 485,405 8,132 2.24 (13,634) (3,135) (0.83)

Total interest-bearing deposits 3,172,864 21,180 0.89 2,922,367 27,957 1.28 250,497 (6,777) (0.39)

FHLB advances 1,016,943 13,501 1.77 1,019,172 20,153 2.64 (2,229) (6,652) (0.87)

Junior subordinated debentures 22,681 519 3.06 22,681 750 4.42 — (231) (1.36)

PPPLF borrowings 61,333 161 0.35 — — — 61,333 161 0.35

Total interest-bearing liabilities 4,273,821 35,361 1.11 3,964,220 48,860 1.65 309,601 (13,499) (0.54)

Noninterest-bearing demand deposits 733,359 613,917 119,442

Other liabilities 164,928 98,012 66,916

Shareholders’ equity 511,584 473,722 37,862

Total liabilities and shareholders’ equity $5,683,692 $5,149,871 $533,821

Net interest income (FTE) $95,981 $102,403 ($6,422)

Interest rate spread 2.18 2.51 (0.33)

Net interest margin 2.41 2.82 (0.41)

Management's Discussion and Analysis

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

(Dollars in thousands)

Nine months ended September 30, 2020 2019 Change

Three months ended March 31, 2021 2020 Change

Commercial loans $246 $278 ($32)

Nontaxable debt securities — 6 (6)

Total $780 $983 ($203)

Net Interest Income

Net interest income continues to be the primary source of our operating income.

Net interest income for the three and nine months ended September 30, 2020 totaled $31.7 million, and $95.2 million, respectively, compared to $33.0 million and $101.4 million, respectively, for the same periods in 2019.

Net interest income for the three months ended March 31, 2021 totaled $32.9 million, compared to $32.6 million for the same period in 2020.

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

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

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

Prepayment penalty income associated with loan payoffs for both the three and nine months ended September 30, 2020 and 2019 was immaterial.

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

Prepayment penalty fee income associated with loan payoffs for both the three months ended March 31, 2021 and 2020 was immaterial.

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

As market interest rates decline, loan prepayments and the receipt of payments on mortgage-backed securities generally increase.

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

As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans amounted to $4.1 million for the nine months ended September 30, 2020, up by $988 thousand from the same period in 2019.

FTE net interest income for the three and nine months ended September 30, 2020 amounted to $31.9 million and $96.0 million, respectively, down by $1.4 million and $6.4 million, respectively, from the same periods in 2019.

Growth in average interest-earning assets, net of increased average interest-bearing liability balances, contributed approximately $6.1 million and $12.8 million, respectively, of additional net interest income for the three and nine months ended September 30, 2020, however, this was offset by declines in asset yields out-pacing declines in funding costs, which reduced net interest income by $7.5 million and $19.2 million, respectively.

The net interest margin was 2.31% and 2.41%, respectively, for the three and nine months ended September 30, 2020, compared to 2.72% and 2.82%, respectively, for the same periods a year ago.

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

Total average securities for the three and nine months ended September 30, 2020 decreased by $14.0 million and $67.4 million, respectively, from the average balances for the same periods a year earlier.

The decline in the average balance of securities was due to timing of reinvestment of security portfolio cash flows.

The FTE rate of return on the securities portfolio for the three and nine months ended September 30, 2020 was 2.14% and 2.39%, respectively, compared to 2.72% and 2.83%, respectively, for the same periods in 2019, reflecting purchases of relatively lower yielding debt securities and lower market interest rates.

Total average loan balances for the three and nine months ended September 30, 2020 increased by $551.3 million and $434.6 million, respectively, from the average loan balances for the comparable 2019 period.

This reflected growth in average commercial loan balances, which included the origination of PPP loans in 2020, as well as growth in average residential real estate loan balances, which included purchases of residential mortgage loans in the latter portion of 2019 and first quarter of 2020.

The yield on total loans for the three and nine months ended September 30, 2020 was 3.25% and 3.58%, respectively, compared to 4.42% and 4.53%, respectively, for the same periods in 2019.

As market interest rates decline, the receipt of payments on mortgage-backed securities and loan prepayments generally increase.

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

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

As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to interest income) amounted to $882 thousand for the three months ended March 31, 2021.

This compares to net amortization or a net reduction of $1.5 million for the same period in 2020.

Net interest income in 2021 included approximately $1.2 million of accelerated amortization of net fees associated with $66 million of PPP loans that were forgiven by the SBA in the three months ended March 31, 2021.

FTE net interest income for the three months ended March 31, 2021 amounted to $33.1 million, up by $238 thousand, or 1%, from the same period in 2020.

Growth in average interest-earning assets and a decline in average interest-bearing liability balances, contributed approximately $4.1 million of net interest income for the three months ended March 31, 2021.

This was largely offset by lower asset yields out-pacing declines in funding costs, which reduced net interest income by $3.8 million.

The net interest margin was 2.51% for the three months ended March 31, 2021, down by 10 basis points from 2.61% for the same period a year ago.

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

Total average securities for the three months ended March 31, 2021 increased by $10.6 million, or 1%, from the average balances for the same period a year earlier.

The FTE rate of return on the securities portfolio for the three months ended March 31, 2021 was 1.44% compared to 2.59% for the same period in 2020, reflecting purchases of relatively lower yielding debt securities and lower market interest rates.

Total average loan balances for the three months ended March 31, 2021 increased by $232.3 million, or 6%, from the average loan balances for the comparable 2020 period.

This reflected growth in average commercial loan balances concentrated in lower yielding PPP loans.

The yield on total loans for the three months ended March 31, 2021 was 3.32% compared to 4.09% for the same period in 2020.

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

Management's Discussion and Analysis

The average balance of FHLB advances for the three and nine months ended September 30, 2020 decreased by $119.3 million and $2.2 million, respectively, compared to the average balances for the same periods in 2019.

The average rate paid on such advances for the three and nine months ended September 30, 2020 was 1.55% and 1.77%, respectively, compared to 2.64% and 2.64%, respectively, for the same periods in 2019, due to lower rates on short-term advances.

Included in total average interest-bearing deposits were of out-of-market wholesale brokered time deposits, which decreased by $11.3 million and $13.6 million, respectively, from the same periods in 2019.

The average rate paid on wholesale brokered time deposits for the three and nine months ended September 30, 2020 was 1.11% and 1.41%, respectively, compared to 2.28% and 2.24%, respectively, for the same periods in 2019.

The decline in the yield on average wholesale brokered time deposits reflected lower market interest rates.

Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, for the three and nine months ended September 30, 2020 increased by $316.3 million and $264.1 million, respectively, from the average balances for the same periods in 2019.

The increases largely reflected growth in average lower-cost deposit categories, partially offset by maturities of higher-cost promotional time deposits.

The average rate paid on in-market interest-bearing deposits for the three and nine months ended September 30, 2020 decreased by 52 basis points and 29 basis points, respectively, compared to the same periods in 2019, largely due to downward repricing of interest-bearing in-market deposits reflecting lower market interest rates.

The average balance of noninterest-bearing demand deposits for the three and nine months ended September 30, 2020 increased by $216.5 million and $119.4 million, respectively, from the average balances for the same periods in 2019.

See additional disclosure regarding PPP loan funding deposits under the caption “Sources of Funds.”

The average balance of FHLB advances for the three months ended March 31, 2021 decreased by $581.1 million, or 52%, compared to the average balances for the same period in 2020.

The average rate paid on such advances for the three months ended March 31, 2021 was 1.03%, down from 2.06% for the same period in 2020, due to lower rates on short-term advances.

Management's Discussion and Analysis

Included in total average interest-bearing deposits were of out-of-market wholesale brokered time deposits, which increased by $187.3 million, or 48%, from the same period in 2020.

The average rate paid on wholesale brokered time deposits for the three months ended March 31, 2021 was 0.31%, down by 150 basis points from 1.81% for the same period in 2020, reflecting lower market interest rates.

Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, for the three months ended March 31, 2021 increased by $374.6 million, or 14%, from the average balances for the same period in 2020.

The increases largely reflected growth in lower-cost deposit categories, partially offset by maturities of higher-cost promotional time deposits.

