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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-25 · 314 added, 535 removed, 882 unchanged (49% of the section changed)

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For a full understanding of this analysis, it should be read in conjunction with other sections of this Annual Report on Form 10-K, including Part I, “Item 1.

Business”, Part II, “Item 6.

Selected Financial Data” and Part II, “Item 8.

Business” and Part II, “Item 8.

Financial Statements and Supplementary Data.”

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“Management’s Discussion and Analysis of Results of Operations and Financial Condition,” which was filed with the SEC on February 25, 2021.

Critical Accounting Policies and Estimates

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

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

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

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

The updated policy is described in detail below.

Allowance for Credit Losses on Loans

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Management's Discussion and Analysis

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

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

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

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

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

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

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

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

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

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

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

These qualitative risk factors include:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Valuation of Goodwill and Identifiable Intangible Assets

Goodwill represents the excess of the purchase price over the net fair value of the acquired businesses.

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

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

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

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

Management's Discussion and Analysis

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

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

Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value.

Significant judgment is applied when goodwill is assessed for impairment.

This judgment includes, but may not be limited to, the selection of appropriate discount rates, the identification of relevant market comparables and the development of cash flow projections.

The selection and weighting of the various fair value techniques may result in a higher or lower fair value.

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

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

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

The market approach takes into consideration fair values of comparable companies operating in similar lines of business that are potentially subject to similar economic and environmental factors and could be considered reasonable investment alternatives.

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

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

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

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

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

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

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

If applicable, the Corporation tests each of the intangibles by comparing the carrying value of the intangible asset to the sum of undiscounted cash flows expected to be generated by the asset.

If the carrying amount of the asset exceeds its undiscounted cash flows, then an impairment loss would be recognized for the amount by which the carrying amount exceeds its fair value.

Impairment would result in a write-down to the estimated fair value based on the anticipated discounted future cash flows.

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

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

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

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

Changes in the original assumptions could change the amount of the intangible assets recognized and the resulting amortization.

Subsequent changes in assumptions could result in recognition of impairment of these intangible assets.

When there are events or circumstances that occur indicating that the carrying amount of the Corporation’s intangible assets may not be recoverable, the Corporation tests each of the intangibles by comparing the carrying value of the intangible asset to the sum of undiscounted cash flows expected to be generated by the asset.

As of December 31, 2020, the carrying value of intangible assets was deemed to be recoverable.

These assumptions used in the impairment tests of goodwill and intangible assets are susceptible to change based on changes in economic conditions and other factors.

Any change in the estimates which the Corporation uses to determine the carrying value of the Corporation’s goodwill and identifiable intangible assets, or which otherwise adversely affects their value or estimated lives could adversely affect the Corporation’s results of operations.

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

Management's Discussion and Analysis

Defined Benefit Pension Plans

The determination of the defined benefit obligation and net periodic benefit cost related to our defined benefit pension plans requires estimates and assumptions such as discount rates, mortality, rates of return on plan assets and compensation increases.

Management evaluates the assumptions annually and uses an actuarial firm to assist in making these estimates.

Changes in assumptions due to market conditions, governing laws and regulations, or circumstances specific to the Corporation could result in material changes to defined benefit pension obligation and net periodic benefit cost.

See Note 17 to the Consolidated Financial Statements for additional information.

The Corporation offers a comprehensive product line of banking and financial services to individuals and businesses, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut;

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

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

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

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

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

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

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

We believe the key to future growth is providing customers with convenient in-person service and digital banking solutions.

In 2022, we plan to open a new full-service branch in Cumberland, Rhode Island.

Risk Management

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

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

Management's Discussion and Analysis

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

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

Credit risk also exists with respect to investment securities.

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It exists because the repricing frequency and magnitude of interest-earning assets and interest-bearing liabilities are not identical.

See the “Asset/Liability Management and Interest Rate Risk” section below for additional disclosure.

Management's Discussion and Analysis

Liquidity risk is the risk that the Corporation will not have the ability to generate adequate amounts of cash in the most economical way for it to meet its maturing liability obligations and customer loan demand.

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

For detailed disclosure regarding liquidity management, see the “Liquidity and Capital Resources” section below.

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

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Total revenues 228,829 226,886 1,943 1

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

Provision for credit losses (4,822) 12,342 (17,164) (139)

Noninterest expense 135,464 125,384 10,080 8

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

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

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

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

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

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

Net income totaled $76.9 million in 2021, up by 10% from the $69.8 million reported in 2020.

In 2021, net interest income benefited from lower funding costs and a reduction in wholesale funding balances, as well as accelerated amortization of net deferred fee balances on PPP loans that were forgiven by the SBA and prepayment penalty fee income associated with commercial loan payoffs.

The decrease in noninterest income reflected lower mortgage banking revenues, partially offset by higher wealth management revenues.

The reduction in credit loss provisioning in 2021 reflected improvements in forecasted economic conditions, a downward trend in loan loss rates and relatively stable asset quality metrics.

Noninterest expenses included debt prepayment penalty expense associated with prepaying higher yielding FHLB advances, as well as an increase in salaries and employee benefits expense.

Management's Discussion and Analysis

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

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Tax-exempt income is converted to an FTE basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit.

Unrealized gains (losses) on available for sale securities and fair value adjustments on mortgage loans held for sale are excluded from the average balance and yield calculations.

Unrealized gains (losses) on available for sale securities and changes in fair value on mortgage loans held for sale are excluded from the average balance and yield calculations.

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

Management's Discussion and Analysis

Years ended December 31, 2021 2020

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Taxable debt securities 1,013,445 14,295 1.41 902,278 20,050 2.22

Nontaxable debt securities — — — 450 23 5.11

Total securities

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

FHLB stock 21,422 436 2.04 45,235 2,240 4.95

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Commercial loans $885 $1,055

Nontaxable debt securities — 5

Total $1,055 $1,304

Net Interest Income

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Prepayment penalty fee income associated with loans payoffs amounted to $3.2 million (or 6 basis points benefit to NIM) and $303 thousand (or 0 basis points benefit to NIM), respectively, in 2021 and 2020.

