WASHINGTON TRUST BANCORP INC 10-Q

Item 1. Financial Statements Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) (Dollars in thousands, except par value) September 30, 2021 December 31, 2020 Assets: Cash and due from banks $ 297,039 $ 194,143 Short-term investments 3,349 8,125 Mortgage loans held for sale, at fair value 48,705 61,614 Available for sale debt securities, at fair value (amortized cost of $ 1,049,044 , net of allowance for credit losses on securities of $ 0 at September 30, 2021; and amortized cost of $ 881,570 ; net of allowance for credit losses on securities of $ 0 at December 31, 2020) 1,045,833 894,571 Federal Home Loan Bank stock, at cost 15,094 30,285 Loans: Total loans 4,286,404 4,195,990 Less: allowance for credit losses on loans 41,711 44,106 Net loans 4,244,693 4,151,884 Premises and equipment, net 28,488 28,870 Operating lease right-of-use assets 27,518 29,521 Investment in bank-owned life insurance 92,974 84,193 Goodwill 63,909 63,909 Identifiable intangible assets, net 5,631 6,305 Other assets 129,410 159,749 Total assets $ 6,002,643 $ 5,713,169 Liabilities: Deposits: Noninterest-bearing deposits $ 950,974 $ 832,287 Interest-bearing deposits 4,107,168 3,546,066 Total deposits 5,058,142 4,378,353 Federal Home Loan Bank advances 222,592 593,859 Junior subordinated debentures 22,681 22,681 Operating lease liabilities 29,810 31,717 Other liabilities 114,100 152,364 Total liabilities 5,447,325 5,178,974 Commitments and contingencies (Note 18) Shareholders’ Equity: Common stock of $ .0625 par value; authorized 60,000,000 shares; 17,363,457 shares issued and 17,320,449 shares outstanding at September 30, 2021 and 17,363,457 shares issued and 17,265,337 shares outstanding at December 31, 2020 1,085 1,085 Paid-in capital 126,265 125,610 Retained earnings 447,566 418,246 Accumulated other comprehensive loss ( 18,128 ) ( 7,391 ) Treasury stock, at cost; 43,008 shares at September 30, 2021 and 98,120 shares at December 31, 2020 ( 1,470 ) ( 3,355 ) Total shareholders’ equity 555,318 534,195 Total liabilities and shareholders’ equity $ 6,002,643 $ 5,713,169 The accompanying notes are an integral part of these unaudited consolidated financial statements. -3- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Income (unaudited) (Dollars and shares in thousands, except per share amounts) Three Months Nine Months Periods ended September 30, 2021 2020 2021 2020 Interest income: Interest and fees on loans $ 35,691 $ 34,925 $ 104,670 $ 110,938 Interest on mortgage loans held for sale 298 468 1,144 1,193 Taxable interest on debt securities 3,683 4,870 10,366 16,181 Dividends on Federal Home Loan Bank stock 95 532 338 1,826 Other interest income 56 39 121 424 Total interest and dividend income 39,823 40,834 116,639 130,562 Interest expense: Deposits 2,789 5,532 9,413 21,180 Federal Home Loan Bank advances 872 3,354 3,253 13,501 Junior subordinated debentures 92 135 278 519 Other interest expense — 159 — 161 Total interest expense 3,753 9,180 12,944 35,361 Net interest income 36,070 31,654 103,695 95,201 Provision for credit losses — 1,325 ( 2,000 ) 10,561 Net interest income after provision for credit losses 36,070 30,329 105,695 84,640 Noninterest income: Wealth management revenues 10,455 8,954 30,778 26,248 Mortgage banking revenues 6,373 12,353 24,294 33,300 Card interchange fees 1,265 1,161 3,714 3,139 Service charges on deposit accounts 673 598 1,917 1,975 Loan related derivative income 728 1,264 2,370 3,818 Income from bank-owned life insurance 618 567 1,781 1,922 Other income 408 571 2,233 1,313 Total noninterest income 20,520 25,468 67,087 71,715 Noninterest expense: Salaries and employee benefits 22,162 21,892 65,771 60,824 Outsourced services 3,294 3,160 9,711 8,944 Net occupancy 2,134 2,012 6,304 5,940 Equipment 977 934 2,946 2,806 Legal, audit and professional fees 767 1,252 2,042 2,733 FDIC deposit insurance costs 482 392 1,201 1,488 Advertising and promotion 559 384 1,341 829 Amortization of intangibles 223 228 674 688 Debt prepayment penalties — — 4,230 — Other expenses 1,922 2,090 6,025 7,023 Total noninterest expense 32,520 32,344 100,245 91,275 Income before income taxes 24,070 23,453 72,537 65,080 Income tax expense 5,319 5,131 15,855 13,817 Net income $ 18,751 $ 18,322 $ 56,682 $ 51,263 Net income available to common shareholders $ 18,697 $ 18,285 $ 56,520 $ 51,154 Weighted average common shares outstanding - basic 17,320 17,260 17,303 17,287 Weighted average common shares outstanding - diluted 17,444 17,317 17,451 17,369 Per share information: Basic earnings per common share $ 1.08 $ 1.06 $ 3.27 $ 2.96 Diluted earnings per common share $ 1.07 $ 1.06 $ 3.24 $ 2.95 The accompanying notes are an integral part of these unaudited consolidated financial statements. -4- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (unaudited) (Dollars in thousands) Three Months Nine Months Periods ended September 30, 2021 2020 2021 2020 Net income $ 18,751 $ 18,322 $ 56,682 $ 51,263 Other comprehensive income (loss), net of tax: Net change in fair value of available for sale debt securities ( 3,137 ) ( 3,505 ) ( 12,322 ) 7,493 Net change in fair value of cash flow hedges ( 403 ) 154 ( 36 ) ( 888 ) Net change in defined benefit plan obligations 540 410 1,621 1,229 Total other comprehensive (loss) income, net of tax ( 3,000 ) ( 2,941 ) ( 10,737 ) 7,834 Total comprehensive income $ 15,751 $ 15,381 $ 45,945 $ 59,097 The accompanying notes are an integral part of these unaudited consolidated financial statements. -5- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (unaudited) (Dollars and shares in thousands) For the three months ended September 30, 2021 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at June 30, 2021 17,320 $ 1,085 $ 125,442 $ 437,927 ($ 15,128 ) ($ 1,470 ) $ 547,856 Net income — — — 18,751 — — 18,751 Total other comprehensive loss, net of tax — — — — ( 3,000 ) — ( 3,000 ) Cash dividends declared ($ 0.52 per share) — — — ( 9,112 ) — — ( 9,112 ) Share-based compensation — — 823 — — — 823 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered — — — — — — — Balance at September 30, 2021 17,320 $ 1,085 $ 126,265 $ 447,566 ($ 18,128 ) ($ 1,470 ) $ 555,318 For the nine months ended September 30, 2021 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at December 31, 2020 17,265 $ 1,085 $ 125,610 $ 418,246 ($ 7,391 ) ($ 3,355 ) $ 534,195 Net income — — — 56,682 — — 56,682 Total other comprehensive loss, net of tax — — — — ( 10,737 ) — ( 10,737 ) Cash dividends declared ($ 1.56 per share) — — — ( 27,362 ) — — ( 27,362 ) Share-based compensation — — 2,705 — — — 2,705 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 55 — ( 2,050 ) — — 1,885 ( 165 ) Balance at September 30, 2021 17,320 $ 1,085 $ 126,265 $ 447,566 ($ 18,128 ) ($ 1,470 ) $ 555,318 The accompanying notes are an integral part of these unaudited consolidated financial statements. -6- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (unaudited) (Dollars and shares in thousands) For the three months ended September 30, 2020 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at June 30, 2020 17,260 $ 1,085 $ 123,684 $ 399,386 ($ 462 ) ($ 3,530 ) $ 520,163 Net income — — — 18,322 — — 18,322 Total other comprehensive loss, net of tax — — — — ( 2,941 ) — ( 2,941 ) Cash dividends declared ($ 0.51 per share) — — — ( 8,935 ) — — ( 8,935 ) Share-based compensation — — 1,083 — — — 1,083 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered — — 1 — — — 1 Balance at September 30, 2020 17,260 $ 1,085 $ 124,768 $ 408,773 ($ 3,403 ) ($ 3,530 ) $ 527,693 For the nine months ended September 30, 2020 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Treasury Stock Total Balance at December 31, 2019 17,363 $ 1,085 $ 123,281 $ 390,363 ($ 11,237 ) $ — $ 503,492 Cumulative effect of change in accounting principle - ASC 326 — — — ( 6,108 ) — — ( 6,108 ) Net income — — — 51,263 — — 51,263 Total other comprehensive income, net of tax — — — — 7,834 — 7,834 Cash dividends declared ($ 1.53 per share) — — — ( 26,745 ) — — ( 26,745 ) Share-based compensation — — 2,696 — — — 2,696 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 22 — ( 1,209 ) — — 792 ( 417 ) Treasury stock purchased under the 2019 Stock Repurchase Program ( 125 ) — — — — ( 4,322 ) ( 4,322 ) Balance at September 30, 2020 17,260 $ 1,085 $ 124,768 $ 408,773 ($ 3,403 ) ($ 3,530 ) $ 527,693 The accompanying notes are an integral part of these unaudited consolidated financial statements. -7- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statement of Cash Flows (unaudited) (Dollars in thousands) Nine months ended September 30, 2021 2020 Cash flows from operating activities: Net income $ 56,682 $ 51,263 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses ( 2,000 ) 10,561 Depreciation of premises and equipment 2,549 2,318 Net amortization of premiums and discounts on debt securities and loans 2,742 4,101 Amortization of intangibles 674 688 Share-based compensation 2,705 2,696 Tax benefit (expense) from stock option exercises and other equity awards 135 ( 70 ) Income from bank-owned life insurance ( 1,781 ) ( 1,922 ) Net gains on loan sales, including changes in fair value ( 24,093 ) ( 33,799 ) Proceeds from sales of loans, net 706,253 586,677 Loans originated for sale ( 634,451 ) ( 599,789 ) Decrease (increase) in operating lease right-of-use assets 2,003 ( 3,069 ) (Decrease) increase in operating lease liabilities ( 1,907 ) 3,151 Decrease (increase) in other assets 34,107 ( 67,262 ) (Decrease) increase in other liabilities ( 36,698 ) 62,634 Net cash provided by operating activities 106,920 18,178 Cash flows from investing activities: Purchases of: Available for sale debt securities: Mortgage-backed ( 297,810 ) ( 247,957 ) Available for sale debt securities: Other ( 221,166 ) ( 129,000 ) Maturities, calls and principal payments of: Available for sale debt securities: Mortgage-backed 274,169 228,268 Available for sale debt securities: Other 70,500 140,500 Net redemption of Federal Home Loan Bank stock 15,191 13,384 Net increase in loans ( 80,021 ) ( 332,850 ) Purchases of loans ( 41,546 ) ( 51,081 ) Proceeds from the sale of property acquired through foreclosure or repossession — 1,107 Purchases of premises and equipment ( 2,166 ) ( 1,331 ) Purchases of bank-owned life insurance ( 7,000 ) — Proceeds from surrender of bank-owned life insurance — 787 Net cash used in investing activities ( 289,849 ) ( 378,173 ) Cash flows from financing activities: Net increase in deposits 679,789 786,811 Proceeds from Federal Home Loan Bank advances 1,173,000 1,592,500 Repayment of Federal Home Loan Bank advances ( 1,544,267 ) ( 2,020,096 ) Proceeds from Payment Protection Program Lending Facility — 200,628 Repayment of Payment Protection Program Lending Facility — ( 94,882 ) Treasury stock purchased — ( 4,322 ) Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered ( 165 ) ( 417 ) Cash dividends paid ( 27,308 ) ( 26,667 ) Net cash provided by financing activities 281,049 433,555 Net increase in cash and cash equivalents 98,120 73,560 Cash and cash equivalents at beginning of period 202,268 138,455 Cash and cash equivalents at end of period $ 300,388 $ 212,015 Noncash Activities: Loans charged off $ 630 $ 1,072 Loans transferred to property acquired through foreclosure or repossession — 28 Supplemental Disclosures: Interest payments $ 14,675 $ 36,868 Income tax payments 15,551 15,039 The accompanying notes are an integral part of these unaudited consolidated financial statements. -8- Condensed Notes to Unaudited Consolidated Financial Statements Note 1 - Basis of Presentation Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company that has elected to be a financial holding company. The Bancorp’s subsidiaries include The Washington Trust Company, of Westerly (the “Bank”), a Rhode Island chartered financial institution founded in 1800, and Weston Securities Corporation (“WSC”). Through its subsidiaries, the Bancorp offers a complete product line of financial services, 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. The Unaudited Consolidated Financial Statements include the accounts of the Bancorp and its subsidiaries (collectively the “Corporation” or “Washington Trust”). All intercompany balances and transactions have been eliminated in consolidation. The