WASH filing — read by section

Item 7. Management’s Discussion and Analysis

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 
 The following analysis is intended to provide the reader with a further understanding of the consolidated financial condition and results of operations of the Corporation for the periods shown. 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” and Part II, “Item 8. Financial Statements and Supplementary Data.” 
 
 Information pertaining to 2019 was included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, starting on page 34 under Part II, Item 7. “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” which was filed with the SEC on February 25, 2021. 
 
 Overview 
 The Corporation offers a comprehensive product line of banking and financial services to individuals and businesses, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut; its ATMs; telephone banking; mobile banking and its internet website (www.washtrust.com). 
 
 Our largest source of operating income is net interest income, which is the difference between interest earned on loans and securities and interest paid on deposits and borrowings. In addition, we generate noninterest income from a number of sources, including wealth management services, mortgage banking activities and deposit services. Our principal noninterest expenses include salaries and employee benefit costs, outsourced services provided by third party vendors, occupancy and facility-related costs and other administrative expenses. 
 
 We continue to leverage our strong regional brand to build market share and remain steadfast in our commitment to provide superior service. 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 
 The Corporation has a comprehensive enterprise risk management (“ERM”) program through which the Corporation identifies, measures, monitors and controls current and emerging material risks. 
 
 The Board of Directors is responsible for oversight of the ERM program. The ERM program enables the aggregation of risk across the Corporation and ensures the Corporation has the tools, programs and processes in place to support informed decision making, to anticipate risks before they materialize and to maintain the Corporation’s risk profile consistent with its risk strategy. 
 
 The Board of Directors has approved an ERM Policy that addresses each category of risk. The risk categories include: credit risk, interest rate risk, liquidity risk, price and market risk, compliance risk, strategic and reputation risk, and operational risk. A description of each risk category is provided below. 
 
 Credit risk represents the possibility that borrowers or other counterparties may not repay loans or other contractual obligations according to their terms due to changes in the financial capacity, ability and willingness of such borrowers or counterparties to meet their obligations. In some cases, the collateral securing 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 the real estate and other assets serving as collateral for the repayment of loans. Credit risk also exists with respect to investment securities. For further discussion regarding the credit risk and the credit quality of the Corporation’s loan portfolio, see Notes 5 and 6 to the Consolidated Financial Statements. For further discussion regarding the Corporation’s securities portfolio, see Note 4 to the Consolidated Financial Statements. 
 
 Interest rate risk is the risk of loss to future earnings due to changes in interest rates. It exists because the repricing frequency and magnitude of interest-earning assets and interest-bearing liabilities are not identical. See the “Asset/Liability Management and Interest Rate Risk” section below for additional disclosure. 
 
 -31- 

 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, 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. Interest rate risk, discussed above, is the most significant market risk to which the Corporation is exposed. The Corporation is also exposed to financial market risk and housing market risk. 
 
 Compliance risk represents the risk of regulatory sanctions or financial loss resulting from the failure to comply with laws, rules and regulations and standards of good banking practice. Activities which may expose the Corporation to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, adherence to all applicable laws and regulations and employment and tax matters. 
 
 Strategic and reputation risk represent the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, and failure to assess existing and new opportunities and threats in business, markets and products. 
 
 Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, natural disasters and security risks. 
 
 ERM is an overarching program that includes all areas of the Corporation. A framework approach is utilized to assign responsibility and to ensure that the various business units and activities involved in the risk management life-cycle are effectively integrated. The Corporation has adopted the “three lines of defense” concept that is an industry best practice for ERM. Business units are the first line of defense in managing risk. They are responsible for identifying, measuring, monitoring, and controlling current and emerging risks. They must report on and escalate their concerns. Corporate functions such as Credit Risk Management, Financial Administration, Information Assurance and Compliance, comprise the second line of defense. They are responsible for policy setting and for reviewing and challenging the risk management activities of the business units. They collaborate closely with business units on planning and resource allocation with respect to risk management. Internal Audit is a third line of defense. They provide independent assurance to the Board of Directors of the effectiveness of the first and second lines in fulfilling their risk management responsibilities. 
 
 For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see the section labeled “Risk Factors” in Item 1A of this Annual Report on Form 10-K. 
 
 -32- 

 Management's Discussion and Analysis 

 Results of Operations 
 The following table presents a summarized consolidated statement of operations: 
 
 (Dollars in thousands) Change 
 Years Ended December 31, 2021 2020 $ % 
 Net interest income $141,435 $127,444 $13,991 11 % 
 Noninterest income 87,394 99,442 (12,048) (12) 
 Total revenues 228,829 226,886 1,943 1 
 Provision for credit losses (4,822) 12,342 (17,164) (139) 
 
 Noninterest expense 135,464 125,384 10,080 8 
 Income before income taxes 98,187 89,160 9,027 10 
 Income tax expense 21,317 19,331 1,986 10 
 Net income $76,870 $69,829 $7,041 10 % 

 The following table presents a summary of performance metrics and ratios: 
 
 Years Ended December 31, 2021 2020 
 Diluted earnings per common share $4.39 $4.00 
 Return on average assets (net income divided by average assets) 1.32 % 1.22 % 
 Return on average equity (net income available for common shareholders divided by average equity) 
 14.03 % 13.51 % 
 Net interest income as a percentage of total revenues 62 % 56 % 
 Noninterest income as a percentage of total revenues 38 % 44 % 

 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. 
 
 -33- 

 Management's Discussion and Analysis 

 Average Balances/Net Interest Margin - Fully Taxable Equivalent (“FTE”) Basis 
 The following table presents average balance and interest rate information. Tax-exempt income is converted to 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 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. 
 
 Years ended December 31, 2021 2020 
 (Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate 
 Assets: 
 Cash, federal funds sold and short-term investments $167,898 $181 0.11 % $160,427 $459 0.29 % 
 Mortgage loans held for sale 52,580 1,531 2.91 54,237 1,762 3.25 
 Taxable debt securities 1,013,445 14,295 1.41 902,278 20,050 2.22 
 