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

Additionally, as PPP loans are forgiven by the SBA, related unamortized net fee balances are accelerated and amortized, increasing net interest income.

Changes in market interest rates affect the level of loan prepayments and the receipt of payments on mortgage-backed securities.

Prepayment speeds generally increase as market interest rates decline and decrease as market interest rates rise.

Changes in prepayment speeds could increase or decrease the level of net amortization of premiums and discounts, thereby affecting interest income.

As noted in the Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans (a net reduction to net interest income) amounted to $3.4 million in 2021, down by $2.3 million from 2020.

The decline in net amortization reflected accelerated amortization of net deferred fee balances on PPP loans, partially offset by an increase in amortization of net premiums on securities.

Accelerated amortization of net deferred fee balances on PPP loans forgiven by the SBA amounted to $5.4 million (or 10 basis points benefit to NIM) and $423 thousand (or 0 basis points benefit to NIM), respectively, in 2021 and 2020.

FTE net interest income in 2021 amounted to $142.3 million, up by $13.8 million, or 11%, from 2020.

Declines in average interest-bearing liability balances and growth in average interest-earning assets contributed $8.9 million of net interest income in 2021.

Declines in funding costs outpaced lower asset yields and contributed $5.0 million of net interest income.

The NIM was 2.59% in 2021, up by 19 basis points from 2.40% in 2020.

NIM benefited from lower funding costs and a reduction in average wholesale funding balances.

It also benefited from accelerated amortization of net deferred fee balances on PPP loans that were forgiven by the SBA and loan prepayment fees.

Excluding the impact of both accelerated net deferred fee amortization on PPP loans and commercial loan prepayment fee income, the NIM amounted to 2.43% in 2021, compared to 2.39% in 2020.

Total average securities for 2021 increased by $111.2 million, or 12%, from the average balance for 2020.

The FTE rate of return on securities was 1.41% in 2021, down by 81 basis points from 2.22% in 2020, reflecting purchases of relatively lower yielding debt securities and lower market interest rates.

Total average loan balances increased by $57.4 million, or 1%, from the average balance for 2020.

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

Management's Discussion and Analysis

portion of 2019 and first quarter of 2020.

This reflected growth in average residential real estate loan balances.

The yield on total loans in 2021 was 3.36%, down by 14 basis points from 3.50% in 2020.

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

The yield on total loans benefited from accelerated amortization of net deferred fee

Management's Discussion and Analysis

balances on PPP loans that were forgiven by the SBA and commercial loan prepayment fee income.

Excluding the impact of these items for both periods, the yield on total loans amounted to 3.16% in 2021, down by 32 basis points, from 3.48% in 2020.

Yields reflected lower market interest rates.

The average balance of FHLB advances for 2021 decreased by $549.8 million, or 60%, compared to the average balance for 2020.

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

The average rate paid on such advances in 2021 was 1.02%, down by 70 basis points from 1.72% in 2020, reflecting maturities and payoffs of higher-yielding FHLB advances and lower market interest rates.

Included in total average interest-bearing deposits were out-of-market brokered time deposits, which increased by $142.8 million, or 28%, from 2020.

The average rate paid on wholesale brokered time deposits in 2021 was 0.19%, down by 97 basis points from 1.16% in 2020, reflecting lower market interest rates.

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

Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, increased by $425.9 million, or 15%, from the average balance in 2020, largely due to growth in average lower-cost deposit categories, partially offset by maturities of higher-cost promotional time deposits.

The average rate paid on in-market interest-bearing deposits in 2021 was 0.35%, down by 38 basis points from 0.73% in 2020, largely due to downward repricing of interest-bearing in-market deposits reflecting lower market interest rates.

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

The following table presents certain information on a FTE basis regarding changes in our interest income and interest expense for the period indicated.

The following table presents certain information on an FTE basis regarding changes in our interest income and interest expense for the period indicated.

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

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Taxable debt securities 2,237 (7,992) (5,755)

Nontaxable debt securities (11) (12) (23)

Total securities

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

FHLB stock (852) (952) (1,804)

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Provision for Credit Losses

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

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

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

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

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

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

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

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

A negative provision for credit losses (or a benefit) of $4.8 million was recognized in earnings in 2021 compared to a positive provision for credit losses (or a charge) of $12.3 million in 2020.

The reduction in the provision for credit losses and the related ACL in 2021 reflected improvements in forecasted economic conditions, a downward trend in loan loss rates and relatively stable asset quality metrics.

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

Management's Discussion and Analysis

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

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

local economic and credit conditions;

the direction of real estate values;

and regulatory guidelines.

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

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

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

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

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

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

Net charge-offs totaled $417 thousand, or 0.01% of average loans, in 2021, compared to $1.1 million, or 0.03% of average loans, in 2020.

The ACL on loans was $39.1 million, or 0.91% of total loans, at December 31, 2021, compared to $44.1 million, or 1.05% of total loans, at December 31, 2020.

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

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Income from bank-owned life insurance 2,925 2,491 434 17

Net realized losses on securities — (53) 53 100

Other income 2,540 3,100 (560) (18)

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

Management's Discussion and Analysis

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

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Total wealth management revenues $41,282 $35,454 $5,828 16 %

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

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

Wealth management revenues for 2021 increased by $5.8 million, or 16%, from 2020, due to growth in asset-based revenues.

The increase in asset-based revenues correlated with the increase in average AUA balances in 2021.

Management's Discussion and Analysis

The following table presents the changes in wealth management AUA:

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Balance at the end of period $7,784,211 $6,866,737

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

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

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

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

Wealth management AUA totaled $7.8 billion at December 31, 2021, up by $917.5 million, or 13%, from December 31, 2020, primarily due to net investment appreciation.

The average balance of AUA in 2021 increased by 19% from the average balance in 2020.

Mortgage banking revenues represented 33% of total noninterest income in 2021, compared to 48% for 2020.

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

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

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

(Dollars in thousands) Change

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$33,752 $42,008 ($8,256) (20 %)

Unrealized gains, net (2)

Changes in fair value, net (2)

(5,558) 5,998 (11,556) (193)

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

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

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

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

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

Mortgage banking revenues in 2021 decreased by $18.8 million, or 40%, from 2020.