Bancorp also owns the common stock of two capital trusts, which have issued trust preferred securities. These capital trusts are variable interest entities in which the Bancorp is not the primary beneficiary and, therefore, are not consolidated. The capital trust’s only assets are junior subordinated debentures issued by the Bancorp, which were acquired by the capital trusts using the proceeds from the issuance of the trust preferred securities and common stock. The Bancorp’s equity interest investment in the capital trusts, which is classified in other assets, and the junior subordinated debentures are included in the Unaudited Consolidated Balance Sheets. Interest expense on the junior subordinated debentures is included in the Unaudited Consolidated Statements of Income. The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change are the determination of the allowance for credit losses on loans, the valuation of goodwill and identifiable intangible assets and the accounting for defined benefit pension plans. The Unaudited Consolidated Financial Statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying Unaudited Consolidated Financial Statements have been included. Interim results are not necessarily indicative of the results of the entire year. The accompanying Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Note 2 - Recently Issued Accounting Pronouncements Accounting Standards Adopted in 2021 Income Taxes - ASC 745 Accounting Standards Update No. 2019-12, “Income Taxes - Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), was issued in December 2019 to simplify the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective application through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The Corporation adopted the provisions of ASU 2019-12 effective January 1, 2021 and the adoption did not have a material impact on the Corporation’s consolidated financial statements. Receivables - ASC 310 Accounting Standards Update No. 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs” (“ASU 2020-08”), was issued in October 2020 to provide further clarification and update the previously issued guidance in ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20: Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”). ASU 2017-08 shortened the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. The Corporation early adopted the provisions of ASU 2017-08, effective January 1, 2017. ASU 2020-08 requires that at each reporting period, to the extent that the amortized cost of an individual callable debt security exceeds the amount -9- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) repayable by the issuer at the next call date, the excess premium shall be amortized to the next call date. ASU 2020-08 is effective for fiscal years ending after December 15, 2020 and early adoption is not permitted. The provisions under ASU 2020-08 are required to be applied prospectively. The Corporation adopted the provisions of ASU 2020-08 effective January 1, 2021 and the adoption did not have an impact on the Corporation’s consolidated financial statements. Accounting Standards Pending Adoption There were no recently issued accounting pronouncements, applicable to the Corporation, that are pending adoption as of September 30, 2021. Note 3 - Cash and Due from Banks The Bank maintains certain average reserve balances to meet the requirements of the Federal Reserve Bank of Boston (“FRB”). Some or all of these reserve requirements may be satisfied with vault cash. Effective March 26, 2020, the FRB reduced the reserve requirement ratios to zero percent to eliminate the need for depository institutions, such as the Bank, to maintain balances in accounts at the FRB to satisfy reserve requirements. As a result, there were no reserve balances included in cash and due from banks in the Unaudited Consolidated Balance Sheets at September 30, 2021 and December 31, 2020. Cash and due from banks included interest-bearing deposits in other banks of $ 260.3 million and $ 138.4 million, respectively, at September 30, 2021 and December 31, 2020. Cash and due from banks balances also include cash collateral pledged to derivative counterparties. See Note 10 for additional disclosure regarding cash collateral pledged to derivative counterparties. Note 4 - Securities Available for Sale Debt Securities The following tables present the amortized cost, gross unrealized holding gains, gross unrealized holding losses, allowance for credit losses (“ACL”) on securities and fair value of securities by major security type and class of security: (Dollars in thousands) September 30, 2021 Amortized Cost Unrealized Gains Unrealized Losses Allowance for Credit Losses Fair Value Available for Sale Debt Securities: Obligations of U.S. government-sponsored enterprises $ 181,044 $ 63 ($ 2,502 ) $ — $ 178,605 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 843,485 9,532 ( 9,315 ) — 843,702 Individual name issuer trust preferred debt securities 11,363 6 ( 213 ) — 11,156 Corporate bonds 13,152 — ( 782 ) — 12,370 Total available for sale debt securities $ 1,049,044 $ 9,601 ($ 12,812 ) $ — $ 1,045,833 (Dollars in thousands) December 31, 2020 Amortized Cost Unrealized Gains Unrealized Losses Allowance for Credit Losses Fair Value Available for Sale Debt Securities: Obligations of U.S. government-sponsored enterprises $ 131,186 $ 628 ($ 145 ) $ — $ 131,669 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 725,890 14,942 ( 527 ) — 740,305 Individual name issuer trust preferred debt securities 13,341 — ( 672 ) — 12,669 Corporate bonds 11,153 — ( 1,225 ) — 9,928 Total available for sale debt securities $ 881,570 $ 15,570 ($ 2,569 ) $ — $ 894,571 Amortized cost of available for sale debt securities excludes accrued interest receivable of $ 2.2 million and $ 2.4 million, respectively, as of September 30, 2021 and December 31, 2020. Accrued interest receivable is included in other assets in the -10- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Unaudited Consolidated Balance Sheets. As of September 30, 2021 and December 31, 2020, debt securities with a fair value of $ 344.3 million and $ 291.9 million, respectively, were pledged as collateral for Federal Home Loan Bank of Boston (“FHLB”) borrowings, potential borrowings with the FRB’s discount window, certain public deposits and for other purposes. See Note 8 for additional disclosure on FHLB borrowings. The schedule of maturities of available for sale debt securities is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments. All other debt securities are included based on contractual maturities. Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. (Dollars in thousands) September 30, 2021 Amortized Cost Fair Value Due in one year or less $ 177,689 $ 177,731 Due after one year to five years 410,399 410,341 Due after five years to ten years 366,885 364,137 Due after ten years 94,071 93,624 Total debt securities $ 1,049,044 $ 1,045,833 Included in the above table are debt securities with an amortized cost balance of $ 204.8 million and a fair value of $ 201.3 million at September 30, 2021 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 3 years to 15 years, with call features ranging from 1 month to 1 year. Assessment of Available for Sale Debt Securities for Impairment Management assesses the decline in fair value of investment securities on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, vol atility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates both qualitative and quantitative factors to assess whether an impairment exists. A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a debt security placed on nonaccrual is reversed against interest income. There were no debt securities on nonaccrual status at September 30, 2021 and 2020 and, therefore there was no accrued interest related to debt securities reversed against interest income for the three and nine months ended September 30, 2021 and 2020. The following tables summarize available for sale debt securities in an unrealized loss position, for which an allowance for credit losses on securities has not been recorded, segregated by length of time that the securities have been in a continuous unrealized loss position: (Dollars in thousands) Less than 12 Months 12 Months or Longer Total September 30, 2021 # Fair Value Unrealized Losses # Fair Value Unrealized Losses # Fair Value Unrealized Losses Obligations of U.S. government-sponsored enterprises 14 $ 167,238 ($ 2,499 ) 1 $ 497 ($ 3 ) 15 $ 167,735 ($ 2,502 ) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 36 506,511 ( 8,472 ) 12 46,265 ( 843 ) 48 552,776 ( 9,315 ) Individual name issuer trust preferred debt securities — — — 3 9,157 ( 213 ) 3 9,157 ( 213 ) Corporate bonds — — — 4 12,370 ( 782 ) 4 12,370 ( 782 ) Total 50 $ 673,749 ($ 10,971 ) 20 $ 68,289 ($ 1,841 ) 70 $ 742,038 ($ 12,812 ) -11- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (Dollars in thousands) Less than 12 Months 12 Months or Longer Total December 31, 2020 # Fair Value Unrealized Losses # Fair Value Unrealized Losses # Fair Value Unrealized Losses Obligations of U.S. government-sponsored enterprises 6 $ 63,856 ($ 145 ) — $ — $ — 6 $ 63,856 ($ 145 ) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 16 107,283 ( 527 ) — — — 16 107,283 ( 527 ) Individual name issuer trust preferred debt securities — — — 5 12,669 ( 672 ) 5 12,669 ( 672 ) Corporate bonds — — — 3 9,928 ( 1,225 ) 3 9,928 ( 1,225 ) Total 22 $ 171,139 ($ 672 ) 8 $ 22,597 ($ 1,897 ) 30 $ 193,736 ($ 2,569 ) Deterioration in credit quality of the underlying issuers of the securities, deterioration in the condition of the financial services industry, worsening of the current economic environment, or declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as credit losses, and the Corporation may incur write-downs. Obligations of U.S. Government Agency and U.S. Government-Sponsored Enterprise Securities, including Mortgage-Backed Securities The gross unrealized losses on U.S. government agency and U.S. government-sponsored debt securities, including mortgage-backed securities, were primarily attributable to relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at September 30, 2021. Management believes that the unrealized losses on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no allowance for credits losses on securities was recorded at September 30, 2021. Individual Name Issuer Trust Preferred Debt Securities Included in debt securities in an unrealized loss position at September 30, 2021 were three trust preferred securities issued by three individual companies in the banking sector. Based on the information available through the filing date of this report, all individual name issuer trust preferred debt securities held in our portfolio continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date, as well as credit rating changes between the reporting period date and the filing date of this report, and other information. As of September 30, 2021, there were two individual name issuer trust preferred debt securities with an amortized cost of $ 4.0 million and unrealized losses of $ 140 thousand that were rated below investment grade by Standard & Poors, Inc. (“S&P”). We noted no additional downgrades to below investment grade between September 30, 2021 and the filing date of this report. Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates and not changes in the credit quality of the issuers of the debt securities. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no allowance for credit losses on securities was recorded at September 30, 2021. Corporate Bonds At September 30, 2021, the Corporation had four corporate bond holdings with unrealized losses totaling $ 782 thousand. These investment grade corporate bonds were issued by large corporations in the financial services industry. The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at September 30, 2021. Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date, as well as credit rating changes between the reporting period date and the filing date of this report, and other information. Management believes the unrealized losses on these debt securities are primarily attributable -12- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) to changes in the investment spreads and interest rates and not changes in the credit quality of the issuers of the debt securities. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no allowance for credit losses was recorded at September 30, 2021. Note 5 - Loans The following is a summary of loans: (Dollars in thousands) September 30, 2021 December 31, 2020 Commercial: Commercial real estate (1) $ 1,661,785 $ 1,633,024 Commercial & industrial (2) 682,774 817,408 Total commercial 2,344,559 2,450,432 Residential Real Estate: Residential real estate (3) 1,672,364 1,467,312 Consumer: Home equity 249,874 259,185 Other (4) 19,607 19,061 Total consumer 269,481 278,246 Total loans (5) $ 4,286,404 $ 4,195,990 (1) Commercial real estate (“CRE”) consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. (2) Commercial and industrial (“C&I”) consists of loans to businesses and individuals, a portion of which are fully or partially collateralized by real estate. C&I also includes $ 77.4 million and $ 199.8 million, respectively, of PPP loans as of September 30, 2021 and December 31, 2020. (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. (5) Includes net unamortized loan origination costs of $ 5.0 million and $ 1.5 million, respectively, at September 30, 2021 and December 31, 2020 and net unamortized premiums on purchased loans of $ 489 thousand and $ 787 thousand, respectively, at September 30, 2021 and December 31, 2020. Loan balances exclude accrued interest receivable of $ 11.1 million and $ 11.3 million, respectively, as of September 30, 2021 and December 31, 2020. Accrued interest receivable is included in other assets in the Unaudited Consolidated Balance Sheets. As of September 30, 2021 and December 31, 2020, loans amounting to $ 2.2 billion and $ 2.1 billion, respectively, were pledged as collateral to the FHLB under a blanket pledge agreement and to the FRB. See Note 8 for additional disclosure regarding borrowings. Loan Modifications Under the CARES Act The Corporation elected to account for eligible loan modifications under Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), as amended by the Coronavirus Response and Relief Supplemental Appropriations Act. To be eligible, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) January 1, 2022. Eligible loan modifications are not required to be classified as troubled debt restructurings (“TDRs”) and are not reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized unless the loan is placed on nonaccrual status in accordance with the nonaccrual loans accounting policy described below. 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. As of September 30, 2021, we had active deferments on five loans totaling $ 38.0 million, or 1 % of total loans excluding Paycheck Protection Program (“PPP”) loans. -13- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Concentrations of Credit Risk A significant portion of our loan portfolio is concentrated among borrowers in southern New England and a substantial portion of the portfolio is collateralized by real estate in this area. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy, as well as the health of the real estate economic sector in the Corporation’s market area. Past Due Loans Past due status is based on the contractual payment terms of the loan. The following tables present an age analysis of loans, segregated by class of loans: (Dollars in thousands) Days Past Due September 30, 2021 30-59 60-89 Over 90 Total Past Due Current Total Loans Commercial: Commercial real estate $ — $ — $ — $ — $ 1,661,785 $ 1,661,785 Commercial & industrial 1 1 — 2 682,772 682,774 Total commercial 1 1 — 2 2,344,557 2,344,559 Residential Real Estate: Residential real estate 3,452 2,319 2,927 8,698 1,663,666 1,672,364 Consumer: Home equity 398 323 103 824 249,050 249,874 Other 19 5 — 24 19,583 19,607 Total consumer 417 328 103 848 268,633 269,481 Total loans $ 3,870 $ 2,648 $ 3,030 $ 9,548 $ 4,276,856 $ 4,286,404 (Dollars in thousands) Days Past Due December 31, 2020 30-59 60-89 Over 90 Total Past Due Current Total Loans Commercial: Commercial real estate $ 265 $ — $ — $ 265 $ 1,632,759 $ 1,633,024 Commercial & industrial 1 2 — 3 817,405 817,408 Total commercial 266 2 — 268 2,450,164 2,450,432 Residential Real Estate: Residential real estate 4,466 701 5,172 10,339 1,456,973 1,467,312 Consumer: Home equity 894 129 644 1,667 257,518 259,185 Other 23 7 88 118 18,943 19,061 Total consumer 917 136 732 1,785 276,461 278,246 Total loans $ 5,649 $ 839 $ 5,904 $ 12,392 $ 4,183,598 $ 4,195,990 Included in past due loans as of September 30, 2021 and December 31, 2020, were nonaccrual loans of $ 6.9 million and $ 8.5 million, respectively. All loans 90 days or more past due at September 30, 2021 and December 31, 2020 were classified as nonaccrual. Nonaccrual Loans Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided -14- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. When loans are placed on nonaccrual status, interest previously accrued but not collected is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible. The following table presents the carrying value of nonaccrual loans: (Dollars in thousands) Sep 30, 2021 Dec 31, 2020 Commercial: Commercial real estate $ — $ — Commercial & industrial — — Total commercial — — Residential Real Estate: Residential real estate 10,321 11,981 Consumer: Home equity 655 1,128 Other — 88 Total consumer 655 1,216 Total nonaccrual loans $ 10,976 $ 13,197 Accruing loans 90 days or more past due $ — $ — Nonaccrual loans of $ 4.0 million and $ 4.7 million, respectively, at September 30, 2021 and December 31, 2020 were current as to the payment of principal and interest. No ACL was deemed necessary on nonaccrual loans with a carrying value of $ 4.0 million and $ 3.0 million, respectively, as of September 30, 2021 and December 31, 2020. As of September 30, 2021 and December 31, 2020, nonaccrual loans secured by one- to four-family residential property amounting to $ 1.5 million and $ 3.4 million, respectively, were in process of foreclosure. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2021. -15- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents interest income recognized on nonaccrual loans: (Dollars in thousands) Three Months Nine Months Periods ended September 30, 2021 2020 2021 2020 Commercial: Commercial real estate $ — $ — $ — $ — Commercial & industrial — — — — Total commercial — — — — Residential Real Estate: Residential real estate 131 70 288 341 Consumer: Home equity 9 11 44 51 Other — — — — Total consumer 9 11 44 51 Total $ 140 $ 81 $ 332 $ 392 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 may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring of a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection. The Corporation's ACL reflects the effects of a TDR when management reasonably expects at the reporting date that a TDR will be executed with an individual borrower. A TDR is considered reasonably expected no later than the point when management concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession to avoid a default. Reasonably expected TDRs and executed TDRs are evaluated individually to determine the required ACL. TDRs that did not involve a below-market rate concession and perform in accordance with their modified contractual terms for a reasonable period of time may be included in the Corporation’s existing pools based on the underlying risk characteristics of the loan to measure the ACL. 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, TDRs are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is performing in accordance with their modified contractual terms for a reasonable period of time. The recorded investment in TDRs consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. For accruing TDRs, the recorded investment also includes accrued interest. -16- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the recorded investment in TDRs and other pertinent information: (Dollars in thousands) Sep 30, 2021 Dec 31, 2020 Accruing TDRs $ 8,047 $ 13,418 Nonaccrual TDRs 1,732 2,345 Total TDRs $ 9,779 $ 15,763 Specific reserves on TDRs included in the ACL on loans $ 195 $ 159 Additional commitments to lend to borrowers with TDRs $ — $ — The following tables present TDRs occurring during the period indicated and the recorded investment pre- and post- modification: (Dollars in thousands) Outstanding Recorded Investment # of Loans Pre-Modifications Post-Modifications Three months ended September 30, 2021 2020 2021 2020 2021 2020 Commercial: Commercial real estate — — $ — $ — $ — $ — Commercial & industrial — — — — — — Total commercial — — — — — — Residential Real Estate: Residential real estate — 4 — 2,092 — 2,092 Consumer: Home equity — 1 — 71 — 71 Other — — — — — — Total consumer — 1 $ — $ 71 $ — $ 71 Total — 5 $ — $ 2,163 $ — $ 2,163 (Dollars in thousands) Outstanding Recorded Investment # of Loans Pre-Modifications Post-Modifications Nine months ended September 30, 2021 2020 2021 2020 2021 2020 Commercial: Commercial real estate — 1 $ — $ 841 $ — $ 841 Commercial & industrial — 2 — 460 — 460 Total commercial — 3 — 1,301 — 1,301 Residential Real Estate: Residential real estate — 10 — 5,604 — 5,604 Consumer: Home equity — 4 — 873 — 873 Other — — — — — — Total consumer — 4 $ — $ 873 $ — $ 873 Total — 17 $ — $ 7,778 $ — $ 7,778 -17- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents TDRs occurring during the period indicated by type of modification: (Dollars in thousands) Three Months Nine Months Periods ended September 30, 2021 2020 2021 2020 Below-market interest rate concession $ — $ — $ — $ — Payment deferral — 2,163 — 7,365 Maturity / amortization concession — — — — Interest only payments — — — — Combination (1) — — — 413 Total $ — $ 2,163 $ — $ 7,778 (1) Loans included in this classification were modified with a combination of any two of the concessions listed in this table. The following tables present information on TDRs modified within the previous 12 months for which there was a payment default: (Dollars in thousands) # of Loans Recorded Investment Three months ended September 30, 2021 2020 2021 2020 TDRs with a Payment Default: Residential real estate 1 1 $ 330 $ 903 Home equity — 1 — 47 Totals 1 2 $ 330 $ 950 (Dollars in thousands) # of Loans Recorded Investment Nine months ended September 30, 2021 2020 2021 2020 TDRs with a Payment Default: Residential real estate 1 1 $ 330 $ 903 Home equity — 1 — 47 Totals 1 2 $ 330 $ 950 Individually Analyzed Loans Individually analyzed loans include nonaccrual commercial loans, reasonably expected TDRs and executed TDRs, as well as certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans. As of September 30, 2021, the carrying value of individually analyzed loans amounted to $ 15.5 million, of which $ 7.7 million were considered collateral dependent. As of December 31, 2020, the carrying value of individually analyzed loans amounted to $ 18.3 million, of which $ 8.4 million were considered collateral dependent. For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. See Note 11 for additional disclosure regarding fair value of individually analyzed collateral dependent loans. -18- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the carrying value of collateral dependent individually analyzed loans: (Dollars in thousands) September 30, 2021 December 31, 2020 Carrying Value Related Allowance Carrying Value Related Allowance Commercial: Commercial real estate (1) $ 4,009 $ 321 $ 1,792 $ — Commercial & industrial (2) — — 451 — Total commercial 4,009 321 2,243 — Residential Real Estate: Residential real estate (3) 3,716 538 5,947 38 Consumer: Home equity (3) — — 254 183 Other — — — — Total consumer — — 254 183 Total $ 7,725 $ 859 $ 8,444 $ 221 (1) Secured by income-producing property. (2) Secured by business assets. (3) Secured by one- to four-family residential properties. Credit Quality Indicators Commercial The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan risk rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. The Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for credit losses on loans. See Note 6 for additional information. A description of the commercial loan categories is as follows: Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality, but may exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, performance or may be in an industry or of a loan type known to have a higher degree of risk. These weaknesses may be mitigated by secondary sources of repayment, including Small Business Administration (“SBA”) guarantees. Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies. Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectability. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be -19- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) determined. “Loss” is not intended to imply that the loan has no recovery value, but rather, it is not practical or desirable to continue to carry the asset. The Corporation’s procedures call for loan risk ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. On a quarterly basis, management reviews a watched asset list, which generally consists of commercial loans that are risk-rated 6 or worse, highly leveraged transaction loans, high-volatility commercial real estate, loans with active deferrals resulting from the COVID-19 pandemic, and other selected loans. Management’s review focuses on the current status of the loans, the appropriateness of risk ratings and strategies to improve the credit. An annual credit review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio. Residential and Consumer Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type. In addition, other techniques are utilized to monitor indicators of credit deterioration in the residential real estate loans and home equity consumer loans. Among these techniques is the periodic tracking of loans with an updated Fair Isaac Corporation (“FICO”) score and an updated estimated loan to value (“LTV”) ratio. LTV is estimated based on such factors as geographic location, the original appraised value and changes in median home prices, and takes into consideration the age of the loan. The results of these analyses and other credit review procedures, including selected targeted internal reviews, are taken into account in the determination of qualitative loss factors for residential real estate and home equity consumer credits. -20- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment as of September 30, 2021: (Dollars in thousands) Term Loans Amortized Cost by Origination Year 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Revolving Loans Converted to Term Loans Total Commercial: CRE: Pass $ 260,038 $ 250,606 $ 305,492 $ 215,877 $ 179,618 $ 322,267 $ 8,466 $ 2,279 $ 1,544,643 Special Mention 6,002 786 29,670 37,010 16,091 23,209 364 — 113,132 Classified — 4,010 — — — — — — 4,010 Total CRE 266,040 255,402 335,162 252,887 195,709 345,476 8,830 2,279 1,661,785 C&I: Pass 120,412 96,441 106,652 90,595 52,440 99,439 87,001 1,096 654,076 Special Mention — — 642 4,641 6,419 13,019 1,186 — 25,907 Classified — — — — — 2,791 — — 2,791 Total C&I 120,412 96,441 107,294 95,236 58,859 115,249 88,187 1,096 682,774 Residential Real Estate: Residential real estate: Current 573,380 387,179 174,478 99,480 95,794 333,355 — — 1,663,666 Past Due — 1,407 272 1,299 763 4,957 — — 8,698 Total residential real estate 573,380 388,586 174,750 100,779 96,557 338,312 — — 1,672,364 Consumer: Home equity: Current 8,170 7,294 4,315 2,682 1,125 3,939 213,010 8,515 249,050 Past Due — — — — — 185 241 398 824 Total home equity 8,170 7,294 4,315 2,682 1,125 4,124 213,251 8,913 249,874 Other: Current 6,128 3,936 1,381 708 784 6,360 286 — 19,583 Past Due 14 10 — — — — — — 24 Total other 6,142 3,946 1,381 708 784 6,360 286 — 19,607 Total Loans $ 974,144 $ 751,669 $ 622,902 $ 452,292 $ 353,034 $ 809,521 $ 310,554 $ 12,288 $ 4,286,404 -21- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment as of December 31, 2020: (Dollars in thousands) Term Loans Amortized Cost by Origination Year 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Revolving Loans Converted to Term Loans Total Commercial: CRE: Pass $ 283,341 $ 353,875 $ 260,917 $ 236,310 $ 136,490 $ 249,359 $ 10,333 $ 2,386 $ 1,533,011 Special Mention 756 20,235 39,387 16,222 11,318 10,367 771 — 99,056 Classified 957 — — — — — — — 957 Total CRE 285,054 374,110 300,304 252,532 147,808 259,726 11,104 2,386 1,633,024 C&I: Pass 293,493 95,775 98,146 56,792 44,445 91,128 95,817 1,296 776,892 Special Mention 1,123 722 3,210 6,839 3,141 14,853 3,806 56 33,750 Classified 403 — — — — 6,363 — — 6,766 Total C&I 295,019 96,497 101,356 63,631 47,586 112,344 99,623 1,352 817,408 Residential Real Estate: Residential real estate: Current 463,477 253,228 146,839 155,976 128,139 309,314 — — 1,456,973 Past Due 238 1,698 1,310 886 110 6,097 — — 10,339 Total residential real estate 463,715 254,926 148,149 156,862 128,249 315,411 — — 1,467,312 Consumer: Home equity: Current 9,838 6,771 3,898 1,474 1,217 3,955 219,085 11,280 257,518 Past Due — 35 24 — — 186 310 1,112 1,667 Total home equity 9,838 6,806 3,922 1,474 1,217 4,141 219,395 12,392 259,185 Other: Current 5,214 2,241 1,237 1,544 548 7,850 308 1 18,943 Past Due 19 1 — — 88 7 3 — 118 Total other 5,233 2,242 1,237 1,544 636 7,857 311 1 19,061 Total Loans $ 1,058,859 $ 734,581 $ 554,968 $ 476,043 $ 325,496 $ 699,479 $ 330,433 $ 16,131 $ 4,195,990 Consistent with industry practice, Washington Trust may renew commercial loans at or immediately prior to their maturity. In the tables above, renewals subject to full credit evaluation before being granted are reported as originations in the period renewed. -22- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 6 - Allowance for Credit Losses on Loans The ACL on loans is management’s current estimate of expected credit losses over the expected life of the loans. 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. Qualitative adjustments 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. In accordance with the ACL policy, the methodology is reviewed no less than annually. In the first quarter of 2021, management updated its ACL methodology for pooled loans to incorporate additional econometric factors in the determination of the probability of default for each loan portfolio segment. Econometric factors are selected based on the correlation of the factor to credit losses for each loan portfolio segment. Effective January 1, 2021, the following econometric factors are utilized in the determination of the probability of default for each loan 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. Prior to January 1, 2021, solely the NUR was used in the determination of the probability of default for each loan portfolio segment. The following table presents the activity in the ACL on loans for the three months ended September 30, 2021: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 21,450 $ 11,717 $ 33,167 $ 6,877 $ 1,340 $ 495 $ 1,835 $ 41,879 Charge-offs — 2 2 ( 57 ) ( 183 ) ( 11 ) ( 194 ) ( 249 ) Recoveries — — — 5 73 3 76 81 Provision ( 613 ) ( 392 ) ( 1,005 ) 1,131 ( 112 ) ( 14 ) ( 126 ) — Ending Balance $ 20,837 $ 11,327 $ 32,164 $ 7,956 $ 1,118 $ 473 $ 1,591 $ 41,711 The following table presents the activity in the ACL on loans for the nine months ended September 30, 2021: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 22,065 $ 12,228 $ 34,293 $ 8,042 $ 1,300 $ 471 $ 1,771 $ 44,106 Charge-offs — ( 304 ) ( 304 ) ( 107 ) ( 183 ) ( 36 ) ( 219 ) ( 630 ) Recoveries — 3 3 85 79 19 98 186 Provision ( 1,228 ) ( 600 ) ( 1,828 ) ( 64 ) ( 78 ) 19 ( 59 ) ( 1,951 ) Ending Balance $ 20,837 $ 11,327 $ 32,164 $ 7,956 $ 1,118 $ 473 $ 1,591 $ 41,711 The following table presents the activity in the allowance for loan losses for the three months ended September 30, 2020: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 20,283 $ 11,278 $ 31,561 $ 8,053 $ 1,394 $ 433 $ 1,827 $ 41,441 Charge-offs — ( 2 ) ( 2 ) ( 99 ) — ( 10 ) ( 10 ) ( 111 ) Recoveries — 2 2 — 4 9 13 15 Provision 1,474 ( 93 ) 1,381 ( 35 ) ( 51 ) 5 ( 46 ) 1,300 Ending Balance $ 21,757 $ 11,185 $ 32,942 $ 7,919 $ 1,347 $ 437 $ 1,784 $ 42,645 -23- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the activity in the allowance for loan losses for the nine months ended September 30, 2020: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 14,741 $ 3,921 $ 18,662 $ 6,615 $ 1,390 $ 347 $ 1,737 $ 27,014 Adoption of ASC 326 3,405 3,029 6,434 221 ( 106 ) ( 48 ) ( 154 ) 6,501 Charge-offs ( 172 ) ( 585 ) ( 757 ) ( 99 ) ( 174 ) ( 42 ) ( 216 ) ( 1,072 ) Recoveries — 11 11 — 11 23 34 45 Provision 3,783 4,809 8,592 1,182 226 157 383 10,157 Ending Balance $ 21,757 $ 11,185 $ 32,942 $ 7,919 $ 1,347 $ 437 $ 1,784 $ 42,645 Note 7 - Leases The Corporation has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception. Operating lease right-of-use (“ROU”) assets amounted to $ 27.5 million and $ 29.5 million, respectively, as of September 30, 2021 and December 31, 2020. Operating lease liabilities totaled $ 29.8 million and $ 31.7 million, respectively, as of September 30, 2021 and December 31, 2020. As of September 30, 2021, there were three operating leases that had not yet commenced. As of December 31, 2020, there were no operating leases that had not yet commenced. Rental expense for operating leases is recognized on a straight-line bas is over the lease term and amounted to $ 1.0 million and $ 3.1 million respectively, for the three and nine months ended September 30, 2021, compared to $ 1.0 million and $ 3.0 million, respectively, for the same periods in 2020. V ariable lease components, such as consumer price index adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities. The following table presents information regarding the Corporation’s operating leases: Sep 30, 2021 Dec 31, 2020 Weighted average discount rate 3.35 % 3.34 % Range of lease expiration dates 10 months - 19 years 7 months - 20 years Range of lease renewal options 1 year - 5 years 1 year - 5 years Weighted average remaining lease term 13.0 years 13.4 years The following table presents the undiscounted annual lease payments under the terms of the Corporation’s operating leases at September 30, 2021, including a reconciliation to the present value of operating lease liabilities recognized in the Unaudited Consolidated Balance Sheets: (Dollars in thousands) October 1, 2021 to December 31, 2021 $ 978 2022 3,981 2023 3,881 2024 3,670 2025 2,932 2026 and thereafter 22,099 Total operating lease payments (1) 37,541 Less: interest 7,731 Present value of operating lease liabilities (2) $ 29,810 (1) Includes $ 1.4 million related to options to extend lease terms that are reasonably certain of being exercised. (2) Includes short-term operating lease liabilities of $ 3.1 million. -24- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the components of total lease expense and operating cash flows: (Dollars in thousands) Three Months Nine Months Periods ended September 30, 2021 2020 2021 2020 Lease Expense: Operating lease expense $ 1,004 $ 1,005 $ 3,011 $ 2,915 Variable lease expense 10 14 44 41 Total lease expense (1) $ 1,014 $ 1,019 $ 3,055 $ 2,956 Cash Paid: Cash paid reducing operating lease liabilities $ 932 $ 956 $ 2,910 $ 2,831 (1) Included in net occupancy expenses in the Unaudited Consolidated Income Statement. Note 8 - Federal Home Loan Bank Advances Advances payable to the FHLB amounted to $ 222.6 million and $ 593.9 million, respectively, at September 30, 2021 and December 31, 2020. As of September 30, 2021 and December 31, 2020, the Bank had access to a $ 40.0 million unused line of credit and also had remaining available borrowing capacity of $ 1.5 billion and $ 969.7 million, respectively, with the FHLB. The Bank pledges certain qualified investment securities and loans as collateral to the FHLB. The following table presents maturities and weighted average interest rates on FHLB advances outstanding as of September 30, 2021: (Dollars in thousands) Scheduled Maturity Weighted Average Rate October 1, 2021 to December 31, 2021 $ 142,450 0.39 % 2022 — — 2023 35,000 0.45 2024 35,000 2.45 2025 — — 2026 and thereafter 10,142 3.06 Balance at September 30, 2021 $ 222,592 0.84 % Note 9 - Shareholders' Equity Stock Repurchase Program The Corporation’s Stock Repurchase Program adopted on December 1, 2020 (the “2020 Repurchase Program”) authorizes the repurchase of up to 850,000 shares, or approximately 5 %, of the Corporation’s outstanding common stock. This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The