WASHINGTON TRUST BANCORP INC 10-Q

Item 1. Financial Statements Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) (Dollars in thousands, except par value) March 31, 2022 December 31, 2021 Assets: Cash and due from banks $ 224,807 $ 175,259 Short-term investments 3,289 3,234 Mortgage loans held for sale, at fair value 15,612 40,196 Available for sale debt securities, at fair value (amortized cost of $ 1,082,203 , net of allowance for credit losses on securities of $ 0 at March 31, 2022; and amortized cost of $ 1,051,800 ; net of allowance for credit losses on securities of $ 0 at December 31, 2021) 1,008,184 1,042,859 Federal Home Loan Bank stock, at cost 8,452 13,031 Loans: Total loans 4,283,852 4,272,925 Less: allowance for credit losses on loans 39,236 39,088 Net loans 4,244,616 4,233,837 Premises and equipment, net 28,878 28,908 Operating lease right-of-use assets 28,816 26,692 Investment in bank-owned life insurance 93,192 92,592 Goodwill 63,909 63,909 Identifiable intangible assets, net 5,198 5,414 Other assets 123,046 125,196 Total assets $ 5,847,999 $ 5,851,127 Liabilities: Deposits: Noninterest-bearing deposits $ 911,990 $ 945,229 Interest-bearing deposits 4,215,960 4,034,822 Total deposits 5,127,950 4,980,051 Federal Home Loan Bank advances 55,000 145,000 Junior subordinated debentures 22,681 22,681 Operating lease liabilities 31,169 29,010 Other liabilities 98,007 109,577 Total liabilities 5,334,807 5,286,319 Commitments and contingencies (Note 17) Shareholders’ Equity: Common stock of $ .0625 par value; authorized 60,000,000 shares; 17,363,457 shares issued and 17,331,555 shares outstanding at March 31, 2022 and 17,363,457 shares issued and 17,330,818 shares outstanding at December 31, 2021 1,085 1,085 Paid-in capital 127,355 126,511 Retained earnings 465,295 458,310 Accumulated other comprehensive loss ( 79,451 ) ( 19,981 ) Treasury stock, at cost; 31,902 shares at March 31, 2022 and 32,639 shares at December 31, 2021 ( 1,092 ) ( 1,117 ) Total shareholders’ equity 513,192 564,808 Total liabilities and shareholders’ equity $ 5,847,999 $ 5,851,127 The accompanying notes are an integral part of these unaudited consolidated financial statements. -4- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Income (unaudited) (Dollars and shares in thousands, except per share amounts) Three months ended March 31, 2022 2021 Interest income: Interest and fees on loans $ 33,930 $ 34,159 Interest on mortgage loans held for sale 232 441 Taxable interest on debt securities 4,230 3,242 Dividends on Federal Home Loan Bank stock 67 133 Other interest income 78 33 Total interest and dividend income 38,537 38,008 Interest expense: Deposits 3,103 3,663 Federal Home Loan Bank advances 244 1,380 Junior subordinated debentures 99 94 Total interest expense 3,446 5,137 Net interest income 35,091 32,871 Provision for credit losses 100 ( 2,000 ) Net interest income after provision for credit losses 34,991 34,871 Noninterest income: Wealth management revenues 10,531 9,895 Mortgage banking revenues 3,501 11,927 Card interchange fees 1,164 1,133 Service charges on deposit accounts 668 609 Loan related derivative income 301 467 Income from bank-owned life insurance 601 556 Other income 393 1,387 Total noninterest income 17,159 25,974 Noninterest expense: Salaries and employee benefits 21,002 21,527 Outsourced services 3,242 3,200 Net occupancy 2,300 2,128 Equipment 918 994 Legal, audit and professional fees 770 597 FDIC deposit insurance costs 366 345 Advertising and promotion 351 222 Amortization of intangibles 217 226 Debt prepayment penalties — 3,335 Other expenses 2,053 2,139 Total noninterest expense 31,219 34,713 Income before income taxes 20,931 26,132 Income tax expense 4,448 5,661 Net income $ 16,483 $ 20,471 Net income available to common shareholders $ 16,429 $ 20,415 Weighted average common shares outstanding - basic 17,331 17,275 Weighted average common shares outstanding - diluted 17,482 17,431 Per share information: Basic earnings per common share $ 0.95 $ 1.18 Diluted earnings per common share $ 0.94 $ 1.17 The accompanying notes are an integral part of these unaudited consolidated financial statements. -5- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (Loss) (unaudited) (Dollars in thousands) Three months ended March 31, 2022 2021 Net income $ 16,483 $ 20,471 Other comprehensive income (loss), net of tax: Net change in fair value of available for sale debt securities ( 49,460 ) ( 13,319 ) Net change in fair value of cash flow hedges ( 10,335 ) 297 Net change in defined benefit plan obligations 325 407 Total other comprehensive loss, net of tax ( 59,470 ) ( 12,615 ) Total comprehensive (loss) income ($ 42,987 ) $ 7,856 The accompanying notes are an integral part of these unaudited consolidated financial statements. -6- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (unaudited) (Dollars and shares in thousands) For the three months ended March 31, 2022 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at December 31, 2021 17,331 $ 1,085 $ 126,511 $ 458,310 ($ 19,981 ) ($ 1,117 ) $ 564,808 Net income — — — 16,483 — — 16,483 Total other comprehensive loss, net of tax — — — — ( 59,470 ) — ( 59,470 ) Cash dividends declared ($ 0.54 per share) — — — ( 9,498 ) — — ( 9,498 ) Share-based compensation — — 888 — — — 888 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 1 — ( 44 ) — — 25 ( 19 ) Balance at March 31, 2022 17,332 $ 1,085 $ 127,355 $ 465,295 ($ 79,451 ) ($ 1,092 ) $ 513,192 For the three months ended March 31, 2021 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at December 31, 2020 17,265 $ 1,085 $ 125,610 $ 418,246 ($ 7,391 ) ($ 3,355 ) $ 534,195 Net income — — — 20,471 — — 20,471 Total other comprehensive loss, net of tax — — — — ( 12,615 ) — ( 12,615 ) Cash dividends declared ($ 0.52 per share) — — — ( 9,119 ) — — ( 9,119 ) Share-based compensation — — 918 — — — 918 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 41 — ( 1,646 ) — — 1,395 ( 251 ) Balance at March 31, 2021 17,306 $ 1,085 $ 124,882 $ 429,598 ($ 20,006 ) ($ 1,960 ) $ 533,599 The accompanying notes are an integral part of these unaudited consolidated financial statements. -7- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statement of Cash Flows (unaudited) (Dollars in thousands) Three months ended March 31, 2022 2021 Cash flows from operating activities: Net income $ 16,483 $ 20,471 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for credit losses 100 ( 2,000 ) Depreciation of premises and equipment 838 828 Net amortization of premiums and discounts on debt securities and loans 966 882 Amortization of intangibles 217 226 Share-based compensation 888 918 Tax benefit from stock option exercises and other equity awards 10 9 Income from bank-owned life insurance ( 601 ) ( 556 ) Net gains on loan sales, including changes in fair value ( 3,085 ) ( 11,858 ) Proceeds from sales of loans, net 122,165 291,789 Loans originated for sale ( 95,644 ) ( 299,051 ) (Increase) decrease in operating lease right-of-use assets ( 2,124 ) 760 Increase (decrease) in operating lease liabilities 2,160 ( 744 ) Decrease in other assets 21,289 30,504 (Decrease) in other liabilities ( 25,100 ) ( 35,544 ) Net cash provided by (used in) operating activities 38,562 ( 3,366 ) Cash flows from investing activities: Purchases of: Available for sale debt securities: Mortgage-backed ( 74,919 ) ( 130,496 ) Available for sale debt securities: Other ( 250 ) ( 77,528 ) Maturities, calls and principal payments of: Available for sale debt securities: Mortgage-backed 43,334 114,653 Available for sale debt securities: Other — 20,000 Net redemption of Federal Home Loan Bank stock 4,579 5,513 Purchases of other equity investments ( 188 ) — Net (increase) decrease in loans ( 8,700 ) 7,570 Purchases of loans ( 465 ) ( 1,539 ) Purchases of premises and equipment ( 834 ) ( 911 ) Net cash used in investing activities ( 37,443 ) ( 62,738 ) Cash flows from financing activities: Net increase in deposits 147,899 170,789 Proceeds from Federal Home Loan Bank advances 197,000 414,000 Repayment of Federal Home Loan Bank advances ( 287,000 ) ( 540,947 ) Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered ( 19 ) ( 251 ) Cash dividends paid ( 9,396 ) ( 9,012 ) Net cash provided by financing activities 48,484 34,579 Net increase (decrease) in cash and cash equivalents 49,603 ( 31,525 ) Cash and cash equivalents at beginning of period 178,493 202,268 Cash and cash equivalents at end of period $ 228,096 $ 170,743 Noncash Activities: Loans charged off $ 36 $ 64 Supplemental Disclosures: Interest payments $ 3,458 $ 6,222 Income tax payments 931 1,641 The accompanying notes are an integral part of these unaudited consolidated financial statements. -8- Condensed Notes to Unaudited Consolidated Financial Statements Note 1 - Basis of Presentation The Bancorp is a publicly-owned registered bank holding company that has elected to be a financial holding company. The Bancorp’s subsidiaries include the Bank, a Rhode Island chartered financial institution founded in 1800, and Weston Securities Corporation. Through its subsidiaries, the Bancorp offers a complete product line of financial services, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut. The Unaudited Consolidated Financial Statements include the accounts of the Bancorp and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain previously reported amounts have been reclassified to conform to the current year’s presentation. The accounting and reporting policies of the Corporation conform to GAAP and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Management considers the ACL on loans to be a material estimate that is particularly susceptible to change. The Unaudited Consolidated Financial Statements of the Corporation presented herein have been prepared pursuant to the rules of the SEC for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying Unaudited Consolidated Financial Statements have been included. Interim results are not necessarily indicative of the results of the entire year. The accompanying Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Note 2 - Recently Issued Accounting Pronouncements Accounting Standards Pending Adoption Business Combinations - ASC 805 ASU No. 