The average rate paid on in-market interest-bearing deposits for the three months ended March 31, 2021 was 0.44%, down by 60 basis points from 1.04% for the same period in 2020, reflecting downward repricing of interest-bearing in-market deposits due to lower market interest rates.

The average balance of noninterest-bearing demand deposits for the three months ended March 31, 2021 increased by $279.8 million, or 46%, from the average balance for the same period in 2020.

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

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

1 unchanged sentence

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

(Dollars in thousands) Three Months Ended September 30, 2020 vs.

2019 Nine Months Ended September 30,

Change Due to Change Due to

Volume Rate Net Change Volume Rate Net Change

(Dollars in thousands) Change Due to

Three Months Ended March 31, 2021 vs.

Volume Rate Net Change

Interest on Interest-Earning Assets:

3 unchanged sentences

Taxable debt securities 67 (2,658) (2,591)

Nontaxable debt securities (2) (1) (3) (12) (12) (24)

Total securities (97) (1,354) (1,451) (1,356) (3,037) (4,393)

FHLB stock (211) (296) (507)

20 unchanged sentences

Junior subordinated debentures — (119) (119)

Other borrowings 159 — 159 161 — 161

Total interest expense (1,615) (7,762) (9,377)

Net interest income (FTE) $4,055 ($3,817) $238

Provision for Credit Losses

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

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

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

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

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

Management's Discussion and Analysis

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

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

local economic and credit conditions;

the direction of real estate values;

and regulatory guidelines.

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

Provisions for credit losses of $1.3 million and $10.6 million, respectively, were charged to earnings for the three and nine months ended September 30, 2020, compared to $400 thousand and $1.6 million, respectively, for the same periods in 2019.

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

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

Net charge-offs totaled $96 thousand and $1.0 million, respectively, for the three and nine months ended September 30, 2020, compared to $801 thousand and $1.7 million, respectively, for the same periods in 2019.

The allowance for credit losses on loans was $42.6 million, or 1.00% of total loans, at September 30, 2020, compared to an allowance for loan losses of $27.0 million, or 0.69% of total loans, at December 31, 2019.

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

Provision for Credit Losses

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

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

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

As a result of improvement in forecasted economic conditions and continued stable asset quality metrics, a negative provision for credit losses (or a benefit) of $2.0 million was recognized in earnings in the three months ended March 31, 2021.

This compares to a positive provision for credit losses (or a charge) of $7.0 million for the same period in 2020.

The higher credit provisioning in 2020 was attributable to the negative impact of the emergence of the COVID-19 pandemic on economic conditions.

Total net charge-offs were $18 thousand for the three months ended March 31, 2021, compared to $623 thousand for the same period in 2020.

The ACL on loans was $42.1 million, or 1.00% of total loans, at March 31, 2021, compared to an ACL on loans of $44.1 million, or 1.05% of total loans, at December 31, 2020.

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

Noninterest Income

1 unchanged sentence

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

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2020 2019 $ % 2020 2019 $ %

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

Noninterest income:

7 unchanged sentences

Income from bank-owned life insurance 556 564 (8) (1)

Net realized gains on securities — — — — — (80) 80 100

Other income 1,387 316 1,071 339

2 unchanged sentences

Noninterest Income Analysis

Revenue from wealth management services represented 37% of total noninterest income for the nine months ended September 30, 2020, compared to 55% for the same period in 2019.

Revenue from wealth management services represented 38% of total noninterest income for the three months ended March 31, 2021, compared to 44% for the same period in 2020.

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

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

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

Management's Discussion and Analysis

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

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

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2020 2019 $ % 2020 2019 $ %

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

Wealth management revenues:

2 unchanged sentences

Total wealth management revenues $9,895 $8,689 $1,206 14 %

Wealth management revenues for the three and nine months ended September 30, 2020 decreased by $199 thousand and $1.7 million, respectively, from the comparable periods in 2019, due to a decline in asset-based revenues.

The decrease in asset-based revenues correlated to declines in the average balances of assets under administration (“AUA”) for the comparable periods in 2019.

Management's Discussion and Analysis

Wealth management revenues for the three months ended March 31, 2021 increased by $1.2 million, or 14%, from the comparable period in 2020, reflecting growth in asset-based revenues.

The increase in asset-based revenues was directionally consistent with an increase in the average balances of assets under administration (“AUA”).

The following table presents the changes in wealth management AUA:

(Dollars in thousands) Three Months Nine Months

Periods ended September 30, 2020 2019 2020 2019

(Dollars in thousands)

Three months ended March 31, 2021 2020

Wealth management assets under administration:

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

Net investment appreciation & income 335,209 66,514 234,076 809,060

Net investment appreciation (depreciation) & income 208,953 (772,735)

Net client asset outflows (26,464) (125,333)

Balance at the end of period $7,049,226 $5,337,733

Wealth management AUA amounted to $6.4 billion at September 30, 2020, up by $269.3 million, or 4%, from the balance at September 30, 2019, reflecting net investment appreciation offset, in part, by net client asset outflows.

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

The average balance of AUA for the three and nine months ended September 30, 2020 decreased by approximately 0.2% and 4%, respectively, from the average balances for the same periods in 2019.

Mortgage banking revenues represented 46% of total noninterest income for the nine months ended September 30, 2020, compared to 22% for the same period in 2019.

Wealth management AUA amounted to $7.0 billion at March 31, 2021, up by $1.7 billion, or 32%, from the balance at March 31, 2020, primarily due to net investment appreciation.

The average balance of AUA for the three months ended March 31, 2021 increased by approximately 17% from the average balance for the same period in 2020.

Mortgage banking revenues represented 46% of total noninterest income for the three months ended March 31, 2021, compared to 31% for the same period in 2020.

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

Management's Discussion and Analysis

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

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2020 2019 $ % 2020 2019 $ %

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

Mortgage banking revenues:

12 unchanged sentences

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

For the three and nine months ended September 30, 2020, mortgage banking revenues were up by $7.5 million and $22.2 million, respectively, compared to the same periods in 2019, primarily due to an increase in net realized gains associated with mortgage banking activities.

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

For the three and nine months ended September 30, 2020, mortgage loans sold to the secondary market totaled $354.2 million and $821.6 million, respectively, compared to $185.0 million and $414.5 million, respectively, for the same periods in 2019.

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

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

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

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

For the three and nine months ended September 30, 2020, service charges on deposit accounts decreased by $341 thousand and $768 thousand, respectively, compared to the same periods in 2019, primarily due to lower overdraft activity and related fee income.

Loan related derivative income for the three months ended September 30, 2020 decreased by $143 thousand from the same period in 2019.

Loan-related derivative income for the nine months ended September 30, 2020 increased by $941 thousand from the comparable period in 2019, reflecting higher gains on commercial borrower interest rate swap transactions.

For the three months ended March 31, 2021, mortgage banking revenues were up by $5.8 million, or 96%, compared to the same period in 2020.

The increase was primarily the result of higher mortgage origination, refinancing and sales activity in response to a low interest rate environment.

For the three months ended March 31, 2021, mortgage loans sold to the secondary market totaled $292.0 million, compared to $162.2 million for the same period in 2020.

Also included in mortgage banking revenues were changes in the fair value of mortgage loans held for sale and mortgage loan commitments.

Service charges on deposit accounts for the three months ended March 31, 2021 decreased by $251 thousand, or 29%, from the same period in 2020, primarily due to lower overdraft activity and related fee income.

Loan related derivative income for the three months ended March 31, 2021 decreased by $2.0 million, or 81%, from the same period in 2020, reflecting lower volume of commercial borrower interest rate swap transactions.

Other income for the three months ended March 31, 2021 increased by $1.1 million from the same period in 2020.

Included in other income in the first quarter of 2021 was income of $1.0 million associated with a litigation settlement.

Management's Discussion and Analysis

1 unchanged sentence

The following table presents noninterest expense comparisons:

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2020 2019 $ % 2020 2019 $ %

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

Noninterest expense:

7 unchanged sentences

Amortization of intangibles 226 230 (4) (2)

Debt prepayment penalties 3,335 — 3,335 100

Other 2,139 3,256 (1,117) (34)

1 unchanged sentence

Noninterest Expense Analysis

Salaries and employee benefits expense for the three and nine months ended September 30, 2020 increased by $3.6 million and $6.4 million, respectively, compared to the same periods in 2019, largely reflecting volume-related increases in mortgage banking commissions expense, higher staffing levels, annual merit increases, and increases in performance-based compensation expense.