timing and actual number of shares repurchased depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The 2020 Repurchase Program expired on October 31, 2021 and no shares were repurchased under this program. -25- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Regulatory Capital Requirements Capital levels at September 30, 2021 exceeded the regulatory minimum levels to be considered “well capitalized.” The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios, as well as the corresponding minimum and well capitalized regulatory amounts and ratios that were in effect during the respective periods: (Dollars in thousands) Actual For Capital Adequacy Purposes To Be “Well Capitalized” Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio September 30, 2021 Total Capital (to Risk-Weighted Assets): Corporation $ 569,424 13.83 % $ 329,407 8.00 % N/A N/A Bank 559,605 13.59 329,378 8.00 $ 411,723 10.00 % Tier 1 Capital (to Risk-Weighted Assets): Corporation 535,552 13.01 247,055 6.00 N/A N/A Bank 525,733 12.77 247,034 6.00 329,378 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets): Corporation 513,553 12.47 185,291 4.50 N/A N/A Bank 525,733 12.77 185,275 4.50 267,620 6.50 Tier 1 Capital (to Average Assets): (1) Corporation 535,552 9.12 234,803 4.00 N/A N/A Bank 525,733 8.96 234,722 4.00 293,403 5.00 December 31, 2020 Total Capital (to Risk-Weighted Assets): Corporation 539,496 13.51 319,532 8.00 N/A N/A Bank 534,288 13.38 319,503 8.00 399,379 10.00 Tier 1 Capital (to Risk-Weighted Assets): Corporation 503,791 12.61 239,649 6.00 N/A N/A Bank 498,583 12.48 239,627 6.00 319,503 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets): Corporation 481,792 12.06 179,737 4.50 N/A N/A Bank 498,583 12.48 179,721 4.50 259,596 6.50 Tier 1 Capital (to Average Assets): (1) Corporation 503,791 8.95 225,209 4.00 N/A N/A Bank 498,583 8.86 225,126 4.00 281,407 5.00 (1) Leverage ratio. In addition to the minimum regulatory capital required for capital adequacy purposes outlined in the table above, the Corporation is required to maintain a minimum capital conservation buffer, in the form of common equity, of 2.50% in order to avoid restrictions on capital distributions and discretionary bonuses. The Corporation’s capital levels exceeded the minimum regulatory capital requirements plus the capital conservation buffer at September 30, 2021 and December 31, 2020. The Bancorp owns the common stock of two capital trusts, which have issued trust preferred securities. In accordance with GAAP, the capital trusts are treated as unconsolidated subsidiaries. At both September 30, 2021 and December 31, 2020, $ 22.0 million in trust preferred securities were included in the Tier 1 capital of the Corporation for regulatory capital reporting purposes pursuant to the FRB’s capital adequacy guidelines. In accordance with regulatory capital rules, the Corporation elected the option to delay the estimated impact of Accounting Standards Codification (“ASC”) 326 on its regulatory capital over a two-year deferral and subsequent three-year transition period ending December 31, 2024. As a result, capital ratios and amounts as of September 30, 2021 and December 31, 2020 exclude the impact of the increased ACL on loans and unfunded loan commitments attributed to the adoption of ASC 326, which was effective January 1, 2020, adjusted for an approximation of the after-tax provision for credit losses attributable to -26- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) ASC 326 relative to the incurred loss methodology during the deferral period. The cumulative difference at the end of the deferral period will be phased-in to regulatory capital over a three-year transition period beginning in 2022. Note 10 - Derivative Financial Instruments The Corporation’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Corporation’s known or expected cash receipts and its known or expected cash payments principally to manage the Corporation’s interest rate risk. Additionally, the Corporation enters into interest rate derivatives to accommodate the business requirements of its customers. All derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and resulting designation. Interest Rate Risk Management Agreements Interest rate risk management agreements, such as caps, swaps and floors, are used from time to time as part of the Corporation’s interest rate risk management strategy. Interest rate swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g., fixed-rate for variable-rate payments) computed on a notional principal amount. Interest rate caps and floors represent options purchased by the Corporation to manage the interest rate paid throughout the term of the option contract. The credit risk associated with these transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure. Cash Flow Hedging Instruments As of September 30, 2021 and December 31, 2020, the Corporation had interest rate swap contracts with a total notional amount of $ 60.0 million that were designated as cash flow hedges to hedge the interest rate risk associated with short-term variable rate FHLB advances. The interest rate swaps on borrowings mature in December of 2021 and December of 2023. As of September 30, 2021, the Corporation had an interest rate swap contract with a total notional amount of $ 300.0 million that was designated as a cash flow hedge to hedge the interest rate risk associated with a pool of variable rate commercial loans. The interest rate swap on loans was executed in the second quarter of 2021 and matures in May of 2026. The changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized. Loan Related Derivative Contracts Interest Rate Swap Contracts with Customers The Corporation enters into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert variable-rate loan payments to fixed-rate loan payments. When the Corporation enters into an interest rate swap contract with a commercial loan borrower, it simultaneously enters into a “mirror” swap contract with a third party. The third party exchanges the client’s fixed-rate loan payments for variable-rate loan payments. The Corporation retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans. As of September 30, 2021 and December 31, 2020, Washington Trust had interest rate swap contracts with commercial loan borrowers with notional amounts of $ 998.5 million and $ 991.0 million, respectively, and equal amounts of “mirror” swap contracts with third party financial institutions. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Risk Participation Agreements The Corporation has entered into risk participation agreements with other banks in commercial loan arrangements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Under a risk participation-out agreement, a derivative asset, the Corporation participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Corporation assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower for a fee received from the other bank. -27- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) As of September 30, 2021, the notional amounts of risk participation-out agreements and risk participation-in agreements were $ 74.6 million and $ 147.4 million, respectively, compared to $ 61.6 million and $ 92.7 million, respectively, as of December 31, 2020. Mortgage Loan Commitments Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Forward sale commitments are contracts for delayed delivery or net settlement of the underlying instrument, such as a residential real estate mortgage loan, where the seller agrees to deliver on a specified future date, either a specified instrument at a specified price or yield or the net cash equivalent of an underlying instrument. Both interest rate lock commitments and forward sale commitments are derivative financial instruments, but do not meet criteria for hedge accounting and therefore, the changes in fair value of these commitments are reflected in earnings. As of September 30, 2021, the notional amounts of interest rate lock commitments and forward sale commitments were $ 97.9 million and $ 195.1 million, respectively, compared to $ 167.7 million and $ 279.7 million, respectively, as of December 31, 2020. The following table presents the fair values of derivative instruments in the Unaudited Consolidated Balance Sheets: (Dollars in thousands) Derivative Assets Derivative Liabilities Fair Value Fair Value Balance Sheet Location Sep 30, 2021 Dec 31, 2020 Balance Sheet Location Sep 30, 2021 Dec 31, 2020 Derivatives Designated as Cash Flow Hedging Instruments: Interest rate risk management contracts: Interest rate swaps Other assets $ 180 $ — Other liabilities $ 2,006 $ 1,958 Derivatives not Designated as Hedging Instruments: Loan related derivative contracts: Interest rate swaps with customers Other assets 42,873 75,804 Other liabilities 1,667 68 Mirror swaps with counterparties Other assets 1,649 67 Other liabilities 42,996 76,248 Risk participation agreements Other assets 1 22 Other liabilities 2 2 Mortgage loan commitments: Interest rate lock commitments Other assets 2,344 7,202 Other liabilities — — Forward sale commitments Other assets 703 — Other liabilities 1,024 2,914 Gross amounts 47,750 83,095 47,695 81,190 Less: amounts offset (1) 1,828 67 1,828 67 Derivative balances, net of offset 45,922 83,028 45,867 81,123 Less: collateral pledged (2) — — 39,109 74,698 Net amounts $ 45,922 $ 83,028 $ 6,758 $ 6,425 (1) Interest rate risk management contracts and loan related derivative contracts with counterparties are subject to master netting arrangements. (2) Collateral pledged to derivative counterparties is in the form of cash. Washington Trust may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions. -28- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the effect of derivative instruments in the Unaudited Consolidated Statements of Changes in Shareholders’ Equity: (Dollars in thousands) Gain (Loss) Recognized in Other Comprehensive Income, Net of Tax Three Months Nine Months Periods ended September 30, 2021 2020 2021 2020 Derivatives Designated as Cash Flow Hedging Instruments: Interest rate risk management contracts: Interest rate swaps ($ 403 ) $ 214 ($ 36 ) ($ 1,109 ) Interest rate caps — 25 — 71 Interest rate floors — ( 85 ) — 150 Total ($ 403 ) $ 154 ($ 36 ) ($ 888 ) Interest rate cap and interest rate floor contracts designated as cash flow hedges matured in 2020. For derivatives designated as cash flow hedging instruments, see Note 16 for additional disclosure pertaining to the amounts and location of reclassifications from accumulated other comprehensive income into earnings. The following table presents the effect of derivative instruments in the Corporation’s Unaudited Consolidated Statements of Income: (Dollars in thousands) Amount of Gain (Loss) Recognized in Income on Derivatives Three Months Nine Months Periods ended September 30, Statement of Income Location 2021 2020 2021 2020 Derivatives not Designated as Hedging Instruments: Loan related derivative contracts: Interest rate swaps with customers Loan related derivative income ($ 2,715 ) $ 767 ($ 21,281 ) $ 67,258 Mirror swaps with counterparties Loan related derivative income 3,558 499 23,173 ( 63,655 ) Risk participation agreements Loan related derivative income ( 115 ) ( 2 ) 478 215 Mortgage loan commitments: Interest rate lock commitments Mortgage banking revenues ( 17 ) ( 1,499 ) ( 4,859 ) 5,785 Forward sale commitments Mortgage banking revenues ( 361 ) ( 4,743 ) 4,994 ( 10,733 ) Total $ 350 ($ 4,978 ) $ 2,505 ($ 1,130 ) -29- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 11 - Fair Value Measurements The Corporation uses fair value measurements to record fair value adjustments on certain assets and liabilities and to determine fair value disclosures. Items recorded at fair value on a recurring basis include securities available for sale, mortgage loans held for sale and derivatives. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent individually analyzed loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets. Fair value is a market-based measurement, not an entity-specific measurement. Fair value measurements are determined based on the assumptions the market participants would use in pricing the asset or liability. In addition, GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Corporation’s market assumptions. These two types of inputs have created the following fair value hierarchy: • Level 1 – Quoted prices for identical assets or liabilities in active markets. • Level 2 – 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 inputs and significant value drivers are observable in active markets. • Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in the markets and which reflect the Corporation’s market assumptions. Fair Value Option Election GAAP allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation has elected the fair value option for mortgage loans held for sale to better match changes in fair value of the loans with changes in the fair value of the forward sale commitment contracts used to economically hedge them. The following table presents a summary of mortgage loans held for sale accounted for under the fair value option: (Dollars in thousands) September 30, 2021 December 31, 2020 Aggregate fair value $ 48,705 $ 61,614 Aggregate principal balance 47,464 59,313 Difference between fair value and principal balance $ 1,241 $ 2,301 Changes in fair value of mortgage loans held for sale accounted for under the fair value option election are included in mortgage banking revenues in the Unaudited Consolidated Statements of Income. Changes in fair value amounted to an increase to mortgage banking revenues of $ 372 thousand for the three months ended September 30, 2021 and a decrease to mortgage banking revenues of $ 1.1 million for the nine months ended September 30, 2021. This compared to increases to mortgage banking revenues of $ 1.1 million and $ 2.2 million, respectively, in the three and nine months ended September 30, 2020. There were no mortgage loans held for sale 90 days or more past due as of September 30, 2021 and December 31, 2020. Valuation Techniques Debt Securities Available for sale debt securities are recorded at fair value on a recurring basis. When available, the Corporation uses quoted market prices to determine the fair value of debt securities; such items are classified as Level 1. There were no Level 1 debt securities held at September 30, 2021 and December 31, 2020. Level 2 debt securities are traded less frequently than exchange-traded instruments. The fair value of these securities is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category includes obligations of U.S. government-sponsored enterprises, including mortgage-backed securities, individual name issuer trust preferred debt securities and corporate bonds. -30- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Debt securities not actively traded whose fair value is determined through the use of cash flows utilizing inputs that are unobservable are classified as Level 3. There were no Level 3 debt securities held at September 30, 2021 and December 31, 2020. Mortgage Loans Held for Sale The fair value of mortgage loans held for sale is estimated based on current market prices for similar loans in the secondary market and therefore are classified as Level 2 assets. Collateral Dependent Individually Analyzed Loans The fair value of collateral dependent individually analyzed loans is determined based upon the appraised fair value of the underlying collateral. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For collateral dependent loans that are expected to be repaid substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the collateral. Internal valuations may be utilized to determine the fair value of other business assets. Collateral dependent individually analyzed loans are categorized as Level 3. Loan Servicing Rights Loans sold with the retention of servicing result in the recognition of loan servicing rights. Loan servicing rights are included in other assets in the Unaudited Consolidated Balance Sheets and are amortized as an offset to mortgage banking revenues over the estimated period of servicing. Loan servicing rights are evaluated quarterly for impairment based on their fair value. Impairment exists if the carrying value exceeds the estimated fair value. Impairment is measured on an aggregated basis by stratifying the loan servicing rights based on homogeneous characteristics such as note rate and loan type. The fair value is estimated using an independent valuation model that estimates the present value of expected cash flows, incorporating assumptions for discount rates and prepayment rates. Any impairment is recognized through a valuation allowance and as a reduction to mortgage banking revenues. Loan servicing rights are categorized as Level 3. Derivatives Interest rate swaps, caps and floors are traded in over-the-counter markets where quoted market prices are not readily available. Fair value measurements are determined using independent valuation software, which utilizes the present value of future cash flows discounted using market observable inputs such as forward rate assumptions. The Corporation evaluates the credit risk of its counterparties, as well as that of the Corporation. Accordingly, factors such as the likelihood of default by the Corporation and its counterparties, its net exposures and remaining contractual life are considered in determining if any fair value adjustments related to credit risk are required. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position, if any. The Corporation has determined that the majority of the inputs used to value its derivative positions fall within Level 2 of the fair value hierarchy. However, the credit valuation adjustments utilize Level 3 inputs. As of September 30, 2021 and December 31, 2020, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation has classified its derivative valuations in their entirety as Level 2. Fair value measurements of forward loan commitments (interest rate lock commitments and forward sale commitments) are primarily based on current market prices for similar assets in the secondary market for mortgage loans and therefore are classified as Level 2 assets. The fair value of interest rate lock commitments is also dependent on the ultimate closing of the loans. Pull-through rates are based on the Corporation’s historical data and reflect the Corporation’s best estimate of the likelihood that a commitment will result in a closed loan. Although the pull-through rates are Level 3 inputs, the Corporation has assessed the significance of the impact of pull-through rates on the overall valuation of its interest rate lock commitments and has determined that they are not significant to the overall valuation. As a result, the Corporation has classified its interest rate lock commitments as Level 2. -31- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Items Recorded at Fair Value on a Recurring Basis The following tables present the balances of assets and liabilities reported at fair value on a recurring basis: (Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2021 Assets: Available for sale debt securities: Obligations of U.S. government-sponsored enterprises $ 178,605 $ — $ 178,605 $ — Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 843,702 — 843,702 — Individual name issuer trust preferred debt securities 11,156 — 11,156 — Corporate bonds 12,370 — 12,370 — Mortgage loans held for sale 48,705 — 48,705 — Derivative assets 45,922 — 45,922 — Total assets at fair value on a recurring basis $ 1,140,460 $ — $ 1,140,460 $ — Liabilities: Derivative liabilities $ 45,867 $ — $ 45,867 $ — Total liabilities at fair value on a recurring basis $ 45,867 $ — $ 45,867 $ — (Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2020 Assets: Available for sale debt securities: Obligations of U.S. government-sponsored enterprises $ 131,669 $ — $ 131,669 $ — Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 740,305 — 740,305 — Individual name issuer trust preferred debt securities 12,669 — 12,669 — Corporate bonds 9,928 — 9,928 — Mortgage loans held for sale 61,614 — 61,614 — Derivative assets 83,028 — 83,028 — Total assets at fair value on a recurring basis $ 1,039,213 $ — $ 1,039,213 $ — Liabilities: Derivative liabilities $ 81,123 $ — $ 81,123 $ — Total liabilities at fair value on a recurring basis $ 81,123 $ — $ 81,123 $ — Items Recorded at Fair Value on a Nonrecurring Basis The following table presents the carrying value of assets held at September 30, 2021, which were written down to fair value during the nine months ended September 30, 2021: (Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Collateral dependent individually analyzed loans $ 3,563 $ — $ — $ 3,563 Total assets at fair value on a nonrecurring basis $ 3,563 $ — $ — $ 3,563 -32- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the carrying value of assets held at December 31, 2020, which were written down to fair value during the year ended December 31, 2020: (Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Collateral dependent individually analyzed loans $ 1,720 $ — $ — $ 1,720 Loan servicing rights 7,434 — — 7,434 Total assets at fair value on a nonrecurring basis $ 9,154 $ — $ — $ 9,154 The following tables present valuation techniques and unobservable inputs for assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value: (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range of Inputs Utilized (Weighted Average) September 30, 2021 Collateral dependent individually analyzed loans $ 3,563 Appraisals of collateral Discount for costs to sell 0 % - 14 % ( 11 %) Appraisal adjustments 0 % - 100 % ( 15 %) (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range of Inputs Utilized (Weighted Average) December 31, 2020 Collateral dependent individually analyzed loans $ 1,720 Appraisals of collateral Discount for costs to sell 0 % - 25 % ( 11 %) Appraisal adjustments 0 % - 100 % ( 15 %) Loan servicing rights 7,434 Discounted cash flow Discount rates 10 % - 14 % ( 10 %) Prepayment rates 18 % - 42 % ( 21 %) Valuation of Financial Instruments The estimated fair values and related carrying amounts for financial instruments for which fair value is only disclosed are presented below as of the periods indicated. The tables exclude financial instruments for which the carrying value approximates fair value such as cash and cash equivalents, FHLB stock, accrued interest receivable, bank-owned life insurance, non-maturity deposits and accrued interest payable. (Dollars in thousands) September 30, 2021 Carrying Amount Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets: Loans, net of allowance for credit losses on loans $ 4,244,693 $ 4,174,632 $ — $ — $ 4,174,632 Financial Liabilities: Time deposits $ 1,464,284 $ 1,468,196 $ — $ 1,468,196 $ — FHLB advances 222,592 225,069 — 225,069 — Junior subordinated debentures 22,681 20,136 — 20,136 — -33- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (Dollars in thousands) December 31, 2020 Carrying Amount Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets: Loans, net of allowance for credit losses on loans $ 4,151,884 $ 4,114,628 $ — $ — $ 4,114,628 Financial Liabilities: Time deposits $ 1,296,396 $ 1,302,128 $ — $ 1,302,128 $ — FHLB advances 593,859 602,000 — 602,000 — Junior subordinated debentures 22,681 19,422 — 19,422 — Note 12 - Revenue from Contracts with Customers The following tables summarize total revenues as presented in the Unaudited Consolidated Statements of Income and the related amounts that are from contracts with customers within the scope of ASC 606. As shown below, a substantial portion of our revenues are specifically excluded from the scope of ASC 606. For the three months ended September 30, 2021 2020 (Dollars in thousands) Revenue (1) ASC 606 Revenue (2) Revenue (1) ASC 606 Revenue (2) Net interest income $ 36,070 $ — $ 31,654 $ — Noninterest income: Asset-based wealth management revenues 10,224 10,224 8,786 8,786 Transaction-based wealth management revenues 231 231 168 168 Total wealth management revenues 10,455 10,455 8,954 8,954 Mortgage banking revenues 6,373 — 12,353 — Card interchange fees 1,265 1,265 1,161 1,161 Service charges on deposit accounts 673 673 598 598 Loan related derivative income 728 — 1,264 — Income from bank-owned life insurance 618 — 567 — Other income 408 310 571 491 Total noninterest income 20,520 12,703 25,468 11,204 Total revenues $ 56,590 $ 12,703 $ 57,122 $ 11,204 (1) As reported in the Consolidated Statements of Income. (2) Revenue from contracts with customers in scope of ASC 606. -34- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) For the nine months ended September 30, 2021 2020 (Dollars in thousands) Revenue (1) ASC 606 Revenue (2) Revenue (1) ASC 606 Revenue (2) Net interest income $ 103,695 $ — $ 95,201 $ — Noninterest income: Asset-based wealth management revenues 29,798 29,798 25,297 25,297 Transaction-based wealth management revenues 980 980 951 951 Total wealth management revenues 30,778 30,778 26,248 26,248 Mortgage banking revenues 24,294 — 33,300 — Card interchange fees 3,714 3,714 3,139 3,139 Service charges on deposit accounts 1,917 1,917 1,975 1,975 Loan related derivative income 2,370 — 3,818 — Income from bank-owned life insurance 1,781 — 1,922 — Other income 2,233 1,834 1,313 1,026 Total noninterest income 67,087 38,243 71,715 32,388 Total revenues $ 170,782 $ 38,243 $ 166,916 $ 32,388 (1) As reported in the Consolidated Statements of Income. (2) Revenue from contracts with customers in scope of ASC 606. The Corporation recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), automated teller machine (“ATM”) fees, wire transfer fees, overdraft charge fees, and stop-payment and returned check fees. Such revenue is derived from transactional information and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction. The Corporation recognizes revenue over a period of time, generally monthly, as services are performed and performance obligations are satisfied. Such revenue includes wealth management revenues and service charges on deposit accounts. Wealth management revenues are categorized as either asset-based revenues or transaction-based revenues. Asset-based revenues include trust and investment management fees that are earned based upon a percentage of asset values under administration. Transaction-based revenues include tax preparation fees, commissions and other service fees. Fee revenue from service charges on deposit accounts represent service charges assessed to customers who hold deposit accounts at the Bank. The following table presents revenue from contracts with customers based on the timing of revenue recognition: (Dollars in thousands) Three Months Nine Months Periods ended September 30, 2021 2020 2021 2020 Revenue recognized at a point in time: Card interchange fees $ 1,265 $ 1,161 $ 3,714 $ 3,139 Service charges on deposit accounts 531 447 1,516 1,488 Other income 247 441 1,678 895 Revenue recognized over time: Wealth management revenues 10,455 8,954 30,778 26,248 Service charges on deposit accounts 142 151 401 487 Other income 63 50 156 131 Total revenues from contracts in scope of Topic 606 $ 12,703 $ 11,204 $ 38,243 $ 32,388 Receivables for revenue from contracts with customers primarily consist of amounts due for wealth management services performed for which the Corporation’s performance obligations have been fully satisfied. Receivables amounted to -35- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) $ 4.8 million at both September 30, 2021 and December 31, 2020 and were included in other assets in the Unaudited Consolidated Balance Sheets. Deferred revenues, which are considered contract liabilities under ASC 606, represent advance consideration received from customers for which the Corporation has a remaining performance obligation to fulfill. Contract liabilities are recognized as revenue over the life of the contract as the performance obligations are satisfied. The balances of contract liabilities were insignificant at both September 30, 2021 and December 31, 2020 and were included in other liabilities in the Unaudited Consolidated Balance Sheets. For commissions and incentives that are in scope of ASC 606, such as those paid to employees in our wealth management services and commercial banking segments in order to obtain customer contracts, contract cost assets are established. The contract cost assets are capitalized and amortized over the estimated useful life that the asset is expected to generate benefits. The carrying value of contract cost assets amounted to $ 1.6 million at September 30, 2021, compared to $ 1.5 million at December 31, 2020 and were included in other assets in the Unaudited Consolidated Balance Sheets. The amortization of contract cost assets is recorded within salaries and employee benefits expense in the Unaudited Consolidated Statements of Income. Note 13 - Defined Benefit Pension Plans Washington Trust maintains a qualified pension plan for the benefit of certain eligible employees who were hired prior to October 1, 2007. Washington Trust also has non-qualified retirement plans to provide supplemental retirement benefits to certain employees, as defined in the plans. The defined benefit pension plans were previously amended to freeze benefit accruals after a 10 -year transition period ending in December 2023. The following table presents components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss), on a pre-tax basis: (Dollars in thousands) Qualified Pension Plan Non-Qualified Retirement Plans Three Months Nine Months Three Months Nine Months Periods ended September 30, 2021 2020 2021 2020 2021 2020 2021 2020 Net Periodic Benefit Cost: Service cost (1) $ 592 $ 541 $ 1,777 $ 1,623 $ 52 $ 43 $ 156 $ 128 Interest cost (2) 500 626 1,502 1,879 84 116 253 349 Expected return on plan assets (2) ( 1,203 ) ( 1,135 ) ( 3,611 ) ( 3,404 ) — — — — Recognized net actuarial loss (2) 531 396 1,591 1,187 180 139 542 419 Net periodic benefit cost $ 420 $ 428 $ 1,259 $ 1,285 $ 316 $ 298 $ 951 $ 896 (1) Included in salaries and employee benefits expense in the Unaudited Consolidated Statements of Income. (2) Included in other expenses in the Unaudited Consolidated Statements of Income. The following table presents the measurement date and weighted-average assumptions used to determine net periodic benefit cost: Qualified Pension Plan Non-Qualified Retirement Plans For the nine months ended September 30, 2021 2020 2021 2020 Measurement date Dec 31, 2020 Dec 31, 2019 Dec 31, 2020 Dec 31, 2019 Equivalent single discount rate for benefit obligations 2.71 % 3.42 % 2.51 % 3.30 % Equivalent single discount rate for service cost 2.86 3.54 2.94 3.62 Equivalent single discount rate for interest cost 2.16 3.07 1.97 2.93 Expected long-term return on plan assets 5.75 5.75 N/A N/A Rate of compensation increase 3.75 3.75 3.75 3.75 -36- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 14 - Share-Based Compensation Arrangements During the nine months ended September 30, 2021, the Corporation granted performance share unit awards and nonvested share unit awards. Performance share unit awards were granted to certain key employees providing the opportunity to earn shares of common stock over a 3 -year performance period. The weighted average fair value of the performance share unit awards was $ 46.15 . The number of shares to be vested will be contingent upon the Corporation’s attainment of certain performance measures as detailed in the performance share award agreements. Based on the most recent performance assumption available, it is estimated that 51,156 shares will be earned. In addition, the Corporation granted to certain key employees and non-executive directors 8,360 nonvested share units with 3 -year cliff vesting. The weighted average grant date fair value of the nonvested share units was $ 50.81 . Note 15 - Business Segments Washington Trust segregates financial information in assessing its results among its Commercial Banking and Wealth Management Services operating segments. The Corporate unit includes activity not allocated to the operating segments. Management uses certain methodologies to allocate income and expenses to the business lines. The methodologies are periodically reviewed and revised. Results may be restated, when necessary, to reflect changes in organizational structure or allocation methodology. A funds transfer pricing (“FTP”) methodology is used to assign interest income and interest expense to each interest-earning asset and interest-bearing liability on a matched maturity funding basis. The matched maturity funding concept considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated. Loans are assigned a FTP rate for funds used and deposits are assigned a FTP rate for funds provided. Certain indirect expenses are allocated to segments. These include indirect expenses such as technology, operations and other support functions. Commercial Banking The Commercial Banking operating segment includes commercial, residential and consumer lending activities; mortgage banking activities; deposit generation; cash management activities; and direct banking activities, which include the operation of ATMs, telephone banking, internet banking and mobile banking services and customer support and sales. Wealth Management Services The Wealth Management Services operating segment includes investment management; holistic financial planning services; personal trust and estate services, including services as trustee, personal representative, custodian and guardian; settlement of decedents’ estates; and institutional trust services, including custody and fiduciary services. Corporate Corporate includes the Treasury Unit, which is responsible for managing the wholesale investment portfolio and wholesale funding needs. It also includes income from bank-owned life insurance (“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. -37- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the statement of operations and total assets for Washington Trust’s reportable segments: (Dollars in thousands) Commercial Banking Wealth Management Services Corporate Consolidated Total Three months ended September 30, 2021 2020 2021 2020 2021 2020 2021 2020 Net interest income (expense) $ 35,732 $ 33,103 ($ 25 ) ($ 24 ) $ 363 ($ 1,425 ) $ 36,070 $ 31,654 Provision for credit losses — 1,325 — — — — — 1,325 Net interest income (expense) after provision for credit losses 35,732 31,778 ( 25 ) ( 24 ) 363 ( 1,425 ) 36,070 30,329 Noninterest income 9,440 15,940 10,455 8,954 625 574 20,520 25,468 Noninterest expenses: Depreciation and amortization expense 718 601 341 350 46 38 1,105 989 Other noninterest expenses 20,108 20,273 7,190 7,178 4,117 3,904 31,415 31,355 Total noninterest expenses 20,826 20,874 7,531 7,528 4,163 3,942 32,520 32,344 Income (loss) before income taxes 24,346 26,844 2,899 1,402 ( 3,175 ) ( 4,793 ) 24,070 23,453 Income tax expense (benefit) 5,394 5,828 710 403 ( 785 ) ( 1,100 ) 5,319 5,131 Net income (loss) $ 18,952 $ 21,016 $ 2,189 $ 999 ($ 2,390 ) ($ 3,693 ) $ 18,751 $ 18,322 Total assets at period end $ 4,520,169 $ 4,588,419 $ 75,438 $ 74,942 $ 1,407,036 $ 1,186,431 $ 6,002,643 $ 5,849,792 Expenditures for long-lived assets 309 360 13 20 16 26 338 406 (Dollars in thousands) Commercial Banking Wealth Management Services Corporate Consolidated Total Nine months ended September 30, 2021 2020 2021 2020 2021 2020 2021 2020 Net interest income (expense) $ 105,579 $ 94,692 ($ 72 ) ($ 117 ) ($ 1,812 ) $ 626 $ 103,695 $ 95,201 Provision for credit losses ( 2,000 ) 10,561 — — — — ( 2,000 ) 10,561 Net interest income (expense) after provision for loan losses 107,579 84,131 ( 72 ) ( 117 ) ( 1,812 ) 626 105,695 84,640 Noninterest income 33,510 43,515 31,778 26,248 1,799 1,952 67,087 71,715 Noninterest expenses: Depreciation and amortization expense 2,040 1,832 1,044 1,058 139 116 3,223 3,006 Other noninterest expenses 60,093 56,571 20,594 20,408 16,335 11,290 97,022 88,269 Total noninterest expenses 62,133 58,403 21,638 21,466 16,474 11,406 100,245 91,275 Income (loss) before income taxes 78,956 69,243 10,068 4,665 ( 16,487 ) ( 8,828 ) 72,537 65,080 Income tax expense (benefit) 17,275 14,769 2,412 1,216 ( 3,832 ) ( 2,168 ) 15,855 13,817 Net income (loss) $ 61,681 $ 54,474 $ 7,656 $ 3,449 ($ 12,655 ) ($ 6,660 ) $ 56,682 $ 51,263 Total assets at period end $ 4,520,169 $ 4,588,419 $ 75,438 $ 74,942 $ 1,407,036 $ 1,186,431 $ 6,002,643 $ 5,849,792 Expenditures for long-lived assets 2,026 1,147 87 86 53 98 2,166 1,331 -38- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 16 - Other Comprehensive Income (Loss) The following tables present the activity in other comprehensive income (loss): Three months ended