 FHLB stock 21,422 436 2.04 45,235 2,240 4.95 
 Commercial real estate 1,643,107 49,551 3.02 1,632,460 52,231 3.20 
 Commercial & industrial 752,934 30,824 4.09 767,176 27,410 3.57 
 Total commercial 
 2,396,041 80,375 3.35 2,399,636 79,641 3.32 
 Residential real estate 
 1,571,459 52,884 3.37 1,488,343 55,866 3.75 
 Home equity 254,289 8,212 3.23 277,296 10,032 3.62 
 Other 19,765 966 4.89 18,929 941 4.97 
 Total consumer 
 274,054 9,178 3.35 296,225 10,973 3.70 
 Total loans 
 4,241,554 142,437 3.36 4,184,204 146,480 3.50 
 Total interest-earning assets 
 5,496,899 158,880 2.89 5,346,381 170,991 3.20 
 Noninterest-earning assets 341,067 358,569 
 Total assets 
 $5,837,966 $5,704,950 
 Liabilities and Shareholders’ Equity: 
 Interest-bearing demand deposits 
 $202,929 $259 0.13 % $159,366 $806 0.51 % 
 NOW accounts 765,584 491 0.06 593,105 368 0.06 
 Money market accounts 984,278 2,413 0.25 839,915 5,402 0.64 
 Savings accounts 521,143 282 0.05 415,741 265 0.06 
 Time deposits (in-market) 702,303 7,749 1.10 742,236 13,138 1.77 
 Total interest-bearing in-market deposits 
 3,176,237 11,194 0.35 2,750,363 19,979 0.73 
 Wholesale brokered time deposits 
 644,151 1,196 0.19 501,306 5,833 1.16 
 Total interest-bearing deposits 
 3,820,388 12,390 0.32 3,251,669 25,812 0.79 
 FHLB advances 370,881 3,800 1.02 920,704 15,806 1.72 
 Junior subordinated debentures 
 22,681 370 1.63 22,681 641 2.83 
 PPPLF borrowings — — — 66,492 233 0.35 
 Total interest-bearing liabilities 
 4,213,950 16,560 0.39 4,261,546 42,492 1.00 
 Noninterest-bearing demand deposits 934,626 759,841 
 Other liabilities 143,197 167,861 
 Shareholders’ equity 546,193 515,702 
 Total liabilities and shareholders’ equity 
 $5,837,966 $5,704,950 
 Net interest income (FTE) 
 $142,320 $128,499 
 Interest rate spread 2.50 % 2.20 % 
 Net interest margin 2.59 % 2.40 % 

 -34- 

 Management's Discussion and Analysis 

 Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency for the years indicated: 
 
 (Dollars in thousands) 
 Years ended December 31, 2021 2020 
 Commercial loans $885 $1,055 
 
 Net Interest Income 
 Net interest income, the primary source of our operating income, totaled $141.4 million and $127.4 million, respectively, for 2021 and 2020. Net interest income is affected by the level of and changes in interest rates, and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Prepayment penalty income associated with loan payoffs is included in net interest income. 
 
 The following discussion presents net interest income on a 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 (“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 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. The yield on total loans benefited from accelerated amortization of net deferred fee 
 
 -35- 

 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 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 $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. 
 
 The average balance of noninterest-bearing demand deposits for 2021 increased by $174.8 million, or 23%, from the average balance for 2020. See additional disclosure under the caption “Sources of Funds.” 
 
 -36- 

 Management's Discussion and Analysis 

 Volume/Rate Analysis - Interest Income and Expense (FTE Basis) 
 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. 
 
 (Dollars in thousands) Changes Due To 
 Years Ended December 31, 2021 vs. 2020 Volume Rate Net Change 
 Interest on interest-earning assets: 
 Cash, federal funds sold and short-term investments $21 ($299) ($278) 
 Mortgage loans held for sale (52) (179) (231) 
 Taxable debt securities 2,237 (7,992) (5,755) 
 
 FHLB stock (852) (952) (1,804) 
 Commercial real estate 332 (3,012) (2,680) 
 Commercial & industrial (516) 3,930 3,414 
 Total commercial 
 (184) 918 734 
 Residential real estate 
 2,959 (5,941) (2,982) 
 Home equity (792) (1,028) (1,820) 
 Other 41 (16) 25 
 Total consumer 
 (751) (1,044) (1,795) 
 Total loans 
 2,024 (6,067) (4,043) 
 Total interest income 
 3,378 (15,489) (12,111) 
 Interest on interest-bearing liabilities: 
 Interest-bearing demand deposits 178 (725) (547) 
 NOW accounts 123 — 123 
 Money market accounts 784 (3,773) (2,989) 
 Savings accounts 60 (43) 17 
 Time deposits (in-market) (671) (4,718) (5,389) 
 Total interest-bearing in-market deposits 
 474 (9,259) (8,785) 
 Wholesale brokered time deposits 1,293 (5,930) (4,637) 
 Total interest-bearing deposits 
 1,767 (15,189) (13,422) 
 FHLB advances (7,140) (4,866) (12,006) 
 Junior subordinated debentures — (271) (271) 
 PPPLF borrowings (117) (116) (233) 
 Total interest expense 
 (5,490) (20,442) (25,932) 
 Net interest income (FTE) 
 $8,868 $4,953 $13,821 

 Provision for Credit Losses 
 The provision for credit losses results from management’s review of the adequacy of the ACL. The ACL is management’s estimate of expected lifetime credit losses as of the reporting date and includes consideration of current forecasted economic conditions. Estimating an appropriate level of ACL necessarily involves a high degree of judgment. 
 
 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. 
 
 -37- 

 Management's Discussion and Analysis 

 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. 
 
 Noninterest Income 
 Noninterest income is an important source of revenue for Washington Trust. The principal categories of noninterest income are shown in the following table: 
 
 (Dollars in thousands) Change 
 Years Ended December 31, 2021 2020 $ % 
 Noninterest income : 
 
 Wealth management revenues $41,282 $35,454 $5,828 16 % 
 
 Mortgage banking revenues 28,626 47,377 (18,751) (40) 
 Card interchange fees 4,996 4,287 709 17 
 Service charges on deposit accounts 2,683 2,742 (59) (2) 
 Loan related derivative income 4,342 3,991 351 9 
 Income from bank-owned life insurance 2,925 2,491 434 17 
 
 Other income 2,540 3,100 (560) (18) 
 
 Total noninterest income $87,394 $99,442 ($12,048) (12 %) 

 Noninterest Income Analysis 
 Revenue from wealth management services represented 47% of total noninterest income in 2021, compared to 36% in 2020. A substantial portion of wealth management revenues is dependent on the value of wealth management AUA and is closely tied to the performance of the financial markets. This portion of wealth management revenues is referred to as “asset-based” and includes trust and investment management fees. Wealth management revenues also include “transaction-based” revenues, such as commissions and other service fees that are not primarily derived from the value of assets. 
 
 The categories of wealth management revenues are shown in the following table: 
 
 (Dollars in thousands) Change 
 Years Ended December 31, 2021 2020 $ % 
 Wealth management revenues: 
 Asset-based revenues $40,215 $34,363 $5,852 17 % 
 Transaction-based revenues 1,067 1,091 (24) (2) 
 Total wealth management revenues $41,282 $35,454 $5,828 16 % 

 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. 
 