These were partially offset by increases in deferred labor costs (a contra expense) associated with loan originations in 2020.

Outsourced services expense for the three and nine months ended September 30, 2020 increased by $438 thousand and $1.1 million, respectively, compared to the same periods in 2019, reflecting volume-related increases in third party processing costs and the expansion of services provided by third party vendors.

Legal, audit and professional fees for the three and nine months ended September 30, 2020 increased by $607 thousand and $890 thousand, respectively, compared to the same periods in 2019, reflecting increased costs associated with various legal and consulting matters.

FDIC deposit insurance costs for the three and nine months ended September 30, 2020 increased by $852 thousand and $979 thousand, respectively, compared to the same periods in 2019, largely due to approximately $900 thousand of FDIC assessment credits recognized in the third quarter of 2019.

Salaries and employee benefits expense for the three months ended March 31, 2021 increased by $2.1 million, or 11%, compared to the same period in 2020, largely reflecting volume-related increases in mortgage banking commissions expense and annual merit increases, partially offset by higher deferred labor costs (a contra expense) largely associated with PPP loan originations.

Legal, audit and professional fees for the three months ended March 31, 2021 decreased by $225 thousand, or 27%, compared to the same period in 2020, reflecting a decline in legal expenses.

Debt prepayment penalty expense for the three months ended March 31, 2021 totaled $3.3 million and resulted from the prepayment of $26.8 million of higher-yielding FHLB advances.

There were no debt prepayments in the comparable period in 2020.

Other expenses for the three months ended March 31, 2021 decreased by $1.1 million, or 34%, compared to the same period in 2020.

Included in other expenses in the first quarter of 2020 was a charge for $800 thousand representing the establishment of contingency loss reserve associated with counterfeit checks drawn on a commercial customer’s account.

This contingency matter was resolved in the second quarter of 2020 and resulted in a partial reversal, or a benefit, of $170 thousand being recognized as a reduction to other expenses in the second quarter of 2020.

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

(Dollars in thousands) Three Months Nine Months

Periods ended September 30, 2020 2019 2020 2019

(Dollars in thousands)

Three months ended March 31, 2021 2020

Income tax expense $5,661 $3,139

Effective income tax rate 21.7 % 20.9 %

The effective income tax rates for the three and nine months ended September 30, 2020 and 2019 differed from the federal rate of 21%, primarily due to state income tax expense, offset by the benefits of tax-exempt income, income from BOLI, federal tax credits and the recognition of excess tax benefits (expense) associated with the settlement of share-based awards.

The modest decrease in the effective tax rate for the nine months ended September 30, 2020 compared to the same period in 2019 largely reflected lower state tax exposure.

The effective income tax rates for the three months ended March 31, 2021 and 2020 differed from the federal rate of 21%, primarily due to state income tax expense, partially offset by the benefits of tax-exempt income and income from BOLI.

The increase in the effective tax rate for the three months ended March 31, 2021 compared to the same period in 2020 largely reflected higher state income tax expense and a decrease in the proportion of tax-exempt income to pre-tax income.

Management's Discussion and Analysis

7 unchanged sentences

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

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2020 2019 $ % 2020 2019 $ %

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

Net interest income $34,520 $29,009 $5,511 19 %

7 unchanged sentences

Net income $23,785 $10,413 $13,372 128 %

Net interest income for the Commercial Banking segment for the three and nine months ended September 30, 2020, increased by $4.6 million and $11.0 million, respectively, from the same periods in 2019, reflecting growth in loans partially offset by lower yields on loans due to declines in market interest rates.

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

Noninterest income derived from the Commercial Banking segment for the three and nine months ended September 30, 2020 was up by $7.3 million and $22.8 million, respectively, from the comparable periods in 2019 largely due to higher mortgage banking revenues.

See additional discussion regarding mortgage banking revenues, loan related derivative income and service charges on deposits under the caption “Noninterest Income” above.

Commercial Banking noninterest expenses for the three and nine months ended September 30, 2020 were up by $4.0 million and $7.7 million, respectively, from the same periods in 2019, reflecting increases in salaries and employee benefits, FDIC deposit insurance costs, outsourced services and legal expenses.

Net interest income for the Commercial Banking segment for the three months ended March 31, 2021, increased by $5.5 million, or 19%, from the same period in 2020, reflecting growth in loans partially offset by lower yields on loans due to lower market interest rates.

For the three months ended March 31, 2021, a negative provision for credit losses (or a benefit) of $2.0 million was charged to earnings, compared to a positive provision for credit losses (or a charge) of $7.0 million for the same period in 2020.

The year-over-year reduction in credit loss provisioning reflected improvement in forecasted economic conditions and continued stable asset quality metrics.

Noninterest income derived from the Commercial Banking segment for the three months ended March 31, 2021 was up by $3.9 million, or 36%, from the comparable period in 2020 reflecting higher mortgage banking revenues, partially offset by lower loan related derivative income and lower fee income for service charges on deposit accounts.

See additional discussion regarding mortgage banking revenues and loan related derivative income under the caption “Noninterest Income” above.

Commercial Banking noninterest expenses for the three months ended March 31, 2021 were up by $1.2 million, or 6%, from the same period in 2020, largely reflecting increases in salaries and employee benefits.

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

Management's Discussion and Analysis

Wealth Management Services

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

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2020 2019 $ % 2020 2019 $ %

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

Net interest expense ($23) ($67) $44 66 %

4 unchanged sentences

Net income $3,181 $1,066 $2,115 198 %

For the three and nine months ended September 30, 2020, noninterest income derived from the Wealth Management Services segment decreased by $199 thousand and $1.7 million, respectively, compared to the same periods in 2019, due to a decline in asset-based revenues.

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

For the three and nine months ended September 30, 2020, noninterest expenses for the Wealth Management Services segment increased by $951 thousand and $746 thousand, respectively, from the same periods in 2019, including increases salaries and employee benefits, legal and outsourced services expenses.

Management's Discussion and Analysis

For the three months ended March 31, 2021, noninterest income derived from the Wealth Management Services segment increased by $2.2 million, or 25%, compared to the same period in 2020, reflecting growth in asset-based revenues and income of $1.0 million associated with a litigation settlement.

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

For the three months ended March 31, 2021, noninterest expenses for the Wealth Management Services segment decreased by $463 thousand, or 6%, from the same period in 2020.

This included decreases in legal and other expenses partially offset by an increase and salaries and employee benefits expense.

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

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

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2020 2019 $ % 2020 2019 $ %

(Dollars in thousands) Change

Three months ended March 31, 2021 2020 $ %

Net interest (expense) income ($1,626) $3,660 ($5,286) (144 %)

4 unchanged sentences

Net (loss) income ($6,495) $422 ($6,917) (1,639 %)

Net interest income for the Corporate unit for the three and nine months ended September 30, 2020 was down by $6.0 million and $17.5 million, respectively, compared to the same periods in 2019.

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

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

For the three and nine months ended September 30, 2020, noninterest expenses for the Corporate unit increased by $546 thousand and $802 thousand, respectively from the same periods in 2019, including increases in salaries and benefits, legal and other professional fees and outsourced services.

Management's Discussion and Analysis

Net interest income for the Corporate unit for the three months ended March 31, 2021 was down by $5.3 million, or 144%, compared to the same period in 2020.

Lower interest income on securities resulting from lower yields was partially offset by lower wholesale funding costs.

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

For the three months ended March 31, 2021, noninterest expenses for the Corporate unit increased by $3.5 million, or 93%, from the same period in 2020, due to debt prepayment penalty expense of $3.3 million that was recognized in the first quarter of 2021.

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

Financial Condition

1 unchanged sentence

(Dollars in thousands) Change

September 30,

2021 December 31,

7 unchanged sentences

Total shareholders’ equity 533,599 534,195 (596) —

Total assets amounted to $5.8 billion at September 30, 2020, up by $557.1 million, or 11%, from the end of 2019.