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”), was issued in October 2021 to clarify the accounting for contract cost assets and contract liabilities acquired in a business combination. Under current GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination at fair value on the acquisition date. The provisions of ASU 2021-08 clarify that contract cost assets and contract liabilities acquired in a business combination should be accounted for in accordance with ASC 606 as if the acquirer had originated the contracts. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The provisions under ASU 2021-08 are required to be applied prospectively. The adoption of ASU 2021-08 is not expected to have a material impact on the Corporation’s consolidated financial statements. Financial Instruments - Credit Losses - ASC 326 ASU No. 2022-02, “Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), was issued in March 2022 to provide updates on the accounting treatment for TDRs and related disclosures requirements, as well as modifying the disclosure requirement associated with the existing credit quality indicators “vintage” disclosure. With respect to TDRs, ASU 2022-02 eliminates the recognition and measurement guidance for TDRs under current GAAP and instead requires that the Corporation evaluate whether the modification represents a new loan or a continuation of existing loan, consistent with the current GAAP treatment for other loan modifications. In addition, ASU 2022-02 eliminates existing disclosure requirements on TDRs and replaces with enhanced disclosure requirements related to loan modifications made to borrowers, including those experiencing financial difficulty. ASU 2022-02 also provides an update to the existing tabular vintage disclosure of credit quality indicators by requiring current period gross write-offs to be disclosed by year of origination for each loan segment. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The provisions under ASU 2022-02 should be applied on a prospective basis. However, the Corporation has the option to use a modified retrospective transition method related to the change in accounting treatment for TDRs with a cumulative effect of the the change in accounting principle recognized in the opening balance of retained earnings as of the adoption date. The Corporation is currently evaluating this ASU and has not yet determined the impact that the adoption of ASU 2022-02 will have on its consolidated financial statements. -9- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 3 - Securities Available for Sale Debt Securities The following tables present the amortized cost, gross unrealized holding gains, gross unrealized holding losses, ACL on securities and fair value of securities by major security type and class of security: (Dollars in thousands) March 31, 2022 Amortized Cost Unrealized Gains Unrealized Losses ACL Fair Value Available for Sale Debt Securities: Obligations of U.S. government-sponsored enterprises $ 201,206 $ — ($ 15,774 ) $ — $ 185,432 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 858,461 920 ( 57,811 ) — 801,570 Individual name issuer trust preferred debt securities 9,377 — ( 358 ) — 9,019 Corporate bonds 13,159 — ( 996 ) — 12,163 Total available for sale debt securities $ 1,082,203 $ 920 ($ 74,939 ) $ — $ 1,008,184 (Dollars in thousands) December 31, 2021 Amortized Cost Unrealized Gains Unrealized Losses ACL Fair Value Available for Sale Debt Securities: Obligations of U.S. government-sponsored enterprises $ 200,953 $ 12 ($ 4,511 ) $ — $ 196,454 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 828,319 6,850 ( 10,207 ) — 824,962 Individual name issuer trust preferred debt securities 9,373 — ( 235 ) — 9,138 Corporate bonds 13,155 — ( 850 ) — 12,305 Total available for sale debt securities $ 1,051,800 $ 6,862 ($ 15,803 ) $ — $ 1,042,859 The Corporation excludes accrued interest from the amortized cost basis of debt securities and reports accrued interest in other assets in the Unaudited Consolidated Balance Sheets. Accrued interest receivable on available for sale debt securities totaled $ 2.2 million and $ 2.3 million, respectively, as of March 31, 2022 and December 31, 2021. As of March 31, 2022 and December 31, 2021, securities with a fair value of $ 301.8 million and $ 332.0 million, respectively, were pledged as collateral for FHLB borrowings, potential borrowings with the FRBB, certain public deposits and for other purposes. See Note 7 for additional disclosure on FHLB borrowings. The schedule of maturities of available for sale debt securities is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments. All other debt securities are included based on contractual maturities. Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. (Dollars in thousands) March 31, 2022 Amortized Cost Fair Value Due in one year or less $ 139,387 $ 130,147 Due after one year to five years 371,924 347,322 Due after five years to ten years 420,816 390,659 Due after ten years 150,076 140,056 Total debt securities $ 1,082,203 $ 1,008,184 -10- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Included in the above table are debt securities with an amortized cost balance of $ 223.0 million and a fair value of $ 205.9 million at March 31, 2022 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 2 years to 15 years, with call features ranging from 1 month to 2 year. Assessment of Available for Sale Debt Securities for Impairment Management assesses the decline in fair value of investment securities on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, vol atility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates both qualitative and quantitative factors to assess whether an impairment exists. A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a debt security placed on nonaccrual is reversed against interest income. There were no debt securities on nonaccrual status at March 31, 2022 and 2021 and, therefore there was no accrued interest related to debt securities reversed against interest income for the three months ended March 31, 2022 and 2021. The following tables summarize available for sale debt securities in an unrealized loss position, for which an ACL on securities has not been recorded, segregated by length of time that the securities have been in a continuous unrealized loss position: (Dollars in thousands) Less than 12 Months 12 Months or Longer Total March 31, 2022 # Fair Value Unrealized Losses # Fair Value Unrealized Losses # Fair Value Unrealized Losses Obligations of U.S. government-sponsored enterprises 10 $ 89,928 ($ 6,378 ) 10 $ 95,504 ($ 9,396 ) 20 $ 185,432 ($ 15,774 ) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 80 485,574 ( 33,595 ) 32 233,593 ( 24,216 ) 112 719,167 ( 57,811 ) Individual name issuer trust preferred debt securities — — — 3 9,019 ( 358 ) 3 9,019 ( 358 ) Corporate bonds — — — 4 12,163 ( 996 ) 4 12,163 ( 996 ) Total 90 $ 575,502 ($ 39,973 ) 49 $ 350,279 ($ 34,966 ) 139 $ 925,781 ($ 74,939 ) (Dollars in thousands) Less than 12 Months 12 Months or Longer Total December 31, 2021 # Fair Value Unrealized Losses # Fair Value Unrealized Losses # Fair Value Unrealized Losses Obligations of U.S. government-sponsored enterprises 12 $ 152,733 ($ 3,313 ) 6 $ 43,202 ($ 1,198 ) 18 $ 195,935 ($ 4,511 ) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 41 514,419 ( 7,270 ) 21 108,983 ( 2,937 ) 62 623,402 ( 10,207 ) Individual name issuer trust preferred debt securities — — — 3 9,138 ( 235 ) 3 9,138 ( 235 ) Corporate bonds — — — 4 12,305 ( 850 ) 4 12,305 ( 850 ) Total 53 $ 667,152 ($ 10,583 ) 34 $ 173,628 ($ 5,220 ) 87 $ 840,780 ($ 15,803 ) Deterioration in credit quality of the underlying issuers of the securities, deterioration in the condition of the financial services industry, worsening of the current economic environment, or declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as credit losses, and the Corporation may incur write-downs. Obligations of U.S. Government Agency and U.S. Government-Sponsored Enterprise Securities, including Mortgage-Backed Securities The gross unrealized losses on U.S. government agency and U.S. government-sponsored debt securities, including mortgage- -11- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) backed securities, were primarily attributable to relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at March 31, 2022. Management believes that the unrealized losses on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no allowance for credits losses on securities was recorded at March 31, 2022. Individual Name Issuer Trust Preferred Debt Securities Included in debt securities in an unrealized loss position at March 31, 2022 were three trust preferred securities issued by three individual companies in the banking sector. Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date, as well as credit rating changes between the reporting period date and the filing date of this report, and other information. As of March 31, 2022, there was one individual name issuer trust preferred debt security with an amortized cost of $ 2.0 million and unrealized losses of $ 77 thousand that was rated below investment grade by S&P. We noted no additional downgrades to below investment grade between March 31, 2022 and the filing date of this report. Based on the information available through the filing date of this report, all individual name issuer trust preferred debt securities held in our portfolio continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates and not changes in the credit quality of the issuers of the debt securities. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no ACL on securities was recorded at March 31, 2022. Corporate Bonds At March 31, 2022, the Corporation had four corporate bond holdings with unrealized losses totaling $ 996 thousand. Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date, as well as credit rating changes between the reporting period date and the filing date of this report, and other information. As of March 31, 2022, there was one corporate bond debt security with an amortized cost of $ 2.0 million and unrealized losses of $ 50 thousand that was rated below investment grade by S&P. We noted no additional downgrades to below investment grade between March 31, 2022 and the filing date of this report. Based on the information available through the filing date of this report, all corporate bond debt securities held in our portfolio continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates and not changes in the credit quality of the issuers of the debt securities. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no ACL was recorded at March 31, 2022. -12- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 4 - Loans The following table presents a summary of loans: (Dollars in thousands) March 31, 2022 December 31, 2021 Commercial: Commercial real estate (1) $ 1,628,620 $ 1,639,062 Commercial & industrial (2) 614,892 641,555 Total commercial 2,243,512 2,280,617 Residential Real Estate: Residential real estate (3) 1,777,974 1,726,975 Consumer: Home equity 246,097 247,697 Other (4) 16,269 17,636 Total consumer 262,366 265,333 Total loans (5) $ 4,283,852 $ 4,272,925 (1) CRE consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. (2) C&I consists of loans to businesses and individuals, a portion of which are fully or partially collateralized by real estate. C&I also includes $ 12.5 million and $ 38.0 million, respectively, of PPP loans as of March 31, 2022 and December 31, 2021. (3) Residential real estate consists of mortgage and homeowner construction loans secured by one- to four-family residential properties. (4) Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans. (5) Includes net unamortized loan origination costs of $ 8.3 million and $ 6.7 million, respectively, at March 31, 2022 and December 31, 2021 and net unamortized premiums on purchased loans of $ 389 thousand and $ 414 thousand, respectively, at March 31, 2022 and December 31, 2021. Loan balances exclude accrued interest receivable of $ 10.6 million and $ 10.3 million, respectively, as of March 31, 2022 and December 31, 2021. As of both March 31, 2022 and December 31, 2021, loans amounting to $ 2.2 billion were pledged as collateral to the FHLB under a blanket pledge agreement and to the FRBB for the discount window. See Note 7 for additional disclosure regarding borrowings. The Corporation elected to account for eligible loan modifications under Section 4013 of the CARES Act, as amended by the CRRSA Act. Eligible loan modifications from March 1, 2020 through January 1, 2022 made in response to the COVID-19 pandemic were not required to be classified as TDRs. During this period of time, we processed loan payment deferral modifications, or “deferments”, on 654 loans totaling $ 727.7 million. The vast majority of the deferments qualified as eligible loan modifications and were not classified as TDRs. As of March 31, 2022, all of these loans have exited their payment deferral period. Concentrations of Credit Risk A significant portion of our loan portfolio is concentrated among borrowers in southern New England and a substantial portion of the portfolio is collateralized by real estate in this area. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy, as well as the health of the real estate economic sector in the Corporation’s market area. -13- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Past Due Loans Past due status is based on the contractual payment terms of the loan. The following tables present an aging analysis of past due loans, segregated by class of loans: (Dollars in thousands) Days Past Due March 31, 2022 30-59 60-89 Over 90 Total Past Due Current Total Loans Commercial: Commercial real estate $ — $ — $ — $ — $ 1,628,620 $ 1,628,620 Commercial & industrial 108 — — 108 614,784 614,892 Total commercial 108 — — 108 2,243,404 2,243,512 Residential Real Estate: Residential real estate 1,299 — 5,168 6,467 1,771,507 1,777,974 Consumer: Home equity 112 141 178 431 245,666 246,097 Other 30 — — 30 16,239 16,269 Total consumer 142 141 178 461 261,905 262,366 Total loans $ 1,549 $ 141 $ 5,346 $ 7,036 $ 4,276,816 $ 4,283,852 (Dollars in thousands) Days Past Due December 31, 2021 30-59 60-89 Over 90 Total Past Due Current Total Loans Commercial: Commercial real estate $ — $ — $ — $ — $ 1,639,062 $ 1,639,062 Commercial & industrial 3 — — 3 641,552 641,555 Total commercial 3 — — 3 2,280,614 2,280,617 Residential Real Estate: Residential real estate 1,784 3,176 4,662 9,622 1,717,353 1,726,975 Consumer: Home equity 580 77 108 765 246,932 247,697 Other 21 — — 21 17,615 17,636 Total consumer 601 77 108 786 264,547 265,333 Total loans $ 2,388 $ 3,253 $ 4,770 $ 10,411 $ 4,262,514 $ 4,272,925 Included in past due loans as of March 31, 2022 and December 31, 2021, were nonaccrual loans of $ 5.7 million and $ 9.4 million, respectively. In addition, all loans 90 days or more past due at March 31, 2022 and December 31, 2021 were classified as nonaccrual. Nonaccrual Loans Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. When loans are placed on nonaccrual status, interest previously accrued but not collected is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible. -14- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table is a summary of nonaccrual loans, segregated by class of loans: (Dollars in thousands) Mar 31, 2022 Dec 31, 2021 Commercial: Commercial real estate $ — $ — Commercial & industrial — — Total commercial — — Residential Real Estate: Residential real estate 11,916 13,576 Consumer: Home equity 673 627 Other — — Total consumer 673 627 Total nonaccrual loans $ 12,589 $ 14,203 Accruing loans 90 days or more past due $ — $ — No ACL was deemed necessary on nonaccrual loans with carrying values of $ 4.2 million as of both March 31, 2022 and December 31, 2021. Nonaccrual loans of $ 6.9 million and $ 4.8 million, respectively, at March 31, 2022 and December 31, 2021 were current as to the payment of principal and interest. As of March 31, 2022 and December 31, 2021, nonaccrual loans secured by one- to four-family residential property amounting to $ 1.7 million and $ 1.5 million, respectively, were in process of foreclosure. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2022. The following table presents interest income recognized on nonaccrual loans: (Dollars in thousands) Three months ended March 31, 2022 2021 Commercial: Commercial real estate $ — $ — Commercial & industrial — 1 Total commercial — 1 Residential Real Estate: Residential real estate 101 65 Consumer: Home equity 7 24 Other — — Total consumer 7 24 Total $ 108 $ 90 Troubled Debt Restructurings A loan that has been modified or renewed is considered to be a TDR when two conditions are met: (1) the borrower is experiencing financial difficulty and (2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or a transaction with similar credit risk characteristics. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, -15- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring of a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection. The Corporation's ACL reflects the effects of a TDR when management reasonably expects at the reporting date that a TDR will be executed with an individual borrower. A TDR is considered reasonably expected no later than the point when management concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession to avoid a default. Reasonably expected TDRs and executed TDRs are evaluated individually to determine the required ACL. TDRs that did not involve a below-market rate concession and perform in accordance with their modified contractual terms for a reasonable period of time may be included in the Corporation’s existing pools based on the underlying risk characteristics of the loan to measure the ACL. TDRs are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term and full collection of principal and interest is in doubt. TDRs are reported as such for at least one year from the date of the restructuring. In years after the restructuring, TDRs are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is performing in accordance with their modified contractual terms for a reasonable period of time. The recorded investment in TDRs consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. For accruing TDRs, the recorded investment also includes accrued interest. The following table presents the recorded investment in TDRs and other pertinent information: (Dollars in thousands) Mar 31, 2022 Dec 31, 2021 Accruing TDRs $ 16,540 $ 16,564 Nonaccrual TDRs 2,789 2,819 Total TDRs $ 19,329 $ 19,383 Specific reserves on TDRs included in the ACL on loans $ 146 $ 148 Additional commitments to lend to borrowers with TDRs $ — $ — -16- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) During the three months ended March 31, 2022 and 2021, there were no loans modified in a TDR. The following tables present information on TDRs modified within the previous 12 months for which there was a payment default: (Dollars in thousands) # of Loans Recorded Investment Three months ended March 31, 2022 2021 2022 2021 TDRs with a Payment Default: Residential real estate — 1 $ — $ 396 Home equity — — — — Totals — 1 $ — $ 396 Individually Analyzed Loans Individually analyzed loans include nonaccrual commercial loans, reasonably expected TDRs and executed TDRs, as well as certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans. As of March 31, 2022, the carrying value of individually analyzed loans amounted to $ 