 -38- 

 Management's Discussion and Analysis 

 The following table presents the changes in wealth management AUA: 
 
 (Dollars in thousands) 2021 2020 
 Wealth management AUA: 
 Balance at the beginning of period $6,866,737 $6,235,801 
 Net investment appreciation & income 931,302 774,265 
 Net client asset outflows (13,828) (143,329) 
 
 Balance at the end of period $7,784,211 $6,866,737 

 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. 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 
 Years Ended December 31, 2021 2020 $ % 
 Mortgage banking revenues: 
 Realized gains on loan sales, net (1) 
 $33,752 $42,008 ($8,256) (20 %) 
 Changes in fair value, net (2) 
 (5,558) 5,998 (11,556) (193) 
 Loan servicing fee income, net (3) 
 432 (629) 1,061 169 
 Total mortgage banking revenues $28,626 $47,377 ($18,751) (40 %) 
 
 Loans sold to the secondary market (4) 
 $953,436 $1,139,761 ($186,325) (16 %) 

 (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 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. 
 
 -39- 

 Management's Discussion and Analysis 

 Noninterest Expense 
 The following table presents noninterest expense comparisons: 
 
 (Dollars in thousands) Change 
 Years Ended December 31, 2021 2020 $ % 
 Noninterest expense: 
 Salaries and employee benefits $87,295 $82,899 $4,396 5 % 
 Outsourced services 13,296 11,894 1,402 12 
 Net occupancy 8,449 8,023 426 5 
 Equipment 3,905 3,831 74 2 
 
 Legal, audit and professional fees 2,859 3,747 (888) (24) 
 FDIC deposit insurance costs 1,592 1,818 (226) (12) 
 Advertising and promotion 1,843 1,469 374 25 
 Amortization of intangibles 890 914 (24) (3) 
 
 Debt prepayment penalties 6,930 1,413 5,517 390 
 
 Other 8,405 9,376 (971) (10) 
 Total noninterest expense $135,464 $125,384 $10,080 8 % 

 Noninterest Expense 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. 
 
 Income Taxes 
 The following table presents the Corporation’s income tax expense and effective tax rate for the periods indicated: 
 
 (Dollars in thousands) 
 Years ended December 31, 2021 2020 
 Income tax expense $21,317 $19,331 
 Effective income tax rate 21.7 % 21.7 % 

 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. 
 
 -40- 

 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 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 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. 
 
 Commercial Banking 
 The following table presents a summarized statement of operations for the Commercial Banking business segment: 
 
 (Dollars in thousands) Change 
 Years Ended December 31, 2021 2020 $ % 
 Net interest income $141,493 $127,545 $13,948 11 % 
 Provision for loan losses (4,822) 12,342 (17,164) (139) 
 Net interest income after provision for credit losses 146,315 115,203 31,112 27 
 Noninterest income 44,748 63,612 (18,864) (30) 
 Noninterest expense 103,856 94,128 9,728 10 
 Income before income taxes 87,207 84,687 2,520 3 
 Income tax expense 18,575 17,989 586 3 
 Net income $68,632 $66,698 $1,934 3 % 

 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. 
 
 -41- 

 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. 
 
 Wealth Management Services 
 The following table presents a summarized statement of operations for the Wealth Management Services business segment: 
 
 (Dollars in thousands) Change 
 Years Ended December 31, 2021 2020 $ % 
 Net interest expense ($58) ($101) $43 (43 %) 
 
 Noninterest income 42,646 35,830 6,816 19 
 Noninterest expense 31,608 31,256 352 1 
 Income before income taxes 10,980 4,473 6,507 145 
 Income tax expense 2,742 1,342 1,400 104 
 Net income $8,238 $3,131 $5,107 163 % 

 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 $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. 
 
 Financial Condition 
 Summary 
 The following table presents selected financial condition data: 
 
 (Dollars in thousands) Change 
 December 31, 2021 2020 $ % 
 Cash and due from banks $175,259 $194,143 ($18,884) (10 %) 
 Total securities 1,042,859 894,571 148,288 17 
 Total loans 4,272,925 4,195,990 76,935 2 
 Allowance for credit losses on loans 39,088 44,106 (5,018) (11) 
 Total assets 5,851,127 5,713,169 137,958 2 
 Total deposits 4,980,051 4,378,353 601,698 14 
 FHLB advances 145,000 593,859 (448,859) (76) 
 Total shareholders’ equity 564,808 534,195 30,613 6 

 Total assets amounted to $5.9 billion at December 31, 2021, up by $138.0 million, or 2%, from the end of 2020. 
 
 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. 
 
 -42- 

 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. 
 
 Securities 
 I nvestment security activity is monitored by the Investment Committee, the members of which also sit on the Asset/Liability Committee (“ALCO”). Asset and liability management objectives are the primary influence on the Corporation’s investment activities. However, the Corporation also recognizes that there are certain specific risks inherent in investment activities. The securities portfolio is managed in accordance with regulatory guidelines and established internal corporate investment policies that provide limitations on specific risk factors such as market risk, credit risk and concentration, liquidity risk and operational risk to help monitor risks associated with investing in securities. Reports on the activities conducted by Investment Committee and the ALCO are presented to the Board of Directors on a regular basis. 
 
 The Corporation’s securities portfolio is managed to generate interest income, to implement interest rate risk management strategies, and to provide a readily available source of liquidity for balance sheet management. Securities are designated as either available for sale, held to maturity or trading at the time of purchase. The Corporation does not 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. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Debt securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized. 
 
 Determination of Fair Value 
 The Corporation uses an independent pricing service to obtain quoted prices. The prices provided by the independent pricing service are generally based on observable market data in active markets. The determination of whether markets are active or inactive is based upon the level of trading activity for a particular security class. Management reviews the independent pricing service’s documentation to gain an understanding of the appropriateness of the pricing methodologies. Management also reviews the prices provided by the independent pricing service for reasonableness based upon current trading levels for similar securities. If the prices appear unusual, they are re-examined and the value is either confirmed or revised. In addition, management periodically performs independent price tests of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of December 31, 2021 and 2020, management did not make any adjustments to the prices provided by the pricing service. 
 
 Our fair value measurements generally utilize Level 2 inputs, representing quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and model-derived valuations in which all significant input assumptions are observable in active markets. 
 
 See Notes 4 and 15 to the Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities. 
 
 -43- 

 Management's Discussion and Analysis 

 Securities Portfolio 
 The carrying amounts of securities held are as follows: 
 
 (Dollars in thousands) 
 December 31, 2021 2020 
 Amount % Amount % 
 Available for Sale Debt Securities: 
 Obligations of U.S. government-sponsored enterprises 
 $196,454 19 % $131,669 15 % 
 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 
 824,962 79 740,305 83 
 
 Individual name issuer trust preferred debt securities 9,138 1 12,669 1 
 
 Corporate bonds 12,305 1 9,928 1 
 
 Total available for sale debt securities $1,042,859 100 % $894,571 100 % 

 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. government agencies or U.S. government-sponsored enterprises. 
 