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

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

Total assets amounted to $5.7 billion at March 31, 2021, up by $6.2 million, from the end of 2020.

Management's Discussion and Analysis

The securities portfolio increased by $53.5 million due to purchases of debt securities and the balance of cash and due from banks declined by $27.2 million reflecting lower levels of cash collateral pledged to derivative counterparties.

See Note 10 to the Unaudited Consolidated Financial Statements for additional disclosure regarding derivative financial instruments.

The allowance for credit losses on loans increased by $15.6 million, or 58%, from the end of 2019.

This reflected the adoption of the CECL accounting methodology effective January 1, 2020, as well as the estimated impact of the COVID-19 pandemic.

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

Total deposits increased by $786.8 million, or 22%, reflecting increases in both in-market deposits and wholesale brokered time deposits.

Total loans declined modestly by $1.3 million, as loan originations were offset by payoffs and pay-downs.

The ACL on loans decreased by $2.0 million from the end of 2020, reflecting improvement in forecasted economic conditions and continued stable asset quality metrics.

Total deposits increased by $170.8 million, or 4%, with an increase in in-market deposits partially offset by a decrease in wholesale brokered time deposits.

FHLB advances decreased by $126.9 million, or 21%, from December 31, 2020.

Shareholders’ equity amounted to $527.7 million at September 30, 2020, up by $24.2 million, or 5%, from the balance at December 31, 2019.

As of September 30, 2020, the Bancorp and the Bank were “well capitalized.” See Note 8 to the Unaudited Consolidated Financial Statements for additional discussion on regulatory capital requirements.

Shareholders’ equity declined modesty by $596 thousand, reflecting a decrease in accumulated other comprehensive income due to a temporary decline in the fair value of available for sale debt securities.

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

5 unchanged sentences

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

The Corporation does not maintain a portfolio of trading securities.

As of September 30, 2020 and December 31, 2019, the Corporation did not have securities designated as held to maturity.

The Corporation does not have securities designated as held to maturity and does not maintain a portfolio of trading securities.

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

5 unchanged sentences

Management reviews the independent pricing service’s documentation to gain an understanding of the appropriateness of the pricing methodologies.

Management's Discussion and Analysis

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

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

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

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

As of September 30, 2020 and December 31, 2019, management did not make any adjustments to the prices provided by the pricing service.

As of March 31, 2021 and December 31, 2020, management did not make any adjustments to the prices provided by the pricing service.

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

See Notes 4 and 11 to the Unaudited Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities.

Management's Discussion and Analysis

Securities Portfolio

The carrying amounts of securities held are as follows:

(Dollars in thousands) September 30, 2020 December 31, 2019

(Dollars in thousands) March 31, 2021 December 31, 2020

Amount % Amount %

10 unchanged sentences

Total available for sale debt securities $948,094 100 % $894,571 100 %

The securities portfolio stood at $913.9 million as of September 30, 2020, or 16% of total assets, compared to $899.5 million as of December 31, 2019, or 17% of total assets.

The securities portfolio stood at $948.1 million as of March 31, 2021, or 17% of total assets, compared to $894.6 million as of December 31, 2020, or 16% of total assets.

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

1 unchanged sentence

government-sponsored enterprises.

The securities portfolio increased by $14.4 million, or 2%, from the end of 2019, reflecting purchases of debt securities totaling $377.0 million, with a weighted average yield of 1.96%, as well as an increase in the fair value of available for sale securities.

These were partially offset by routine paydowns on mortgage-backed securities, calls and maturities of debt securities.

As of September 30, 2020, the net unrealized gain position on available for sale debt securities amounted to $14.0 million, compared to $4.2 million as of December 31, 2019.

These net positions included gross unrealized losses of $3.3 million and $4.9 million, respectively, of as September 30, 2020 and December 31, 2019.

The securities portfolio increased by $53.5 million, or 6%, from the end of 2020, reflecting purchases of debt securities totaling $208.0 million, with a weighted average yield of 1.44%.

These purchases were partially offset by routine pay-downs on mortgage-backed securities and calls of debt securities, as well as a temporary decline in the fair value of available for sale securities.

As of March 31, 2021, the carrying amount of available for sale debt securities included net unrealized losses of $4.5 million, compared to a net unrealized gains of $13.0 million as of December 31, 2020.

The decline in fair value of available for sale debt securities from the end of 2020 was primarily concentrated in obligations of U.S.

government agencies and U.S.

government-sponsored enterprises, including mortgage-backed securities, and attributable to relative changes in interest rates since the time of purchase.

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

Total loans amounted to $4.3 billion at September 30, 2020, up by $389.0 million, or 10%, from the end of 2019, largely due to commercial loan growth and first quarter 2020 purchases of residential real estate mortgage loans.

Growth in commercial loans was largely due to second quarter 2020 originations of PPP loans within the commercial and industrial portfolio.

Total loans amounted to $4.2 billion at March 31, 2021, down by $1.3 million, from the end of 2020.

This included a net decrease of $9.8 million in the residential real estate portfolio, reflecting continued elevated payoff and refinancing activity, and a net increase of $8.7 million in the commercial loan portfolio.

Growth in commercial loans was largely due to first quarter 2021 originations of PPP loans within the commercial and industrial portfolio, which were partially offset by payoffs and pay-downs, including PPP loans that were forgiven by the SBA.

Management's Discussion and Analysis

The following is a summary of loans:

(Dollars in thousands) September 30, 2020 December 31, 2019

(Dollars in thousands) March 31, 2021 December 31, 2020

Amount % Amount %

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

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

Through September 30, 2020, we have executed loan payment deferral modifications on 617 loans totaling $685.4 million.

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

Seventeen of these deferments executed on loan balances of $7.8 million were past due before the COVID-19 pandemic and therefore, were classified as TDRs and were included in past due loans as of September 30, 2020.

As of September 30, 2020, we had active deferrals on 253 loans totaling $418.2 million, or 10% of total loans excluding PPP loans.

As of November 2, 2020, we have active deferrals on 146 loans totaling $252.9 million, or 6% of total loans excluding PPP loans.

Since the beginning of the COVID-19 pandemic and through March 31, 2021, Washington Trust has processed loan payment deferral modifications, or "deferments", on 652 loans totaling $727 million.

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

As of March 31, 2021, we had active deferments on 88 loans totaling $191.4 million, or 5% of total loans excluding PPP loans.

As of May 3, 2021, we have active deferments on 44 loans totaling $121.5 million, or 3% of total loans excluding PPP loans at March 31, 2021.

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

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

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

Management considers deferments when estimating the allowance for credit losses.

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

Loss exposure within these industries is mitigated by a number of factors such as collateral values, LTV ratios, and other key indicators, however, some degree of credit loss has been incorporated into the ACL on loans.

Commercial Loans

The commercial loan portfolio represented 58% of total loans at September 30, 2020.

The commercial loan portfolio represented 59% of total loans at March 31, 2021.

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

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

Our participation in commercial loans originated by other banks amounted to $430.6 million and $399.7 million, respectively, at September 30, 2020 and December 31, 2019.

Our participation in commercial loans originated by other banks amounted to $409.9 million and $408.8 million, respectively, at March 31, 2021 and December 31, 2020.

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

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Commercial real estate loans consist of commercial mortgages secured by real property where the primary source of repayment is derived from rental income associated with the property or the proceeds of the sale, refinancing or permanent financing of the property.

Commercial real estate loans also include construction loans made to businesses for land development or the on-

Management's Discussion and Analysis

site construction of industrial, commercial, or residential buildings.

Commercial real estate loans also include construction loans made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.

Commercial and industrial loans primarily provide working capital, equipment financing and financing for other business-related purposes.

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

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

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

A portion of the

Management's Discussion and Analysis

Bank’s commercial and industrial loans is also collateralized by real estate.

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

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

Commercial Real Estate Loans (“CRE”)

CRE loans totaled $1.7 billion at September 30, 2020, up by $118.2 million, or 8%, from the balance at December 31, 2019.

Included in CRE loans were construction and development loans of $101.4 million and $211.5 million, respectively, as of September 30, 2020 and December 31, 2019.

For the nine months ended September 30, 2020, CRE loan originations and advances totaled approximately $211 million, which were partially offset by payoffs and paydowns.