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

Included in mortgage banking revenues are changes in the fair value of mortgage loans held for sale and forward loan commitments, which are primarily based on current market prices in the secondary market and correlate to changes in the size of the mortgage pipeline.

The decline in mortgage banking revenues was mainly attributable to a decline in current market pricing and lower sales volume.

Mortgage loans sold to the secondary market totaled $953.4 million in 2021 compared to $1.1 billion in 2020, as a larger proportion of loans were originated for portfolio in 2021.

Card interchange fees increased by $709 thousand, or 17%, from 2020 largely due to higher transaction volume.

Included in income from bank-owned life insurance (“BOLI”) was the recognition of $526 thousand and $229 thousand, respectively, of income associated with the receipt of life insurance proceeds in 2021 and 2020.

Excluding these amounts from both periods, income from BOLI was up by $137 thousand, or 6%, from 2020, reflecting a $7.0 million purchase of BOLI in 2021.

Other income decreased by $560 thousand, or 18%, from 2020.

Included in other income was $1.0 million of income associated with a litigation settlement in 2021 and a gain of $1.4 million associated with the sale of a limited partnership interest in a low-income housing tax credit investment in 2020.

Excluding these items from both periods, other income was down by $160 thousand, or 9%, from 2020.

Management's Discussion and Analysis

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

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

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

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

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

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

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

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

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

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

Noninterest Expense

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Noninterest Expense Analysis

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

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

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

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

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

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

There were no such expenses incurred in 2019.

Management's Discussion and Analysis

Salaries and employee benefits expense for 2021 increased by $4.4 million, or 5%, from 2020, largely reflecting annual merit increases, increased staffing levels and increases in performance-based compensation expense.

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

Outsourced services expense for 2021 increased by $1.4 million, or 12%, from 2020, reflecting increases in third party services and processing costs.

Legal, audit and professional fees for 2021 decreased by $888 thousand, or 24%, from 2020, reflecting a decline in legal expenses.

Debt prepayment penalty expense amounted to $6.9 million in 2021, compared to $1.4 million in 2020, resulting from the prepayment of higher-yielding FHLB advances.

Other expenses for 2021 decreased by $971 thousand, or 10% from 2020.

Included in other expenses in 2020 was a charge of $630 thousand related to counterfeit checks drawn on a commercial customer’s account.

Excluding the impact of this item, other expenses was down by $341 thousand, or 4%, from 2020.

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

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Effective income tax rate 21.7 % 21.7 %

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

The effective tax rate remained essentially unchanged in 2021.

The effective tax rates differed from the federal rate of 21%, primarily due to state income tax expense, partially offset by the benefits of tax-exempt income, income from BOLI, federal tax credits and the recognition of excess tax expense or benefits associated with the settlement of share-based awards.

Management's Discussion and Analysis

The Corporation’s net deferred tax assets amounted to $14.0 million at December 31, 2021, compared to $12.2 million at December 31, 2020.

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

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

Net deferred tax assets increased in 2021, largely reflecting an increase in the deferred tax asset associated with the temporary decline in fair value of securities available for sale.

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

Segment Reporting

The Corporation manages its operations through two business segments, Commercial Banking and Wealth Management Services.

Activity not related to the segments, including activity related to the investment securities portfolio, wholesale funding matters and administrative units are considered Corporate.

The Corporate unit also includes income from BOLI and the residual impact of methodology allocations such as funds transfer pricing offsets.

Methodologies used to allocate income and expenses to business lines are periodically reviewed and revised.

The Corporation manages its operations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services.

In the fourth quarter of 2021 the Corporation re-assessed its reportable business segments and related allocation methodology in connection with the implementation of a new budgeting and profitability system in the same period.

Management determined it was appropriate to allocate activity previously reported in the Corporate Unit to the Commercial Banking and Wealth Management Services operating segments.

The Corporate Unit had included activities related to the Treasury function, which is responsible for managing the investment portfolio and wholesale funding needs, as well as certain administrative and executive expenses that were not previously allocated to the operating segments.

The prior year segment information contained within this report has been restated to reflect this change to reportable business segments and related allocation methodology.

See Note 19 to the Consolidated Financial Statements for additional disclosure related to business segments.

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Net income $68,632 $66,698 $1,934 3 %

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

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

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

Management's Discussion and Analysis

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

Net interest income for the Commercial Banking segment increased by $13.9 million, or 11%, from 2020.

Net interest income largely benefited from lower cost of funds, accelerated amortization of net deferred fee balances on PPP loans forgiven by the SBA and prepayment penalty fee income associated with loans payoffs, and was negatively impacted by lower yields on loans and securities.

A negative provision for credit losses (or a benefit) of $4.8 million was recognized in earnings in 2021, compared to a positive provision (or a charge) of $12.3 million in 2020.

The reduction in credit loss provisioning reflected a improvements in forecasted economic conditions, a downward trend in loss rates and relatively stable asset quality metrics.

See additional discussion under the caption “Asset Quality” below.

Noninterest income derived from the Commercial Banking segment decreased by $18.9 million, or 30%, from 2020, largely reflecting lower mortgage banking revenues.

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

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

Management's Discussion and Analysis

Commercial Banking noninterest expenses were up by $9.7 million, or 10%, from 2020, largely reflecting increases in debt prepayment penalty expense, salaries and employee benefits and outsourced services.

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

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Net income $8,238 $3,131 $5,107 163 %

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

Noninterest income for the Wealth Management Services segment increased by $6.8 million, or 19%, compared to 2020, due to an increase in asset-based revenues.

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

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

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

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

(Dollars in thousands) Change

Years Ended December 31, 2020 2019 $ %

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

Noninterest income 2,525 2,367 158 7

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

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

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

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

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

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

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

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

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

There was no such expense incurred in 2019.

Management's Discussion and Analysis

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

Noninterest expenses for the Wealth Management Services segment increased by $352 thousand, or 1%, compared to 2020, largely reflecting an increase in salaries and employee benefits expense, partially offset by a decline in legal expenses.

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

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Total assets amounted to $5.9 billion at December 31, 2021, up by $138.0 million, or 2%, from the end of 2020.

