WASHINGTON TRUST BANCORP INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Corporation’s Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 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 six months ended June 30, 2021 are not necessarily indicative of the results for the full-year ended December 31, 2021 or any future period. Forward-Looking Statements This report contains statements that are “forward-looking statements.” We may also make forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “outlook,” “will,” “should,” and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different than the anticipated future results, performance or achievements expressed or implied by the forward-looking statements. Some of the factors that might cause these differences include the following: 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; 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 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; decreases in the value of securities and other assets; reductions in loan demand; changes in loan collectability, increases in defaults and charge-off rates; changes related to the discontinuation and replacement of LIBOR; changes in the size and nature of our competition; changes in legislation or regulation and accounting principles, policies and guidelines; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; reputational risk relating to our participation in the Paycheck Protection Program and other pandemic-related legislative and regulatory initiatives and programs; and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC, may result in these differences. You should carefully review all of these factors and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. Critical Accounting Policies and Estimates Accounting policies involving significant judgments, estimates and assumptions by management, which have, or could have, a material impact on the Corporation’s consolidated financial statements are considered critical accounting policies. Management considers the following to be its critical accounting policies: the determination of 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. 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 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. Full -44- 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. Historical credit loss experience provides the basis for the calculation of loss given default and the estimation of expected credit losses. As discussed further below, adjustments to historical information are made for differences in specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, that may not be reflected in historical loss rates. Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components. The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics. Pooled loan portfolio segments include commercial real estate (including commercial construction loans), commercial and industrial (including 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. For collateral dependent loans for which repayment is to be provided substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral dependent loans for which repayment is to be provided substantially through the operation of the collateral, such as accruing TDRs, estimated costs to sell are not incorporated into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the collateral. For pooled loans, the Corporation utilizes a DCF methodology to estimate credit losses over the expected life of the loan. The life of the loan excludes expected extensions, renewals and modifications, unless 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. Quantitative loss factors are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. These qualitative risk factors include: (1) changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; (2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; (3) changes in the nature and volume of the portfolio and in the terms of loans; (4) changes in the experience, ability, and depth of lending management and other relevant staff; (5) changes in the volume and severity of past due loans, -45- 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 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. 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. 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. Recently Issued Accounting Pronouncements See Note 2 to the Unaudited Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Corporation’s financial statements. Overview The Corporation offers a comprehensive product line of banking and financial services to individuals and businesses, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut; its ATMs; telephone banking; mobile banking and its internet website (www.washtrust.com). Our largest source of operating income is net interest income, which is the difference between interest earned on loans and securities and interest paid on deposits and borrowings. In addition, we generate noninterest income from a number of sources, including wealth management services, mortgage banking activities and deposit services. Our principal noninterest expenses include salaries and employee benefit costs, outsourced services provided by third party vendors, occupancy and facility-related costs and other administrative expenses. We continue to leverage our strong regional brand to build market share and remain steadfast in our commitment to provide superior service. 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. On May 4, 2021, the SBA announced that PPP funding has been exhausted and that it has stopped accepting applications from most lenders. In the second quarter of 2021, we originated approximately 100 PPP loans with principal balances totaling approximately $4 million and we processed SBA forgiveness on approximately 650 PPP loans with principal balances totaling $85 million. As of June 30, 2021, the carrying value of PPP loans amounted to $147.0 million and included net unamortized loan origination fee balances of $4.9 million. As of July 31, 2021, the carrying value of PPP loans has declined to $135.3 million and included net unamortized loan origination fee balances of $4.6 million. Management expects a significant portion of PPP loans to be ultimately 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 The Corporation has a comprehensive enterprise risk management (“ERM”) program through which the Corporation identifies, measures, monitors and controls current and emerging material risks. The Board of Directors is responsible for oversight of the ERM program. The ERM program enables the aggregation of risk across the Corporation and ensures the Corporation has the tools, programs and processes in place to support informed -46- 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. The risk categories include: credit risk, interest rate risk, liquidity risk, price and market risk, compliance risk, strategic and reputation risk, and operational risk. A description of each risk category is provided below. Credit risk represents the possibility that borrowers or other counterparties may not repay loans or other contractual obligations according to their terms due to changes in the financial capacity, ability and willingness of such borrowers or counterparties to meet their obligations. In some cases, the collateral securing payment of the loans may be sufficient to assure repayment, but in other cases the Corporation may experience significant credit losses which could have an adverse effect on its operating results. The Corporation makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of the real estate and other assets serving as collateral for the repayment of loans. Credit risk also exists with respect to investment securities. For further discussion regarding the credit risk and the credit quality of the Corporation’s loan portfolio, see Note 5 and Note 6 to the Unaudited Consolidated Financial Statements. For further discussion regarding credit risk associated with unfunded commitments, see Note 18 to the Unaudited Consolidated Financial Statements. For further discussion regarding the Corporation’s securities portfolio, see Note 4 to the Unaudited Consolidated Financial Statements. Interest rate risk is the risk of loss to future earnings due to changes in interest rates. It exists because the repricing frequency and magnitude of interest-earning assets and interest-bearing liabilities are not identical. Liquidity risk is the risk that the Corporation will not have the ability to generate adequate amounts of cash for it to meet its maturing liability obligations and customer loan demand. For detailed disclosure regarding liquidity management, asset/liability management and interest rate risk, see “Liquidity and Capital Resources” and “Asset/Liability Management and Interest Rate Risk” sections below. Price and market risk refers to the risk of loss arising from adverse changes in interest rates and other relevant market rates and prices, such as equity prices. Interest rate risk, discussed above, is the most significant market risk to which the Corporation is exposed. The Corporation is also exposed to financial market risk and housing market risk. Compliance risk represents the risk of regulatory sanctions or financial loss resulting from the failure to comply with laws, rules and regulations and standards of good banking practice. Activities which may expose the Corporation to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, adherence to all applicable laws and regulations, and employment and tax matters. Strategic and reputation risk represent the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, and failure to assess existing and new opportunities and threats in business, markets, and products. Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, natural disasters and security risks. ERM is an overarching program that includes all areas of the Corporation. A framework approach is utilized to assign responsibility and to ensure that the various business units and activities involved in the risk management life-cycle are effectively integrated. The Corporation has adopted the “three lines of defense” strategy that is an industry best practice for ERM. Business units are the first line of defense in managing risk. They are responsible for identifying, measuring, monitoring, and controlling current and emerging risks. They must report on and escalate their concerns. Corporate functions such as Credit Risk Management, Financial Administration, Information Assurance and Compliance, comprise the second line of defense. They are responsible for policy setting and for reviewing and challenging the risk management activities of the business units. They collaborate closely with business units on planning and resource allocation with respect to risk management. Internal Audit is the third line of defense. They provide independent assurance to the Board of Directors of the effectiveness of the first and second lines in fulfilling their risk management responsibilities. For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see 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. -47- Management's Discussion and Analysis Results of Operations The following table presents a summarized consolidated statement of operations: (Dollars in thousands) Three Months Six Months Change Change Periods ended June 30, 2021 2020 $ % 2021 2020 $ % Net interest income $34,754 $30,945 $3,809 12 % $67,625 $63,547 $4,078 6 % Noninterest income 20,593 26,320 (5,727) (22) 46,567 46,247 320 1 Total revenues 55,347 57,265 (1,918) (3) 114,192 109,794 4,398 4 Provision for credit losses — 2,200 (2,200) (100) (2,000) 9,236 (11,236) (122) Noninterest expense 33,012 28,478 4,534 16 67,725 58,931 8,794 15 Income before income taxes 22,335 26,587 (4,252) (16) 48,467 41,627 6,840 16 Income tax expense 4,875 5,547 (672) (12) 10,536 8,686 1,850 21 Net income $17,460 $21,040 ($3,580) (17 %) $37,931 $32,941 $4,990 15 % The following table presents a summary of performance metrics and ratios: Three Months Six Months Periods ended June 30, 2021 2020 2021 2020 Diluted earnings per common share $1.00 $1.21 $2.17 $1.89 Return on average assets (net income divided by average assets) 1.20 % 1.46 % 1.32 % 1.18 % Return on average equity (net income available for common shareholders divided by average equity) 12.92 % 16.51 % 14.22 % 13.03 % Net interest income as a percentage of total revenues 63 % 54 % 59 % 58 % Noninterest income as a percentage of total revenues 37 % 46 % 41 % 42 % Net income totaled $17.5 million and $37.9 million, respectively, for the three and six months ended June 30, 2021, compared to $21.0 million and $32.9 million, respectively, for the same periods in 2020. Net interest income in 2021 largely benefited from lower funding costs and a reduction in wholesale funding balances, as well as accelerated amortization of net deferred fee balances on PPP loans that were forgiven by the SBA. Noninterest income changes reflected lower mortgage banking revenues and higher wealth management revenues. The year-over-year reduction in credit loss provisioning reflected improvement in forecasted economic conditions and continued stable asset quality metrics. Noninterest expenses in 2021 included debt prepayment penalty expense associated with paying off higher yielding FHLB advances, as well as an increase in salaries and benefits expense. -48- Management's Discussion and Analysis Average Balances / Net Interest Margin - Fully Taxable Equivalent (FTE) Basis The following table presents average balance and interest rate information. Tax-exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. Unrealized gains (losses) on available for sale securities and fair value adjustments on mortgage loans held for sale are excluded from the average balance and yield calculations. Nonaccrual loans, as well as interest recognized on these loans, are included in amounts presented for loans. Three months ended June 30, 2021 2020 Change (Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Assets: Cash, federal funds sold and short-term investments $146,313 $32 0.09 $187,306 $36 0.08 ($40,993) ($4) 0.01 Mortgage loans held for sale 57,473 405 2.83 53,443 440 3.31 4,030 (35) (0.48) Taxable debt securities 1,029,933 3,441 1.34 904,792 5,477 2.43 125,141 (2,036) (1.09) FHLB stock 25,128 110 1.76 51,967 654 5.06 (26,839) (544) (3.30) Commercial real estate 1,639,515 11,701 2.86 1,635,431 12,580 3.09 4,084 (879) (0.23) Commercial & industrial 807,598 8,113 4.03 791,672 6,739 3.42 15,926 1,374 0.61 Total commercial 2,447,113 19,814 3.25 2,427,103 19,319 3.20 20,010 495 0.05 Residential real estate 1,514,487 12,920 3.42 1,497,665 14,330 3.85 16,822 (1,410) (0.43) Home equity 257,257 2,056 3.21 282,470 2,382 3.39 (25,213) (326) (0.18) Other 20,979 253 4.84 18,956 229 4.86 2,023 24 (0.02) Total consumer 278,236 2,309 3.33 301,426 2,611 3.48 (23,190) (302) (0.15) Total loans 4,239,836 35,043 3.32 4,226,194 36,260 3.45 13,642 (1,217) (0.13) Total interest-earning assets 5,498,683 39,031 2.85 5,423,702 42,867 3.18 74,981 (3,836) (0.33) Noninterest-earning assets 334,742 365,990 (31,248) Total assets $5,833,425 $5,789,692 $43,733 Liabilities and Shareholders’ Equity: Interest-bearing demand deposits $182,465 $49 0.11 $162,388 $142 0.35 $20,077 ($93) (0.24) NOW accounts 760,294 119 0.06 570,739 84 0.06 189,555 35 — Money market accounts 951,194 552 0.23 821,063 1,370 0.67 130,131 (818) (0.44) Savings accounts 518,072 72 0.06 403,286 67 0.07 114,786 5 (0.01) Time deposits (in-market) 686,590 1,889 1.10 746,750 3,507 1.89 (60,160) (1,618) (0.79) Total interest-bearing in-market deposits 3,098,615 2,681 0.35 2,704,226 5,170 0.77 394,389 (2,489) (0.42) Wholesale brokered time deposits 662,541 280 0.17 559,822 1,942 1.40 102,719 (1,662) (1.23) Total interest-bearing deposits 3,761,156 2,961 0.32 3,264,048 7,112 0.88 497,108 (4,151) (0.56) FHLB advances 456,661 1,001 0.88 1,068,034 4,382 1.65 (611,373) (3,381) (0.77) Junior subordinated debentures 22,681 92 1.63 22,681 171 3.03 — (79) (1.40) PPPLF borrowings — — — 2,565 2 0.31 (2,565) (2) (0.31) Total interest-bearing liabilities 4,240,498 4,054 0.38 4,357,328 11,667 1.08 (116,830) (7,613) (0.70) Noninterest-bearing demand deposits 912,295 745,050 167,245 Other liabilities 140,108 175,563 (35,455) Shareholders’ equity 540,524 511,751 28,773 Total liabilities and shareholders’ equity $5,833,425 $5,789,692 $43,733 Net interest income (FTE) $34,977 $31,200 $3,777 Interest rate spread 2.47 2.10 0.37 Net interest margin 2.55 2.31 0.24 -49- Management's Discussion and Analysis Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: (Dollars in thousands) Three months ended June 30, 2021 2020 Change Commercial loans $223 $254 ($31) Six months ended June 30, 2021 2020 Change (Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Assets: Cash, federal funds sold and short-term investments $150,580 $65 0.09 $150,325 $385 0.52 $255 ($320) (0.43) Mortgage loans held for sale 59,429 846 2.87 42,265 725 3.45 17,164 121 (0.58) Taxable debt securities 973,214 6,683 1.38 905,043 11,311 2.51 68,171 (4,628) (1.13) FHLB stock 26,987 243 1.82 51,964 1,294 5.01 (24,977) (1,051) (3.19) Commercial real estate 1,632,725 23,060 2.85 1,609,193 28,677 3.58 23,532 (5,617) (0.73) Commercial & industrial 823,580 15,979 3.91 699,586 13,294 3.82 123,994 2,685 0.09 Total commercial 2,456,305 39,039 3.21 2,308,779 41,971 3.66 147,526 (2,932) (0.45) Residential real estate 1,484,571 25,737 3.50 1,483,473 28,613 3.88 1,098 (2,876) (0.38) Home equity 257,494 4,177 3.27 284,151 5,483 3.88 (26,657) (1,306) (0.61) Other 20,545 495 4.86 19,406 478 4.95 1,139 17 (0.09) Total consumer 278,039 4,672 3.39 303,557 5,961 3.95 (25,518) (1,289) (0.56) Total loans 4,218,915 69,448 3.32 4,095,809 76,545 3.76 123,106 (7,097) (0.44) Total interest-earning assets 5,429,125 77,285 2.87 5,245,406 90,260 3.46 183,719 (12,975) (0.59) Noninterest-earning assets 343,889 346,914 (3,025) Total assets $5,773,014 $5,592,320 $180,694 Liabilities and Shareholders’ Equity: Interest-bearing demand deposits $183,223 $145 0.16 $158,902 $642 0.81 $24,321 ($497) (0.65) NOW accounts 729,301 221 0.06 538,010 154 0.06 191,291 67 — Money market accounts 930,656 1,266 0.27 808,166 3,462 0.86 122,490 (2,196) (0.59) Savings accounts 504,040 141 0.06 388,831 128 0.07 115,209 13 (0.01) Time deposits (in-market) 695,038 4,127 1.20 763,552 7,556 1.99 (68,514) (3,429) (0.79) Total interest-bearing in-market deposits 3,042,258 5,900 0.39 2,657,461 11,942 0.90 384,797 (6,042) (0.51) Wholesale brokered time deposits 621,075 724 0.24 475,822 3,706 1.57 145,253 (2,982) (1.33) Total interest-bearing deposits 3,663,333 6,624 0.36 3,133,283 15,648 1.00 530,050 (9,024) (0.64) FHLB advances 499,435 2,381 0.96 1,095,894 10,147 1.86 (596,459) (7,766) (0.90) Junior subordinated debentures 22,681 186 1.65 22,681 384 3.40 — (198) (1.75) PPPLF borrowings — — — 1,282 2 0.31 (1,282) (2) (0.31) Total interest-bearing liabilities 4,185,449 9,191 0.44 4,253,140 26,181 1.24 (67,691) (16,990) (0.80) Noninterest-bearing demand deposits 901,522 677,961 223,561 Other liabilities 149,622 153,781 (4,159) Shareholders’ equity 536,421 507,438 28,983 Total liabilities and shareholders’ equity $5,773,014 $5,592,320 $180,694 Net interest income (FTE) $68,094 $64,079 $4,015 Interest rate spread 2.43 2.22 0.21 Net interest margin 2.53 2.46 0.07 Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: (Dollars in thousands) Six months ended June 30, 2021 2020 Change Commercial loans $469 $532 ($63) -50- Management's Discussion and Analysis Net Interest Income Net interest income continues to be the primary source of our operating income. Net interest income for the three and six months ended June 30, 2021 totaled $34.8 million and $67.6 million, respectively, compared to $30.9 million and $63.5 million, respectively, for the same periods 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. Prepayment penalty income associated with loan payoffs is included in net interest income. 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 fee income associated with loan payoffs. Prepayment penalty fee income associated with loan payoffs was $717 thousand and $934 thousand, respectively, for the three and six months ended June 30, 2021. Prepayment penalty fee income associated with loan payoffs amounted to $21 thousand and $146 thousand, respectively, for the three and six months ended June 30, 2020. 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, 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. 