 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, 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 
 The Bank is a member of the FHLB, which is a cooperative that provides services to its member banking institutions. The primary reason for the Bank’s membership is to gain access to a reliable source of wholesale funding in order to manage interest rate risk. The purchase of FHLB stock is a requirement for a member to gain access to funding. The Bank purchases FHLB stock in proportion to the volume of funding received and views the purchases as a necessary long-term investment for the purposes of balance sheet liquidity and not for investment return. 
 
 The Bank’s investment in FHLB stock totaled $13.0 million at December 31, 2021, compared to $30.3 million at December 31, 2020. No market exists for shares of FHLB stock and therefore, it is carried at cost. FHLB stock may be redeemed at par value five years following termination of FHLB membership, subject to limitations which may be imposed by the FHLB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLB. While the Bank currently has no intentions to terminate its FHLB membership, the ability to redeem its investment in FHLB stock would be subject to the conditions imposed by the FHLB. Management monitors the investment to determine if impairment exists. 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. 
 
 Loans 
 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 
 
 -44- 

 Management's Discussion and Analysis 

 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 % 
 Commercial: 
 Commercial real estate (1) 
 $1,639,062 38 % $1,633,024 39 % 
 Commercial & industrial (2) 
 641,555 15 817,408 19 
 Total commercial 2,280,617 53 2,450,432 58 
 Residential real estate: 
 Residential real estate (3) 
 1,726,975 40 1,467,312 35 
 Consumer: 
 Home equity 
 247,697 6 259,185 6 
 Other (4) 
 17,636 1 19,061 1 
 Total consumer 265,333 7 278,246 7 
 Total loans $4,272,925 100 % $4,195,990 100 % 

 (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) 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. 
 (4) Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans. 
 
 An analysis of the maturity and interest rate sensitivity of the Corporation’s loan portfolio as of December 31, 2021 follows: 
 
 (Dollars in thousands) Commercial Consumer 
 CRE (1) 
 C&I Total Commercial Residential Real Estate (2) 
 Home Equity Other Total Consumer Total 
 Amounts due in: 
 One year or less $277,579 $123,519 $401,098 $38,872 $2,804 $2,747 $5,551 $445,521 
 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 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 
 
 Interest rate terms on amounts due after one year: 
 
 Predetermined rates 
 $156,915 $176,545 $333,460 $634,593 $25,185 $13,545 $38,730 $1,006,783 
 Variable or adjustable rates 
 1,204,568 341,491 1,546,059 1,053,510 219,708 1,344 221,052 2,820,621 

 (1) Includes construction and development loans that will convert to repayment terms following the construction period and will be reclassified to either the commercial real estate or commercial & industrial category. 
 (2) Includes homeowner construction loans. Maturities of homeowner construction loans are included based on their contractual conventional mortgage repayment terms following the completion of construction. 
 
 Generally, the actual maturity of loans is substantially shorter than their contractual maturity due to prepayments and, in the case of loans secured by real estate, due to payoff of loans upon the sale of the property by the borrower. The average life of loans secured by real estate tends to increase when market loan rates are higher than rates on existing portfolio loans and, conversely, tends to decrease when rates on existing portfolio loans are higher than market loan rates. 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 
 
 -45- 

 Management's Discussion and Analysis 

 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 
 The commercial loan portfolio represented 53% of total loans at December 31, 2021. 
 
 In making commercial loans, we may occasionally solicit the participation of other banks. The Bank also participates in commercial loans originated by other banks. In such cases, these loans are individually underwritten by us using standards similar to those employed for our self-originated loans. Our participation in commercial loans originated by other banks amounted to $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. Commercial real estate loans consist of commercial mortgages secured by real property where the primary source of repayment is derived from rental income associated with the property or the proceeds of the sale, refinancing or permanent financing of the property. Commercial real estate loans also include construction loans made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. Commercial and industrial loans primarily provide working capital, equipment financing and financing for other business-related purposes. Commercial and industrial loans are frequently collateralized by equipment, inventory, accounts receivable, and/or general business assets. A portion of the Bank’s commercial and industrial loans is also collateralized by real estate. Commercial and industrial loans also include PPP loans that are fully guaranteed by the U.S. government, tax-exempt loans made to states and political subdivisions, as well as industrial development or revenue bonds issued through quasi-public corporations for the benefit of a private or non-profit entity where that entity rather than the governmental entity is obligated to pay the debt service. 
 
 Commercial Real Estate Loans 
 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. 
 
 -46- 

 Management's Discussion and Analysis 

 The following table presents a geographic summary of CRE loans by property location: 
 
 (Dollars in thousands) December 31, 2021 December 31, 2020 
 Outstanding Balance % of Total Outstanding Balance % of Total 
 Connecticut $643,182 39 % $649,919 40 % 
 Massachusetts 464,018 28 468,947 29 
 Rhode Island 408,496 25 431,133 26 
 Subtotal 1,515,696 92 1,549,999 95 
 All other states 123,366 8 83,025 5 
 Total $1,639,062 100 % $1,633,024 100 % 

 The following table presents a summary of CRE loans by property type segmentation: 
 
 (Dollars in thousands) December 31, 2021 December 31, 2020 
 Count Outstanding Balance % of Total Count Outstanding Balance % of Total 
 CRE Portfolio Segmentation: 
 Multi-family dwelling 127 $474,229 29 % 137 $524,874 32 % 
 Retail 121 389,487 24 136 339,569 21 
 Office 57 216,602 13 73 290,756 18 
 Hospitality 31 184,990 11 40 157,720 10 
 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 
 Other 36 69,333 5 38 71,324 4 
 Total CRE loans 
 440 $1,639,062 100 % 489 $1,633,024 100 % 
 
 Average CRE loan size 
 $3,725 $3,340 
 Largest individual CRE loan outstanding 
 $39,945 $32,200 

 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) 
 Count Balance % of Outstanding Balance (1) 
 
 Total CRE deferments 
 2 $9,720 1 % 38 $176,402 11 % 

 (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 
 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. 
 
 -47- 

 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. 
 
 The following table presents a summary of C&I loan by industry segmentation: 
 
 (Dollars in thousands) December 31, 2021 December 31, 2020 
 Count Outstanding Balance % of Total Count Outstanding Balance % of Total 
 C&I Portfolio Segmentation: 
 Healthcare and social assistance 101 $174,376 27 % 253 $200,217 24 % 
 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 
 Transportation and warehousing 
 31 35,064 5 42 24,061 3 
 Entertainment and recreation 
 37 32,087 5 91 29,415 4 
 Finance and insurance 
 59 31,279 5 106 26,244 3 
 Accommodation and food services 114 28,320 4 271 47,020 6 
 Information 
 14 25,045 4 32 28,394 3 
 Professional, scientific and technical 
 69 8,912 1 265 39,295 5 
 Public administration 
 16 5,441 1 26 23,319 3 
 Other 
 281 73,232 13 772 107,468 13 
 Total C&I loans 
 1,079 $641,555 100 % 2,517 $817,408 100 % 
 
 Average C&I loan size 
 $595 $325 
 Largest individual C&I loan outstanding 
 $18,721 $19,500 

 At December 31, 2021, we had no active deferments on C&I loans. 
 