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

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

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

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

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

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

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

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

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

The securities portfolio increased by $148.3 million, or 17%, reflecting purchases, partially offset by pay-downs, called securities and a temporary decline in fair value.

Total loans increased by $76.9 million, or 2%, as loan originations and purchases were partially offset by payoffs, pay-downs and PPP loans forgiven by the SBA.

Management's Discussion and Analysis

Total deposits increased by $601.7 million, or 14%, reflecting growth across all in-market deposit categories, partially offset by a decrease in wholesale brokered time deposits.

FHLB advances decreased by $448.9 million, or 76%, from December 31, 2020, as lower levels of wholesale funding were needed given the in-market deposits increase.

Shareholders’ equity amounted to $564.8 million at December 31, 2021, up by $30.6 million, or 6%, from the balance at December 31, 2020, reflecting earnings net of dividend declarations and a decline in the accumulated other comprehensive income component of shareholders’ equity.

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

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

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

The Corporation does not maintain a portfolio of trading securities.

As of December 31, 2021 and December 31, 2020, the Corporation did not have securities designated as held to maturity.

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

Management's Discussion and Analysis

Determination of Fair Value

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See Notes 4 and 15 to the Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities.

Management's Discussion and Analysis

Securities Portfolio

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December 31, 2021 2020

Amount % Amount % Amount %

Amount % Amount %

Available for Sale Debt Securities:

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824,962 79 740,305 83

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

Individual name issuer trust preferred debt securities 9,138 1 12,669 1

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Total available for sale debt securities $1,042,859 100 % $894,571 100 %

(Dollars in thousands)

December 31, 2020 2019 2018

Amount % Amount % Amount %

Held to Maturity Debt Securities:

Mortgage-backed securities issued by U.S.

government agencies and U.S.

government-sponsored enterprises

$— — % $— — % $10,415 100 %

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

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

The securities portfolio amounted to $1.0 billion as of December 31, 2021, or 18% of total assets, compared to $894.6 million as of December 31, 2020, or 16% or total assets.

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

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government-sponsored enterprises.

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

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

Management's Discussion and Analysis

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

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.

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

(Dollars in thousands) December 31, 2020

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

Available for Sale Debt Securities:

Obligations of U.S.

government-sponsored enterprises:

Amortized cost

$806 $41,896 $88,484 $— $131,186

Weighted average yield

2.15 % 2.58 % 1.30 % — % 1.72 %

Mortgage-backed securities issued by U.S.

The securities portfolio increased by $148.3 million, or 17%, from the end of 2020, reflecting purchases of U.S.

government agency and U.S.

government-sponsored debt securities, including mortgage-backed securities, totaling $599.4 million, with a weighted average yield of 1.67%.

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

As of December 31, 2021, the carrying amount of available for sale debt securities included net unrealized losses of $8.9 million, compared to net unrealized gains of $13.0 million as of December 31, 2020.

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

government agencies and U.S.

government-sponsored enterprises:

Amortized cost

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

Weighted average yield

2.49 2.34 2.13 1.71 2.22

Individual name issuer trust preferred debt securities:

Amortized cost

— — 13,341 — 13,341

Weighted average yield

— — 0.82 — 0.82

Corporate bonds:

Amortized cost

— — 3,279 7,874 11,153

Weighted average yield

— — 0.84 1.34 1.19

Total available for sale debt securities:

Amortized cost

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

Weighted average yield

2.49 % 2.37 % 1.79 % 1.69 % 2.11 %

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

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

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

Federal Home Loan Bank Stock

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Based on the capital adequacy and the liquidity position of the FHLB, management believes there is no impairment related to the carrying amount of its FHLB stock as of December 31, 2021.

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

Total loans amounted to $4.3 billion at December 31, 2021, up by $76.9 million, or 2%, from the end of 2020.

Total loans excluding PPP loans amounted to $4.2 billion at December 31, 2021, up by $238.7 million, or 6%, from

Management's Discussion and Analysis

The following table sets forth the composition of the Corporation’s loan portfolio for each of the past five years:

December 31, 2020, largely reflecting growth in the residential real estate portfolio.

The following table sets forth the composition of the Corporation’s loan portfolio:

(Dollars in thousands)

December 31, 2021 2020

Amount % Amount % Amount % Amount % Amount %

Amount % Amount %

Commercial real estate (1)

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Total loans $4,272,925 100 % $4,195,990 100 %

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

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

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

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

C&I also includes PPP loans.

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

Commercial & industrial also includes PPP loans.

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

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After one year to five years 700,330 302,654 1,002,984 169,233 9,373 8,382 17,755 1,189,972

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

After five years to fifteen years 661,153 214,910 876,063 485,461 13,619 5,285 18,904 1,380,428

After fifteen years — 472 472 1,033,409 221,901 1,222 223,123 1,257,004

Total $1,639,062 $641,555 $2,280,617 $1,726,975 $247,697 $17,636 $265,333 $4,272,925

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

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

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

Due to the fact that the Bank may, consistent with industry practice, renew a significant portion of commercial loans at or immediately prior to their maturity by renewing the loans on substantially

Management's Discussion and Analysis

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

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

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

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

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

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

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

Management considers deferments when estimating the ACL.

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

similar or revised terms, the principal repayments actually received by the Bank are anticipated to be significantly less than the amounts contractually due in any particular period.

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

COVID-19 Pandemic Related

Through December 31, 2021, Washington Trust processed loan payment deferral modifications, or “deferments”, on 654 loans totaling $728 million, of which active deferments remain on 2 loans totaling $9.7 million.

The majority of these deferments qualified as eligible loan modifications under Section 4012 of the CARES Act, as amended, and therefore were not required to be classified as TDRs.

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

Management monitors active deferments through its quarterly watched asset review.

See additional information under the caption “Commercial Real Estate Loans” below.

Through December 31, 2021, Washington Trust has originated 2,939 PPP loans with principal balances totaling $326.7 million and has processed SBA forgiveness on 2,580 PPP loans with principal balances totaling $283.5 million.