21.0 million, of which $ 14.4 million were considered collateral dependent. As of December 31, 2021, the carrying value of individually analyzed loans amounted to $ 21.1 million, of which $ 14.4 million were considered collateral dependent. For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. See Note 10 for additional disclosure regarding fair value of individually analyzed collateral dependent loans. The following table presents the carrying value of collateral dependent individually analyzed loans: (Dollars in thousands) March 31, 2022 December 31, 2021 Carrying Value Related Allowance Carrying Value Related Allowance Commercial: Commercial real estate (1) $ 10,593 $ — $ 10,603 $ — Commercial & industrial (2) — — — — Total commercial 10,593 — 10,603 — Residential Real Estate: Residential real estate (3) 3,776 531 3,803 534 Consumer: Home equity (3) — — — — Other — — — — Total consumer — — — — Total $ 14,369 $ 531 $ 14,406 $ 534 (1) Secured by income-producing property. (2) Secured by business assets. (3) Secured by one- to four-family residential properties. Credit Quality Indicators Commercial The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan risk rating system takes into consideration parameters -17- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. The Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for loan losses. See Note 5 for additional information. A description of the commercial loan categories is as follows: Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality, but may exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, performance or may be in an industry or of a loan type known to have a higher degree of risk. These weaknesses may be mitigated by secondary sources of repayment, including SBA guarantees. Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies. Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectability. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined. “Loss” is not intended to imply that the loan has no recovery value, but rather, it is not practical or desirable to continue to carry the asset. The Corporation’s procedures call for loan risk ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. On a quarterly basis, management reviews a watched asset list, which generally consists of commercial loans that are risk-rated 6 or worse, highly leveraged transaction loans, high-volatility commercial real estate and other selected loans. Management’s review focuses on the current status of the loans, the appropriateness of risk ratings and strategies to improve the credit. An annual credit review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio. Residential and Consumer Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type. In addition, other techniques are utilized to monitor indicators of credit deterioration in the residential real estate loans and home equity consumer loans. Among these techniques is the periodic tracking of loans with an updated FICO score and an updated estimated LTV ratio. LTV is estimated based on such factors as geographic location, the original appraised value and changes in median home prices, and takes into consideration the age of the loan. The results of these analyses and other credit review procedures, including selected targeted internal reviews, are taken into account in the determination of qualitative loss factors for residential real estate and home equity consumer credits. -18- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment as of March 31, 2022: (Dollars in thousands) Term Loans Amortized Cost by Origination Year 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Revolving Loans Converted to Term Loans Total Commercial: CRE: Pass $ 138,105 $ 390,948 $ 209,963 $ 230,338 $ 208,730 $ 384,605 $ 8,206 $ 1,617 $ 1,572,512 Special Mention — 9,047 291 13,295 9,720 12,885 277 — 45,515 Classified — — 949 — 2,685 6,959 — — 10,593 Total CRE 138,105 399,995 211,203 243,633 221,135 404,449 8,483 1,617 1,628,620 C&I: Pass 9,593 85,132 78,438 102,252 94,577 126,646 91,555 887 589,080 Special Mention 530 — — 569 4,556 18,211 1,186 — 25,052 Classified — — — 63 — 1 696 — 760 Total C&I 10,123 85,132 78,438 102,884 99,133 144,858 93,437 887 614,892 Residential Real Estate: Residential real estate: Current 152,448 729,453 312,951 145,184 80,870 350,601 — — 1,771,507 Past Due — — 1,400 270 2,373 2,424 — — 6,467 Total residential real estate 152,448 729,453 314,351 145,454 83,243 353,025 — — 1,777,974 Consumer: Home equity: Current 2,561 9,149 4,703 3,107 2,412 4,040 211,618 8,076 245,666 Past Due — — — — — 184 75 172 431 Total home equity 2,561 9,149 4,703 3,107 2,412 4,224 211,693 8,248 246,097 Other: Current 466 5,249 2,811 1,079 316 6,064 254 — 16,239 Past Due 14 5 9 — — 2 — — 30 Total other 480 5,254 2,820 1,079 316 6,066 254 — 16,269 Total Loans $ 303,717 $ 1,228,983 $ 611,515 $ 496,157 $ 406,239 $ 912,622 $ 313,867 $ 10,752 $ 4,283,852 -19- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment as of December 31, 2021: (Dollars in thousands) Term Loans Amortized Cost by Origination Year 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Revolving Loans Converted to Term Loans Total Commercial: CRE: Pass $ 417,705 $ 212,649 $ 260,940 $ 206,164 $ 163,132 $ 266,067 $ 7,015 $ 2,202 $ 1,535,874 Special Mention 9,089 489 33,982 28,432 — 20,273 320 — 92,585 Classified — 958 — 2,685 6,959 1 — — 10,603 Total CRE 426,794 214,096 294,922 237,281 170,091 286,341 7,335 2,202 1,639,062 C&I: Pass 116,959 78,601 104,827 87,619 51,579 83,182 89,686 911 613,364 Special Mention — — 606 4,599 6,195 15,605 1,186 — 28,191 Classified — — — — — — — — — Total C&I 116,959 78,601 105,433 92,218 57,774 98,787 90,872 911 641,555 Residential Real Estate: Residential real estate: Current 733,658 353,742 158,140 85,656 88,365 297,792 — — 1,717,353 Past Due — 1,402 1,167 2,379 763 3,911 — — 9,622 Total residential real estate 733,658 355,144 159,307 88,035 89,128 301,703 — — 1,726,975 Consumer: Home equity: Current 10,434 5,850 3,703 2,380 1,064 3,592 211,488 8,421 246,932 Past Due — — 185 — — 245 115 220 765 Total home equity 10,434 5,850 3,888 2,380 1,064 3,837 211,603 8,641 247,697 Other: Current 5,536 3,264 1,313 407 747 6,090 258 — 17,615 Past Due 21 — — — — — — — 21 Total other 5,557 3,264 1,313 407 747 6,090 258 — 17,636 Total Loans $ 1,293,402 $ 656,955 $ 564,863 $ 420,321 $ 318,804 $ 696,758 $ 310,068 $ 11,754 $ 4,272,925 Consistent with industry practice, Washington Trust may renew commercial loans at or immediately prior to their maturity. In the tables above, renewals subject to full credit evaluation before being granted are reported as originations in the period renewed. -20- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 5 - 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 loans. The level of the ACL on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the calculation of loss given default and the estimation of expected credit losses. Qualitative adjustments are made for differences in specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, that may not be reflected in historical loss rates. The following table presents the activity in the ACL on loans for the three months ended March 31, 2022: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 18,933 $ 10,832 $ 29,765 $ 7,860 $ 1,069 $ 394 $ 1,463 $ 39,088 Charge-offs — ( 5 ) ( 5 ) — — ( 31 ) ( 31 ) ( 36 ) Recoveries 145 6 151 21 2 10 12 184 Provision ( 618 ) 389 ( 229 ) 185 27 17 44 — Ending Balance $ 18,460 $ 11,222 $ 29,682 $ 8,066 $ 1,098 $ 390 $ 1,488 $ 39,236 The following table presents the activity in the ACL on loans for the three months ended March 31, 2021: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 22,065 $ 12,228 $ 34,293 $ 8,042 $ 1,300 $ 471 $ 1,771 $ 44,106 Charge-offs — ( 3 ) ( 3 ) ( 50 ) — ( 11 ) ( 11 ) ( 64 ) Recoveries — 2 2 33 2 9 11 46 Provision ( 768 ) 162 ( 606 ) ( 1,556 ) 129 82 211 ( 1,951 ) Ending Balance $ 21,297 $ 12,389 $ 33,686 $ 6,469 $ 1,431 $ 551 $ 1,982 $ 42,137 Note 6 - Deposits The following table presents a summary of deposits: (Dollars in thousands) Mar 31, 2022 Dec 31, 2021 Noninterest-bearing demand deposits $ 911,990 $ 945,229 Interest-bearing demand deposits 248,914 251,032 NOW accounts 893,603 867,138 Money market accounts 1,295,339 1,072,864 Savings accounts 566,461 555,177 Time deposits (1) 1,211,643 1,288,611 Total deposits $ 5,127,950 $ 4,980,051 (1) Includes wholesale brokered time deposit balances of $ 401,785 and $ 515,228 , respectively, as of March 31, 2022 and December 31, 2021. -21- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 7 - Borrowings Advances payable to the FHLB amounted to $ 55.0 million and $ 145.0 million, respectively, at March 31, 2022 and December 31, 2021. As of March 31, 2022 and December 31, 2021, the Bank had access to a $ 40.0 million unused line of credit with the FHLB. Additionally, the Bank had a $ 102.0 million standby letter of credit with the FHLB at March 31, 2022. The Bank had remaining available borrowing capacity of $ 1.6 billion with the FHLB at both March 31, 2022 and December 31, 2021. The Bank pledges certain qualified investment securities and loans as collateral to the FHLB. The following table presents maturities and weighted average interest rates on FHLB advances outstanding as of March 31, 2022: (Dollars in thousands) Scheduled Maturity Weighted Average Rate April 1, 2022 to December 31, 2022 $ 20,000 0.65 % 2023 35,000 0.45 2024 — — 2025 — — 2026 — — 2027 and thereafter — — Balance at March 31, 2022 $ 55,000 0.52 % Note 8 - Shareholders' Equity Stock Repurchase Program The 2021 Repurchase Program authorizes the repurchase of up to 850,000 shares, or approximately 5 %, of the Corporation’s outstanding common stock. This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The 2021 Repurchase Program expires on December 31, 2022 and may be modified, suspended, or discontinued at any time. As of March 31, 