 -48- 

 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, 2021 December 31, 2020 
 Count Outstanding Balance % of Total Count Outstanding Balance % of Total 
 PPP Loans by Segment: 
 Accommodation and food services 69 $13,687 36 % 209 $23,678 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 
 Information 
 6 2,034 5 20 2,478 1 
 Retail 22 1,698 4 134 12,107 6 
 Entertainment and recreation 
 12 1,693 4 61 3,386 2 
 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 
 Transportation and warehousing 
 9 138 — 21 2,059 1 
 Public administration 
 1 21 — 4 483 — 
 Other 
 113 6,764 20 573 43,961 21 
 Total PPP loans (included in the C&I loan portfolio) 
 347 $38,019 100 % 1,706 $199,780 100 % 
 
 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. 
 
 Residential real estate loans are originated both for sale to the secondary market as well as for retention in the Bank’s loan portfolio. We also originate residential real estate loans for various investors in a broker capacity, including conventional mortgages and reverse mortgages. 
 
 The table below presents residential real estate loan origination activity: 
 
 (Dollars in thousands) 
 Years ended December 31, 2021 2020 
 Amount % of Total Amount % of Total 
 Originations for retention in portfolio (1) 
 $756,343 45 % $502,120 30 % 
 Originations for sale to the secondary market (2) 
 933,324 55 1,171,906 70 
 Total $1,689,667 100 % $1,674,026 100 % 

 (1) Includes the full commitment amount of homeowner construction loans. 
 (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. 
 
 -49- 

 Management's Discussion and Analysis 

 The table below presents residential real estate loan sales activity: 
 
 (Dollars in thousands) 
 Years ended December 31, 2021 2020 
 Amount % of Total Amount % of Total 
 Loans sold with servicing rights retained $591,550 62 % $849,467 75 % 
 Loans sold with servicing rights released (1) 
 361,886 38 290,294 25 
 Total $953,436 100 % $1,139,761 100 % 

 (1) Includes brokered loans (loans originated for others). 
 
 Loans are sold with servicing retained or released. Loans sold with servicing rights retained result in the capitalization of servicing rights. Loan servicing rights are included in other assets and are subsequently amortized as an offset to mortgage banking revenues over the estimated period of servicing. The net balance of capitalized servicing rights amounted to $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 $1.5 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: 
 
 (Dollars in thousands) December 31, 2021 December 31, 2020 
 Amount % of Total Amount % of Total 
 Massachusetts 
 $1,207,789 70 % $994,800 68 % 
 Rhode Island 365,831 21 331,713 23 
 Connecticut 
 132,430 8 122,102 8 
 Subtotal 1,706,050 99 1,448,615 99 
 All other states 20,925 1 18,697 1 
 Total (1) 
 $1,726,975 100 % $1,467,312 100 % 

 (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 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. 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 December 31, 2021, we had no active deferments on consumer loans. 
 
 -50- 

 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. The Corporation expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. The purchase of the life insurance policy results in an income-earning asset on the Consolidated Balance Sheet that provides monthly tax-free income to the Corporation. The largest risk to the BOLI program is credit risk of the insurance carriers. To mitigate this risk, annual financial condition reviews are completed on all carriers. BOLI is invested in the “general account” of quality insurance companies. 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. (“S&P”). BOLI is included in the Consolidated Balance Sheet at its cash surrender value. Increases in BOLI’s cash surrender value are reported as a component of noninterest income in the Consolidated Statements of Income. 
 
 Asset Quality 
 Management continually monitors the asset quality of the loan portfolio using all available information. The Board of Directors of the Bank monitors credit risk management through two committees, the Finance Committee and the Audit Committee. The Finance Committee has primary oversight responsibility for the credit granting function, including approval authority for credit granting policies, review of management’s credit granting activities and approval of large exposure credit requests. The Audit Committee oversees various systems and procedures performed by management for monitoring the credit quality of the loan portfolio, conducting a credit review program, maintaining the integrity of the loan rating system and determining the adequacy of the ACL. The Audit Committee also approves the policy and methodology for establishing the ACL. 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. 
 
 Nonperforming Assets 
 Nonperforming assets include nonaccrual loans and property acquired through foreclosure or repossession (“OREO”). 
 
 -51- 

 Management's Discussion and Analysis 

 The following table presents nonperforming assets and additional asset quality data: 
 
 (Dollars in thousands) 
 December 31, 2021 2020 
 Commercial: 
 Commercial real estate 
 $— $— 
 Commercial & industrial 
 — — 
 Total commercial 
 — — 
 Residential Real Estate: 
 Residential real estate 
 13,576 11,981 
 Consumer: 
 Home equity 
 627 1,128 
 Other 
 — 88 
 Total consumer 
 627 1,216 
 Total nonaccrual loans 14,203 13,197 
 Property acquired through foreclosure or repossession, net 
 — — 
 Total nonperforming assets $14,203 $13,197 
 
 Nonperforming assets to total assets 0.24% 0.23% 
 Nonperforming loans to total loans 0.33% 0.31% 
 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 increased by $1.0 million from December 31, 2020, all in nonaccrual loans. At December 31, 2021, there were no properties held in OREO. 
 
 Nonaccrual Loans 
 Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible. 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 $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. 
 
 -52- 

 Management's Discussion and Analysis 

 The following table presents the activity in nonaccrual loans: 
 
 (Dollars in thousands) 
 Years ended December 31, 2021 2020 
 Balance at beginning of period $13,197 $17,408 
 Additions to nonaccrual status 7,813 3,644 
 Loans returned to accruing status (1,216) (3,282) 
 Loans charged-off (661) (1,317) 
 Loans transferred to other real estate owned — (313) 
 Payments, payoffs and other changes (4,930) (2,943) 
 Balance at end of period $14,203 $13,197 

 The following table presents additional detail on nonaccrual loans: 
 
 (Dollars in thousands) December 31, 2021 December 31, 2020 
 Days Past Due Days Past Due 
 Over 90 Under 90 Total % (1) 
 Over 90 Under 90 Total % (1) 
 
 Commercial: 
 
 Commercial real estate 
 $— $— $— — % $— $— $— — % 
 Commercial & industrial 
 — — — — — — — — 
 Total commercial 
 — — — — — — — — 
 Residential Real Estate: 
 
 Residential real estate 
 4,662 8,914 13,576 0.79 5,172 6,809 11,981 0.82 
 Consumer: 
 Home equity 108 519 627 0.25 644 484 1,128 0.44 
 Other — — — — 88 — 88 0.46 
 Total consumer 108 519 627 0.24 732 484 1,216 0.44 
 Total nonaccrual loans $4,770 $9,433 $14,203 0.33 % $5,904 $7,293 $13,197 0.31 % 

 (1) Percentage of nonaccrual loans to the total loans outstanding within the respective category. 
 