CRE loans totaled $1.6 billion at March 31, 2021, down by $14.5 million, or 1%, from the balance at December 31, 2020.

Included in CRE loans were construction and development loans of $123.6 million and $111.2 million, respectively, as of March 31, 2021 and December 31, 2020.

For the three months ended March 31, 2021, CRE loan originations and construction advances were offset by payoffs and pay-downs of approximately $60 million.

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

(Dollars in thousands) September 30, 2020 December 31, 2019

(Dollars in thousands) March 31, 2021 December 31, 2020

Outstanding Balance % of Total Outstanding Balance % of Total

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

(Dollars in thousands) September 30, 2020 December 31, 2019

(Dollars in thousands) March 31, 2021 December 31, 2020

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

16 unchanged sentences

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

(Dollars in thousands) November 2, 2020 September 30, 2020 June 30, 2020

(Dollars in thousands) May 3, 2021 March 31, 2021 December 31, 2020

Count Balance % of Outstanding Balance (1) Count Balance % of Outstanding Balance (1) Count Balance % of Outstanding Balance (2)

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17 $95,888 6 % 28 $137,933 9 % 38 $176,402 11 %

(1) Percent of respective outstanding portfolio segment balance as of September 30, 2020.

(2) Percent of respective outstanding portfolio segment balance as of June 30, 2020.

As of November 2, 2020, we have active deferrals on 46 CRE loans totaling $207.8 million, which represented 12% of the total CRE portfolio at September 30, 2020.

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

• The retail segment consisted of 134 loans with balances totaling $336.1 million at September 30, 2020, representing 20% of the total CRE portfolio.

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

At November 2, 2020, we have active deferrals on 12 retail loans totaling $68.8 million, which represented 20% of this segment’s balance at September 30, 2020.

• The hospitality segment consisted of 39 loans with balances totaling $148.2 million at September 30, 2020, representing 9% of the total CRE portfolio.

(1) Percent of respective outstanding portfolio segment balance as of March 31, 2021.

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

As of May 3, 2021, we have active deferrals on 17 CRE loans totaling $95.9 million, which represented 6% of the total CRE portfolio at March 31, 2021.

The hospitality segment consisted of 39 loans with balances totaling $168.1 million at March 31, 2021, representing 10% of the total CRE portfolio.

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

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

At November 2, 2020, we have active deferrals on 18 hospitality loans totaling $78.6 million, which represented 53% of this segment’s balance at September 30, 2020.

• The healthcare segment consisted of 16 loans with balances totaling $120.4 million at September 30, 2020, representing 7% of the total CRE portfolio.

At May 3, 2021, we have active deferrals on 5 hospitality loans totaling $27.3 million, which represented 16% of this segment’s balance at March 31, 2021.

The retail segment consisted of 131 loans with balances totaling $345.7 million at March 31, 2021, representing 21% of the total CRE portfolio.

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

At May 3, 2021, we have active deferrals on 3 retail loans totaling $20.6 million, which represented 6% of this segment’s balance at March 31, 2021.

The healthcare segment consisted of 15 loans with balances totaling $116.8 million at March 31, 2021, representing 7% of the total CRE portfolio.

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

At November 2, 2020, we have active deferrals on 2 healthcare loans totaling $22.2 million, which represented 18% of this segment’s balance at September 30, 2020.

At May 3, 2021, we have active deferrals on 1 healthcare loan totaling $18.4 million, which represented 16% of this segment’s balance at March 31, 2021.

Commercial and Industrial Loans (“C&I”)

C&I loans amounted to $822.3 million at September 30, 2020, up by $237.0 million, or 40%, from the balance at December 31, 2019.

For the nine months ended September 30, 2020, C&I loan originations amounted to $284 million and were partially offset by paydowns, payoffs and a modest decline in line utilization.

C&I originations were concentrated in PPP loans.

As of September 30, 2020, there were 1,770 PPP loans with a carrying value of $216.8 million included in the C&I portfolio.

C&I loans amounted to $840.6 million at March 31, 2021, up by $23.2 million, or 3%, from the balance at December 31, 2020.

For the three months ended March 31, 2021, C&I loan originations were concentrated in PPP loan originations.

Originations were partially offset by payoffs and pay-downs of $93 million, which included $66 million of PPP loans that were forgiven by the SBA.

C&I line utilization increased modestly in the first quarter of 2021.

As of March 31, 2021, there were 2,065 PPP loans with a carrying value of $228.6 million included in the C&I portfolio.

The average PPP loan size was $111 thousand.

Net unamortized loan origination fees on PPP loans amounted to $5.1 million at September 30, 2020.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $49.4 million at September 30, 2020.

All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at September 30, 2020.

Net unamortized loan origination fees on PPP loans amounted to $5.7 million at March 31, 2021.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $44.7 million at March 31, 2021.

All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at March 31, 2021.

Management's Discussion and Analysis

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

(Dollars in thousands) September 30, 2020 December 31, 2019

(Dollars in thousands) March 31, 2021 December 31, 2020

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

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Manufacturing 161 89,118 11 146 88,802 11

Retail 201 67,851 8 75 43,386 7

Educational services 60 67,357 8 22 56,556 10

Owner occupied and other real estate 277 76,704 9 268 74,309 9

Accommodation and food services 359 69,380 8 271 47,020 6

Educational services 65 67,694 8 53 64,969 8

Retail 201 57,128 7 192 63,895 8

Professional, scientific and technical

277 39,957 5 265 39,295 5

Accommodation and food services 276 43,525 5 64 16,562 3

Finance and insurance

90 31,185 4 106 26,244 3

Entertainment and recreation

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46 23,727 3 42 24,061 3

Finance and insurance

107 26,213 3 57 28,501 5

Public administration

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

September 30, 2020

Count Outstanding Balance % of Total

PPP Loans by Segment:

Healthcare and social assistance 183 $49,331 23 %

March 31, 2021 December 31, 2020

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

PPP Loans By Industry:

Accommodation and food services 299 $46,873 21 % 209 $23,678 12 %

Healthcare and social assistance 224 44,902 20 173 47,354 24

Manufacturing 100 22,564 10 89 23,321 12

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Entertainment and recreation

Finance and insurance

85 4,797 2 61 3,386 2

24 3,325 1 20 2,478 1

Transportation and warehousing

23 2,088 1 21 2,059 1

Finance and insurance

37 1,102 — 55 2,000 1

Public administration

5 421 — 4 483 —

724 47,957 22 573 43,961 21

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

2 unchanged sentences

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

(Dollars in thousands) November 2, 2020 September 30, 2020 June 30, 2020

(Dollars in thousands) May 3, 2021 March 31, 2021 December 31, 2020

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

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C&I Deferments by Segment:

Healthcare and social assistance 3 $12,990 9 % 5 $19,855 13 % 5 $19,620 13 %

Accommodation and food services

1 304 1 1 304 1 2 2,889 12

Healthcare and social assistance 2 1,613 1 4 14,947 11 6 15,384 11

Owner occupied and other real estate 4 1,382 2 5 2,243 4 21 5,128 8

Transportation and warehousing

— — — 3 814 4 4 1,120 5

Manufacturing 2 940 1 1 1,538 2 4 2,505 4

Entertainment and recreation

— — — 2 424 2 3 560 2

Educational services — — — 4 7,400 13 4 7,329 12

Retail — — — 1 1,068 2 5 2,693 5

Professional, scientific and technical — — — — — — 1 41 —

Public administration

— — — — — — 1 98 —

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

Manufacturing — — — — — — 2 947 1

— — — 5 7,693 12 4 7,673 12

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4 $13,294 2 % 17 $29,416 5 % 21 $33,135 5 %

(1) Percent of respective outstanding portfolio segment balance, excluding PPP loans, as of September 30, 2020.

(2) Percent of respective outstanding portfolio segment balance, excluding PPP loans, as of June 30, 2020.

As of November 2, 2020, we have active deferrals on 19 C&I loans totaling $8.8 million, which represented 1% of the total C&I portfolio (excluding PPP loans) at September 30, 2020.

Healthcare and social assistance totaled $185.6 million as of September 30, 2020 and is our largest single C&I industry segment, representing 23% of the total C&I portfolio.