2022, no shares have been repurchased under the 2021 Repurchase Program. -22- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Regulatory Capital Requirements Capital levels at March 31, 2022 exceeded the regulatory minimum levels to be considered “well capitalized.” The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios, as well as the corresponding minimum and well capitalized regulatory amounts and ratios that were in effect during the respective periods: (Dollars in thousands) Actual For Capital Adequacy Purposes To Be “Well Capitalized” Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio March 31, 2022 Total Capital (to Risk-Weighted Assets): Corporation $ 586,872 14.15 % $ 331,834 8.00 % N/A N/A Bank 574,138 13.85 331,722 8.00 $ 414,652 10.00 % Tier 1 Capital (to Risk-Weighted Assets): Corporation 552,481 13.32 248,875 6.00 N/A N/A Bank 539,747 13.02 248,791 6.00 331,722 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets): Corporation 530,482 12.79 186,656 4.50 N/A N/A Bank 539,747 13.02 186,593 4.50 269,524 6.50 Tier 1 Capital (to Average Assets): (1) Corporation 552,481 9.46 233,500 4.00 N/A N/A Bank 539,747 9.25 233,387 4.00 291,734 5.00 December 31, 2021 Total Capital (to Risk-Weighted Assets): Corporation 578,137 14.01 330,105 8.00 N/A N/A Bank 565,087 13.70 330,025 8.00 412,532 10.00 Tier 1 Capital (to Risk-Weighted Assets): Corporation 546,362 13.24 247,578 6.00 N/A N/A Bank 533,312 12.93 247,519 6.00 330,025 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets): Corporation 524,363 12.71 185,684 4.50 N/A N/A Bank 533,312 12.93 185,639 4.50 268,146 6.50 Tier 1 Capital (to Average Assets): (1) Corporation 546,362 9.36 233,534 4.00 N/A N/A Bank 533,312 9.14 233,434 4.00 291,793 5.00 (1) Leverage ratio. In addition to the minimum regulatory capital required for capital adequacy purposes outlined in the table above, the Corporation is required to maintain a minimum capital conservation buffer, in the form of common equity, of 2.50% in order to avoid restrictions on capital distributions and discretionary bonuses. The Corporation’s capital levels exceeded the minimum regulatory capital requirements plus the capital conservation buffer at March 31, 2022 and December 31, 2021. The Bancorp owns the common stock of two capital trusts, which have issued trust preferred securities. In accordance with GAAP, the capital trusts are treated as unconsolidated subsidiaries. At both March 31, 2022 and December 31, 2021, $ 22.0 million in trust preferred securities were included in the Tier 1 capital of the Corporation for regulatory capital reporting purposes pursuant to the capital adequacy guidelines of the Board of Governors of the Federal Reserve System. In accordance with regulatory capital rules, the Corporation elected the option to delay the estimated impact of ASC 326 on its regulatory capital over a two-year deferral and subsequent three-year transition period ending December 31, 2024. As a result, capital ratios exclude the full impact of the increased ACL on loans and unfunded loan commitments attributed to the adoption of ASC 326, adjusted for an approximation of the after-tax provision for credit losses attributable to ASC 326 -23- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) relative to the incurred loss methodology during the two-year deferral period. The cumulative difference at the end of the deferral period is being phased-in to regulatory capital over the three-year transition period, which began January 1, 2022. Note 9 - Derivative Financial Instruments The Corporation’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Corporation’s known or expected cash receipts and its known or expected cash payments principally to manage the Corporation’s interest rate risk. Additionally, the Corporation enters into interest rate derivatives to accommodate the business requirements of its customers. All derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and resulting designation. Interest Rate Risk Management Agreements Interest rate risk management agreements, such as caps, swaps and floors, are used from time to time as part of the Corporation’s interest rate risk management strategy. Interest rate swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g., fixed-rate for variable-rate payments) computed on a notional principal amount. Interest rate caps and floors represent options purchased by the Corporation to manage the interest rate paid throughout the term of the option contract. The credit risk associated with these transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure. Cash Flow Hedging Instruments As of March 31, 2022 and December 31, 2021, the Corporation had an interest rate swap contract with a total notional amount of $ 20.0 million that was designated as a cash flow hedge to hedge the interest rate risk associated with short-term variable rate FHLB advances. The interest rate swap on borrowings matures in December 2023. As of March 31, 2022 and December 31, 2021, the Corporation had an interest rate swap contract with a total notional amount of $ 300.0 million that was designated as a cash flow hedge to hedge the interest rate risk associated with a pool of variable rate commercial loans. The interest rate swap on loans matures in May 2026. The changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income (loss) and subsequently reclassified to earnings when gains or losses are realized. Loan Related Derivative Contracts Interest Rate Swap Contracts with Customers The Corporation enters into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert variable-rate loan payments to fixed-rate loan payments. When the Corporation enters into an interest rate swap contract with a commercial loan borrower, it simultaneously enters into a “mirror” swap contract with a third party. The third party exchanges the client’s fixed-rate loan payments for variable-rate loan payments. The Corporation retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans. As of March 31, 2022 and December 31, 2021, Washington Trust had interest rate swap contracts with commercial loan borrowers with notional amounts of $ 979.4 million and $ 1.0 billion, respectively, and equal amounts of “mirror” swap contracts with third party financial institutions. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Risk Participation Agreements The Corporation has entered into risk participation agreements with other banks in commercial loan arrangements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Under a risk participation-out agreement, a derivative asset, the Corporation participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Corporation assumes, or participates in, a portion of the -24- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) credit risk associated with the interest rate swap position with the commercial borrower for a fee received from the other bank. As of March 31, 2022, the notional amounts of risk participation-out agreements and risk participation-in agreements were $ 73.8 million and $ 162.8 million, respectively, compared to $ 74.2 million and $ 163.2 million, respectively, as of December 31, 2021. Mortgage Loan Commitments Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Forward sale commitments are contracts for delayed delivery or net settlement of the underlying instrument, such as a residential real estate mortgage loan, where the seller agrees to deliver on a specified future date, either a specified instrument at a specified price or yield or the net cash equivalent of an underlying instrument. Both interest rate lock commitments and forward sale commitments are derivative financial instruments, but do not meet criteria for hedge accounting and therefore, the changes in fair value of these commitments are reflected in earnings. As of March 31, 2022, the notional amounts of interest rate lock commitments and forward sale commitments were $ 40.1 million and $ 67.6 million, respectively, compared to $ 49.8 million and $ 103.6 million, respectively, as of December 31, 2021. The following table presents the fair values of derivative instruments in the Unaudited Consolidated Balance Sheets: (Dollars in thousands) Derivative Assets Derivative Liabilities Fair Value Fair Value Balance Sheet Location Mar 31, 2022 Dec 31, 2021 Balance Sheet Location Mar 31, 2022 Dec 31, 2021 Derivatives Designated as Cash Flow Hedging Instruments: Interest rate risk management contracts: Interest rate swaps Other assets $ 201 $ 182 Other liabilities $ 18,947 $ 5,301 Derivatives not Designated as Hedging Instruments: Loan related derivative contracts: Interest rate swaps with customers Other assets 7,088 32,361 Other liabilities 21,656 2,015 Mirror swaps with counterparties Other assets 21,518 2,001 Other liabilities 7,141 32,480 Risk participation agreements Other assets — 1 Other liabilities 2 2 Mortgage loan commitments: Interest rate lock commitments Other assets 407 1,256 Other liabilities 85 — Forward sale commitments Other assets 985 54 Other liabilities 69 905 Gross amounts 30,199 35,855 47,900 40,703 Less: amounts offset (1) 13,961 2,167 13,961 2,167 Derivative balances, net of offset 16,238 33,688 33,939 38,536 Less: collateral pledged (2) — — 10,848 34,539 Net amounts $ 16,238 $ 33,688 $ 23,091 $ 3,997 (1) Interest rate risk management contracts and loan related derivative contracts with counterparties are subject to master netting arrangements. (2) Collateral pledged to derivative counterparties is in the form of cash. Washington Trust may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions. -25- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the effect of derivative instruments in the Unaudited Consolidated Statements of Changes in Shareholders’ Equity and Unaudited Consolidated Statements of Income: (Dollars in thousands) Gain (Loss) Recognized in Other Comprehensive Income (Loss), Net of Tax Three months ended March 31, 2022 2021 Derivatives Designated as Cash Flow Hedging Instruments: Interest rate risk management contracts: Interest rate swaps ($ 10,335 ) $ 297 Total ($ 10,335 ) $ 297 For derivatives designated as cash flow hedging instruments, see Note 15 for additional disclosure pertaining to the amounts and location of reclassifications from AOCL into earnings. (Dollars in thousands) Amount of Gain (Loss) Recognized in Income on Derivatives Three months ended March 31, Statement of Income Location 2022 2021 Derivatives not Designated as Hedging Instruments: Loan related derivative contracts: Interest rate swaps with customers Loan related derivative income ($ 40,822 ) ($ 30,231 ) Mirror swaps with counterparties Loan related derivative income 41,122 30,683 Risk participation agreements Loan related derivative income 1 15 Mortgage loan commitments: Interest rate lock commitments Mortgage banking revenues ( 934 ) ( 4,529 ) Forward sale commitments Mortgage banking revenues 2,991 7,285 Total $ 2,358 $ 3,223 -26- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 10 - Fair Value Measurements The Corporation uses fair value measurements to record fair value adjustments on certain assets and liabilities and to determine fair value disclosures. Items recorded at fair value on a recurring basis include securities available for sale, mortgage loans held for sale and derivatives. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent individually analyzed loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets. Fair value is a market-based measurement, not an entity-specific measurement. Fair value measurements are determined based on the assumptions the market participants would use in pricing the asset or liability. In addition, GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information, or “inputs”, are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Corporation’s market assumptions. These two types of inputs have created the following fair value hierarchy: • Level 1 – Quoted prices for identical assets or liabilities in active markets. • Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. • Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in the markets and which reflect the Corporation’s market assumptions. Fair Value Option Election GAAP allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation has elected the fair value option for mortgage loans held for sale to better match changes in fair value of the loans with changes in the fair value of the forward sale commitment contracts used to economically hedge them. The following table presents a summary of mortgage loans held for sale accounted for under the fair value option: (Dollars in thousands) March 31, 2022 December 31, 2021 Aggregate fair value $ 15,612 $ 40,196 Aggregate principal balance 15,692 39,201 Difference between fair value and principal balance ($ 80 ) $ 995 Changes in fair value of mortgage loans held for sale accounted for under the fair value option election are included in mortgage banking revenues in the Unaudited Consolidated Statements of Income. Changes in fair value amounted to a decrease to mortgage banking revenues of $ 1.1 million and $ 1.5 million, respectively, for the three months ended March 31, 2022 and 2021. There were no mortgage loans held for sale 90 days or more past due as of March 31, 2022 and December 31, 2021. Valuation Techniques Debt Securities Available for sale debt securities are recorded at fair value on a recurring basis. When available, the Corporation uses quoted market prices to determine the fair value of debt securities; such items are classified as Level 1. There were no Level 1 debt securities held at March 31, 2022 and December 31, 2021. Level 2 debt securities are traded less frequently than exchange-traded instruments. The fair value of these securities is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category includes obligations of U.S. government-sponsored enterprises, including mortgage-backed securities, individual name issuer trust preferred debt securities and corporate bonds. -27- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Debt securities not actively traded whose fair value is determined through the use of cash flows utilizing inputs that are unobservable are classified as Level 3. There were no Level 3 debt securities held at March 31, 2022 and December 31, 2021. Mortgage Loans Held for Sale The fair value of mortgage loans held for sale is estimated based on current market prices for similar loans in the secondary market and therefore are classified as Level 2 assets. Collateral Dependent Individually Analyzed Loans The fair value of collateral dependent individually analyzed loans is determined based upon the appraised fair value of the underlying collateral. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For collateral dependent loans that are expected to be repaid substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the collateral. Internal valuations may be utilized to determine the fair value of other business assets. Collateral dependent individually analyzed loans are categorized as Level 3. Derivatives Interest rate swaps are traded in over-the-counter markets where quoted market prices are not readily available. Fair value measurements are determined using independent valuation software, which utilizes the present value of future cash flows discounted using market observable inputs such as forward rate assumptions. The Corporation evaluates the credit risk of its counterparties, as well as that of the Corporation. Accordingly, factors such as the likelihood of default by the Corporation and its counterparties, its net exposures and remaining contractual life are considered in determining if any fair value adjustments related to credit risk are required. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position, if any. The Corporation has determined that the majority of the inputs used to value its derivative positions fall within Level 2 of the fair value hierarchy. However, the credit valuation adjustments utilize Level 3 inputs. As of March 31, 2022 and December 31, 2021, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation has classified its derivative valuations in their entirety as Level 2. Fair value measurements of forward loan commitments (interest rate lock commitments and forward sale commitments) are primarily based on current market prices for similar assets in the secondary market for mortgage loans and therefore are classified as Level 2 assets. The fair value of interest rate lock commitments is also dependent on the ultimate closing of the loans. Pull-through rates are based on the Corporation’s historical data and reflect the Corporation’s best estimate of the likelihood that a commitment will result in a closed loan. Although the pull-through rates are Level 3 inputs, the Corporation has assessed the significance of the impact of pull-through rates on the overall valuation of its interest rate lock commitments and has determined that they are not significant to the overall valuation. As a result, the Corporation has classified its interest rate lock commitments as Level 2. -28- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Items Recorded at Fair Value on a Recurring Basis The following tables present the balances of assets and liabilities reported at fair value on a recurring basis: (Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) March 31, 2022 Assets: Available for sale debt securities: Obligations of U.S. government-sponsored enterprises $ 185,432 $ — $ 185,432 $ — Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 801,570 — 801,570 — Individual name issuer trust preferred debt securities 9,019 — 9,019 — Corporate bonds 12,163 — 12,163 — Mortgage loans held for sale 15,612 — 15,612 — Derivative assets 16,238 — 16,238 — Total assets at fair value on a recurring basis $ 1,040,034 $ — $ 1,040,034 $ — Liabilities: Derivative liabilities $ 33,939 $ — $ 33,939 $ — Total liabilities at fair value on a recurring basis $ 33,939 $ — $ 33,939 $ — (Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2021 Assets: Available for sale debt securities: Obligations of U.S. government-sponsored enterprises $ 196,454 $ — $ 196,454 $ — Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 824,962 — 824,962 — Individual name issuer trust preferred debt securities 9,138 — 9,138 — Corporate bonds 12,305 — 12,305 — Mortgage loans held for sale 40,196 — 40,196 — Derivative assets 33,688 — 33,688 — Total assets at fair value on a recurring basis $ 1,116,743 $ — $ 1,116,743 $ — Liabilities: Derivative liabilities $ 38,536 $ — $ 38,536 $ — Total liabilities at fair value on a recurring basis $ 38,536 $ — $ 38,536 $ — Items Recorded at Fair Value on a Nonrecurring Basis There were no assets written down to fair value during the three months ended March 31, 2022. During 2021, two collateral dependent individually analyzed loans were written down to fair value. One loan with a carrying value of $ 3.1 million was paid in full in the fourth quarter of 2021. The second loan with a carrying value of $ 533 thousand was fully reserved for as of December 31, 2021. -29- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents valuation techniques and unobservable inputs for assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value: (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Inputs Utilized (Weighted Average) December 31, 2021 Collateral dependent individually analyzed loans $— Appraisals of collateral Discount for costs to sell 14 % Appraisal adjustments 100 % Valuation of Financial Instruments The estimated fair values and related carrying amounts for financial instruments for which fair value is only disclosed are presented below as of the periods indicated. The tables exclude financial instruments for which the carrying value approximates fair value such as cash and cash equivalents, FHLB