As of December 31, 2021, the carrying value of PPP loans amounted to $38.0 million and included net unamortized loan origination fee balances of $1.3 million.

See additional information under the caption “Commercial & Industrial Loans” below.

Commercial Loans

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

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

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

Our participation in commercial loans originated by other banks amounted to $451.6 million and $408.8 million, respectively, at December 31, 2021 and 2020.

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

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

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Commercial Real Estate Loans

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

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

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

Commercial real estate (“CRE”) loans totaled $1.6 billion at December 31, 2021, up by $6.0 million, or 0.4%, from the balance at December 31, 2020.

Included in CRE loans were construction and development loans of $122.4 million and $111.2 million, respectively, as of December 31, 2021 and 2020.

In 2021, CRE loan originations and advances totaled approximately $365 million, largely offset by payoffs and pay-downs.

Shared national credit balances outstanding included in the CRE loan portfolio totaled $3.5 million at December 31, 2021.

The balance was included in the pass-rated category of commercial loan credit quality and current with respect to contractual payment terms at December 31, 2021.

Management's Discussion and Analysis

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Hospitality 31 184,990 11 40 157,720 10

Healthcare 15 109,321 7 16 110,409 7

Industrial and warehouse 35 137,254 8 28 97,055 6

Healthcare 13 128,189 8 15 109,321 7

Commercial mixed use 20 38,978 2 22 42,405 2

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$39,945 $32,200

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

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

The following table presents a summary of CRE loan deferments:

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

Count Balance % of Outstanding Balance (1)

CRE Deferments by Segment:

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

Retail 3 20,600 6 5 39,781 12

Healthcare 1 18,307 17 2 22,305 20

Office 1 1,833 1 2 2,457 1

Commercial mixed use — — — 1 637 2

Multi-family dwelling — — — 1 364 —

Other 7 27,786 39 7 27,785 39

Total CRE deferments

2 $9,720 1 % 38 $176,402 11 %

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

Management's Discussion and Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

(1) CRE deferments as a percent of the outstanding CRE portfolio balance as of the dates indicated..

CRE loans with active deferments remain on one relationship with two loans in the hospitality segment as of December 31, 2021.

This active deferment is a principal only payment deferral and the borrower continues to pay interest.

The hospitality segment was a segment that management previously identified as “at risk” of significant impact from the COVID-19 pandemic.

This active deferment is expected to expire in the first quarter of 2022.

Commercial and Industrial Loans

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

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

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

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

The average PPP loan size was $117 thousand.

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

Commercial and industrial (“C&I”) loans amounted to $641.6 million at December 31, 2021, down by $175.9 million, or 22%, from the balance at December 31, 2020.

This included a net reduction of PPP loans of $161.8 million.

Excluding PPP loans, C&I loans decreased by $14.1 million in 2021, as loan originations of approximately $125 million were offset by payoffs, pay-downs and a decrease in line utilization.

Management's Discussion and Analysis

Shared national credit balances outstanding included in the C&I loan portfolio totaled $40.8 million at December 31, 2021.

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

Management's Discussion and Analysis

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

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Healthcare and social assistance 101 $174,376 27 % 253 $200,217 24 %

Manufacturing 146 88,802 11 65 53,561 9

Owner occupied and other real estate 185 72,957 11 268 74,309 9

Manufacturing 65 55,341 9 146 88,802 11

Educational services 28 52,211 8 53 64,969 8

Retail 79 47,290 7 192 63,895 8

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

Professional, scientific and technical

Transportation and warehousing

31 35,064 5 42 24,061 3

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37 32,087 5 91 29,415 4

32 28,394 3 11 22,162 4

Finance and insurance

59 31,279 5 106 26,244 3

Transportation and warehousing

Accommodation and food services 114 28,320 4 271 47,020 6

14 25,045 4 32 28,394 3

Professional, scientific and technical

69 8,912 1 265 39,295 5

Public administration

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$18,721 $19,500

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

At December 31, 2021, we had no active deferments on C&I loans.

Management's Discussion and Analysis

PPP loans are included in the C&I portfolio.

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

(Dollars in thousands) December 31, 2020

Count Outstanding Balance % of Total

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

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

PPP Loans by Segment:

Healthcare and social assistance 173 $47,354 24 %

Accommodation and food services 69 $13,687 36 % 209 $23,678 12 %

Manufacturing 89 23,321 12

Healthcare and social assistance 36 6,926 18 173 47,354 24

Professional, scientific and technical

34 2,464 6 220 20,031 10

6 2,034 5 20 2,478 1

Retail 22 1,698 4 134 12,107 6

Educational services 32 9,681 5

Owner occupied and other real estate 115 9,241 5

Entertainment and recreation

Finance and insurance

Transportation and warehousing

Public administration

12 1,693 4 61 3,386 2

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

1,706 $199,780 100 %

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

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

Management's Discussion and Analysis

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

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

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

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

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

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

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

C&I Deferments by Segment:

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

Accommodation and food services

Manufacturing 11 1,274 3 89 23,321 12

Owner occupied and other real estate 20 709 2 115 9,241 5

Educational services 8 312 1 32 9,681 5

Finance and insurance

6 299 1 55 2,000 1

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9 138 — 21 2,059 1

Manufacturing 2 947 1 2 947 1

Entertainment and recreation

Public administration

1 21 — 4 483 —

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

113 6,764 20 573 43,961 21

Total C&I deferments

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

347 $38,019 100 % 1,706 $199,780 100 %

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

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

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

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

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

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

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

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

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

The deferment was executed for a restaurant.

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

This industry segment consists largely of golf courses and marinas.

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

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

Average PPP loan size $110 $117

Net unamortized fees on PPP loans $1,267 $3,893

As of February 15, 2022, the carrying value of PPP loans declined to $21.9 million and included net unamortized loan origination fee balances of $780 thousand.

Residential Real Estate Loans

The residential real estate loan portfolio represented 40% of total loans at December 31, 2021.

Management's Discussion and Analysis

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

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

Residential real estate loan origination, refinancing and sales activity was elevated in both 2021 and 2020 in response to low market interest rates.

Management's Discussion and Analysis

The table below presents residential real estate loan sales activity:

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

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

Loans are sold with servicing retained or released.