 There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2021. 
 
 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. Included in total nonaccrual residential real estate loans at December 31, 2021 were four loans purchased for portfolio and serviced by others amounting to $1.2 million. Management monitors the collection efforts of its third party servicers as part of its assessment of the collectability of nonperforming loans. 
 
 Troubled Debt Restructurings 
 In the course of resolving problem loans, the Corporation may choose to restructure the contractual terms of certain loans. A loan that has been modified or renewed is considered to be a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or a transaction with similar credit risk characteristics. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection. 
 
 -53- 

 Management's Discussion and Analysis 

 TDRs are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term and full collection of principal and interest is in doubt. 
 
 TDRs are reported as such for at least one year from the date of the restructuring. In years after the restructuring, a TDR is removed from this classification if the restructuring did not involve a below-market rate concession and the loan is performing in accordance with its modified contractual terms for a reasonable period of time. 
 
 As of December 31, 2021, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured. 
 
 See Note 5 to the Consolidated Financial Statements for disclosure regarding the Corporation’s election to account for eligible loan modifications under Section 4013 of the CARES Act, as amended. Loan modifications that did not qualify for the TDR accounting relief provided under the CARES Act were classified as TDRs. 
 
 The following table sets forth information on TDRs as of the dates indicated. The amounts below consist of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. Accrued interest is not included in the carrying amounts set forth below. 
 
 (Dollars in thousands) December 31, 2021 December 31, 2020 
 Count Amount Count Amount 
 Accruing TDRs 
 Commercial: 
 Commercial real estate 
 4 $10,603 3 $1,792 
 Commercial & industrial 
 1 2,792 5 6,814 
 Total commercial 
 5 13,395 8 8,606 
 Residential Real Estate: 
 Residential real estate 
 4 2,372 8 3,932 
 Consumer: 
 Home equity 
 2 561 3 788 
 Other 
 — — 1 14 
 Total consumer 
 2 561 4 802 
 Accruing TDRs 11 16,328 20 13,340 
 Nonaccrual TDRs 
 
 Residential Real Estate: 
 Residential real estate 
 5 2,748 5 2,273 
 Consumer: 
 Home equity 
 1 71 1 72 
 Other 
 — — — — 
 Total consumer 
 1 71 1 72 
 Nonaccrual TDRs 6 2,819 6 2,345 
 Total TDRs 17 $19,147 26 $15,685 

 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. 
 
 -54- 

 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. 
 
 Past Due Loans 
 The following table presents past due loans by category: 
 
 (Dollars in thousands) 
 December 31, 2021 2020 
 Amount % (1) 
 Amount % (1) 
 
 Commercial: 
 Commercial real estate 
 $— — % $265 0.02 % 
 Commercial & industrial 
 3 — 3 — 
 Total commercial 
 3 — 268 0.01 
 Residential Real Estate: 
 Residential real estate 
 9,622 0.56 10,339 0.70 
 Consumer: 
 Home equity 
 765 0.31 1,667 0.64 
 Other 
 21 0.12 118 0.62 
 Total consumer 
 786 0.30 1,785 0.64 
 Total past due loans $10,411 0.24 % $12,392 0.30 % 

 (1) Percentage of past due loans to the total loans outstanding within the respective category. 
 
 As of December 31, 2021, the composition of past due loans (loans past due 30 days or more) was 100% residential and consumer and 0% commercial, compared to 98% and 2%, respectively, at December 31, 2020. Total past due loans decreased by $2.0 million from the end of 2020. 
 
 Total past due loans included $9.4 million of nonaccrual loans as of December 31, 2021, compared to $8.5 million of as of December 31, 2020. All loans 90 days or more past due at December 31, 2021 and 2020 were classified as nonaccrual. 
 
 Potential Problem Loans 
 The Corporation classifies certain loans as “substandard,” “doubtful,” or “loss” based on criteria consistent with guidelines provided by banking regulators. Potential problem loans include classified accruing commercial loans that were less than 90 days past due at December 31, 2021 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future. 
 
 Potential problem loans are not included in the amounts of nonaccrual or TDRs presented above. They are assessed for loss exposure using the methods described in Note 5 to the 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 
 
 -55- 

 Management's Discussion and Analysis 

 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 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. Full or partial charge-offs on collateral dependent individually analyzed loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan. The Corporation does not recognize a recovery when an updated appraisal indicates a subsequent increase in value. 
 
 Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status. New appraisals are generally obtained for TDRs or nonaccrual loans or when management believes it is warranted. The Corporation has continued to maintain appropriate professional standards regarding the professional qualifications of appraisers and has an internal review process to monitor the quality of appraisals. 
 
 For residential real estate loans and real estate collateral dependent consumer loans that are in the process of collection, valuations are obtained from independent appraisal firms with values determined on an “as is” basis. 
 
 The following table presents additional detail on the Corporation’s loan portfolio and associated allowance: 
 
 (Dollars in thousands) December 31, 2021 December 31, 2020 
 Loans Related Allowance Allowance / Loans Loans Related Allowance Allowance / Loans 
 Individually analyzed loans $21,080 $682 3.24 % $18,252 $379 2.08 % 
 Pooled (collectively evaluated) loans 4,251,845 38,406 0.90 4,177,738 43,727 1.05 
 Total $4,272,925 $39,088 0.91 % $4,195,990 $44,106 1.05 % 

 Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components. The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics. The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments. 
 
 The ACL for individually analyzed loans is measured using a 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 
 
 -56- 

 Management's Discussion and Analysis 

 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 $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 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. 
 
 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 Loans to Total Portfolio (1) Allocated ACL ACL to Loans Loans to Total Portfolio (1) 
 Commercial: 
 
 Commercial real estate $18,933 1.16 % 38 % $22,065 1.35 % 39 % 
 Commercial & industrial 10,832 1.69 15 12,228 1.50 19 
 Total commercial 29,765 1.31 53 34,293 1.40 58 
 
 Residential Real Estate: 
 Residential real estate 7,860 0.46 40 8,042 0.55 35 
 Consumer: 
 Home equity 1,069 0.43 6 1,300 0.50 6 
 Other 394 2.23 1 471 2.47 1 
 Total consumer 1,463 0.55 7 1,771 0.64 7 
 
 Total allowance for credit losses on loans at end of period $39,088 0.91 % 100 % $44,106 1.05 % 100 % 

 (1) Percentage of loans outstanding in respective category to total loans outstanding. 
 