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 $2.4 million for the six months ended June 30, 2021. This compares to net amortization or a net reduction to interest income of $2.7 million for the same period in 2020. The year-over-year change in net amortization reflected accelerated amortization of net deferred fee balances on PPP loans, partially offset by an increase in amortization of net premiums on securities. As PPP loans are forgiven by the SBA, related unamortized net fee balances are accelerated and amortized into net interest income. Such accelerated amortization amounted to $1.0 million and $2.2 million, respectively, for the three and six months ended June 30, 2021. There was no PPP forgiveness in the corresponding periods in 2020. FTE net interest income for the three and six months ended June 30, 2021 amounted to $35.0 million and $68.1 million, respectively, up by $3.8 million and $4.0 million, respectively, from the same periods in 2020. A decline in average interest-bearing liability balances and growth in average interest-earnings assets contributed approximately $2.2 million and $6.2 million, respectively, of net interest income for the three and six months ended June 30, 2021. For the three months ended June 30, 2021 compared to the same period a year ago, declines in funding costs out-paced lower asset yields and contributed $1.6 million to net interest income. For the six months ended June 30, 2021 compared to the same period a year ago, lower asset yields out-paced declines in funding costs and reduced net interest income by $2.2 million. The net interest margin was 2.55% and 2.53%, respectively, for the three and six months ended June 30, 2021, compared to 2.31% and 2.46%, respectively, for the same periods a year ago. The net interest margin benefited in 2021 from lower funding costs and a reduction in wholesale funding balances. It also benefited from accelerated amortization of net deferred fee balances on PPP loans that were forgiven by the SBA and loan prepayment fees. Accelerated PPP amortization added 7 basis points and 9 basis points, respectively, to the net interest margin for the three and six months ended June 30, 2021, compared to zero in 2020. Loan prepayment fees added 5 basis points and 4 basis points, respectively, to the net interest margin for the three and six months ended June 30, 2021, as compared to zero and 1 basis point, respectively, for the same periods in 2020. Total average securities for the three and six months ended June 30, 2021 increased by $125.1 million and $68.2 million, respectively, from the average balances for the same periods a year earlier. The FTE rate of return on the securities portfolio for the three and six months ended June 30, 2021 was 1.34% and 1.38%, respectively, compared to 2.43% and 2.51%, respectively, for the same periods in 2020, reflecting purchases of relatively lower yielding debt securities and the impact of lower market interest rates. Total average loan balances for the three and six months ended June 30, 2021 increased by $13.6 million and $123.1 million, respectively, from the average loan balances for the comparable 2020 periods. The year-to-date increase reflected growth in -51- Management's Discussion and Analysis average commercial loan balances concentrated in lower yielding PPP loans. The yield on total loans for the both the three and six months ended June 30, 2021 was 3.32%, compared to 3.45% and 3.76%, respectively, for the same periods in 2020. Yields on LIBOR-based and prime-based loans reflected lower market interest rates. The average balance of FHLB advances for the three and six months ended June 30, 2021 decreased by $611.4 million and $596.5 million, respectively, compared to the average balances for the same periods in 2020. The average rate paid on such advances for the three and six months ended June 30, 2021 was 0.88% and 0.96%, respectively, down from 1.65% and 1.86%, respectively, for the same periods in 2020, reflecting maturities and payoffs of higher-yielding FHLB advances and lower market interest rates. Included in total average interest-bearing deposits were of out-of-market wholesale brokered time deposits, which increased by $102.7 million and $145.3 million, respectively, from the same periods in 2020. The average rate paid on wholesale brokered time deposits for the three and six months ended June 30, 2021 was 0.17% and 0.24%, respectively, compared to 1.40% and 1.57%, respectively, for the same periods in 2020, reflecting lower market interest rates. Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, for the three and six months ended June 30, 2021 increased by $394.4 million and $384.8 million, respectively, from the average balances for the same periods 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 and six months ended June 30, 2021 decreased by 42 basis points and 51 basis points, respectively, from the same periods 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 and six months ended June 30, 2021 increased by $167.2 million and $223.6 million, respectively, from the average balance for the same periods in 2020. See additional disclosure under the caption “Sources of Funds.” -52- Management's Discussion and Analysis Volume / Rate Analysis - Interest Income and Expense (FTE Basis) The following table presents certain information on a FTE basis regarding changes in our interest income and interest expense for the period indicated. The net change attributable to both volume and rate has been allocated proportionately. (Dollars in thousands) Three Months Ended June 30, 2021 vs. 2020 Six Months Ended June 30, 2021 vs. 2020 Change Due to Change Due to Volume Rate Net Change Volume Rate Net Change Interest on Interest-Earning Assets: Cash, federal funds sold and other short-term investments ($9) $5 ($4) $1 ($321) ($320) Mortgage loans held for sale 31 (66) (35) 259 (138) 121 Taxable debt securities 674 (2,710) (2,036) 797 (5,425) (4,628) FHLB stock (241) (303) (544) (452) (599) (1,051) Commercial real estate 31 (910) (879) 410 (6,027) (5,617) Commercial & industrial 137 1,237 1,374 2,404 281 2,685 Total commercial 168 327 495 2,814 (5,746) (2,932) Residential real estate 161 (1,571) (1,410) 21 (2,897) (2,876) Home equity (208) (118) (326) (484) (822) (1,306) Other 24 — 24 27 (10) 17 Total consumer (184) (118) (302) (457) (832) (1,289) Total loans 145 (1,362) (1,217) 2,378 (9,475) (7,097) Total interest income 600 (4,436) (3,836) 2,983 (15,958) (12,975) Interest on Interest-Bearing Liabilities: Interest-bearing demand deposits 15 (108) (93) 85 (582) (497) NOW accounts 35 — 35 67 — 67 Money market accounts 190 (1,008) (818) 461 (2,657) (2,196) Savings accounts 14 (13) 1 35 (22) 13 Time deposits (in-market) (262) (1,356) (1,618) (630) (2,799) (3,429) Total interest-bearing in-market deposits (8) (2,485) (2,493) 18 (6,060) (6,042) Wholesale brokered time deposits 304 (1,966) (1,662) 878 (3,860) (2,982) Total interest-bearing deposits 296 (4,451) (4,155) 896 (9,920) (9,024) FHLB advances (1,865) (1,516) (3,381) (4,105) (3,661) (7,766) Junior subordinated debentures — (79) (79) — (198) (198) PPPLF borrowings 1 1 2 (1) (1) (2) Total interest expense (1,568) (6,045) (7,613) (3,210) (13,780) (16,990) Net interest income (FTE) $2,168 $1,609 $3,777 $6,193 ($2,178) $4,015 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 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. For the three months ended June 30, 2021 there was no provision for credit losses, compared to a positive provision for credit losses (or a charge) of $2.2 million for the same period in 2020. For the six months ended June 30, 2021, a negative provision for credit losses (or a benefit) of $2.0 million was recognized in earnings, compared to a positive provision for credit losses (or a charge) of $9.2 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. -53- Management's Discussion and Analysis Total net charge-offs were $258 thousand and $276 thousand, respectively, for the three and six months ended June 30, 2021, compared to $308 thousand and $931 thousand, respectively, for the same periods in 2020. The ACL on loans was $41.9 million, or 0.97% of total loans, at June 30, 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 Noninterest income is an important source of revenue for Washington Trust. The principal categories of noninterest income are shown in the following table: (Dollars in thousands) Three Months Six Months Change Change Periods ended June 30, 2021 2020 $ % 2021 2020 $ % Noninterest income: Wealth management revenues $10,428 $8,605 $1,823 21 % $20,323 $17,294 $3,029 18 % Mortgage banking revenues 5,994 14,851 (8,857) (60) 17,921 20,947 (3,026) (14) Card interchange fees 1,316 1,031 285 28 2,449 1,978 471 24 Service charges on deposit accounts 635 517 118 23 1,244 1,377 (133) (10) Loan related derivative income 1,175 99 1,076 1,087 1,642 2,554 (912) (36) Income from bank-owned life insurance 607 791 (184) (23) 1,163 1,355 (192) (14) Other income 438 426 12 3 1,825 742 1,083 146 Total noninterest income $20,593 $26,320 ($5,727) (22 %) $46,567 $46,247 $320 1 % Noninterest Income Analysis Revenue from wealth management services represented 44% of total noninterest income for the six months ended June 30, 2021, compared to 37% 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 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 Six Months Change Change Periods ended June 30, 2021 2020 $ % 2021 2020 $ % Wealth management revenues: Asset-based revenues $9,991 $8,156 $1,835 22 % $19,574 $16,511 $3,063 19 % Transaction-based revenues 437 449 (12) (3) 749 783 (34) (4) Total wealth management revenues $10,428 $8,605 $1,823 21 % $20,323 $17,294 $3,029 18 % Wealth management revenues for the three and six months ended June 30, 2021 increased by $1.8 million and $3.0 million, respectively, from the comparable periods in 2020, reflecting growth in asset-based revenues. The increase in asset-based revenues correlated with the increase in the average balances of assets under administration (“AUA”). -54- Management's Discussion and Analysis The following table presents the changes in wealth management AUA: (Dollars in thousands) Three Months Six Months Periods ended June 30, 2021 2020 2021 2020 Wealth management assets under administration: Balance at the beginning of period $7,049,226 $5,337,733 $6,866,737 $6,235,801 Net investment appreciation (depreciation) & income 368,383 671,602 577,336 (101,133) Net client asset inflows (outflows) 23,910 129,510 (2,554) 4,177 Balance at the end of period $7,441,519 $6,138,845 $7,441,519 $6,138,845 Wealth management AUA amounted to $7.4 billion at June 30, 2021, up by $1.3 billion, or 21%, from the balance at June 30, 2020, primarily due to net investment appreciation. The average balance of AUA for the three and six months ended June 30, 2021 increased by approximately 26% and 20%, respectively, from the average balance for the same periods in 2020. Mortgage banking revenues represented 38% of total noninterest income for the six months ended June 30, 2021, compared to 45% for the same period in 2020. 