stock, accrued interest receivable, bank-owned life insurance, non-maturity deposits and accrued interest payable. The Corporation considers cash and cash equivalents, accrued interest receivable and accrued interest payable as level 1 measurements within the fair value hierarchy. The Corporation considers FHLB stock, bank-owned life insurance and non-maturity deposits as level 2 measurements. (Dollars in thousands) March 31, 2022 Carrying Amount Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets: Loans, net of allowance for credit losses on loans $ 4,244,616 $ 4,184,223 $ — $ — $ 4,184,223 Financial Liabilities: Time deposits $ 1,211,643 $ 1,215,055 $ — $ 1,215,055 $ — FHLB advances 55,000 54,425 — 54,425 — Junior subordinated debentures 22,681 18,665 — 18,665 — (Dollars in thousands) December 31, 2021 Carrying Amount Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets: Loans, net of allowance for credit losses on loans $ 4,233,837 $ 4,145,516 $ — $ — $ 4,145,516 Financial Liabilities: Time deposits $ 1,288,611 $ 1,294,053 $ — $ 1,294,053 $ — FHLB advances 145,000 144,862 — 144,862 — Junior subordinated debentures 22,681 20,181 — 20,181 — -30- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 11 - Revenue from Contracts with Customers The following tables summarize total revenues as presented in the Unaudited Consolidated Statements of Income and the related amounts that are from contracts with customers within the scope of ASC 606. As shown below, a substantial portion of our revenues are specifically excluded from the scope of ASC 606. For the three months ended March 31, 2022 2021 (Dollars in thousands) Revenue (1) ASC 606 Revenue (2) Revenue (1) ASC 606 Revenue (2) Net interest income $ 35,091 $ — $ 32,871 $ — Noninterest income: Asset-based wealth management revenues 10,211 10,211 9,583 9,583 Transaction-based wealth management revenues 320 320 312 312 Total wealth management revenues 10,531 10,531 9,895 9,895 Mortgage banking revenues 3,501 — 11,927 — Card interchange fees 1,164 1,164 1,133 1,133 Service charges on deposit accounts 668 668 609 609 Loan related derivative income 301 — 467 — Income from bank-owned life insurance 601 — 556 — Other income 393 286 1,387 1,245 Total noninterest income 17,159 12,649 25,974 12,882 Total revenues $ 52,250 $ 12,649 $ 58,845 $ 12,882 (1) As reported in the Unaudited Consolidated Statements of Income. (2) Revenue from contracts with customers in scope of ASC 606. The Corporation recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), ATM fees, wire transfer fees, overdraft charge fees, and stop-payment and returned check fees. Such revenue is derived from transactional information and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction. The Corporation recognizes revenue over a period of time, generally monthly, as services are performed and performance obligations are satisfied. Such revenue includes wealth management revenues and service charges on deposit accounts. Wealth management revenues are categorized as either asset-based revenues or transaction-based revenues. Asset-based revenues include trust and investment management fees that are earned based upon a percentage of asset values under administration. Transaction-based revenues include tax preparation fees, commissions and other service fees. Fee revenue from service charges on deposit accounts represent service charges assessed to customers who hold deposit accounts at the Bank. -31- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents revenue from contracts with customers based on the timing of revenue recognition: (Dollars in thousands) Three months ended March 31, 2022 2021 Revenue recognized at a point in time: Card interchange fees $ 1,164 $ 1,133 Service charges on deposit accounts 549 481 Other income 229 1,203 Revenue recognized over time: Wealth management revenues 10,531 9,895 Service charges on deposit accounts 119 128 Other income 57 42 Total revenues from contracts in scope of Topic 606 $ 12,649 $ 12,882 Receivables for revenue from contracts with customers primarily consist of amounts due for wealth management services performed for which the Corporation’s performance obligations have been fully satisfied. Receivables amounted to $ 4.9 million and $ 6.6 million, respectively, at March 31, 2022 and December 31, 2021 and were included in other assets in the Unaudited Consolidated Balance Sheets. Deferred revenues, which are considered contract liabilities under ASC 606, represent advance consideration received from customers for which the Corporation has a remaining performance obligation to fulfill. Contract liabilities are recognized as revenue over the life of the contract as the performance obligations are satisfied. The balances of contract liabilities were insignificant at both March 31, 2022 and December 31, 2021 and were included in other liabilities in the Unaudited Consolidated Balance Sheets. For commissions and incentives that are in scope of ASC 606, such as those paid to employees in our wealth management services and commercial banking segments in order to obtain customer contracts, contract cost assets are established. The contract cost assets are capitalized and amortized over the estimated useful life that the asset is expected to generate benefits. The carrying value of contract cost assets amounted to $ 2.0 million at March 31, 2022, compared to $ 1.9 million at December 31, 2021 and were included in other assets in the Unaudited Consolidated Balance Sheets. The amortization of contract cost assets is recorded within salaries and employee benefits expense in the Unaudited Consolidated Statements of Income. -32- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 12 - Defined Benefit Pension Plans Washington Trust maintains a qualified pension plan for the benefit of certain eligible employees who were hired prior to October 1, 2007. Washington Trust also has non-qualified retirement plans to provide supplemental retirement benefits to certain employees, as defined in the plans. The defined benefit pension plans were previously amended to freeze benefit accruals after a 10-year transition period ending in December 2023. The following table presents components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss), on a pre-tax basis: (Dollars in thousands) Qualified Pension Plan Non-Qualified Retirement Plans Three months ended March 31, 2022 2021 2022 2021 Net Periodic Benefit Cost: Service cost (1) $ 516 $ 592 $ 54 $ 52 Interest cost (2) 592 645 106 84 Expected return on plan assets (2) ( 1,159 ) ( 1,204 ) — — Recognized net actuarial loss (2) 255 387 173 158 Net periodic benefit cost $ 204 $ 420 $ 333 $ 294 (1) Included in salaries and employee benefits expense in the Unaudited Consolidated Statements of Income. (2) Included in other expenses in the Unaudited Consolidated Statements of Income. The following table presents the measurement date and weighted-average assumptions used to determine net periodic benefit cost: Qualified Pension Plan Non-Qualified Retirement Plans For the three months ended March 31, 2022 2021 2022 2021 Measurement date Dec 31, 2021 Dec 31, 2020 Dec 31, 2021 Dec 31, 2020 Equivalent single discount rate for benefit obligations 3.00 % 2.71 % 2.89 % 2.51 % Equivalent single discount rate for service cost 3.11 2.86 3.16 2.94 Equivalent single discount rate for interest cost 2.67 2.16 2.48 1.97 Expected long-term return on plan assets 5.25 5.75 N/A N/A Rate of compensation increase 3.75 3.75 3.75 3.75 Note 13 - Share-Based Compensation Arrangements During the three months ended March 31, 2022, the Corporation granted performance share unit and restricted stock unit awards. Performance share units were granted to certain key employees providing them the opportunity to earn shares of common stock over a 3 -year performance period. The weighted average fair value of the performance share units was $ 59.31 . The number of shares to be vested will be contingent upon the Corporation’s attainment of certain performance measures as detailed in the performance share unit award agreements. Based on the most recent performance assumption available, it is estimated that 42,728 shares will be earned. In addition, the Corporation granted to certain key employees 3,157 restricted stock units with 3 -year cliff vesting. The weighted average grant date fair value of the restricted stock units was $ 59.31 . Note 14 - Business Segments The Corporation manages its operations through two reportable business segments, consisting of Commercial Banking and Wealth Management Services. Management uses an allocation methodology to allocate income and expenses to the business lines. Direct activities are assigned to the appropriate business segment to which the activity relates. Indirect activities, such as corporate, technology and other support functions, are allocated to business segments primarily based upon full-time equivalent employee computations. -33- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Commercial Banking The Commercial Banking segment includes commercial, residential and consumer lending activities; mortgage banking activities; deposit generation; cash management activities; banking activities, including customer support and the operation of ATMs, telephone banking, internet banking and mobile banking services; as well as investment portfolio and wholesale funding activities. Wealth Management Services The Wealth Management Services segment includes investment management; holistic financial planning services; personal trust and estate services, including services as trustee, personal representative, custodian and guardian; settlement of decedents’ estates; and institutional trust services, including custody and fiduciary services. The following table presents the statement of operations and total assets for Washington Trust’s reportable segments: (Dollars in thousands) Commercial Banking Wealth