September 30, 2021 2020 (Dollars in thousands) Pre-tax Amounts Income Taxes Net of Tax Pre-tax Amounts Income Taxes Net of Tax Securities available for sale: Changes in fair value of available for sale debt securities ($ 4,127 ) ($ 990 ) ($ 3,137 ) ($ 4,582 ) ($ 1,077 ) ($ 3,505 ) Cash flow hedges: Change in fair value of cash flow hedges ( 288 ) ( 69 ) ( 219 ) ( 146 ) ( 39 ) ( 107 ) Net cash flow hedge (losses) gains reclassified into earnings (1) (2) ( 243 ) ( 59 ) ( 184 ) 344 83 261 Net change in fair value of cash flow hedges ( 531 ) ( 128 ) ( 403 ) 198 44 154 Defined benefit plan obligations: Amortization of net actuarial losses (3) 711 171 540 535 125 410 Total other comprehensive loss ($ 3,947 ) ($ 947 ) ($ 3,000 ) ($ 3,849 ) ($ 908 ) ($ 2,941 ) (1) The pre-tax amounts for the three months ended September 30, 2021 are included in interest expense on FHLB advances and interest and fees on loans in the Unaudited Consolidated Statements of Income. (2) The pre-tax amounts for the three months ended September 30, 2020 are included in interest expense on FHLB advances, interest expense on junior subordinated debentures and interest and fees on loans in the Unaudited Consolidated Statements of Income. (3) The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income. Nine months ended September 30, 2021 2020 (Dollars in thousands) Pre-tax Amounts Income Taxes Net of Tax Pre-tax Amounts Income Taxes Net of Tax Securities available for sale: Changes in fair value of available for sale debt securities ($ 16,212 ) ($ 3,890 ) ($ 12,322 ) $ 9,794 $ 2,301 $ 7,493 Cash flow hedges: Change in fair value of cash flow hedges ( 21 ) ( 5 ) ( 16 ) ( 1,994 ) ( 473 ) ( 1,521 ) Net cash flow hedge (losses) gains reclassified into earnings (1) (2) ( 27 ) ( 7 ) ( 20 ) 829 196 633 Net change in fair value of cash flow hedges ( 48 ) ( 12 ) ( 36 ) ( 1,165 ) ( 277 ) ( 888 ) Defined benefit plan obligations: Amortization of net actuarial losses (3) 2,133 512 1,621 1,606 377 1,229 Total other comprehensive (loss) income ($ 14,127 ) ($ 3,390 ) ($ 10,737 ) $ 10,235 $ 2,401 $ 7,834 (1) The pre-tax amounts for the nine months ended September 30, 2021 are included in interest expense on FHLB advances and interest and fees on loans in the Unaudited Consolidated Statements of Income. (2) The pre-tax amounts for the nine months ended September 30, 2020 are included in interest expense on FHLB advances, interest expense on junior subordinated debentures and interest and fees on loans in the Unaudited Consolidated Statements of Income. (3) The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income. The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax: (Dollars in thousands) Net Unrealized Gains (Losses) on Available For Sale Debt Securities Net Unrealized Losses on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total For the three months ended September 30, 2021 Balance at June 30, 2021 $ 696 ($ 1,080 ) ($ 14,744 ) ($ 15,128 ) Other comprehensive loss before reclassifications ( 3,137 ) ( 219 ) — ( 3,356 ) Amounts reclassified from accumulated other comprehensive income — ( 184 ) 540 356 Net other comprehensive (loss) income ( 3,137 ) ( 403 ) 540 ( 3,000 ) Balance at September 30, 2021 ($ 2,441 ) ($ 1,483 ) ($ 14,204 ) ($ 18,128 ) -39- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (Dollars in thousands) Net Unrealized Gains (Losses) on Available For Sale Debt Securities Net Unrealized Losses on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total For the nine months ended September 30, 2021 Balance at December 31, 2020 $ 9,881 ($ 1,447 ) ($ 15,825 ) ($ 7,391 ) Other comprehensive loss before reclassifications ( 12,322 ) ( 16 ) — ( 12,338 ) Amounts reclassified from accumulated other comprehensive income — ( 20 ) 1,621 1,601 Net other comprehensive (loss) income ( 12,322 ) ( 36 ) 1,621 ( 10,737 ) Balance at September 30, 2021 ($ 2,441 ) ($ 1,483 ) ($ 14,204 ) ($ 18,128 ) (Dollars in thousands) Net Unrealized Gains (Losses) on Available For Sale Debt Securities Net Unrealized (Losses) Gains on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total For the three months ended September 30, 2020 Balance at June 30, 2020 $ 14,224 ($ 1,835 ) ($ 12,851 ) ($ 462 ) Other comprehensive loss before reclassifications ( 3,505 ) ( 107 ) — ( 3,612 ) Amounts reclassified from accumulated other comprehensive income — 261 410 671 Net other comprehensive (loss) income ( 3,505 ) 154 410 ( 2,941 ) Balance at September 30, 2020 $ 10,719 ($ 1,681 ) ($ 12,441 ) ($ 3,403 ) (Dollars in thousands) Net Unrealized Gains on Available For Sale Debt Securities Net Unrealized (Losses) Gains on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total For the nine months ended September 30, 2020 Balance at December 31, 2019 $ 3,226 ($ 793 ) ($ 13,670 ) ($ 11,237 ) Other comprehensive income (loss) before reclassifications 7,493 ( 1,521 ) — 5,972 Amounts reclassified from accumulated other comprehensive income — 633 1,229 1,862 Net other comprehensive income (loss) 7,493 ( 888 ) 1,229 7,834 Balance at September 30, 2020 $ 10,719 ($ 1,681 ) ($ 12,441 ) ($ 3,403 ) -40- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 17 - Earnings per Common Share The following table presents the calculation of earnings per common share: (Dollars and shares in thousands, except per share amounts) Three Months Nine Months Periods ended September 30, 2021 2020 2021 2020 Earnings per common share - basic: Net income $ 18,751 $ 18,322 $ 56,682 $ 51,263 Less: dividends and undistributed earnings allocated to participating securities ( 55 ) ( 37 ) ( 163 ) ( 109 ) Net income available to common shareholders $ 18,696 $ 18,285 $ 56,519 $ 51,154 Weighted average common shares 17,320 17,260 17,303 17,287 Earnings per common share - basic $ 1.08 $ 1.06 $ 3.27 $ 2.96 Earnings per common share - diluted: Net income $ 18,751 $ 18,322 $ 56,682 $ 51,263 Less: dividends and undistributed earnings allocated to participating securities ( 54 ) ( 37 ) ( 162 ) ( 109 ) Net income available to common shareholders $ 18,697 $ 18,285 $ 56,520 $ 51,154 Weighted average common shares 17,320 17,260 17,303 17,287 Dilutive effect of common stock equivalents 124 57 148 82 Weighted average diluted common shares 17,444 17,317 17,451 17,369 Earnings per common share - diluted $ 1.07 $ 1.06 $ 3.24 $ 2.95 Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 148,542 and 149,675 , respectively, for the three and nine months ended September 30, 2021, compared to 223,210 and 221,047 , respectively, for the same periods in 2020. Note 18 - Commitments and Contingencies Financial Instruments with Off-Balance Sheet Risk The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Unaudited Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. Financial Instruments Whose Contract Amounts Represent Credit Risk (Unfunded Commitments) Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements. Each borrower’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the borrower. Standby Letters of Credit Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support the financing needs of the Bank’s commercial customers. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The collateral supporting those commitments is essentially the same as for other commitments. Most standby letters of credit extend for one year. The maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered, totaled $ 12.1 million and $ 11.7 million, respectively, as of September 30, 2021 and December 31, 2020. At September 30, 2021 and December 31, 2020, there were no liabilities to beneficiaries resulting from -41- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) standby letters of credit. Fee income on standby letters of credit was insignificant for the three and nine months ended September 30, 2021 and 2020. A substantial portion of the standby letters of credit were supported by pledged collateral. The collateral obtained is determined based on management’s credit evaluation of the customer. Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required. Financial Instruments Whose Notional Amounts Exceed the Amount of Credit Risk Mortgage Loan Commitments Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with these rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Both interest rate lock commitments and forward sale commitments are derivative financial instruments. Loan Related Derivative Contracts The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers are similar to those used for loans. The interest rate swaps with other counterparties are generally subject to bilateral collateralization terms. The following table presents the contractual and notional amounts of financial instruments with off-balance sheet risk: (Dollars in thousands) Sep 30, 2021 Dec 31, 2020 Financial instruments whose contract amounts represent credit risk (unfunded commitments): Commitments to extend credit: Commercial loans $ 483,296 $ 453,493 Home equity lines 352,999 319,744 Other loans 125,949 89,078 Standby letters of credit 12,146 11,709 Financial instruments whose notional amounts exceed the amounts of credit risk: Mortgage loan commitments: Interest rate lock commitments 97,856 167,671 Forward sale commitments 195,105 279,653 Loan related derivative contracts: Interest rate swaps with customers 998,530 991,002 Mirror swaps with counterparties 998,530 991,002 Risk participation-in agreements 147,404 92,717 Interest rate risk management contracts: Interest rate swaps 360,000 60,000 See Note 10 for additional disclosure pertaining to derivative financial instruments. ACL on Unfunded Commitments The ACL on unfunded commitments is management’s estimate of expected credit losses over the expected contractual term (or life) in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. Unfunded commitments for home equity lines of credit and commercial demand loans are considered unconditionally cancellable for regulatory capital purposes and, therefore, are excluded from the calculation to estimate the ACL on unfunded commitments. For each portfolio, estimated loss rates and funding factors are applied to the corresponding balance of unfunded commitments. For each portfolio, the estimated loss rates applied to unfunded commitments are the same quantitative and qualitative loss rates applied to the corresponding on-balance sheet amounts in determining the ACL on loans. The estimated funding factor applied to unfunded commitments represents the likelihood that the funding will occur and is based upon the Corporation’s average historical utilization rate for each portfolio. -42- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The ACL on unfunded commitments is included in other liabilities in the Unaudited Consolidated Balance Sheets. The ACL on unfunded commitments is adjusted through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income. The activity in the ACL on unfunded commitments for the three months ended September 30, 2021 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 1,214 $ 1,045 $ 2,259 $ 56 $ — $ 18 $ 18 $ 2,333 Provision 4 ( 8 ) ( 4 ) 4 — — — — Ending Balance $ 1,218 $ 1,037 $ 2,255 $ 60 $ — $ 18 $ 18 $ 2,333 The activity in the ACL on unfunded commitments for the nine months ended September 30, 2021 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 907 $ 1,402 $ 2,309 $ 54 $ — $ 19 $ 19 $ 2,382 Provision 311 ( 365 ) ( 54 ) 6 — ( 1 ) ( 1 ) ( 49 ) Ending Balance $ 1,218 $ 1,037 $ 2,255 $ 60 $ — $ 18 $ 18 $ 2,333 The activity in the ACL on unfunded commitments for the three months ended September 30, 2020 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 887 $ 1,207 $ 2,094 $ 42 $ — $ 19 $ 19 $ 2,155 Provision ( 30 ) 60 30 ( 5 ) — — — 25 Ending Balance $ 857 $ 1,267 $ 2,124 $ 37 $ — $ 19 $ 19 $ 2,180 The activity in the ACL on unfunded commitments for the nine months ended September 30, 2020 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 136 $ 144 $ 280 $ 6 $ — $ 7 $ 7 $ 293 Adoption of Topic 326 817 626 1,443 34 — 6 6 1,483 Provision ( 96 ) 497 401 ( 3 ) — 6 6 404 Ending Balance $ 857 $ 1,267 $ 2,124 $ 37 $ — $ 19 $ 19 $ 2,180 Other Contingencies Litigation The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated balance sheets or statements of income of the Corporation. -43- Management's Discussion and Analysis