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The net balance of capitalized servicing rights amounted to $9.8 million and $7.4 million, respectively, as of December 31, 2021 and 2020.

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

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

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

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

Management's Discussion and Analysis

The balance of residential mortgage loans serviced for others, which are not included in the Consolidated Balance Sheets, amounted to $1.5 billion and $1.2 billion, respectively, as of December 31, 2021 and 2020.

Residential real estate loans held in portfolio amounted to $1.7 billion at December 31, 2021, up by $259.7 million, or 18%, from the balance at December 31, 2020, reflecting a higher proportion of loans originated for portfolio, as well as purchases of $39.3 million of loans with a weighted average yield of 2.74%.

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

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

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(1) Includes residential mortgage loans purchased from and serviced by other financial institutions totaling $78.7 million and $131.8 million, respectively, as of December 31, 2021 and 2020.

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

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

As of December 31, 2021, we had no active deferments residential real estate loans.

Consumer Loans

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

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

Home equity lines of credit and home equity loans represented 93% of the total consumer portfolio at December 31, 2021.

Our home equity line and home equity loan origination activities are conducted primarily in southern New England.

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

The consumer loan portfolio totaled $265.3 million at December 31, 2021, down by $12.9 million, or 5%, from December 31, 2020.

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $9.4 million and $10.0 million, respectively, at December 31, 2021 and December 31, 2020.

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

As of December 31, 2021, we had no active deferments on consumer loans.

Management's Discussion and Analysis

Investment in Bank-Owned Life Insurance

BOLI amounted to $92.6 million and $84.2 million, respectively, at December 31, 2021 and 2020.

The increase in 2021 included $7.0 million of purchases of BOLI.

BOLI provides a means to mitigate increasing employee benefit costs.

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BOLI is invested in the “general account” of quality insurance companies.

All such general account carriers were rated “A” or better by A.M.

Best and “A2” or better by Moody’s at December 31, 2020.

All such general account carriers were rated as investment grade at December 31, 2021 by credit rating agencies such as A.M.

Best, Moody’s and Standard and Poors, Inc.

BOLI is included in the Consolidated Balance Sheet at its cash surrender value.

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

These committees report the results of their respective oversight functions to

Management's Discussion and Analysis

the Board of Directors.

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

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

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

Management's Discussion and Analysis

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

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Commercial real estate

$— $603 $925 $4,954 $7,811

Commercial & industrial

— 657 — 283 1,337

Total commercial

— 1,260 925 5,237 9,148

Residential Real Estate:

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13,576 11,981

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

88 88 — 16 116

Total consumer

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

Total nonaccrual loans 14,203 13,197

Property acquired through foreclosure or repossession, net

— 1,109 2,142 131 1,075

Total nonperforming assets $14,203 $13,197

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Total past due loans to total loans 0.24% 0.30%

Allowance for credit losses on loans to total loans 0.91% 1.05%

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

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

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

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

Total nonperforming assets increased by $1.0 million from December 31, 2020, all in nonaccrual loans.

At December 31, 2021, there were no properties held in OREO.

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

Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $844 thousand in 2020, compared to $1.2 million in 2019.

Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms was approximately $647 thousand in 2021, compared to $844 thousand in 2020.

Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $528 thousand and $416 thousand, respectively, in 2021 and 2020.

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

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

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

As of both December 31, 2021 and December 31, 2020, the composition of nonaccrual loans was 100% residential and consumer.

Nonaccrual residential real estate mortgage loans amounted to $13.6 million at December 31, 2021, up by $1.6 million from the end of 2020.

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

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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.

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

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

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Commercial & industrial

1 2,792 5 6,814

Total commercial

5 13,395 8 8,606

Residential Real Estate:

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Total TDRs 17 $19,147 26 $15,685

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

As of December 31, 2021, the composition of TDRs was 70% commercial and 30% residential and consumer, compared to 55% and 45%, respectively, as of December 31, 2020.

Management's Discussion and Analysis

Commercial TDRs amounted to $13.4 million at December 31, 2021, up by $4.8 million from the end of 2020.

This increase reflected the restructuring of one commercial relationship with two loans totaling $9.7 million that did not qualify for additional TDR accounting relief, partially offset by payoffs.

Residential and consumer TDRs amounted to $5.8 million at December 31, 2021, down by $1.3 million from the end of 2020.

The ACL included specific reserves for TDRs of $148 thousand and $159 thousand, respectively, at December 31, 2021 and 2020.

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Total commercial

268 0.01 1,434 0.07

Residential Real Estate:

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

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

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

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

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

Accordingly, there can be no assurance that other loans will not

Management's Discussion and Analysis

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

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

become 90 days or more past due, be placed on nonaccrual, become restructured, or require increased allowance coverage and provision for loan losses.

There were no potential problem loans at December 31, 2021, compared to $12.7 million in potential problem loans at September 30, 2021.

The balance of potential problem loans at September 30, 2021 consisted of three loans associated with two commercial real estate relationships.

In the fourth quarter of 2021, one relationship with two loans was restructured and classified as an accruing TDR;

and the second relationship with one loan was paid off.

Allowance for Credit Losses on Loans

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In 2020, the ACL for individually analyzed loans was measured using a DCF method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan was collateral dependent, at the fair value of the collateral.

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

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

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

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

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

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

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

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

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

The DCF methodology combines the probability of default, the

Management's Discussion and Analysis

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

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

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

loss given default, prepayment speeds and remaining life of the loan to estimate a reserve for each loan.

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

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

The ACL on loans amounted to $44.1 million at December 31, 2020, up by $17.1 million, or 63%, from the balance at December 31, 2019.

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

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

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

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

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

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

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

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

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

The ACL on loans amounted to $39.1 million at December 31, 2021, down by $5.0 million, or 11%, from the balance at December 31, 2020.

The ACL on loans as a percentage of total loans, also known as the reserve coverage ratio, was 0.91% at December 31, 2021, compared to 1.05% at December 31, 2020.

A negative provision for credit losses (or a benefit) of $4.8 million was recognized in earnings in 2021, compared to a positive provision for credit losses (or a charge) of $12.3 million charged to earnings in 2020.