(1) Percent of respective outstanding portfolio segment balance, excluding PPP loans, as of March 31, 2021.

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

As of May 3, 2021, we have active deferrals on 4 C&I loans totaling $13.3 million, which represented 2% of the total C&I portfolio (excluding PPP loans) at March 31, 2021.

Healthcare and social assistance totaled $196.6 million as of March 31, 2021 and is our largest single C&I industry segment, representing 23% of the total C&I portfolio.

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

At November 2, 2020, we have active deferrals on 2 healthcare and social assistance loans of $1.6 million, which represented 1% of this industry segment’s balances (excluding PPP loans) as of September 30, 2020.

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

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

• The accommodation and food services industry segment consisted of 276 loans with balances totaling $43.5 million as of September 30, 2020, representing 5% of the total C&I portfolio.

At November 2, 2020, we have active deferrals on 3 accommodation and food services loans totaling $3.2 million, which represented 18% of this industry segment’s balance (excluding PPP loans) at September 30, 2020.

The deferrals were executed for restaurant and food establishments.

• The entertainment and recreation industry segment consisted of 93 loans with balances totaling $34.5 million as of September 30, 2020, representing 4% of the total C&I portfolio.

This industry segment consists largely of golf courses and marinas.

At November 2, 2020, we have active deferrals on 2 entertainment and recreation industry loans totaling $418 thousand, which represented 1% of this industry segment’s balance (excluding PPP loans) at September 30, 2020.

The deferments were executed for a gym.

At May 3, 2021, we have active deferrals on 3 healthcare and social assistance loans of $13.0 million, which represented 9% of this industry segment’s balances (excluding PPP loans) as of March 31, 2021.

Residential Real Estate Loans

The residential real estate loan portfolio represented 35% of total loans at September 30, 2020.

The residential real estate loan portfolio represented 35% of total loans at March 31, 2021.

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

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

Management's Discussion and Analysis

The table below presents residential real estate loan origination activity:

(Dollars in thousands) Three Months Nine Months

Periods ended September 30, 2020 2019 2020 2019

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

(Dollars in thousands)

Three months ended March 31, 2021 2020

Amount % of Total Amount % of Total

Originations for retention in portfolio (1) $131,791 30 % $108,498 37 %

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

Management's Discussion and Analysis

The table below presents residential real estate loan sales activity:

(Dollars in thousands)

Three Months Nine Months

Periods ended September 30, 2020 2019 2020 2019

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

Three months ended March 31, 2021 2020

Amount % of Total Amount % of Total

Loans sold with servicing rights retained $226,645 78 % $44,498 27 %

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

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

Loans are sold with servicing retained or released.

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

The net balance of capitalized servicing rights amounted to $6.6 million and $3.5 million, respectively, as of September 30, 2020 and December 31, 2019.

The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $1.1 billion and $587.0 million, respectively, as of September 30, 2020 and December 31, 2019.

Residential real estate loans held in portfolio amounted to $1.5 billion at September 30, 2020, up by $57.6 million, or 4%, from the balance at December 31, 2019.

During the nine months ended September 30, 2020, Washington Trust purchased $51.2 million of residential real estate mortgage loans with a weighted average yield of 3.38% from another financial institution.

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

The net balance of capitalized servicing rights amounted to $8.9 million and $7.4 million, respectively, as of March 31, 2021 and December 31, 2020.

The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $1.4 billion and $1.2 billion, respectively, as of March 31, 2021 and December 31, 2020.

Residential real estate loans held in portfolio amounted to $1.5 billion at March 31, 2021, down by $9.8 million, or 1%, from the balance at December 31, 2020, reflecting continued elevated payoff and refinancing activity.

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

(Dollars in thousands) September 30, 2020 December 31, 2019

(Dollars in thousands) March 31, 2021 December 31, 2020

Amount % of Total Amount % of Total

6 unchanged sentences

$1,457,490 100 % $1,467,312 100 %

(1) Includes residential real estate loans purchased from other financial institutions totaling $149.4 million and $151.8 million, respectively, as of September 30, 2020 and December 31, 2019.

As of November 2, 2020, we have active deferrals on 69 residential real estate loans totaling $35.1 million, which represented 2% of the total residential real estate portfolio balance as of September 30, 2020.

The average size of residential real estate

Management's Discussion and Analysis

loans with active deferrals as of November 2, 2020 was approximately $509 thousand and these loans have an estimated LTV ratio of 57%.

(1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $114.0 million and $131.8 million, respectively, as of March 31, 2021 and December 31, 2020.

As of May 3, 2021, we have active deferrals on 19 residential real estate loans totaling $11.9 million, which represented 1% of the total residential real estate portfolio balance as of March 31, 2021.

The average size of residential real estate loans with active deferrals as of May 3, 2021 was approximately $624 thousand and these loans have an estimated LTV ratio of 53%.

Consumer Loans

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

The consumer loan portfolio totaled $287.3 million at September 30, 2020, down by $23.7 million, or 8%, from December 31, 2019.

Home equity lines of credit and home equity loans represented 93% of the total consumer portfolio at September 30, 2020.

The consumer loan portfolio totaled $278.1 million at March 31, 2021, down by $195 thousand from December 31, 2020.

Home equity lines of credit and home equity loans represented 92% of the total consumer portfolio at March 31, 2021.

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

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $10.6 million and $12.8 million, respectively, at September 30, 2020 and December 31, 2019.

As of November 2, 2020, we have active deferrals on 12 consumer loans totaling $1.1 million, which represented 0.4% of the total consumer portfolio balance as of September 30, 2020.

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $10.6 million and $10.0 million, respectively, at March 31, 2021 and December 31, 2020.

As of May 3, 2021, we have active deferrals on 4 consumer loans totaling $486 thousand, which represented 0.2% of the total consumer portfolio balance as of March 31, 2021.

Management's Discussion and Analysis

Asset Quality

2 unchanged sentences

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

(Dollars in thousands) Sep 30,

(Dollars in thousands) Mar 31,

Commercial real estate $— $—

12 unchanged sentences

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

Total nonperforming assets decreased by $3.8 million from December 31, 2019.

This included a $2.7 million decrease in nonaccrual loans and a $1.1 million decrease in property acquired through foreclosure (“OREO”).

The decrease in OREO reflected sales of two properties essentially at their carrying value during the nine months ended September 30, 2020.

At September 30, 2020, there were no properties held in OREO.

Nonaccrual Loans

During the nine months ended September 30, 2020, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.

Management's Discussion and Analysis

During the three months ended March 31, 2021, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.

The following table presents the activity in nonaccrual loans:

(Dollars in thousands) Three Months Nine Months

For the periods ended September 30, 2020 2019 2020 2019

(Dollars in thousands)

For the periods ended March 31, 2021 2020

Balance at beginning of period $13,197 $17,408

5 unchanged sentences

Balance at end of period $12,983 $17,918

Management's Discussion and Analysis

The following table presents additional detail on nonaccrual loans:

(Dollars in thousands) September 30, 2020 December 31, 2019

(Dollars in thousands) March 31, 2021 December 31, 2020

Days Past Due Days Past Due

13 unchanged sentences

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

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2020.

As of September 30, 2020, the composition of nonaccrual loans was 97% residential and consumer and 3% commercial, compared to 93% and 7%, respectively, at December 31, 2019.

Nonaccrual residential real estate mortgage loans amounted to $12.8 million at September 30, 2020, down by $1.5 million from the end of 2019.

As of September 30, 2020, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Rhode Island and Connecticut.

Included in total nonaccrual residential real estate loans at September 30, 2020 were five loans purchased for portfolio and serviced by others amounting to $1.6 million.

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

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2021.

As of March 31, 2021, the composition of nonaccrual loans was 100% residential and consumer and 0% commercial, unchanged from the composition at December 31, 2020.

Nonaccrual residential real estate mortgage loans amounted to $11.7 million at March 31, 2021, down by $233 thousand from the end of 2020.

As of March 31, 2021, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Connecticut and Rhode Island.

Troubled Debt Restructurings

3 unchanged sentences

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

Management's Discussion and Analysis

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

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

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

1 unchanged sentence

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

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

As of September 30, 2020, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured in a TDR.