 -57- 

 Management's Discussion and Analysis 

 The following table reflects the activity in the ACL on loans during the years presented: 
 
 (Dollars in thousands) 
 December 31, 2021 2020 2019 
 Balance at beginning of period $44,106 $27,014 $27,072 
 Adoption of ASC 326 — 6,501 — 
 Charge-offs: 
 Commercial: 
 Commercial real estate 
 — 356 1,028 
 Commercial & industrial 
 307 586 21 
 Total commercial 
 307 942 1,049 
 Residential real estate: 
 Residential real estate 
 107 99 486 
 Consumer: 
 Home equity 
 183 224 390 
 Other 
 66 52 95 
 Total consumer 
 249 276 485 
 Total charge-offs 663 1,317 2,020 
 Recoveries: 
 Commercial: 
 Commercial real estate 
 — 51 125 
 Commercial & industrial 
 41 24 168 
 Total commercial 
 41 75 293 
 Residential real estate: 
 Residential real estate 
 89 20 — 
 Consumer: 
 Home equity 
 91 52 72 
 Other 
 25 25 22 
 Total consumer 
 116 77 94 
 Total recoveries 246 172 387 
 Net charge-offs 417 1,145 1,633 
 Provision charged to earnings (4,601) 11,736 1,575 
 Balance at end of period $39,088 $44,106 $27,014 
 
 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 
 Our sources of funds include deposits, brokered time deposits, FHLB advances, other borrowings and proceeds from the sales, maturities and payments of loans and investment securities. The Corporation uses funds to originate and purchase loans, purchase investment securities, conduct operations, expand the branch network and pay dividends to shareholders. 
 
 -58- 

 Management's Discussion and Analysis 

 Deposits 
 The Corporation offers a wide variety of deposit products to consumer and business customers. Deposits provide an important source of funding for the Bank, as well as an ongoing stream of fee revenue. 
 
 The Bank is a participant in the Demand Deposit Marketplace program, Insured Cash Sweep program and the Certificate of Deposit Account Registry Service program. The Bank uses these deposit sweep services to place customer and client funds into interest-bearing demand accounts, money market accounts, and/or time deposits issued by other participating banks. Customer and client funds are placed at one or more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a program participant, we receive reciprocal amounts of deposits from other participating banks. We consider these reciprocal deposit balances to be in-market deposits as distinguished from traditional out-of-market wholesale brokered deposits. 
 
 The following table presents a summary of deposits: 
 
 (Dollars in thousands) Change 
 December 31, 2021 2020 $ % 
 Noninterest-bearing demand deposits $945,229 $832,287 $112,942 14 % 
 Interest-bearing demand deposits 251,032 174,290 76,742 44 
 NOW accounts 867,138 698,706 168,432 24 
 Money market accounts 1,072,864 910,167 162,697 18 
 Savings accounts 555,177 466,507 88,670 19 
 Time deposits (in-market) 773,383 704,855 68,528 10 
 Total in-market deposits 4,464,823 3,786,812 678,011 18 
 Wholesale brokered time deposits 515,228 591,541 (76,313) (13) 
 Total deposits $4,980,051 $4,378,353 $601,698 14 % 

 Total deposits amounted to $5.0 billion at December 31, 2021, up by $601.7 million, or 14%, in 2021. 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 
 Borrowings primarily consist of FHLB advances, which are used as a source of funding for liquidity and interest rate risk management purposes. 
 
 -59- 

 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 
 Liquidity Management 
 Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 70% of total average assets in 2021. While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and brokered time deposits), cash flows from the 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 usual” cash flows. In management’s estimation, risks are concentrated in two major categories: (1) runoff of in-market deposit balances; and (2) unexpected drawdown of loan commitments. Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our stress test scenarios, therefore, emphasize attempts to quantify deposits at risk over selected time horizons. In addition to these unexpected outflow risks, several other “business as usual” factors enter into the calculation of the adequacy of contingent liquidity including: (1) payment proceeds from loans and investment securities; (2) maturing debt obligations; and (3) maturing time deposits. The Corporation has established collateralized borrowing capacity with the 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. 
 
 The table below presents unused funding capacity by source as of the dates indicated: 
 
 (Dollars in thousands) 
 December 31, 2021 2020 
 Additional Funding Capacity: 
 Federal Home Loan Bank of Boston (1) 
 $1,642,377 $969,735 
 Federal Reserve Bank of Boston (2) 
 16,919 20,678 
 Unencumbered investment securities 702,963 594,998 
 Total $2,362,259 $1,585,411 

 (1) As of December 31, 2021 and 2020, loans with a carrying value of $2.2 billion and $2.1 billion, respectively, and securities available for sale with a carrying value of $163.2 million and $128.6 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity. 
 (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 $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. 
 
 The ALCO establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained within target ranges established by the ALCO during 2021. Based on its assessment of the liquidity considerations described above, management believes the Corporation’s sources of funding meet anticipated funding needs. 
 
 -60- 

 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 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 
 Total shareholders’ equity amounted to $564.8 million at December 31, 2021, up by $30.6 million from December 31, 2020. This increase included net income of $76.9 million, partially offset by $36.8 million in dividend declarations. 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. Book value per share was $32.59 at December 31, 2021, compared to $30.94 at December 31, 2020. 
 
 The Bancorp and the Bank are subject to various regulatory capital requirements and are considered “well capitalized,” with a total risk-based capital ratio of 14.01% at December 31, 2021, compared to 13.51% at December 31, 2020. See Note 13 to the Consolidated Financial Statements for additional discussion of regulatory capital requirements and the Corporation’s election of the option provided by regulatory guidance to delay the estimated impact of ASC 326 on regulatory capital. 
 
 Contractual Obligations and Commitments 
 The Corporation has entered into numerous contractual obligations and commitments. The following tables summarize our contractual cash obligations and other commitments at December 31, 2021: 
 
 (Dollars in thousands) Payments Due by Period 
 Total Less Than 
 1 Year (1) 
 1-3 Years 3-5 Years After
5 Years 
 Contractual Obligations: 
 FHLB advances (2) 
 $145,000 $110,000 $35,000 $— $— 
 Junior subordinated debentures 22,681 — — — 22,681 
 Operating leases 36,498 3,957 7,509 5,263 19,769 
 Third party application processing 19,398 6,726 9,502 3,069 101 
 
 Total contractual obligations $223,577 $120,683 $52,011 $8,332 $42,551 

 (1) Maturities or contractual obligations are considered by management in the administration of liquidity and are routinely refinanced in the ordinary course of business. 
 (2) All FHLB advances are shown in the period corresponding to their scheduled maturity. See Note 12 to the Consolidated Financial Statements for additional information. 
 