Management Services Consolidated Total Three months ended March 31, 2022 2021 2022 2021 2022 2021 Net interest income (expense) $ 35,108 $ 32,885 ($ 17 ) ($ 14 ) $ 35,091 $ 32,871 Provision for credit losses 100 ( 2,000 ) — — 100 ( 2,000 ) Net interest income (expense) after provision for credit losses 35,008 34,885 ( 17 ) ( 14 ) 34,991 34,871 Noninterest income 6,512 14,990 10,647 10,984 17,159 25,974 Noninterest expenses: Depreciation and amortization expense 711 677 344 377 1,055 1,054 Other noninterest expenses 22,611 26,564 7,553 7,095 30,164 33,659 Total noninterest expenses 23,322 27,241 7,897 7,472 31,219 34,713 Income before income taxes 18,198 22,634 2,733 3,498 20,931 26,132 Income tax expense 3,797 4,835 651 826 4,448 5,661 Net income $ 14,401 $ 17,799 $ 2,082 $ 2,672 $ 16,483 $ 20,471 Total assets at period end $ 5,773,796 $ 5,646,209 $ 74,203 $ 73,180 $ 5,847,999 $ 5,719,389 Expenditures for long-lived assets 730 835 104 76 834 911 Note 15 - Other Comprehensive Income (Loss) The following tables present the activity in other comprehensive income (loss): Three months ended March 31, 2022 2021 (Dollars in thousands) Pre-tax Amounts Income Taxes Net of Tax Pre-tax Amounts Income Taxes Net of Tax Securities available for sale: Changes in fair value of available for sale debt securities ($ 65,078 ) ($ 15,618 ) ($ 49,460 ) ($ 17,525 ) ($ 4,206 ) ($ 13,319 ) Cash flow hedges: Change in fair value of cash flow hedges ( 13,201 ) ( 3,168 ) ( 10,033 ) 109 26 83 Net cash flow hedge (gains) losses reclassified into earnings (1) ( 399 ) ( 97 ) ( 302 ) 281 67 214 Net change in fair value of cash flow hedges ( 13,600 ) ( 3,265 ) ( 10,335 ) 390 93 297 Defined benefit plan obligations: Amortization of net actuarial losses (2) 428 103 325 545 138 407 Total other comprehensive loss ($ 78,250 ) ($ 18,780 ) ($ 59,470 ) ($ 16,590 ) ($ 3,975 ) ($ 12,615 ) (1) The pre-tax amounts for the three months ended March 31, 2022 are included in interest expense on FHLB advances and interest and fees on loans in the Unaudited Consolidated Statements of Income. (2) The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income. -34- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax: (Dollars in thousands) Net Unrealized Losses on Available For Sale Debt Securities Net Unrealized Losses on Cash Flow Hedges Net Unrealized Losses on Defined Benefit Plan Obligations Total For the three months ended March 31, 2022 Balance at December 31, 2021 ($ 6,795 ) ($ 4,013 ) ($ 9,173 ) ($ 19,981 ) Other comprehensive loss before reclassifications ( 49,460 ) ( 10,033 ) — ( 59,493 ) Amounts reclassified from accumulated other comprehensive loss — ( 302 ) 325 23 Net other comprehensive (loss) income ( 49,460 ) ( 10,335 ) 325 ( 59,470 ) Balance at March 31, 2022 ($ 56,255 ) ($ 14,348 ) ($ 8,848 ) ($ 79,451 ) (Dollars in thousands) Net Unrealized Gains (Losses) on Available For Sale Debt Securities Net Unrealized Losses on Cash Flow Hedges Net Unrealized Losses on Defined Benefit Plan Obligations Total For the three months ended March 31, 2021 Balance at December 31, 2020 $ 9,881 ($ 1,447 ) ($ 15,825 ) ($ 7,391 ) Other comprehensive (loss) income before reclassifications ( 13,319 ) 83 — ( 13,236 ) Amounts reclassified from accumulated other comprehensive loss — 214 407 621 Net other comprehensive (loss) income ( 13,319 ) 297 407 ( 12,615 ) Balance at March 31, 2021 ($ 3,438 ) ($ 1,150 ) ($ 15,418 ) ($ 20,006 ) Note 16 - Earnings per Common Share The following table presents the calculation of earnings per common share: (Dollars and shares in thousands, except per share amounts) Three months ended March 31, 2022 2021 Earnings for basic and diluted earnings per common share: Net income $ 16,483 $ 20,471 Less: dividends and undistributed earnings allocated to participating securities ( 54 ) ( 56 ) Net income available to common shareholders $ 16,429 $ 20,415 Shares: Weighted average common shares 17,331 17,275 Dilutive effect of common stock equivalents 151 156 Weighted average diluted common shares 17,482 17,431 Earnings per common share: Basic earnings per common share $ 0.95 $ 1.18 Diluted earnings per common share $ 0.94 $ 1.17 Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 94,175 and 149,575 , respectively, for the three months ended March 31, 2022 and 2021. Note 17 - Commitments and Contingencies Financial Instruments with Off-Balance Sheet Risk The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates. These financial -35- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) instruments include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Unaudited Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. Financial Instruments Whose Contract Amounts Represent Credit Risk (Unfunded Commitments) Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements. Each borrower’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the borrower. Standby Letters of Credit Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support the financing needs of the Bank’s commercial customers. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The collateral supporting those commitments is essentially the same as for other commitments. Most standby letters of credit extend for one year. The maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered, totaled $ 11.8 million as of March 31, 2022 and December 31, 2021, respectively. At March 31, 2022 and December 31, 2021, there were no liabilities to beneficiaries resulting from standby letters of credit. Fee income on standby letters of credit was insignificant for the three months ended March 31, 2022 and 2021. A substantial portion of the standby letters of credit were supported by pledged collateral. The collateral obtained is determined based on management’s credit evaluation of the customer. Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required. Financial Instruments Whose Notional Amounts Exceed the Amount of Credit Risk Mortgage Loan Commitments Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with these rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Both interest rate lock commitments and forward sale commitments are derivative financial instruments. Loan Related Derivative Contracts The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers are similar to those used for loans. The interest rate swaps with other counterparties are generally subject to bilateral collateralization terms. -36- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the contractual and notional amounts of financial instruments with off-balance sheet risk: (Dollars in thousands) Mar 31, 2022 Dec 31, 2021 Financial instruments whose contract amounts represent credit risk (unfunded commitments): Commitments to extend credit: Commercial loans $ 579,639 $ 516,344 Home equity lines 381,332 367,784 Other loans 147,954 122,492 Standby letters of credit 11,812 11,844 Financial instruments whose notional amounts exceed the amounts of credit risk: Mortgage loan commitments: Interest rate lock commitments 40,103 49,800 Forward sale commitments 67,614 103,626 Loan related derivative contracts: Interest rate swaps with customers 989,501 1,022,388 Mirror swaps with counterparties 989,501 1,022,388 Risk participation-in agreements 162,821 163,207 Interest rate risk management contracts: Interest rate swaps 320,000 320,000 See Note 9 for additional disclosure pertaining to derivative financial instruments. ACL on Unfunded Commitments The ACL on unfunded commitments is management’s estimate of expected credit losses over the expected contractual term (or life) in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. Unfunded commitments for home equity lines of credit and commercial demand loans are considered unconditionally cancellable for regulatory capital purposes and, therefore, are excluded from the calculation to estimate the ACL on unfunded commitments. For each portfolio, estimated loss rates and funding factors are applied to the corresponding balance of unfunded commitments. For each portfolio, the estimated loss rates applied to unfunded commitments are the same quantitative and qualitative loss rates applied to the corresponding on-balance sheet amounts in determining the ACL on loans. The estimated funding factor applied to unfunded commitments represents the likelihood that the funding will occur and is based upon the Corporation’s average historical utilization rate for each portfolio. The ACL on unfunded commitments is included in other liabilities in the Unaudited Consolidated Balance Sheets. The ACL on unfunded commitments is adjusted through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income. The activity in the ACL on unfunded commitments for the three months ended March 31, 2022 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 1,267 $ 816 $ 2,083 $ 62 $ — $ 16 $ 16 $ 2,161 Provision 68 21 89 10 — 1 1 100 Ending Balance $ 1,335 $ 837 $ 2,172 $ 72 $ — $ 17 $ 17 $ 2,261 -37- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The activity in the ACL on unfunded commitments for the three months ended March 31, 2021 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 907 $ 1,402 $ 2,309 $ 54 $ — $ 19 $ 19 $ 2,382 Provision 46 ( 88 ) ( 42 ) ( 8 ) — 1 1 ( 49 ) Ending Balance $ 953 $ 1,314 $ 2,267 $ 46 $ — $ 20 $ 20 $ 2,333 Other Contingencies Litigation The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated balance sheets or statements of income of the Corporation. Note 18 - Subsequent Events On April 26, 2022, the Bancorp's shareholders approved the 2022 Incentive Plan. The maximum number of shares of common stock that may be issued under the 2022 Incentive Plan is 600,000 . The type of permitted equity awards under the 2022 Incentive Plan include stock options (both incentive and non-qualified options), stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, cash-based awards, and dividend equivalent rights. -38- Management's Discussion and Analysis