Derivative Financial Instruments

12 Months Ended

Dec. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 December 31, 2021 and 2020, the Corporation had interest rate swap contracts with total notional amounts of $20.0 million and $60.0 million, respectively, that were designated as cash flow hedges to hedge the interest rate risk associated with short-term variable rate FHLB advances. One of the interest rate swaps on borrowings matured in December 2021 and the remaining matures in December 2023.

As of December 31, 2021, the Corporation had an interest rate swap contract with a total notional of $300.0 million that was designated as a cash flow hedge to hedge the interest rate risk associated with a pool of variable rate commercial loans. The interest rate swap on loans was executed in the second quarter of 2021 and matures in May 2026.

The changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized.

Loan Related Derivative Contracts

Interest Rate Swap Contracts with Customers

The Corporation enters into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert variable-rate loan payments to fixed-rate loan payments. When the Corporation enters into an interest rate swap contract with a commercial loan borrower, it simultaneously enters into a “mirror” swap contract with a third party. The third party exchanges the client’s fixed-rate loan payments for variable-rate loan payments. The Corporation retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans.

As of December 31, 2021 and 2020, Washington Trust had interest rate swap contracts with commercial loan borrowers with notional amounts of $1.0 billion and $991.0 million, respectively, and equal amounts of “mirror” swap contracts with third-party financial institutions. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings.

Risk Participation Agreements

The Corporation has entered into risk participation agreements with other banks in commercial loan arrangements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings.

Under a risk participation-out agreement, a derivative asset, the Corporation participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Corporation assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower for a fee received from the other bank.

As of December 31, 2021, the notional amounts of the risk participation-out agreements and risk participation-in agreements were $74.2 million and $163.2 million, respectively, compared to $61.6 million and $92.7 million, respectively, as of December 31, 2020.

Mortgage Loan Commitments

Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Forward sale commitments are contracts for delayed delivery or net settlement of the underlying instrument, such as a residential real estate mortgage loan, where the seller agrees to deliver on a specified future date, either a specified instrument at a specified price or yield or the net cash equivalent of an underlying instrument. Both interest rate lock commitments and forward sale commitments are derivative financial instruments, but do not meet criteria for hedge accounting and therefore, the changes in fair value of these commitments are reflected in earnings.

As of December 31, 2021, the notional amounts of interest rate lock commitments and forward sale commitments were $49.8 million and $103.6 million, respectively, compared to $167.7 million and $279.7 million, respectively, as of December 31, 2020.

The following table presents the fair values of derivative instruments in the Consolidated Balance Sheets:


(Dollars in thousands)	Derivative Assets			Derivative Liabilities
		Fair Value			Fair Value
	Balance Sheet Location	Dec 31, 2021	Dec 31, 2020	Balance Sheet Location	Dec 31, 2021	Dec 31, 2020
Derivatives Designated as Cash Flow Hedging Instruments:
Interest rate risk management contracts:

Interest rate swaps	Other assets	$182	$—	Other liabilities	$5,301	$1,958

Derivatives not Designated as Hedging Instruments:
Loan related derivative contracts:
Interest rate swaps with customers	Other assets	32,361	75,804	Other liabilities	2,015	68
Mirror swaps with counterparties	Other assets	2,001	67	Other liabilities	32,480	76,248
Risk participation agreements	Other assets	1	22	Other liabilities	2	2

Mortgage loan commitments:
Interest rate lock commitments	Other assets	1,256	7,202	Other liabilities	—	—
Forward sale commitments	Other assets	54	—	Other liabilities	905	2,914
Gross amounts		35,855	83,095		40,703	81,190
Less: amounts offset (1)		2,167	67		2,167	67
Derivative balances, net of offset		33,688	83,028		38,536	81,123
Less: collateral pledged (2)		—	—		34,539	74,698
Net amounts		$33,688	$83,028		$3,997	$6,425

(1)Interest rate risk management contracts and loan related derivative contracts with counterparties are subject to master netting arrangements.

(2)Collateral pledged to derivative counterparties is in the form of cash. Washington Trust may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.

The following table presents the effect of derivative instruments in the Consolidated Statements of Changes in Shareholders’ Equity and Consolidated Statements of Income:


(Dollars in thousands)	(Gain) Loss Recognized in Other Comprehensive Income, Net of Tax
Years ended December 31,	2021	2020	2019
Derivatives Designated as Cash Flow Hedging Instruments:
Interest rate risk management contracts:
Interest rate caps	$—	$89	$52
Interest rate swaps	(2,566)	(893)	(1,232)
Interest rate floors	—	150	196
Total	($2,566)	($654)	($984)

Interest rate cap and interest rate floor contracts designated as cash flow hedges matured in 2020.

For derivatives designated as cash flow hedging instruments, see Note 20 for additional disclosure pertaining to the amounts and location of reclassifications from accumulated other comprehensive income (loss) into earnings.


(Dollars in thousands)		Amount of Gain (Loss) Recognized in Income on Derivatives
Years ended December 31,	Statement of Income Location	2021	2020	2019
Derivatives not Designated as Hedging Instruments:
Loan related derivative contracts:
Interest rate swaps with customers	Loan related derivative income	($27,846)	$60,938	$29,910
Mirror swaps with counterparties	Loan related derivative income	31,547	(57,067)	(26,043)
Risk participation agreements	Loan related derivative income	641	120	97
Foreign exchange contracts	Loan related derivative income	—	—	28
Mortgage loan commitments:
Interest rate lock commitments	Mortgage banking revenues	(5,947)	6,106	290
Forward sale commitments	Mortgage banking revenues	5,383	(10,769)	(1,818)
Total		$3,778	($672)	$2,464