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

Net charge-offs totaled $417 thousand, or 0.01% of average loans, in 2021, compared to net charge-offs of $1.1 million, or 0.03% of average loans, in 2020.

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

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

conversely, improving conditions or assumptions could lead to further reductions in the ACL on loans.

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

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

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

Allocated ACL ACL to Loans Allocated ACL ACL to Loans

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

Commercial real estate $18,933 1.16 % 38 % $22,065 1.35 % 39 %

7 unchanged sentences

Total allowance for credit losses on loans at end of period $39,088 0.91 % 100 % $44,106 1.05 % 100 %

Management's Discussion and Analysis

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

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

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

(Dollars in thousands)

December 31, 2020 2019 2018 2017 2016

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

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

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

Residential Real Estate:

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

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

Other 471 1 347 1 254 — 340 1 705 1

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

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

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

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

Management's Discussion and Analysis

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Commercial real estate

356 1,028 627 1,867 5,816

Commercial & industrial

586 21 10 336 759

Total commercial

2 unchanged sentences

Residential real estate

99 486 250 74 200

224 390 193 79 147

52 95 107 106 90

Total consumer

276 485 300 185 237

Total charge-offs 663 1,317 2,020

Commercial real estate

51 125 25 82 56

Commercial & industrial

24 168 119 169 156

Total commercial

75 293 144 251 212

Residential real estate:

Residential real estate

20 — 21 39 11

52 72 29 33 37

25 22 27 23 37

Total consumer

77 94 56 56 74

Total recoveries 246 172 387

3 unchanged sentences

Net charge-offs to average loans 0.01 % 0.03 % 0.04 %

Effective January 1, 2020, Washington Trust adopted ASC 326, which requires that the ACL be calculated based on current expected credit losses over the full remaining expected life of the loans and also consider expected future changes in macroeconomic conditions.

The provisions of ASC 326 were adopted using the modified retrospective method.

Therefore, information prior to January 1, 2020 in the table above has not been adjusted and continues to be reported under the GAAP in effect prior to the adoption of ASC 326.

Sources of Funds

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The Corporation uses funds to originate and purchase loans, purchase investment securities, conduct operations, expand the branch network and pay dividends to shareholders.

Management's Discussion and Analysis

The Corporation offers a wide variety of deposit products to consumer and business customers.

1 unchanged sentence

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

The Bank uses these deposit sweep services to place

Management's Discussion and Analysis

customer and client funds into interest-bearing demand accounts, money market accounts, and/or time deposits issued by other participating banks.

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

Customer and client funds are placed at one or more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance.

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Total deposits amounted to $5.0 billion at December 31, 2021, up by $601.7 million, or 14%, in 2021.

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

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

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

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

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

The Bank estimates, in accordance with regulatory reporting requirements, that its uninsured deposits amounted to $1.3 billion at December 31, 2021.

Included in total deposits were out-of-market brokered time deposits totaling $515.2 million at December 31, 2021, down by $76.3 million, or 13% in 2021.

Excluding out-of-market brokered time deposits, in-market deposits were up by $678.0 million, or 18%, from the balance at December 31, 2020, with growth across all deposit categories.

In-market deposit balances have benefited from federal government stimulus programs issued in response to the COVID-19 pandemic.

The following table presents the amount of time certificates of deposit in denominations of $250 thousand or more at December 31, 2021, maturing during the periods indicated:

(Dollars in thousands)

Three months or less $26,130

Over three months to six months 29,468

Over six months to 12 months 60,148

Over 12 months 68,540

Total time deposits $184,286

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

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

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

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

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

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

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

Management's Discussion and Analysis

FHLB advances totaled $145.0 million at December 31, 2021, down by $448.9 million from the balance at the end of 2020, as lower levels of wholesale funding were needed given the in-market deposits increase.

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

For additional information regarding FHLB advances see Note 12 to the Consolidated Financial Statements.

Liquidity and Capital Resources

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

Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and brokered time deposits), cash flows from the Corporation’s securities portfolios and loan repayments.

Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and brokered time deposits), cash flows from the investment securities portfolios and loan repayments.

Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs, although management has no intention to do so at this time.

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

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

Management's Discussion and Analysis

usual” cash flows.

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

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

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and (3) maturing time deposits.

The Corporation has established collateralized borrowing capacity with the FRB and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business.

The Corporation has established collateralized borrowing capacity with the FRBB and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business.

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

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(2) As of December 31, 2021 and 2020, loans with a carrying value of $8.2 million and $12.6 million, respectively.

and securities available for sale with a carrying value of $14.9 million and $17.0 million, respectively, were pledged to the FRB resulting in this additional unused borrowing capacity.

and securities available for sale with a carrying value of $13.5 million and $14.9 million, respectively, were pledged to the FRBB resulting in this additional unused borrowing capacity.

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

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

Net cash provided by operating activities amounted to $36.5 million in 2020.

Net income of $69.8 million was offset by mortgage banking related adjustments to reconcile net income to net cash used in operating activities.

Net cash used in investing activities totaled $264.2 million in 2020, reflecting outflows to fund the increase in and purchases of loans, as well as purchases of debt securities.

Management's Discussion and Analysis

Net cash provided by operating activities amounted to $100.8 million in 2021 reflecting net income of $76.9 million and mortgage banking related adjustments to reconcile net income to net cash provided by operating activities.

Net cash used in investing activities totaled $240.9 million in 2021, reflecting outflows to fund purchases of debt securities, as well as an increase in and purchases of loans.

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

In 2020, net cash provided by financing activities amounted to $291.6 million, with net increases in deposits, partially offset by a net decrease in FHLB advances, the payment of dividends to shareholders and treasury stock purchases.

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

In 2021, net cash provided by financing activities amounted to $116.3 million, with growth in deposits, partially offset by a net decrease in FHLB advances and the payment of dividends to shareholders.

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

Capital Resources

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This increase included net income of $76.9 million, partially offset by $36.8 million in dividend declarations.

The Corporation declared dividends of $2.05 per share in 2020, representing an increase of 5 cents per share, or 3%, over last year.