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 Six Months Change Change Periods ended June 30, 2021 2020 $ % 2021 2020 $ % Mortgage banking revenues: Realized gains on loan sales, net (1) $8,562 $10,646 ($2,084) (20 %) $22,307 $14,334 $7,973 56 % Unrealized (losses) gains, net (2) (2,543) 4,415 (6,958) (158) (4,431) 6,740 (11,171) (166) Loan servicing fee income, net (3) (25) (210) 185 (88) 45 (127) 172 (135) Total mortgage banking revenues $5,994 $14,851 ($8,857) (60 %) $17,921 $20,947 ($3,026) (14 %) Loans sold to the secondary market (4) $290,558 $305,224 ($14,666) (5 %) $582,577 $467,415 $115,162 25 % (1) Includes gains on loan sales, commission income on loans originated for others, servicing right gains, and gains (losses) on forward loan commitments. (2) Represents fair value adjustments on mortgage loans held for sale and forward loan commitments. (3) Represents loan servicing fee income, net of servicing right amortization and valuation adjustments. (4) Includes brokered loans (loans originated for others). For the three and six months ended June 30, 2021, mortgage banking revenues were down by $8.9 million and $3.0 million, respectively, compared to the same periods in 2020. These revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets. Included in mortgage banking revenues are changes in the fair value of mortgage loans held for sale and mortgage loan commitments, which are primarily based on current market prices in the secondary market and correlate to changes in the mortgage pipeline. The year-over-year decline in second quarter mortgage banking revenues reflected both a decline from previously elevated sales yield levels in the secondary market, as well as a decline in the quarterly volume of loans sold. On a year-to-date basis, higher sales volume mitigated the impact of the decline in current market pricing. For the three and six months ended June 30, 2021, loan related derivative income increased by $1.1 million and decreased by $912 thousand, respectively, from the comparable periods in 2020, reflecting changes in the volume of commercial borrower transactions relative to each period. Income from BOLI for the three and six months ended June 30, 2021 was down by $184 thousand and $192 thousand, respectively, from the same periods in 2020. Included in income from BOLI for the three and six months ended June 30, 2020 was a $229 thousand non-taxable gain due to the receipt of life insurance proceeds. Excluding this non-taxable gain, income from BOLI was up year-over-year, resulting from a $7.0 million purchase of BOLI in the second quarter of 2021. Other income for the six months ended June 30, 2021 increased by $1.1 million from the same period in 2020 due to $1.0 million of income associated with a litigation settlement that was recognized in the first quarter of 2021. -55- Management's Discussion and Analysis Noninterest Expense The following table presents noninterest expense comparisons: (Dollars in thousands) Three Months Six Months Change Change Periods ended June 30, 2021 2020 $ % 2021 2020 $ % Noninterest expense: Salaries and employee benefits $22,082 $19,464 $2,618 13 % $43,609 $38,932 $4,677 12 % Outsourced services 3,217 2,784 433 16 6,417 5,784 633 11 Net occupancy 2,042 1,909 133 7 4,170 3,928 242 6 Equipment 975 895 80 9 1,969 1,872 97 5 Legal, audit and professional fees 678 659 19 3 1,275 1,481 (206) (14) FDIC deposit insurance costs 374 674 (300) (45) 719 1,096 (377) (34) Advertising and promotion 560 186 374 201 782 445 337 76 Amortization of intangibles 225 230 (5) (2) 451 460 (9) (2) Debt prepayment penalties 895 — 895 100 4,230 — 4,230 — Other 1,964 1,677 287 17 4,103 4,933 (830) (17) Total noninterest expense $33,012 $28,478 $4,534 16 % $67,725 $58,931 $8,794 15 % Noninterest Expense Analysis Salaries and employee benefits expense for the three and six months ended June 30, 2021 increased by $2.6 million and $4.7 million, respectively, compared to the same periods in 2020, reflecting volume-related increases in mortgage banking commissions expense, annual merit increases, increased staffing levels and increases in performance-based compensation accruals. These increases were partially offset by a net increase in deferred labor costs (a contra expense) associated with loan originations for portfolio. A higher proportion of residential real estate loans were originated for portfolio in 2021 and was partially offset by the decline in PPP loan originations in 2021. Outsourced services expense for the three and six months ended June 30, 2021 increased by $433 thousand and $633 thousand, respectively, compared to the same periods in 2020, reflecting volume-related increases in third party processing costs and the expansion of services provided by third party vendors. Debt prepayment penalty expense for the three and six months ended June 30, 2021 totaled $895 thousand and $4.2 million, respectively, and resulted from the prepayment of $5.3 million and $32.1 million of higher-yielding FHLB advances. There were no debt prepayments in the comparable periods in 2020. Other expenses for the three and six months ended June 30, 2021 increased by $287 thousand and decreased by $830 thousand, respectively, from the same periods 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. Income Taxes The following table presents the Corporation’s income tax provision and applicable tax rates for the periods indicated: (Dollars in thousands) Three Months Six Months Periods ended June 30, 2021 2020 2021 2020 Income tax expense $4,875 $5,547 $10,536 $8,686 Effective income tax rate 21.8 % 20.9 % 21.7 % 20.9 % -56- Management's Discussion and Analysis The effective income tax rates for the three and six months ended June 30, 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, income from BOLI and federal tax credits. The increase in the effective tax rate for the three and six months ended June 30, 2021 compared to the same periods in 2020 largely reflected higher state income tax expense and a decrease in the proportion of tax-exempt income to pre-tax income. Segment Reporting The Corporation manages its operations through two operating segments, Commercial Banking and Wealth Management Services. The Corporate unit includes activity not allocated to the operating segments, such as activity related to the wholesale investment securities portfolio and wholesale funding matters. The Corporate unit also includes income from BOLI, as well as administrative and executive expenses not allocated to the operating segments and the residual impact of methodology allocations such as FTP offsets. Methodologies used to allocate income and expenses to business lines are periodically reviewed and revised. See Note 15 to the Unaudited Consolidated Financial Statements for additional disclosure related to business segments. Commercial Banking The following table presents a summarized statement of operations for the Commercial Banking business segment: (Dollars in thousands) Three Months Six Months Change Change Periods ended June 30, 2021 2020 $ % 2021 2020 $ % Net interest income $35,326 $32,580 $2,746 8 % $69,847 $61,590 $8,257 13 % Provision for credit losses — 2,200 (2,200) (100) (2,000) 9,236 (11,236) (122) Net interest income after provision for credit losses 35,326 30,380 4,946 16 71,847 52,354 19,493 37 Noninterest income 9,555 16,910 (7,355) (43) 24,070 27,575 (3,505) (13) Noninterest expense 20,649 18,226 2,423 13 41,307 37,529 3,778 10 Income before income taxes 24,232 29,064 (4,832) (17) 54,610 42,400 12,210 29 Income tax expense 5,289 6,177 (888) (14) 11,881 8,941 2,940 33 Net income $18,943 $22,887 ($3,944) (17 %) $42,729 $33,459 $9,270 28 % Net interest income for the Commercial Banking segment for the three and six months ended June 30, 2021, increased by $2.7 million and $8.3 million, respectively, from the same periods in 2020. This was attributable to lower cost of funds due to declines in market interest rates. Net interest income for the Commercial Banking segment also reflected lower yields on loans due to lower market interest rates, partially offset by growth in loans and accelerated amortization of net deferred fee balances on PPP loans that were forgiven by the SBA. For the three months ended June 30, 2021 there was no provision for credit losses, compared to a positive provision for credit losses (or a charge) of $2.2 million for the same period in 2020. For the six months ended June 30, 2021, a negative provision for credit losses (or a benefit) of $2.0 million was recognized in earnings, compared to a positive provision for credit losses (or a charge) of $9.2 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 and six months ended June 30, 2021 was down by $7.4 million and $3.5 million, respectively, from the comparable periods in 2020, largely due to lower mortgage banking revenues and changes in loan related derivative income. 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 and six months ended June 30, 2021 were up by $2.4 million and $3.8 million, respectively, from the same periods in 2020, reflecting increases in salaries and employee benefits and outsourced services expense. See additional discussion under the caption “Noninterest Expense” above. -57- 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 Six Months Change Change Periods ended June 30, 2021 2020 $ % 2021 2020 $ % Net interest expense ($24) ($26) $2 8 % ($47) ($93) $46 49 % Noninterest income 10,428 8,605 1,823 21 21,323 17,294 4,029 23 Noninterest expense 7,370 6,579 791 12 14,107 13,938 169 1 Income before income taxes 3,034 2,000 1,034 52 7,169 3,263 3,906 120 Income tax expense 748 457 291 64 1,702 813 889 109 Net income $2,286 $1,543 $743 48 % $5,467 $2,450 $3,017 123 % For the three and six months ended June 30, 2021, noninterest income derived from the Wealth Management Services segment increased by $1.8 million and $4.0 million, respectively, compared to the same periods in 2020, reflecting growth in asset-based revenues and income of $1.0 million associated with a settlement recognized in the first quarter of 2021. See further discussion under the caption “Noninterest Income” above. For the three and six months ended June 30, 2021, noninterest expenses for the Wealth Management Services segment increased by $791 thousand and $169 thousand, respectively, from the same periods in 2020, largely reflecting annual merit compensation increases, as well as increases in performance-based compensation accruals. The year-to-date increase was partially offset by decreases in legal and other expenses. Corporate The following table presents a summarized statement of operations for the Corporate unit: (Dollars in thousands) Three Months Six Months Change Change Periods ended June 30, 2021 2020 $ % 2021 2020 $ % Net interest (expense) income ($548) ($1,609) $1,061 (66 %) ($2,175) $2,050 ($4,225) (206 %) Noninterest income 610 805 (195) (24) 1,174 1,378 (204) (15) Noninterest expense 4,993 3,673 1,320 36 12,311 7,464 4,847 65 (Loss) income before income taxes (4,931) (4,477) (454) 10 (13,312) (4,036) (9,276) 230 Income tax (benefit) expense (1,162) (1,087) (75) 7 (3,047) (1,068) (1,979) 185 Net (loss) income ($3,769) ($3,390) ($379) 11 % ($10,265) ($2,968) ($7,297) 246 % Net interest income for the Corporate unit for the three and six months ended June 30, 2021 was up by $1.1 million and down by $4.2 million, respectively, compared to the same periods in 2020. The year-over-year increase in second quarter net interest income reflected lower funding costs and lower wholesale funding balances, partially offset by lower interest income on securities resulting from lower yields. On a year-to-date basis, the decline in