 -61- 

 Management's Discussion and Analysis 

 (Dollars in thousands) Amount of Commitment Expiration – Per Period 
 Total Less Than
1 Year 1-3 Years 3-5 Years After
5 Years 
 Other Commitments: 
 
 Commitments to extend credit $1,006,620 $344,823 $81,874 $128,802 $451,121 
 Standby letters of credit 11,844 11,702 142 — — 
 Mortgage loan commitments (1) : 
 
 Interest rate lock commitments 
 49,800 49,800 — — — 
 Forward sale commitments 
 103,626 103,626 — — — 
 Loan related derivative contracts (1) : 
 
 Interest rate swaps with customers 
 1,022,388 62,370 193,641 227,608 538,769 
 Mirror swaps with counterparties 
 1,022,388 62,370 193,641 227,608 538,769 
 Risk participation-in agreements 
 163,207 — 21,674 36,472 105,061 
 
 Interest rate risk management contracts (1) : 
 
 Interest rate swaps 
 320,000 — 20,000 300,000 — 
 Total commitments $3,699,873 $634,691 $510,972 $920,490 $1,633,720 

 (1) Amounts presented represent notional amounts. 
 
 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. 
 
 Asset/Liability Management and Interest Rate Risk 
 Interest rate risk is the risk of loss to future earnings due to changes in interest rates. The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. Periodically, the ALCO reports on the status of liquidity and interest rate risk matters to the Bank’s Board of Directors. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with the Corporation’s liquidity, capital adequacy, growth, risk and profitability goals. 
 
 The Corporation utilizes the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, off-balance sheet interest rate contracts and the pricing and structure of loans and deposits, to manage interest rate risk. The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract. The notional amount of the interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk. See Notes 14 and 22 to the Consolidated Financial Statements for additional information. 
 
 The ALCO uses income simulation to measure interest rate risk inherent in the Corporation’s on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 12-month horizon, a 13- to 24-month horizon and a 60-month horizon. The simulations assume that the size and general composition of the Corporation’s balance sheet remain static over the simulation horizons, with the exception of certain deposit mix shifts from low-cost core savings to higher-cost time deposits in selected interest rate scenarios. Additionally, the simulations take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency. 
 
 The ALCO reviews simulation results to determine whether the Corporation’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. As of 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. 
 
 -62- 

 Management's Discussion and Analysis 

 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 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. Because income simulations assume that the Corporation’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts. 
 
 The following table sets forth the estimated change in net interest income from an unchanged rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on- and off-balance sheet financial instruments as of December 31, 2021 and 2020. Interest rates are assumed to shift by a parallel 100, 200 or 300 basis points upward or 100 basis points downward over a 12-month period, except for core savings deposits, which are assumed to shift by lesser amounts due to their relative historical insensitivity to market interest rate movements. Further, deposits are assumed to have certain minimum rate levels below which they will not fall. It should be noted that the rate scenarios shown do not necessarily reflect the ALCO’s view of the “most likely” change in interest rates over the periods indicated. 
 
 December 31, 2021 December 31, 2020 
 Months 1-12 Months 13-24 Months 1-12 Months 13-24 
 100 basis point rate decrease (1.32) % (5.42) % (2.05) % (4.73) % 
 100 basis point rate increase 3.34 3.91 5.56 7.89 
 200 basis point rate increase 6.87 8.18 11.00 15.05 
 300 basis point rate increase 10.32 11.72 16.47 21.15 

 The ALCO estimates that the negative exposure of net interest income to falling rates as compared to an unchanged rate scenario results from a more rapid decline in earning asset yields compared to rates paid on deposits. If market interest rates were to fall and remain lower for a sustained period, certain core savings and time deposit rates could decline more slowly and by a lesser amount than other market interest rates. Asset yields would likely decline more rapidly than deposit costs as current asset holdings mature or reprice, since cash flow from mortgage-related prepayments and redemption of callable securities would increase as market interest rates fall. 
 
 The overall positive exposure of net interest income to rising rates as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term. For simulation purposes, deposit rate changes are anticipated to lag behind other market interest rates in both timing and magnitude. The ALCO’s estimate of interest rate risk exposure to rising rate environments, including those involving changes to the shape of the yield curve, incorporates certain assumptions regarding the shift in deposit balances from low-cost core savings categories to higher-cost deposit categories, which has characterized a shift in funding mix during the past rising interest rate cycles. 
 
 The relative change in interest rate sensitivity from December 31, 2020 as shown in the above table was largely attributable to an interest rate swap designated as a cash flow hedge that was executed in the second quarter of 2021 to hedge the interest rate risk associated with a pool of variable rate commercial loans. The receive-fixed, pay-floating interest rate swap reduced the positive exposure to rising rates, while it will enhance earnings in the current rate environment and mitigate risk in declining rate scenarios. The interest rate swap effectively fixes a portion of variable rate loan assets. 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. 
 
 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 
 
 -63- 

 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. Simulation modeling assumes a static balance sheet, with the exception of certain modeled deposit mix shifts from low-cost core savings deposits to higher-cost time deposits in rising rate scenarios as noted above. 
 
 As market interest rates have declined, the banking industry has attracted low-cost core savings deposits. The ALCO recognizes that a portion of these increased levels of low-cost balances could shift into higher yielding alternatives in the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above. Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment, which may cause interest rate sensitivity to differ from the results as presented. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The relationship between short-term interest rate changes and core deposit rate and balance changes may differ from the ALCO’s estimates used in income simulation. 
 
 It should also be noted that the static balance sheet assumption does not necessarily reflect the Corporation’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior. 
 
 Mortgage-backed securities and residential real estate loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income. 
 
 The Corporation also monitors the potential change in market value of its available for sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to the Corporation’s capital position. Results are calculated using industry-standard analytical techniques and securities data. 
 
 The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities of December 31, 2021 and 2020 resulting from immediate parallel rate shifts: 
 
 (Dollars in thousands) 
 Security Type Down 100 Basis Points Up 200 Basis Points 
 Obligations of U.S. government-sponsored enterprise securities (callable) $610 ($28,698) 
 
 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 
 8,199 (90,747) 
 Trust preferred debt and other corporate debt securities 1,357 (60) 
 Total change in market value as of December 31, 2021 $10,166 ($119,505) 
 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 
 
 -64- 

 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. 
 
 Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. Deteriorating conditions or assumptions could lead to 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. 
 
 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. 
 Information regarding quantitative and qualitative disclosures about market risk appears under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Interest Rate Risk.” 
 
 -65-
WASHINGTON TRUST BANCORP INC 10-K

Item 7. Management’s Discussion and Analysis