See Note 5 for disclosure regarding the Corporation’s election to account for eligible loan modifications under Section 4013 of the CARES Act.

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

As of March 31, 2021, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured in a TDR.

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

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

Management's Discussion and Analysis

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

1 unchanged sentence

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

(Dollars in thousands) Sep 30,

(Dollars in thousands) Mar 31,

Accruing TDRs

12 unchanged sentences

Total TDRs $14,293 $15,685

TDRs amounted to $8.6 million at September 30, 2020, up by $7.7 million from the end of 2019, due to loan payment deferrals executed on 17 loans that were not eligible for TDR accounting relief provided under the CARES Act.

TDRs amounted to $14.3 million at March 31, 2021, down by $1.4 million from the end of 2020, reflecting payoffs.

As of March 31, 2021, the composition of TDRs was 54% commercial and 46% residential and consumer, compared to 55% and 45%, respectively, as of December 31, 2020.

The ACL included specific reserves for TDRs of $161 thousand at March 31, 2021, compared to $159 thousand at December 31, 2020.

Management's Discussion and Analysis

1 unchanged sentence

The following table presents past due loans by category:

(Dollars in thousands) September 30, 2020 December 31, 2019

(Dollars in thousands) March 31, 2021 December 31, 2020

Commercial real estate $— — % $265 0.02 %

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

As of September 30, 2020, the composition of past due loans (loans past due 30 days or more) was 96% residential and consumer and 4% commercial, compared to 91% and 9%, respectively, at December 31, 2019.

As of March 31, 2021, the composition of past due loans (loans past due 30 days or more) was 100% residential and consumer and 0% commercial, compared to 98% and 2%, respectively, at December 31, 2020.

Total past due loans decreased by $1.5 million from the end of 2020.

Total past due loans included $8.8 million of nonaccrual loans as of September 30, 2020, compared to $11.5 million as of December 31, 2019.

All loans 90 days or more past due at September 30, 2020 and December 31, 2019 were classified as nonaccrual.

Total past due loans included $8.4 million of nonaccrual loans as of March 31, 2021, compared to $8.5 million as of December 31, 2020.

All loans 90 days or more past due at March 31, 2021 and December 31, 2020 were classified as nonaccrual.

Potential Problem Loans

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

Potential problem loans consist of classified accruing commercial loans that were less than 90 days past due at September 30, 2020 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future.

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

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

Potential problem loans include classified accruing commercial loans that were less than 90 days past due at March 31, 2021 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future.

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

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

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

Management has identified approximately $6.4 million in potential problem loans at September 30, 2020, compared to $10.3 million at December 31, 2019.

As of September 30, 2020, the balance of potential problem loans consisted of two commercial relationships, which were both current with respect to payment terms.

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

In addition, see discussion regarding certain commercial industry segments that management considers to be "at-risk" of significant impact from the COVID-19 pandemic under the caption "Commercial Loans" within the Financial Condition section.

As of both March 31, 2021 and December 31, 2020, there were no potential problem loans.

In addition and as a result of the COVID-19 pandemic, management continues to actively monitor loan deferments and loan portfolios in certain industry segments that it considers “at-risk” of significant impact.

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

Allowance for Credit Losses on Loans

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

The ACL on loans is increased through a provision for credit losses recognized in the Unaudited 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 collectibility of the principal balance outstanding is unlikely.

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

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

The ACL on loans is established through a provision charged to earnings.

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

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

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

Management's Discussion and Analysis

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

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

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

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

value of the loan.

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

Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status.

New appraisals are generally obtained for TDRs or nonaccrual loans or when management believes it is warranted.

The Corporation has continued to maintain appropriate professional standards regarding the professional qualifications of appraisers and has an internal review process to monitor the quality of appraisals.

For residential real estate loans and real estate collateral dependent consumer loans that are in the process of collection, valuations are obtained from independent appraisal firms with values determined on an “as is” basis.

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

(Dollars in thousands) September 30, 2020 December 31, 2019

(Dollars in thousands) March 31, 2021 December 31, 2020

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

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Total $4,194,666 $42,137 1.00 % $4,195,990 $44,106 1.05 %

In 2020, 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.

In 2020, Washington Trust utilizes a DCF methodology to estimate credit losses for each pooled portfolio segment.

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

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

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

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

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

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

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

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

The ACL for individually analyzed loans is measured using a DCF method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan was collateral dependent, at the fair value of the collateral.

The ACL for pooled loans is measured utilizing a DCF methodology to estimate credit losses for each pooled portfolio segment.

The methodology incorporates a probability of default and loss given default framework.

Loss given default is estimated based on historical credit loss experience.

Probability of default is estimated using a regression model that incorporates econometric factors.

Management utilizes forecasted econometric factors with a one-year reasonable and supportable forecast period and one-year straight-line reversion period in order to estimate the probability of default for each loan portfolio segment.

The DCF methodology combines the probability of default, the loss given default, prepayment speeds and remaining life of the loan to estimate a reserve for each loan.

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

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

See Note 6 to the Unaudited Consolidated Financial Statements for additional disclosure regarding the process and methodology to estimate the ACL on loans.

The ACL on loans amounted to $42.1 million at March 31, 2021, down by $2.0 million from the balance at December 31, 2020.

Net charge-offs amounted to $18 thousand for the three months ended March 31, 2021.

The ACL on loans as a percentage of total loans, also known as the reserve coverage ratio, was 1.00% at March 31, 2021, compared to 1.05% at December 31, 2020.

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

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

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

(Dollars in thousands) September 30, 2020 December 31, 2019

Management's Discussion and Analysis

(Dollars in thousands) March 31, 2021 December 31, 2020

Allocated ACL ACL to Loans Loans to Total Portfolio (1) Allocated ACL ACL to Loans Loans to Total Portfolio (1)

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

Management's Discussion and Analysis

The ACL on loans amounted to $42.6 million at September 30, 2020, up by $15.6 million from the balance at December 31, 2019.

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

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

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

The Corporation does not recognize a recovery when an updated appraisal indicates a subsequent increase in value.

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

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

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

Sources of Funds

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

Management's Discussion and Analysis

The following table presents a summary of deposits:

(Dollars in thousands) Change

September 30,

2021 December 31,

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Total deposits $4,549,142 $4,378,353 $170,789 4 %

Total deposits amounted to $4.3 billion at September 30, 2020, up by $786.8 million, or 22%, from December 31, 2019.

This included an increase of $299.3 million, or 105%, in out-of-market brokered time deposits.

Excluding out-of-market brokered time deposits, in-market deposits were up by $487.5 million, or 15%, from the balance at December 31, 2019.

In-market deposit growth included temporary PPP loan fundings deposited into customer accounts at Washington Trust.

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

FHLB advances totaled $713.9 million at September 30, 2020, down by $427.6 million, or 37%, from the balance at the end of 2019.

In June 2020, Washington Trust began participating in the FRB’s PPPLF, which extends credit to depository institutions at a fixed interest rate of 0.35%.

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

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

As of September 30, 2020, PPPLF borrowings amounted to $105.7 million, with a corresponding amount of PPP loans pledged as collateral.

See Note 7 to the Unaudited Consolidated Financial Statements for additional information regarding Borrowings.

Total deposits amounted to $4.5 billion at March 31, 2021, up by $170.8 million, or 4%, from December 31, 2020.

This included a decrease of $56.0 million, or 9%, in out-of-market brokered time deposits.

Excluding out-of-market brokered time

Management's Discussion and Analysis

deposits, in-market deposits were up by $226.8 million, or 6%, from the balance at December 31, 2020.

In-market deposit growth reflected a continuation of consumer behavior fostering excess liquidity across the banking industry, as well as temporary increases associated with PPP loan origination funds deposited to customer accounts at Washington Trust.

Borrowings primarily consist of FHLB advances, which are used as a source of funding for liquidity and interest rate risk management purposes.

FHLB advances totaled $466.9 million at March 31, 2021, down by $126.9 million, or 21%, from the balance at the end of 2020.

See additional disclosure regarding the prepayment of certain FHLB advances and the recognition of debt prepayment penalties under the caption “Noninterest Expense” within the Results of Operations section.