Changes in shareholders’ equity also included a net increase of $3.8 million in the AOCI component of shareholders’ equity.

The net increase in AOCI reflected an increase in the fair value of available for sale debt securities, partially offset by a $3.9 million charge to AOCI associated with the annual remeasurement of pension plan liabilities.

This charge was largely due to a decline in the discount rate used to measure the present value of pension plan liabilities as a result of a reduction in market interest rates in 2020.

Management's Discussion and Analysis

Reductions to retained earnings of $6.1 million due to the adoption of ASC 326, as well as a net increase in treasury stock of $3.4 million were also included in changes in shareholders’ equity.

The Corporation declared dividends of $2.10 per share in 2021, representing an increase of 5 cent per share, or 2%, over last year.

The dividend payout ratio (dividends declared per share to diluted earnings per share) was 47.84% in 2021, compared to 51.25% in 2020.

Changes in shareholders’ equity also included a net decrease of $12.6 million in the AOCI component of shareholders’ equity.

The net decrease in AOCI reflected a temporary decrease in the fair value of available for sale debt securities, partially offset by a $4.5 million increase associated with the annual remeasurement of pension plan liabilities.

The increase associated with the annual remeasurement of pension liabilities was largely due to an increase in the discount rate used to measure the present value of pension plan liabilities, resulting from a rise in market interest rates in 2021.

The ratio of total equity to total assets amounted to 9.65% at December 31, 2021, compared to a ratio of 9.35% at December 31, 2020.

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See Note 12 to the Consolidated Financial Statements for additional information.

Management's Discussion and Analysis

(Dollars in thousands) Amount of Commitment Expiration – Per Period

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(1) Amounts presented represent notional amounts.

Management's Discussion and Analysis

Off-Balance Sheet Arrangements

In the normal course of business, the Corporation engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts.

Such transactions are used to meet the financing needs of its customers and to manage the exposure to fluctuations in interest rates.

These financial transactions include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts.

These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk.

The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers, commitments to extend credit, and standby letters of credit are similar to those used for loans.

Interest rate risk management contracts with other counterparties are generally subject to bilateral collateralization terms.

For additional information on derivative financial instruments and financial instruments with off-balance sheet risk see Notes 14 and 22 to the Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Corporation’s financial statements.

Asset/Liability Management and Interest Rate Risk

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

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

In addition to measuring the change in net interest income as compared to an unchanged rate scenario, the ALCO also measures the trend of both net interest income and net interest margin over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.

Management's Discussion and Analysis

In addition to measuring the change in net interest income as compared to an unchanged rate scenario, the ALCO also measures the trend of both net interest income and NIM over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.

The ALCO regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve of up to 500 basis points, as well as parallel changes in interest rates of up to 400 basis points.

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

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

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

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

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

The relative change in interest rate sensitivity from December 31, 2020 as shown in the above table was largely attributable to an interest rate swap designated as a cash flow hedge that was executed in the second quarter of 2021 to hedge the interest rate risk associated with a pool of variable rate commercial loans.

The receive-fixed, pay-floating interest rate swap reduced the positive exposure to rising rates, while it will enhance earnings in the current rate environment and mitigate risk in declining rate scenarios.

The interest rate swap effectively fixes a portion of variable rate loan assets.

A higher level of longer-term fixed rate assets at December 31, 2021 as compared to December 31, 2020 has also contributed to the reduction in the positive exposure to rising rates as they would not reprice upward in a rising rate environment.

Management's Discussion and Analysis

indicator of interest rate risk or future NIM.

Over time, the repricing, maturity and prepayment characteristics of financial instruments and the composition of the Corporation’s balance sheet may change to a different degree than estimated.

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As market interest rates have declined, the banking industry has attracted low-cost core savings deposits.

The ALCO recognizes that a portion of these increased levels of low-cost balances could shift into higher yielding alternatives in

Management's Discussion and Analysis

the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above.

The ALCO recognizes that a portion of these increased levels of low-cost balances could shift into higher yielding alternatives in the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above.

Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment, which may cause interest rate sensitivity to differ from the results as presented.

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Total change in market value as of December 31, 2020 $13,481 ($69,538)

Critical Accounting Policies and Estimates

Estimates and assumptions are necessary in the application of certain accounting policies and procedures and can be susceptible to significant change.

Critical accounting policies are defined as those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Corporation’s financial condition or results of operations.

Management considers its accounting policy relating to the allowance for credit losses on loans to be a critical accounting policy.

Allowance for Credit Losses on Loans

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

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

Management's Discussion and Analysis

Consolidated Statements of Income.

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

At December 31, 2021 the ACL on loans totaled $39.1 million, compared to $44.1 million at December 31, 2020.

A significant portion of our ACL is allocated to the commercial portfolio (both CRE and C&I).

As of December 31, 2021 and 2020, the ACL allocated to the total commercial portfolio was $29.8 million and $34.3 million, respectively.

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

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

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

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

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

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

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

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

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

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

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

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

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

conversely, improving conditions or assumptions could lead to further reductions in the ACL on loans.

In estimating the ACL on loans, management considers the sensitivity of the model and significant judgments and assumptions that could result in an amount that is materially different from management’s estimate.

Given the concentration of ACL allocation to the total commercial portfolio and the significant judgments made by management in deriving the qualitative loss factors, management analyzed the impact that changes in judgments could have.

The range of impact was an ACL allocated to the total commercial loan portfolio between $16.0 million and $47.9 million at December 31, 2021.

The sensitivity and related range of impact is a hypothetical analysis and is not intended to represent management’s judgments or assumptions of qualitative loss factors that were utilized at December 31, 2021 in estimation of the ACL on loans recognized on the Consolidated Balance Sheet.

If the assumptions underlying the determination of the ACL prove to be incorrect, the ACL may not be sufficient to cover actual loan losses and an increase to the ACL may be necessary to allow for different assumptions or adverse developments.

In addition, a problem with one or more loans could require a significant increase to the ACL.

Recently Issued Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Corporation’s financial statements.

Quantitative and Qualitative Disclosures About Market Risk.

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What changed 10-K

Item 7. Management’s Discussion and Analysis