net interest income reflected lower interest income on securities resulting from lower yields, partially offset by lower funding costs and lower wholesale funding balances. Additionally, the year-to-date decline in Corporate net interest income reflected unfavorable net funds transfer pricing allocations with the Commercial Banking segment resulting from the downward repricing of assets exceeding the downward repricing of liabilities. For the three and six months ended June 30, 2021, noninterest expenses for the Corporate unit increased by $1.3 million and $4.8 million, respectively, from the same periods in 2020, primarily due to debt prepayment penalty expense recognized in the three and six months ended June 30, 2021 of $895 thousand and $4.2 million, respectively. See further discussion under the caption “Noninterest Expense” above. -58- Management's Discussion and Analysis Financial Condition Summary The following table presents selected financial condition data: (Dollars in thousands) Change June 30, 2021 December 31, 2020 $ % Cash and due from banks $127,743 $194,143 ($66,400) (34 %) Total securities 1,052,577 894,571 158,006 18 Total loans 4,299,800 4,195,990 103,810 2 Allowance for credit losses on loans 41,879 44,106 (2,227) (5) Total assets 5,851,980 5,713,169 138,811 2 Total deposits 4,725,659 4,378,353 347,306 8 FHLB advances 408,592 593,859 (185,267) (31) Total shareholders’ equity 547,856 534,195 13,661 3 Total assets amounted to $5.9 billion at June 30, 2021, up by $138.8 million from the end of 2020. The balance of cash and due from banks declined by $66.4 million, including a reduction of cash collateral pledged to derivative counterparties. See Note 10 to the Unaudited Consolidated Financial Statements for additional disclosure regarding derivative financial instruments. The securities portfolio increased by $158.0 million, reflecting purchases of $401.8 million, partially offset by pay-downs, called securities and a temporary decline in fair value. Total loans increased by $103.8 million, as loan originations and purchases were partially offset by payoffs, pay-downs and PPP loans that were forgiven by the SBA. The ACL on loans decreased by $2.2 million from the end of 2020, reflecting improvement in forecasted economic conditions and continued stable asset quality metrics. Total deposits increased by $347.3 million, or 8%, with increases in in-market deposits and wholesale brokered time deposits. FHLB advances decreased by $185.3 million, or 31%, from December 31, 2020. Shareholders’ equity increased by $13.7 million, reflecting earnings net of dividend declarations and a decline 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. Securities I nvestment security activity is monitored by the Investment Committee, the members of which also sit on the Asset/Liability Committee (“ALCO”). Asset and liability management objectives are the primary influence on the Corporation’s investment activities. However, the Corporation also recognizes that there are certain specific risks inherent in investment activities. The securities portfolio is managed in accordance with regulatory guidelines and established internal corporate investment policies that provide limitations on specific risk factors such as market risk, credit risk and concentration, liquidity risk and operational risk to help monitor risks associated with investing in securities. Reports on the activities conducted by Investment Committee and the ALCO are presented to the Board of Directors on a regular basis. The Corporation’s securities portfolio is managed to generate interest income, to implement interest rate risk management strategies, and to provide a readily available source of liquidity for balance sheet management. Securities are designated as either available for sale, held to maturity or trading at the time of purchase. The Corporation does not 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. Debt securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized. -59- Management's Discussion and Analysis Determination of Fair Value The Corporation uses an independent pricing service to obtain quoted prices. The prices provided by the independent pricing service are generally based on observable market data in active markets. The determination of whether markets are active or inactive is based upon the level of trading activity for a particular security class. Management reviews the independent pricing service’s documentation to gain an understanding of the appropriateness of the pricing methodologies. Management also reviews the prices provided by the independent pricing service for reasonableness based upon current trading levels for similar securities. If the prices appear unusual, they are re-examined and the value is either confirmed or revised. In addition, management periodically performs independent price tests of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of June 30, 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. Securities Portfolio The carrying amounts of securities held are as follows: (Dollars in thousands) June 30, 2021 December 31, 2020 Amount % Amount % Available for Sale Debt Securities: Obligations of U.S. government-sponsored enterprises $184,255 18 % $131,669 15 % Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 845,036 80 740,305 83 Individual name issuer trust preferred debt securities 11,066 1 12,669 1 Corporate bonds 12,220 1 9,928 1 Total available for sale debt securities $1,052,577 100 % $894,571 100 % The securities portfolio stood at $1.1 billion as of June 30, 2021, or 18% 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. government agencies or U.S. government-sponsored enterprises. The securities portfolio increased by $158.0 million, or 18%, from the end of 2020, reflecting purchases of U.S. government agency and U.S. government sponsored debt securities, including mortgage-backed securities, totaling $401.8 million, with a weighted average yield of 1.67%. These purchases were partially offset by routine pay-downs on mortgage-backed securities and called securities, as well as a temporary decline in the fair value of available for sale securities. As of June 30, 2021, the carrying amount of available for sale debt securities included net unrealized gains of $916 thousand, 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. Loans Total loans amounted to $4.3 billion at June 30, 2021, up by $103.8 million from the end of 2020, reflecting growth in the residential real estate portfolio partially offset by a decline in the commercial loan portfolio. -60- Management's Discussion and Analysis The following is a summary of loans: (Dollars in thousands) June 30, 2021 December 31, 2020 Amount % Amount % Commercial: Commercial real estate (1) $1,669,624 39 % $1,633,024 39 % Commercial & industrial (2) 764,509 18 817,408 19 Total commercial 2,434,133 57 2,450,432 58 Residential Real Estate: Residential real estate (3) 1,590,389 37 1,467,312 35 Consumer: Home equity 254,802 6 259,185 6 Other (4) 20,476 — 19,061 1 Total consumer 275,278 6 278,246 7 Total loans $4,299,800 100 % $4,195,990 100 % (1) CRE consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. (2) C&I consists of loans to businesses and individuals, a portion of which are fully or partially collateralized by real estate. C&I also includes PPP loans. (3) Residential real estate consists of mortgage and homeowner construction loans secured by one- to four-family residential properties. (4) Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans. Washington Trust has processed loan payment deferral modifications, or "deferments", on 654 loans totaling $728 million since the beginning of the second quarter of 2020, in response to the COVID-19 pandemic. 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. 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 has been incorporated into the ACL on loans. Management continues to monitor active deferments through its quarterly watched asset list review. At June 30, 2021, we had active deferments on 22 loans totaling $93.4 million, or 2% of the outstanding balance of total loans, excluding PPP loan balances as of June 30, 2021. At July 31, 2021, active deferments remain on 13 loans totaling $54.0 million, or 1% of the outstanding balance of total loans, excluding PPP loans balances as of June 30, 2021. Commercial Loans The commercial loan portfolio represented 57% of total loans at June 30, 2021. In making commercial loans, we may occasionally solicit the participation of other banks. The Bank also participates in commercial loans originated by other banks. In such cases, these loans are individually underwritten by us using standards similar to those employed for our self-originated loans. Our participation in commercial loans originated by other banks amounted to $450.8 million and $408.8 million, respectively, at June 30, 2021 and December 31, 2020. Our participation in commercial loans originated by other banks also includes shared national credits. Shared national credits are defined as participation in loans or loan commitments of at least $100.0 million that are shared by three or more banks. Commercial loans fall into two major categories, commercial real estate and commercial and industrial loans. 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-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 -61- 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 June 30, 2021, up by $36.6 million, or 2%, from the balance at December 31, 2020. Included in CRE loans were construction and development loans of $135.6 million and $111.2 million, respectively, as of June 30, 2021 and December 31, 2020. For the six months ended June 30, 2021, CRE loan originations and construction advances were offset by payoffs and pay-downs of approximately $112 million. The following table presents a geographic summary of CRE loans by property location: (Dollars in thousands) June 30, 2021 December 31, 2020 Outstanding Balance % of Total Outstanding Balance % of Total Connecticut $635,974 38 % $649,919 40 % Massachusetts 471,426 28 468,947 29 Rhode Island 470,341 28 431,133 26 Subtotal 1,577,741 94 1,549,999 95 All other states 91,883 6 83,025 5 Total $1,669,624 100 % $1,633,024 100 % The following table presents a summary of CRE loans by property type segmentation: (Dollars in thousands) June 30, 2021 December 31, 2020 Count Outstanding Balance % of Total Count Outstanding Balance % of Total CRE Portfolio Segmentation: Multi-family dwelling 133 $536,928 32 % 137 $524,874 32 % Retail 127 342,983 21 136 339,569 21 Office 66 256,030 15 73 290,756 18 Hospitality 38 173,715 10 40 157,720 10 Healthcare 15 134,689 8 15 109,321 7 Industrial and warehouse 33 108,842 7 28 97,055 6 Commercial mixed use 21 40,980 2 22 42,405 3 Other 39 75,457 5 38 71,324 3 Total CRE loans 472 $1,669,624 100 % 489 $1,633,024 100 % Average CRE loan size $3,537 $3,340 Largest individual CRE loan outstanding $32,200 $32,200 The following table presents a summary of CRE loan deferments: (Dollars in thousands) July 31, 2021 June 30, 2021 December 31, 2020 Count Balance % of Outstanding Balance (1) Count Balance % of Outstanding Balance (1) Count Balance % of Outstanding Balance (2) Total CRE deferments 7 $49,198 3 % 14 $87,363 5 % 38 $176,132 11 % (1) CRE deferments as a percent of the outstanding CRE portfolio balance as of June 30, 2021. (2) CRE deferment as a percent of the outstanding CRE portfolio balance as of December 31, 2020. CRE loans with active deferrals remaining as of July 31, 2021 are principal only deferrals and continue to pay interest. These -62- Management's Discussion and Analysis deferrals are primarily in the hospitality, retail and healthcare industry segments, which are segments management previously identified as “at risk” of significant impact of the COVID-19 pandemic. Commercial and Industrial Loans (“C&I”) C&I loans amounted to $764.5 million at June 30, 2021, down by $52.9 million, or 6%, from the balance at December 31, 2020. In the six months ended June 30, 2021, approximately $102 million of PPP loans were originated and approximately $151 million of PPP loans were forgiven by the SBA. Excluding the net reduction in PPP loans of $49 million, C&I loans decreased by approximately $3.9 million. This decrease reflected payoffs and pay-downs of approximately $76 million, which were partially offset by new loan originations. Shared national credit balances outstanding included in the C&I loan portfolio totaled $48.2 million at June 30, 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 June 30, 2021. The following table presents a summary of C&I loan by industry segmentation: (Dollars in thousands) June 30, 2021 December 31, 2020 Count Outstanding Balance % of Total Count Outstanding Balance % of Total C&I Portfolio Segmentation: Healthcare and social assistance 224 $198,099 26 % 253 $200,217 24 % Manufacturing 123 68,908 9 146 88,802 11 Owner occupied and other real estate 230 68,480 9 268 74,309 9 Accommodation and food services 284 74,272 10 271 47,020 6 Educational services 46 50,872 7 53 64,969 8 Retail 162 56,969 7 192 63,895 8 Professional, scientific and technical 207 18,595 2 265 39,295 5 Finance and insurance 81 31,071 4 106 26,244 3 Entertainment and recreation 95 35,823 5 91 29,415 4 Information 26 26,542 3 32 28,394 3 Transportation and warehousing 45 22,967 3 42 24,061 3 Public administration 25 18,984 2 26 23,319 3 Other 724 92,927 13 772 107,468 13 Total C&I loans 2,272 $764,509 100 % 2,517 $817,408 100 % Average C&I loan size $336 $325 Largest individual C&I loan outstanding $19,111 $19,500 At June 30, 2021, we had no active deferrals on C&I loans. -63- Management's Discussion and Analysis PPP loans are included in the C&I portfolio. The following table presents a summary of PPP loans by industry segmentation: June 30, 2021 December 31, 2020 Count Outstanding Balance % of Total Count Outstanding Balance % of Total PPP Loans By Industry: Accommodation and food services 230 $37,089 25 % 209 $23,678 12 % Healthcare and social assistance 155 28,902 20 173 47,354 24 Manufacturing 70 9,844 7 89 23,321 12 Professional, scientific and technical 170 11,409 8 220 20,031 10 Retail 103 10,117 7 134 12,107 6 Educational services 28 3,352 2 32 9,681 5 Owner occupied and other real estate 80 3,349 2 115 9,241 5 Entertainment and recreation 65 3,839 3 61 3,386 2 Information 15 2,912 2 20 2,478 1 Transportation and warehousing 20 1,937 1 21 2,059 1 Finance and insurance 27 759 1 55 2,000 1 Public administration 6 445 — 4 483 — Other 544 33,016 22 573 43,961 21 Total PPP loans (included in the C&I loan portfolio) 1,513 $146,970 100 % 1,706 $199,780 100 % Average PPP loan size $97 $117 Net unamortized fees on PPP loans $4,874 $3,893 Residential Real Estate Loans The residential real estate loan portfolio represented 37% of total loans at June 30, 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. The table below presents residential real estate loan origination activity: (Dollars in thousands) Three Months Six Months Periods ended June 30, 2021 2020 2021 2020 Amount % of Total Amount % of Total Amount % of Total Amount % of Total Originations for retention in portfolio (1) $244,821 50 % $126,894 30 % $376,612 40 % $235,392 33 % Originations for sale to the secondary market (2) 244,562 50 299,321 70 553,887 60 482,543 67 Total $489,383 100 % $426,215 100 % $930,499 100 % $717,935 100 % (1) Includes the full commitment amount of homeowner construction loans. (2) Includes brokered loans (loans originated for others). -64- Management's Discussion and Analysis The table below presents residential real estate loan sales activity: (Dollars in thousands) Three Months Six Months Periods ended June 30, 2021 2020 2021 2020 Amount % of Total Amount % of Total Amount % of Total Amount % of Total Loans sold with servicing rights retained $235,280 81 % $246,945 81 % $461,925 79 % $291,443 62 % Loans sold with servicing rights released (1) 55,278 19 58,279 19 120,652 21 175,972 38 Total $290,558 100 % $305,224 100 % $582,577 100 % $467,415 100 % (1) Includes brokered loans (loans originated for others). Residential real estate loan origination, refinancing and sales activity increased year-over-year in response to declines in market interest rates. Loans are sold with servicing retained or released. Loans sold with servicing rights retained result in the capitalization of servicing rights. Loan servicing rights are included in other assets and are subsequently amortized as an offset to mortgage banking revenues over the estimated period of servicing. The net balance of capitalized servicing rights amounted to $10.5 million and $7.4 million, respectively, as of June 30, 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 $1.5 billion and $1.2 billion, respectively, as of June 30, 2021 and December 31, 2020. Residential real estate loans held in portfolio amounted to $1.6 billion at June 30, 2021, up by $123.1 million, or 8%, from the balance at December 31, 2020, reflecting a higher proportion of loans originated for portfolio, as well as purchases of $39.3 million of loans with a weighted average rate of 2.74%. The purchased loans were individually evaluated to our underwriting standards and are predominantly secured by properties in Massachusetts. The following is a geographic summary of residential real estate mortgages by property location: (Dollars in thousands) June 30, 2021 December 31, 2020 Amount % of Total Amount % of Total Massachusetts $1,097,453 69 % $994,800 68 % Rhode Island 343,035 22 331,713 23 Connecticut 129,142 8 122,102 8 Subtotal 1,569,630 99 1,448,615 99 All other states 20,759 1 18,697 1 Total (1) $1,590,389 100 % $1,467,312 100 % (1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $100.4 million and $131.8 million, respectively, as of June 30, 2021 and December 31, 2020. At June 30, 2021, we had active deferrals on 8 residential real estate loans totaling $6.0 million, which represented 0.4% of the total residential real estate portfolio balance as of June 30, 2021. The average size of residential real estate loans with active deferrals as of June 30, 2021 was approximately $753 thousand and these loans have an estimated LTV ratio of 46%. At July 31, 2021, active deferrals remain on 6 residential real estate loans totaling $4.8 million. Consumer Loans Consumer loans include home equity loans and lines of credit and personal installment loans. The consumer loan portfolio totaled $275.3 million at June 30, 2021, down by $3.0 million from December 31, 2020. Home equity lines of credit and home equity loans represented 93% of the total consumer portfolio at June 30, 2021. The Bank estimates that approximately 60% of the combined home equity lines of credit and home equity loan balances are first lien -65- Management's Discussion and Analysis positions or subordinate to other Washington Trust mortgages. Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $10.0 million at both June 30, 2021 and December 31, 2020. At June 30, 2021, we had no active deferrals on consumer loans. Asset Quality Nonperforming Assets Nonperforming assets include nonaccrual loans and property acquired through foreclosure or repossession. The following table presents nonperforming assets and additional asset quality data: (Dollars in thousands) Jun 30, 2021 Dec 31, 2020 Commercial: Commercial real estate $— $— Commercial & industrial 539 — Total commercial 539 — Residential Real Estate: Residential real estate 8,926 11,981 Consumer: Home equity 1,016 1,128 Other — 88 Total consumer 1,016 1,216 Total nonaccrual loans 10,481 13,197 Property acquired through foreclosure or repossession, net — — Total nonperforming assets $10,481 $13,197 Nonperforming assets to total assets 0.18 % 0.23 % Nonperforming loans to total loans 0.24 % 0.31 % Total past due loans to total loans 0.20 % 0.30 % Accruing loans 90 days or more past due $— $— Nonaccrual Loans During the six months ended June 30, 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 Six Months For the periods ended June 30, 2021 2020 2021 2020 Balance at beginning of period $12,983 $17,918 $13,197 $17,408 Additions to nonaccrual status 537 237 1,271 1,966 Loans returned to accruing status (874) (154) (877) (547) Loans charged-off (317) (325) (381) (960) Loans transferred to other real estate owned — — — (28) Payments, payoffs and other changes (1,848) (1,659) (2,729) (1,822) Balance at end of period $10,481 $16,017 $10,481 $16,017 -66- Management's Discussion and Analysis The following table presents additional detail on nonaccrual loans: (Dollars in thousands) June 30, 2021 December 31, 2020 Days Past Due Days Past Due Over 90 Under 90 Total % (1) Over 90 Under 90 Total % (1) Commercial: Commercial real estate $— $— $— — % $— $— $— — % Commercial & industrial 539 — 539 0.07 — — — — Total commercial 539 — 539 0.02 — — — — Residential Real Estate: Residential real estate 3,601 5,325 8,926 0.56 5,172 6,809 11,981 0.82 Consumer: Home equity 424 592 1,016 0.40 644 484 1,128 0.44 Other — — — — 88 — 88 0.46 Total consumer 424 592 1,016 0.37 732 484 1,216 0.44 Total nonaccrual loans $4,564 $5,917 $10,481 0.24 % $5,904 $7,293 $13,197 0.31 % (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 June 30, 2021. As of June 30, 2021, the composition of nonaccrual loans was 95% residential and consumer and 5% commercial, compared to 100% and 0%, respectively at December 31, 2020. Nonaccrual residential real estate mortgage loans amounted to $8.9 million at June 30, 2021, down by $3.1 million from the end of 2020, reflecting payoffs and to a lesser extent, loans returning to accruing status. As of June 30, 2021, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Connecticut and Rhode Island. Troubled Debt Restructurings A loan that has been modified or renewed is considered to be a TDR when two conditions are met: (1) the borrower is experiencing financial difficulty and (2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or a transaction with similar credit risk characteristics. These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection. TDRs are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term and full collection of principal and interest is in doubt. TDRs are reported as such for at least one year from the date of the restructuring. 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 June 30, 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. -67- Management's Discussion and Analysis The following table sets forth information on TDRs as of the dates indicated. The amounts below consist of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. Accrued interest is not included in the carrying amounts set forth below. (Dollars in thousands) Jun 30, 2021 Dec 31, 2020 Accruing TDRs Commercial: Commercial real estate $958 $1,792 Commercial & industrial 2,792 6,814 Total commercial 3,750 8,606 Residential Real Estate: Residential real estate 4,002 3,932 Consumer: Home equity 777 788 Other 12 14 Total consumer 789 802 Accruing TDRs 8,541 13,340 Nonaccrual TDRs Commercial: Commercial real estate — — Commercial & industrial 537 — Total commercial 537 — Residential Real Estate: Residential real estate 1,670 2,273 Consumer: Home equity 71 72 Other — — Total consumer 71 72 Nonaccrual TDRs 2,278 2,345 Total TDRs $10,819 $15,685 TDRs amounted to $10.8 million at June 30, 2021, down by $4.9 million from the end of 2020, reflecting payoffs. As of June 30, 2021, the composition of TDRs was 40% commercial and 60% residential and consumer, compared to 55% and 45%, respectively, as of December 31, 2020. The ACL included specific reserves for TDRs of $233 thousand at June 30, 2021, compared to $159 thousand at December 31, 2020. -68- Management's Discussion and Analysis Past Due Loans The following table presents past due loans by category: (Dollars in thousands) June 30, 2021 December 31, 2020 Amount % (1) Amount % (1) Commercial: Commercial real estate $— — % $265 0.02 % Commercial & industrial 540 0.07 3 — Total commercial 540 0.02 268 0.01 Residential Real Estate: Residential real estate 6,656 0.42 10,339 0.70 Consumer: Home equity 1,231 0.48 1,667 0.64 Other 28 0.14 118 0.62 Total consumer 1,259 0.46 1,785 0.64 Total past due loans $8,455 0.20 % $12,392 0.30 % (1) Percentage of past due loans to the total loans outstanding within the respective category. As of June 30, 2021, the composition of past due loans (loans past due 30 days or more) was 94% residential and consumer and 6% commercial, compared to 98% and 2%, respectively, at December 31, 2020. Total past due loans decreased by $3.9 million from the end of 2020. Total past due loans included $5.8 million of nonaccrual loans as of June 30, 2021, compared to $8.5 million as of December 31, 2020. All loans 90 days or more past due at June 30, 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 include classified accruing commercial loans that were less than 90 days past due at June 30, 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. As of both June 30, 2021 and December 31, 2020, there were no potential problem loans. In addition, management continues to monitor active loan deferments resulting from the COVID-19 pandemic through its quarterly watched asset list review. 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 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 value of the loan. The Corporation does not recognize a recovery when new appraisals indicate a subsequent increase in value. -69- Management's Discussion and Analysis 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) June 30, 2021 December 31, 2020 Loans Related Allowance Allowance / Loans Loans Related Allowance Allowance / Loans Individually analyzed loans $13,373 $473 3.54 % $18,252 $379 2.08 % Pooled (collectively evaluated) loans 4,286,427 41,406 0.97 4,177,738 43,727 1.05 Total $4,299,800 $41,879 0.97 % $4,195,990 $44,106 1.05 % Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components. The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics. The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments. The ACL for individually analyzed loans is measured using a DCF method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan was collateral dependent, at the fair value of the collateral. The ACL for pooled loans is measured utilizing a DCF methodology to estimate credit losses for each pooled portfolio segment. The methodology incorporates a probability of default and loss given default framework. Loss given default is estimated based on historical credit loss experience. Probability of default is estimated using a regression model that incorporates econometric factors. Management utilizes forecasted econometric factors with a one-year reasonable and supportable forecast period and one-year straight-line reversion period in order to estimate the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, prepayment speeds and remaining life of the loan to estimate a reserve for each loan. The sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived. Quantitative loss factors for pooled loans are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. The ACL on loans amounted to $41.9 million at June 30, 2021, down by $2.2 million from the balance at December 31, 2020. As a result of improvement in forecasted economic conditions and continued stable asset quality metrics, there was no provision for credit losses for the three months ended June 30, 2021 and a negative provision for credit losses (or a benefit) of $2.0 million for the six months ended June 30, 2021. Net charge-offs amounted to $258 thousand and $276 thousand, respectively, for the three and six months ended June 30, 2021. The ACL on loans as a percentage of total loans, also known as the reserve coverage ratio, was 0.97% at June 30, 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. -70- Management's Discussion and Analysis 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) June 30, 2021 December 31, 2020 Allocated ACL ACL to Loans Loans to Total Portfolio (1) Allocated ACL ACL to Loans Loans to Total Portfolio (1) Commercial: Commercial real estate $21,450 1.28 % 39 % $22,065 1.35 % 39 % Commercial & industrial 11,717 1.53 18 12,228 1.50 19 Total commercial 33,167 1.36 57 34,293 1.40 58 Residential Real Estate: Residential real estate 6,877 0.43 37 8,042 0.55 35 Consumer: Home equity 1,340 0.53 6 1,300 0.50 6 Other 495 2.42 — 471 2.47 1 Total consumer 1,835 0.67 6 1,771 0.64 7 Total allowance for credit losses on loans at end of period $41,879 0.97 % 100 % $44,106 1.05 % 100 % (1) Percentage of loans outstanding in respective category to total loans outstanding. Sources of Funds Our sources of funds include deposits, brokered time deposits, FHLB advances, other borrowings and proceeds from the sales, maturities and payments of loans and investment securities. The Corporation uses funds to originate and purchase loans, purchase investment securities, conduct operations, expand the branch network and pay dividends to shareholders. Deposits The Corporation offers a wide variety of deposit products to consumer and business customers. Deposits provide an important source of funding for the Bank as well as an ongoing stream of fee revenue. The Bank is a participant in the Demand Deposit Marketplace program, Insured Cash Sweep program and the Certificate of Deposit Account Registry Service program. The Bank uses these deposit sweep services to place customer and client funds into interest-bearing demand accounts, money market accounts, and/or time deposits issued by other participating banks. Customer and client funds are placed at one or more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a program participant, we receive reciprocal amounts of deposits from other participating banks. We consider these reciprocal deposit balances to be in-market deposits as distinguished from traditional out-of-market wholesale brokered deposits. The following table presents a summary of deposits: (Dollars in thousands) Change June 30, 2021 December 31, 2020 $ % Noninterest-bearing demand deposits $901,801 $832,287 $69,514 8 % Interest-bearing demand deposits 174,165 174,290 (125) — NOW accounts 774,693 698,706 75,987 11 Money market accounts 941,511 910,167 31,344 3 Savings accounts 524,155 466,507 57,648 12 Time deposits (in-market) 677,061 704,855 (27,794) (4) Total in-market deposits 3,993,386 3,786,812 206,574 5 Wholesale brokered time deposits 732,273 591,541 140,732 24 Total deposits $4,725,659 $4,378,353 $347,306 8 % -71- Management's Discussion and Analysis Total deposits amounted to $4.7 billion at June 30, 2021, up by $347.3 million, or 8%, from December 31, 2020. This included an increase of $140.7 million, or 24%, in out-of-market brokered time deposits. Excluding out-of-market brokered time deposits, in-market deposits were up by $206.6 million, or 5%, from the balance at December 31, 2020. In-market deposit growth reflected a continuation of customer 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. These were also partially offset by seasonal outflows of various institutional and governmental depositors based on their underlying business cycles. Borrowings Borrowings primarily consist of FHLB advances, which are used as a source of funding for liquidity and interest rate risk management purposes. FHLB advances totaled $408.6 million at June 30, 2021, down by $185.3 million, or 31%, 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 Liquidity Management Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 68% of total average assets in the six months ended June 30, 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. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and brokered time deposits), cash flows from the Corporation’s securities portfolios and loan repayments. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs, although management has no intention to do so at this time. The Corporation has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management employs stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as usual” cash flows. In management’s estimation, risks are concentrated in two major categories: (1) runoff of in-market deposit balances; and (2) unexpected drawdown of loan commitments. Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our stress test scenarios, therefore, emphasize attempts to quantify deposits at risk over selected time horizons. In addition to these unexpected outflow risks, several other “business as usual” factors enter into the calculation of the adequacy of contingent liquidity including: (1) payment proceeds from loans and investment securities; (2) maturing debt obligations; and (3) maturing time deposits. The Corporation has established collateralized borrowing capacity with the FRB and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business. Borrowing capacity is impacted by the amount and type of assets available to be pledged. The table below presents unused funding capacity by source as of the dates indicated: (Dollars in thousands) June 30, 2021 December 31, 2020 Additional Funding Capacity: Federal Home Loan Bank of Boston (1) $1,218,197 $969,735 Federal Reserve Bank of Boston (2) 19,728 20,678 Unencumbered investment securities 711,185 594,998 Total $1,949,110 $1,585,411 (1) As of June 30, 2021 and December 31, 2020, loans with a carrying value of $2.0 billion and $2.1 billion, respectively, and securities available for sale with carrying values of $131.0 million and $128.6 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity. (2) As of June 30, 2021 and December 31, 2020, loans with a carrying value of $10.1 million and $12.6 million, respectively, and securities available for sale with a carrying value of $15.4 million and $14.9 million, respectively, were pledged to the FRB for the discount window resulting in this additional unused borrowing capacity. -72- Management's Discussion and Analysis 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 six months ended June 30, 2021. 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 $59.4 million for the six months ended June 30, 2021 and largely included net income of $37.9 million and mortgage banking related adjustments to reconcile net income to net cash provided by operating activities. Net cash used in investing activities totaled $273.1 million for the six months ended June 30, 2021, reflecting outflows to fund purchases of debt securities, as well as the net increase in and purchases of loans. These outflows were partially offset by net inflows from maturities, calls and principal payments of securities. For the six months ended June 30, 2021, net cash provided by financing activities amounted to $143.6 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 $547.9 million at June 30, 2021, up by $13.7 million from December 31, 2020. The increase included net income of $37.9 million, partially offset by $18.3 million in dividend declarations and a decline of $7.7 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. The Corporation declared a quarterly dividend of 52 cents per share for the three months ended June 30, 2021, compared to 51 cents per share declared for the same period in 2020. On a year-to-date basis, dividend declarations totaled $1.04 per share in 2021, compared to $1.02 per share in 2020. The ratio of total equity to total assets amounted to 9.36% at June 30, 2021 compared to a ratio of 9.35% at December 31, 2020. Book value per share at June 30, 2021 and December 31, 2020 amounted to $31.63 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 13.65% at June 30, 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 In the normal course of business, the Corporation engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. Such transactions are used to meet the financing needs of its customers and to manage the exposure to fluctuations in interest rates. These financial transactions include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers, commitments to extend credit, and standby letters of credit are similar to those used for loans. Interest rate risk management contracts with other counterparties are generally subject to bilateral collateralization terms. For additional information on derivative financial instruments and financial instruments with off-balance sheet risk see Notes 10 and 18 to the Unaudited Consolidated Financial Statements. Asset/Liability Management and Interest Rate Risk Interest rate risk is the risk of loss to future earnings due to changes in interest rates. The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. Periodically, the ALCO reports on the status of liquidity and interest rate risk matters to the Bank’s Board of Directors. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with the Corporation’s liquidity, capital adequacy, growth, risk and profitability goals. -73- Management's Discussion and Analysis The Corporation utilizes the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, off-balance sheet interest rate contracts and the pricing and structure of loans and deposits, to manage interest rate risk. The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract. The notional amount of the interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk. See Notes 10 and 18 to the Unaudited Consolidated Financial Statements for additional information. The ALCO uses income simulation to measure interest rate risk inherent in the Corporation’s on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 12-month horizon, a 13- to 24-month horizon and a 60-month horizon. The simulations assume that the size and general composition of the Corporation’s balance sheet remain static over the simulation horizons, with the exception of certain deposit mix shifts from low-cost core savings to higher-cost time deposits in selected interest rate scenarios. Additionally, the simulations take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency. The ALCO reviews simulation results to determine whether the Corporation’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. As of June 30, 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. In addition to measuring the change in net interest income as compared to an unchanged rate scenario, the ALCO also measures the trend of both net interest income and net interest margin over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios. The ALCO regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve of up to 500 basis points, as well as parallel changes in interest rates of up to 400 basis points. Because income simulations assume that the Corporation’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts. The following table sets forth the estimated change in net interest income from an unchanged rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on- and off-balance sheet financial instruments as of June 30, 2021 and December 31, 2020. 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. Further, deposits are assumed to have certain minimum rate levels below which they will not fall. It should be noted that the rate scenarios shown do not necessarily reflect the ALCO’s view of the “most likely” change in interest rates over the periods indicated. June 30, 2021 December 31, 2020 Months 1 - 12 Months 13 - 24 Months 1 - 12 Months 13 - 24 100 basis point rate decrease (1.61) % (5.29) % (2.05) % (4.73) % 100 basis point rate increase 4.11 5.31 5.56 7.89 200 basis point rate increase 8.21 9.75 11.00 15.05 300 basis point rate increase 12.21 13.35 16.47 21.15 The ALCO estimates that the negative exposure of net interest income to falling rates as compared to an unchanged rate scenario results from a more rapid decline in earning asset yields compared to rates paid on deposits. If market interest rates were to fall and remain lower for a sustained period, certain core savings and time deposit rates could decline more slowly and by a lesser amount than other market interest rates. Asset yields would likely decline more rapidly than deposit costs as current asset holdings mature or reprice, since cash flow from mortgage-related prepayments and redemption of callable securities would increase as market interest rates fall. -74- Management's Discussion and Analysis The overall positive exposure of net interest income to rising rates as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term. For simulation purposes, deposit rate changes are anticipated to lag behind other market interest rates in both timing and magnitude. The 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 from December 31, 2020 as shown in the above table was largely attributable to an interest rate swap designated as a cash flow hedge that was executed in the second quarter of 2021 to hedge the interest rate risk associated with a pool of variable rate commercial loans. The receive-fixed, pay-floating interest rate swap reduced the positive exposure to rising rates, while it will enhance earnings in the current rate environment and mitigate risk in declining rate scenarios. The interest rate swap effectively fixes a portion of variable rate loan assets. 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. Over time, the repricing, maturity and prepayment characteristics of financial instruments and the composition of the Corporation’s balance sheet may change to a different degree than estimated. Simulation modeling assumes a static balance sheet, with the exception of certain modeled deposit mix shifts from low-cost core savings deposits to higher-cost time deposits in rising rate scenarios as noted above. As market interest rates have declined, the banking industry has attracted low-cost core savings deposits. The ALCO recognizes that a portion of these increased levels of low-cost balances could shift into higher yielding alternatives in the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above. Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment, which may cause interest rate sensitivity to differ from the results as presented. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The relationship between short-term interest rate changes and core deposit rate and balance changes may differ from the ALCO’s estimates used in income simulation. It should also be noted that the static balance sheet assumption does not necessarily reflect the Corporation’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior. Mortgage-backed securities and residential real estate loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income. The Corporation also monitors the potential change in market value of its available for sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to the Corporation’s capital position. Results are calculated using industry-standard analytical techniques and securities data. -75- Management's Discussion and Analysis The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of June 30, 2021 and December 31, 2020 resulting from immediate parallel rate shifts: (Dollars in thousands) Security Type Down 100 Basis Points Up 200 Basis Points U.S. government-sponsored enterprise securities (callable) $3,126 ($17,606) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 26,820 (93,759) Trust preferred debt and other corporate debt securities (163) 127 Total change in market value as of June 30, 2021 $29,783 ($111,238) Total change in market value as of December 31, 2020 $13,481 ($69,538)