For additional information regarding FHLB advances see Note 8 to the Unaudited Consolidated Financial Statements.

Liquidity and Capital Resources

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

The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 60% of total average assets in the nine months ended September 30, 2020.

The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 68% of total average assets in the three months ended March 31, 2021.

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

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

Management's Discussion and Analysis

See additional disclosure regarding Washington Trust’s participation in the FRB’s PPPLF under the caption “Borrowings” in the section “Sources of Funds.”

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

(Dollars in thousands)

September 30,

2021 December 31,

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Total $1,724,752 $1,585,411

(1) As of September 30, 2020 and December 31, 2019, loans with a carrying value of $2.1 billion and $2.1 billion, respectively, and securities available for sale with carrying values of $164.7 million and $271.4 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of September 30, 2020 and December 31, 2019, loans with a carrying value of $13.5 million and $16.6 million, respectively, and securities available for sale with a carrying value of $14.7 million and $17.0 million, respectively, were pledged to the FRB for the discount window resulting in this additional unused borrowing capacity.

(1) As of March 31, 2021 and December 31, 2020, loans with a carrying value of $2.1 billion and $2.1 billion, respectively, and securities available for sale with carrying values of $94.4 million and $128.6 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of March 31, 2021 and December 31, 2020, loans with a carrying value of $11.8 million and $12.6 million, respectively, and securities available for sale with a carrying value of $15.3 million and $14.9 million, respectively, were pledged to the FRB for the discount window resulting in this additional unused borrowing capacity.

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

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

Liquidity remained within target ranges established by the ALCO during the nine months ended September 30, 2020.

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

Net cash provided by operating activities amounted to $18.2 million for the nine months ended September 30, 2020.

Net income of $51.3 million was offset by mortgage banking related adjustments to reconcile net income to net cash used in operating activities.

Net cash used in investing activities totaled $378.2 million for the nine months ended September 30, 2020, reflecting outflows to fund the increase in and purchases of loans, as well as purchases of debt securities.

Liquidity remained within target ranges established by the ALCO during the three months ended March 31, 2021.

Based on its assessment of the

Management's Discussion and Analysis

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

Net cash used in operating activities amounted to $3.4 million for the three months ended March 31, 2021.

Net income of $20.5 million was largely offset by mortgage banking related adjustments to reconcile net income to net cash used in operating activities.

Net cash used in investing activities totaled $62.7 million for the three months ended March 31, 2021, reflecting outflows to fund purchases of debt securities.

These outflows were partially offset by net inflows from maturities, calls and principal payments of securities.

For the nine months ended September 30, 2020, net cash provided by financing activities amounted to $433.6 million, with net increases in deposits, FHLB advances and PPPLF borrowings, partially offset by the payment of dividends to shareholders and treasury stock purchases.

For the three months ended March 31, 2021, net cash provided by financing activities amounted to $34.6 million, with increases in deposits, partially offset by a net decrease in FHLB advances and the payment of dividends to shareholders.

See the Unaudited Consolidated Statements of Cash Flows for further information about sources and uses of cash.

Capital Resources

Total shareholders’ equity amounted to $527.7 million at September 30, 2020, up by $24.2 million from December 31, 2019.

This included net income of $51.3 million and an increase of $7.8 million in the accumulated comprehensive income component of shareholders’ equity, largely reflecting an increase in the fair value of available for sale debt securities.

These increases were partially offset by $26.7 million in dividend declarations, a $6.1 million decrease to retained earnings due to the adoption of CECL, and a net increase in treasury stock of $3.5 million.

The Corporation declared a quarterly dividend of 51 cents per share for the three months ended September 30, 2020, unchanged from the 51 cents per share declared for the same period in 2019.

On a year-to-date basis, dividend declarations totaled $1.53 per share in 2020, compared to $1.49 per share in 2019.

The ratio of total equity to total assets amounted to 9.02% at September 30, 2020 compared to a ratio of 9.51% at December 31, 2019.

Book value per share at September 30, 2020 and December 31, 2019 amounted to $30.57 and $29.00, respectively.

The Bancorp and the Bank are subject to various regulatory capital requirements and are considered “well capitalized” with a total risk-based capital ratio of 13.09% at September 30, 2020, compared to 12.94% at December 31, 2019.

See Note 8 to the Unaudited Consolidated Financial Statements for additional discussion of regulatory capital requirements and the election of the CECL phase-in option provided by regulatory guidance, which delays the estimated impact of CECL on regulatory capital and phases it in over a three-year period beginning in 2022.

Management's Discussion and Analysis

Total shareholders’ equity amounted to $533.6 million at March 31, 2021, down by $596 thousand from December 31, 2020.

The decline reflected a decrease of $12.6 million in the accumulated other comprehensive income component of shareholders' equity largely due to a temporary decline in the fair value of available for sale debt securities, as well as $9.1 million in dividend declarations.

These decreases were partially offset by net income of $20.5 million.

The Corporation declared a quarterly dividend of 52 cents per share for the three months ended March 31, 2021, compared to 51 cents per share declared for the same period in 2020.

The ratio of total equity to total assets amounted to 9.33% at March 31, 2021 compared to a ratio of 9.35% at December 31, 2020.

Book value per share at March 31, 2021 and December 31, 2020 amounted to $30.83 and $30.94, respectively.

The Bancorp and the Bank are subject to various regulatory capital requirements and are considered “well capitalized” with a total risk-based capital ratio of 13.85% at March 31, 2021, compared to 13.51% at December 31, 2020.

See Note 9 to the Unaudited Consolidated Financial Statements for additional discussion of regulatory capital requirements and the election of the ASC 326 phase-in option provided by regulatory guidance, which delays the estimated impact of ASC 326 on regulatory capital and phases it in over a three-year period beginning in 2022.

Off-Balance Sheet Arrangements

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Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract.

The notional amount of the interest rate contracts is the amount upon which interest and other payments are based.

The notional amount of the interest rate

Management's Discussion and Analysis

contracts is the amount upon which interest and other payments are based.

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

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

As of September 30, 2020 and December 31, 2019, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation.

As of March 31, 2021 and December 31, 2020, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation.

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

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

Management's Discussion and Analysis

The following table sets forth the estimated change in net interest income from an unchanged rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on- and off-balance sheet financial instruments as of September 30, 2020 and December 31, 2019.

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

1 unchanged sentence

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

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

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

8 unchanged sentences

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

The ALCO’s estimate of interest rate risk exposure to rising rate environments, including those involving changes to the shape of the yield curve, incorporates certain assumptions regarding the shift in deposit balances from low-cost core savings categories to higher-cost deposit categories, which has characterized a shift in funding mix during the past rising interest rate cycles.

The relative change in interest rate sensitivity for declining rates from December 31, 2019 as shown in the above table was attributable to a lower absolute level of market interest rates with certain rates and yields reaching floors or zero in declining rate scenarios.

The relative increase in interest rate sensitivity for rising rates from December 31, 2019 was attributable to a relative increase in the proportion of low-cost core deposits to total sources of funds.

Interest rate risk modeling assumes that core deposits reprice more slowly and by a lesser amount than the repricing of wholesale funding in response to changes in market interest rates.

The ALCO’s estimate of interest rate risk exposure to rising rate environments, including those involving changes to the shape of the yield

Management's Discussion and Analysis

curve, incorporates certain assumptions regarding the shift in deposit balances from low-cost core savings categories to higher-cost deposit categories, which has characterized a shift in funding mix during the past rising interest rate cycles.

While the ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin.

8 unchanged sentences

It should also be noted that the static balance sheet assumption does not necessarily reflect the Corporation’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior.

Management's Discussion and Analysis

Mortgage-backed securities and residential real estate loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments.

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

The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of September 30, 2020 and December 31, 2019 resulting from immediate parallel rate shifts:

The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of March 31, 2021 and December 31, 2020 resulting from immediate parallel rate shifts:

(Dollars in thousands)

6 unchanged sentences

Trust preferred debt and other corporate debt securities (115) 141

Total change in market value as of September 30, 2020 $10,502 ($63,480)

Total change in market value as of March 31, 2021 $26,669 ($94,746)

Total change in market value as of December 31, 2020 $13,481 ($69,538)

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis