UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended
	~~September~~June 30, ~~2019~~2020	or



☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______.

Commission file number: 001-32991

WASHINGTON TRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)



Rhode Island		05-0404671
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)



23 Broad Street
Westerly,	Rhode Island	02891
(Address of principal executive offices)		(Zip Code)

(401) 348-1200

(Registrant’s telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
COMMON STOCK, $.0625 PAR VALUE PER SHARE	WASH	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ☒ No

The number of shares of common stock of the registrant outstanding as of ~~October~~July 31, ~~2019~~2020 was ~~17,350,703.~~17,260,217.



FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended ~~September~~June 30, ~~2019~~2020

TABLE OF CONTENTS
	Page Number
	Page Number
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019	3
Consolidated Statements of Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	4
Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	5
Consolidated Statements of Changes in Shareholders’ Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	6
Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019	8
Condensed Notes to Unaudited Consolidated Financial Statements:	10
Note 1 - Basis of Presentation	10
Note 2 - Recently Issued Accounting Pronouncements	1011
Note 3 - Cash and Due from Banks	13
Note 4 - Securities	13
Note 5 - Loans	17
Note 6 - Allowance for ~~Loan~~Credit Losses on Loans	2326
Note 7 - ~~Federal Home Loan Bank Advances~~Borrowings	2630
Note 8 - Shareholders’ Equity	2730
Note 9 - Derivative Financial Instruments	2832
Note 10 - Fair Value Measurements	3135
Note 11 - Revenue from Contracts with Customers	3740
Note 12 - Defined Benefit Pension Plans	3942
Note 13 - Share-Based Compensation Arrangements	4043
Note 14 - Business Segments	4043
Note 15 - Other Comprehensive Income (Loss)	4245
Note 16 - Earnings Per Common Share	4447
Note 17 - Leases	4548
Note 18 - Commitments and Contingencies	4649
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	4852
Item 3. Quantitative and Qualitative Disclosures About Market Risk	7785
Item 4. Controls and Procedures	7785
PART II. Other Information
Item 1. Legal Proceedings	7886
Item 1A. Risk Factors	7886
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	87
Item 6. Exhibits	7887
Signatures	7988

- 2-

PART I. Financial Information

Item 1. Financial Statements



Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)	(Dollars in thousands, except par value)


	September 30, 2019				December 31, 2018			June 30, 2020			December 31, 2019
Assets:
Cash and due from banks		$141,768				$89,923			$215,601			$132,193
Short-term investments	4,336				3,552			7,739			6,262
Mortgage loans held for sale, at fair value	44,657				20,996			43,997			27,833
Securities:
Available for sale debt securities, at fair value	887,020				927,810
Held to maturity debt securities, at amortized cost (fair value $10,316 at December 31, 2018)	—				10,415
Total securities	887,020				938,225
Available for sale debt securities, at fair value (amortized cost $919,853; net of allowance for credit losses on securities of $0 at June 30, 2020)								938,446			899,490
Federal Home Loan Bank stock, at cost	45,030				46,068			50,017			50,853
Loans:
Total loans	3,778,106				3,680,360			4,287,641			3,892,999
Less allowance for loan losses	26,997				27,072
Less: allowance for credit losses on loans								41,441			27,014
Net loans	3,751,109				3,653,288			4,246,200			3,865,985
Premises and equipment, net	29,293				29,005			28,067			28,700
Operating lease right-of-use assets	27,500				—			27,022			26,792
Investment in bank-owned life insurance	81,920				80,463			83,056			82,490
Goodwill	63,909				63,909			63,909			63,909
Identifiable intangible assets, net	7,448				8,162			6,759			7,218
Other assets	114,888				77,175			166,147			100,934
Total assets		$5,198,878				$5,010,766			$5,876,960			$5,292,659
Liabilities:
Deposits:
Noninterest-bearing deposits		$619,839				$603,216			$815,770			$609,924
Interest-bearing deposits	2,966,314				2,920,832			3,285,666			2,888,958
Total deposits	3,586,153				3,524,048			4,101,436			3,498,882
Federal Home Loan Bank advances	956,786				950,722			1,005,051			1,141,464
Payment Protection Program Lending Facility								38,900			—
Junior subordinated debentures	22,681			��	22,681			22,681			22,681
Operating lease liabilities	29,541				—			29,125			28,861
Other liabilities	105,892				65,131			159,604			97,279
Total liabilities	4,701,053				4,562,582			5,356,797			4,789,167
Commitments and contingencies (Note 18)
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 60,000,000 shares; issued and outstanding 17,338,348 shares at September 30, 2019 and 17,302,037 at December 31, 2018	1,084				1,081
Common stock of $.0625 par value; authorized 60,000,000 shares; 17,363,457 shares issued and 17,260,217 shares outstanding at June 30, 2020 and 17,363,455 shares issued and outstanding at December 31, 2019								1,085			1,085
Paid-in capital	121,900				119,888			123,684			123,281
Retained earnings	383,765				355,524			399,386			390,363
Accumulated other comprehensive loss	(8,924		)		(28,309		)
Accumulated other comprehensive income (loss)								(462		)	(11,237		)
Treasury stock, at cost; 103,240 shares at June 30, 2020								(3,530		)	—
Total shareholders’ equity	497,825				448,184			520,163			503,492
Total liabilities and shareholders’ equity		$5,198,878				$5,010,766			$5,876,960			$5,292,659



Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)	(Dollars and shares in thousands, except per share amounts)


		Three Months					Nine Months						Three Months					Six Months
Periods ended September 30,		2019			2018		2019			2018
Periods ended June 30,												Periods ended June 30,	2020		2019			2020		2019
Interest income:	Interest income:											Interest income:
Interest and fees on loans	Interest and fees on loans		$41,558			$38,493		$125,440			$109,633	Interest and fees on loans		$36,005		$42,138			$76,013		$83,882
Interest on mortgage loans held for sale	Interest on mortgage loans held for sale	410			384		878			923		Interest on mortgage loans held for sale	440		288			725		468
Taxable interest on debt securities	Taxable interest on debt securities	6,318			5,383		20,550			15,859		Taxable interest on debt securities	5,477		7,006			11,311		14,232
Nontaxable interest on debt securities	Nontaxable interest on debt securities	1			9		18			52		Nontaxable interest on debt securities	—		8			—		17
Dividends on Federal Home Loan Bank stock	Dividends on Federal Home Loan Bank stock	747			634		2,162			1,700		Dividends on Federal Home Loan Bank stock	654		720			1,294		1,415
Other interest income	Other interest income	493			261		1,232			723		Other interest income	36		399			385		739
Total interest and dividend income	Total interest and dividend income	49,527			45,164		150,280			128,890		Total interest and dividend income	42,612		50,559			89,728		100,753
Interest expense:	Interest expense:											Interest expense:
Deposits	Deposits	9,792			6,546		27,957			16,222		Deposits	7,112		9,469			15,648		18,165
Federal Home Loan Bank advances	Federal Home Loan Bank advances	6,512			4,937		20,153			13,627		Federal Home Loan Bank advances	4,382		6,980			10,147		13,641
Junior subordinated debentures	Junior subordinated debentures	245			232		750			629		Junior subordinated debentures	171		252			384		505
Other interest expense												Other interest expense	2		—			2		—
Total interest expense	Total interest expense	16,549			11,715		48,860			30,478		Total interest expense	11,667		16,701			26,181		32,311
Net interest income	Net interest income	32,978			33,449		101,420			98,412		Net interest income	30,945		33,858			63,547		68,442
Provision for loan losses		400			350		1,575			750
Net interest income after provision for loan losses		32,578			33,099		99,845			97,662
Provision for credit losses												Provision for credit losses	2,200		525			9,236		1,175
Net interest income after provision for credit losses												Net interest income after provision for credit losses	28,745		33,333			54,311		67,267
Noninterest income:	Noninterest income:											Noninterest income:
Wealth management revenues	Wealth management revenues	9,153			9,454		27,954			29,329		Wealth management revenues	8,605		9,549			17,294		18,801
Mortgage banking revenues	Mortgage banking revenues	4,840			2,624		11,126			8,403		Mortgage banking revenues	14,851		3,640			20,947		6,286
Card interchange fees	Card interchange fees	1,099			983		3,114			2,791		Card interchange fees	1,031		1,018			1,978		2,015
Service charges on deposit accounts	Service charges on deposit accounts	939			885		2,743			2,651		Service charges on deposit accounts	517		929			1,377		1,804
Loan related derivative income	Loan related derivative income	1,407			278		2,877			1,087		Loan related derivative income	99		746			2,554		1,470
Income from bank-owned life insurance	Income from bank-owned life insurance	569			572		1,784			1,624		Income from bank-owned life insurance	791		566			1,355		1,215
Net realized losses on securities	Net realized losses on securities	—			—		(80		)	—		Net realized losses on securities	—		(80		)	—		(80		)
Other income	Other income	335			419		944			1,066		Other income	426		385			742		609
Total noninterest income	Total noninterest income	18,342			15,215		50,462			46,951		Total noninterest income	26,320		16,753			46,247		32,120
Noninterest expense:	Noninterest expense:											Noninterest expense:
Salaries and employee benefits	Salaries and employee benefits	18,332			17,283		54,387			52,359		Salaries and employee benefits	19,464		18,436			38,932		36,055
Outsourced services	Outsourced services	2,722			1,951		7,846			6,174		Outsourced services	2,784		2,518			5,784		5,124
Net occupancy	Net occupancy	1,933			2,013		5,835			5,945		Net occupancy	1,909		1,904			3,928		3,902
Equipment	Equipment	1,046			1,080		3,085			3,329		Equipment	895		1,028			1,872		2,039
Legal, audit and professional fees	Legal, audit and professional fees	645			559		1,843			1,840		Legal, audit and professional fees	659		664			1,481		1,198
FDIC deposit insurance costs	FDIC deposit insurance costs	(460		)	410		509			1,236		FDIC deposit insurance costs	674		540			1,096		969
Advertising and promotion	Advertising and promotion	368			440		1,132			946		Advertising and promotion	186		525			445		764
Amortization of intangibles	Amortization of intangibles	236			245		714			740		Amortization of intangibles	230		239			460		478
Other expenses	Other expenses	2,048			2,081		6,634			6,911		Other expenses	1,677		2,297			4,933		4,586
Total noninterest expense	Total noninterest expense	26,870			26,062		81,985			79,480		Total noninterest expense	28,478		28,151			58,931		55,115
Income before income taxes	Income before income taxes	24,050			22,252		68,322			65,133		Income before income taxes	26,587		21,935			41,627		44,272
Income tax expense	Income tax expense	5,236			4,741		14,740			13,737		Income tax expense	5,547		4,662			8,686		9,504
Net income	Net income		$18,814			$17,511		$53,582			$51,396	Net income		$21,040		$17,273			$32,941		$34,768

Net income available to common shareholders	Net income available to common shareholders		$18,778			$17,475		$53,477			$51,284	Net income available to common shareholders		$21,000		$17,238			$32,869		$34,699
Weighted average common shares outstanding - basic	Weighted average common shares outstanding - basic	17,338			17,283		17,324			17,263		Weighted average common shares outstanding - basic	17,257		17,330			17,301		17,317
Weighted average common shares outstanding - diluted	Weighted average common shares outstanding - diluted	17,414			17,382		17,406			17,392		Weighted average common shares outstanding - diluted	17,292		17,405			17,377		17,403
Per share information:	Basic earnings per common share		$1.08			$1.01		$3.09			$2.97	Basic earnings per common share		$1.22		$0.99			$1.90		$2.00
	Diluted earnings per common share		$1.08			$1.01		$3.07			$2.95	Diluted earnings per common share		$1.21		$0.99			$1.89		$1.99
	Cash dividends declared per share		$0.51			$0.43		$1.49			$1.29



Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)	(Dollars in thousands)


	Three Months						Nine Months						Three Months						Six Months
Periods ended September 30,	2019			2018			2019			2018
Periods ended June 30,													2020			2019			2020			2019
Net income		$18,814			$17,511			$53,582			$51,396			$21,040			$17,273			$32,941			$34,768
Other comprehensive income (loss), net of tax:
Net change in fair value of available for sale debt securities	2,886			(4,531		)	19,940			(18,057		)	(1,808		)	6,033			10,998			17,054
Net change in fair value of cash flow hedges	(171		)	155			(1,235		)	1,409			8			(622		)	(1,042		)	(1,064		)
Net change in defined benefit plan obligations	227			361			680			1,081			409			226			819			453
Total other comprehensive income (loss), net of tax	2,942			(4,015		)	19,385			(15,567		)
Total other comprehensive (loss) income, net of tax													(1,391		)	5,637			10,775			16,443
Total comprehensive income		$21,756			$13,496			$72,967			$35,829			$19,649			$22,910			$43,716			$51,211



Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (unaudited)	(Dollars and shares in thousands)


For the three months ended September 30, 2019	Common Shares Outstanding	Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total
Balance at July 1, 2019	17,336		$1,083		$121,115			$373,873			($11,866	)		$484,205
For the three months ended June 30, 2020																Common Shares Outstanding	Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance at March 31, 2020																17,252		$1,085		$123,167			$387,243			$929			($3,827	)		$508,597
Net income	—	—		—			18,814			—			18,814			—	—		—			21,040			—			—			21,040
Total other comprehensive income, net of tax	—	—		—			—			2,942			2,942
Total other comprehensive loss																—	—		—			—			(1,391		)	—			(1,391		)
Cash dividends declared ($0.51 per share)	—	—		—			(8,922		)	—			(8,922		)	—	—		—			(8,897		)	—			—			(8,897		)
Share-based compensation	—	—		792			—			—			792			—	—		855			—			—			—			855
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered	2	1		(7		)	—			—			(6		)	8	—		(338		)	—			—			297			(41		)
Balance at September 30, 2019	17,338		$1,084		$121,900			$383,765			($8,924	)		$497,825
Balance at June 30, 2020																17,260		$1,085		$123,684			$399,386			($462	)		($3,530	)		$520,163

For the nine months ended September 30, 2019 Common
Shares Outstanding
Common
Stock

Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
(Loss) Income
Total
Balance at January 1, 2019 17,302

$1,081

$119,888

$355,524

($28,309 )
$448,184
Net income —
—
—
53,582
—
53,582
Total other comprehensive income, net of tax —
—
—
—
19,385
19,385
Cash dividends declared ($1.49 per share) —
—
—
(26,063 ) —
(26,063 )
Share-based compensation —
—
2,295
—
—
2,295
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 36
3
(283 ) —
—
(280 )
Cumulative effect of change in accounting principle —
—
—
722
—
722
Balance at September 30, 2019 17,338

$1,084

$121,900

$383,765

($8,924 )
$497,825



For the six months ended June 30, 2020	Common Shares Outstanding		Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock			Total
Balance at December 31, 2019	17,363			$1,085		$123,281			$390,363			($11,237	)		$—			$503,492
Cumulative effect of change in accounting principle - Topic 326	—		—		—			(6,108		)	—			—			(6,108		)
Net income	—		—		—			32,941			—			—			32,941
Total other comprehensive income	—		—		—			—			10,775			—			10,775
Cash dividends declared ($1.02 per share)	—		—		—			(17,810		)	—			—			(17,810		)
Share-based compensation	—		—		1,613			—			—			—			1,613
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered	22		—		(1,210		)	—			—			792			(418		)
Treasury stock purchased under 2019 Stock Repurchase Program	(125	)	—		—			—			—			(4,322		)	(4,322		)
Balance at June 30, 2020	17,260			$1,085		$123,684			$399,386			($462	)		($3,530	)		$520,163



Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (unaudited)	(Dollars and shares in thousands)

For the three months ended September 30, 2018 Common
Shares Outstanding Common
Stock Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Total
Balance at July 1, 2018 17,278

$1,080

$118,883

$336,670

($35,062 )
$421,571
Net income —
—
—
17,511
—
17,511
Total other comprehensive loss, net of tax —
—
—
—
(4,015 ) (4,015 )
Cash dividends declared ($0.43 per share) —
—
—
(7,496 ) —
(7,496 )
Share-based compensation —
—
658
—
—
658
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 12
1
(321 ) —
—
(320 )
Balance at September 30, 2018 17,290

$1,081

$119,220

$346,685

($39,077 )
$427,909



For the three months ended June 30, 2019	Common Shares Outstanding	Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock		Total
Balance at March 31, 2019	17,305		$1,082		$120,743			$365,521			($17,503	)		$—		$469,843
Net income	—	—		—			17,273			—			—		17,273
Total other comprehensive income	—	—		—			—			5,637			—		5,637
Cash dividends declared ($0.51 per share)	—	—		—			(8,921		)	—			—		(8,921		)
Share-based compensation	—	—		764			—			—			—		764
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered	31	1		(392		)	—			—			—		(391		)
Balance at June 30, 2019	17,336		$1,083		$121,115			$373,873			($11,866	)		$—		$484,205

For the nine months ended September 30, 2018 Common
Shares Outstanding Common
Stock Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Total
Balance at January 1, 2018 17,227

$1,077

$117,961

$317,756

($23,510 )
$413,284
Net income —
—
—
51,396
—
51,396
Total other comprehensive loss, net of tax —
—
—
—
(15,567 ) (15,567 )
Cash dividends declared ($1.29 per share) —
—
—
(22,467 ) —
(22,467 )
Share-based compensation —
—
1,977
—
—
1,977
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 63
4
(718 ) —
—
(714 )
Balance at September 30, 2018 17,290

$1,081

$119,220

$346,685

($39,077 )
$427,909



For the six months ended June 30, 2019	Common Shares Outstanding	Common Stock		Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Treasury Stock		Total
Balance at December 31, 2018	17,302		$1,081		$119,888			$355,524			($28,309	)		$—		$448,184
Cumulative effect of change in accounting principle - Topic 842	—	—		—			722			—			—		722
Net income	—	—		—			34,768			—			—		34,768
Total other comprehensive income	—	—		—			—			16,443			—		16,443
Cash dividends declared ($0.98 per share)	—	—		—			(17,141		)	—			—		(17,141		)
Share-based compensation	—	—		1,503			—			—			—		1,503
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered	34	2		(276		)	—			—			—		(274		)
Balance at June 30, 2019	17,336		$1,083		$121,115			$373,873			($11,866	)		$—		$484,205



Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (unaudited)	(Dollars in thousands)


Nine months ended September 30,		2019			2018
Six months ended June 30,								Six months ended June 30,	2020			2019
Cash flows from operating activities:	Cash flows from operating activities:							Cash flows from operating activities:
Net income	Net income		$53,582			$51,396		Net income		$32,941			$34,768
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:							Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,575			750
Provision for credit losses								Provision for credit losses	9,236			1,175
Depreciation of premises and equipment	Depreciation of premises and equipment	2,478			2,454			Depreciation of premises and equipment	1,557			1,672
Net amortization of premiums and discounts on securities and loans		3,113			2,157
Net amortization of premiums and discounts on debt securities and loans								Net amortization of premiums and discounts on debt securities and loans	2,716			1,894
Amortization of intangibles	Amortization of intangibles	714			740			Amortization of intangibles	460			478
Share-based compensation	Share-based compensation	2,295			1,977			Share-based compensation	1,613			1,503
Tax benefit from stock option exercises and other equity awards		202			454
Tax (expense) benefit from stock option exercises and other equity awards								Tax (expense) benefit from stock option exercises and other equity awards	(77		)	172
Income from bank-owned life insurance	Income from bank-owned life insurance	(1,784		)	(1,624		)	Income from bank-owned life insurance	(1,355		)	(1,215		)
Net gains on loan sales, including fair value adjustments	Net gains on loan sales, including fair value adjustments	(10,749		)	(7,950		)	Net gains on loan sales, including fair value adjustments	(21,074		)	(5,998		)
Net realized losses on securities	Net realized losses on securities	80			—			Net realized losses on securities	—			80
Proceeds from sales of loans, net	Proceeds from sales of loans, net	365,057			306,095			Proceeds from sales of loans, net	447,859			199,897
Loans originated for sale	Loans originated for sale	(380,635		)	(296,367		)	Loans originated for sale	(451,539		)	(213,247		)
Decrease in operating lease right-of-use assets		1,422			—
Decrease in operating lease liabilities		(1,312		)	—
(Increase) decrease in operating lease right-of-use assets								(Increase) decrease in operating lease right-of-use assets	(230		)	748
Increase (decrease) in operating lease liabilities								Increase (decrease) in operating lease liabilities	264			(643		)
Increase in other assets	Increase in other assets	(41,239		)	(20,903		)	Increase in other assets	(67,028		)	(26,368		)
Increase in other liabilities	Increase in other liabilities	42,575			19,256			Increase in other liabilities	59,577			23,781
Net cash provided by operating activities	Net cash provided by operating activities	37,374			58,435			Net cash provided by operating activities	14,920			18,697
Cash flows from investing activities:	Cash flows from investing activities:							Cash flows from investing activities:
Purchases of:	Available for sale debt securities: Mortgage-backed	(72,262		)	(96,867		)	Available for sale debt securities: Mortgage-backed	(149,481		)	(72,262		)
	Available for sale debt securities: Other	(10,507		)	(30,964		)	Available for sale debt securities: Other	(98,500		)	(10,507		)
Proceeds from sale of:	Other investment securities available for sale	9,920			—			Other investment securities available for sale	—			9,920
Maturities, calls and principal payments of:	Available for sale debt securities: Mortgage-backed	96,521			63,918			Available for sale debt securities: Mortgage-backed	120,745			51,590
	Available for sale debt securities: Other	51,135			6,795			Available for sale debt securities: Other	100,500			11,045
	Held to maturity debt securities: Mortgage-backed	—			1,603
Remittance (purchases) of Federal Home Loan Bank stock		1,038			(4,008		)
Net redemption (purchases) of Federal Home Loan Bank stock								Net redemption (purchases) of Federal Home Loan Bank stock	836			(3,691		)
Net increase in loans	Net increase in loans	(92,135		)	(181,853		)	Net increase in loans	(336,489		)	(50,729		)
Purchases of loans	Purchases of loans	(7,324		)	(1,750		)	Purchases of loans	(51,081		)	(161		)
Proceeds from the sale of property acquired through foreclosure or repossession	Proceeds from the sale of property acquired through foreclosure or repossession	—			49			Proceeds from the sale of property acquired through foreclosure or repossession	1,107			—
Purchases of premises and equipment	Purchases of premises and equipment	(2,768		)	(2,320		)	Purchases of premises and equipment	(925		)	(1,971		)
Purchases of bank-owned life insurance		—			(5,000		)
Proceeds from surrender of bank-owned life insurance	Proceeds from surrender of bank-owned life insurance	326			—			Proceeds from surrender of bank-owned life insurance	787			326
Equity investment in real estate limited partnership		(1,256		)	—
Net cash used in investing activities	Net cash used in investing activities	(27,312		)	(250,397		)	Net cash used in investing activities	(412,501		)	(66,440		)
Cash flows from financing activities:	Cash flows from financing activities:							Cash flows from financing activities:
Net increase in deposits		62,105			171,641
Net increase (decrease) in deposits								Net increase (decrease) in deposits	602,554			(19,426		)
Proceeds from Federal Home Loan Bank advances	Proceeds from Federal Home Loan Bank advances	1,334,000			1,462,500			Proceeds from Federal Home Loan Bank advances	1,346,999			1,022,000
Repayment of Federal Home Loan Bank advances	Repayment of Federal Home Loan Bank advances	(1,327,936		)	(1,425,464		)	Repayment of Federal Home Loan Bank advances	(1,483,412		)	(911,762		)
Payment of contingent consideration liability		—			(1,217		)
Proceeds from Payment Protection Program Lending Facility								Proceeds from Payment Protection Program Lending Facility	38,900			—
Treasury stock purchased								Treasury stock purchased	(4,322		)	—
Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered	Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered	(280		)	(714		)	Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered	(418		)	(274		)
Cash dividends paid	Cash dividends paid	(25,322		)	(21,856		)	Cash dividends paid	(17,835		)	(16,456		)
Net cash provided by financing activities	Net cash provided by financing activities	42,567			184,890			Net cash provided by financing activities	482,466			74,082
Net increase (decrease) in cash and cash equivalents		52,629			(7,072		)
Net increase in cash and cash equivalents								Net increase in cash and cash equivalents	84,885			26,339
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	93,475			82,923			Cash and cash equivalents at beginning of period	138,455			93,475
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period		$146,104			$75,851		Cash and cash equivalents at end of period		$223,340			$119,814



Washington Trust Bancorp, Inc. and Subsidiaries
Consolidated Statement of Cash Flows – continued (unaudited)	(Dollars in thousands)


Nine months ended September 30,	2019		2018
Six months ended June 30,					2020		2019
Noncash Activities:
Loans charged off		$1,888		$889		$961		$922
Loans transferred to property acquired through foreclosure or repossession	2,000		3,074		28		—
In conjunction with the adoption of ASU 2016-02 as detailed in Note 2 to the Unaudited Consolidated Financial Statements, the following assets and liabilities were recognized:
Operating lease right-of-use assets	28,923		—		—		28,923
Operating lease liabilities	30,853		—		—		30,853
In conjunction with the adoption of ASU 2017-12 as detailed in Note 2 to the Unaudited Consolidated Financial Statements, the following qualifying debt securities classified as held to maturity were transferred to available for sale:
Fair value of debt securities transferred from held to maturity to available for sale	10,316		—		—		10,316
Supplemental Disclosures:
Interest payments		$47,168		$28,596		$27,257		$30,341
Income tax payments	14,531		12,585		8,234		9,786

Condensed Notes to Unaudited Consolidated Financial Statements

Note 1 - Basis of Presentation

Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company that has elected to be a financial holding company. The Bancorp’s subsidiaries include The Washington Trust Company, of Westerly (the “Bank”), a Rhode Island chartered commercial bank founded in 1800, and Weston Securities Corporation (“WSC”). Through its subsidiaries, the Bancorp offers a complete product line of financial services, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and ~~Connecticut; its automated teller machines (“ATMs”); telephone banking; mobile banking and its internet website (www.washtrust.com).~~Connecticut.

The Unaudited Consolidated Financial Statements include the accounts of the Bancorp and its subsidiaries (collectively the “Corporation” or “Washington Trust”). All intercompany balances and transactions have been eliminated. ~~Certain previously reported amounts have been reclassified to conform to current year’s presentation.~~

The Bancorp also owns the common stock of two capital trusts, which have issued trust preferred securities. These capital trusts are variable interest entities in which the Bancorp is not the primary beneficiary and, therefore, are not consolidated. The capital trust’s only assets are junior subordinated debentures issued by the Bancorp, which were acquired by the capital trusts using the proceeds from the issuance of the trust preferred securities and common stock. The Bancorp’s equity interest in the capital trusts, classified in other assets, and the junior subordinated debentures are included in the Unaudited Consolidated Balance Sheets. Interest expense on the junior subordinated debentures is included in the Unaudited Consolidated Statements of Income.

The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates.

The Unaudited Consolidated Financial Statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying Unaudited Consolidated Financial Statements have been included. Interim results are not necessarily indicative of the results of the entire year. The accompanying Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019.

Risks and Uncertainties

The U.S. government and regulatory agencies have taken several actions to provide support to the U.S. economy. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion stimulus bill, was signed into law on March 27, 2020. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The CARES Act also includes extensive emergency funding for hospitals and providers. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act, as well as other recent legislative and regulatory relief efforts, are expected to have a material impact on the Corporation’s operations. Also, the actions of the Board of Governors of the Federal Reserve System (the “FRB”) to combat the economic contraction caused by the COVID-19 pandemic, including the reduction of the target federal funds rate and quantitative easing programs, could, if prolonged, adversely affect the Corporation’s net interest income and margins, and profitability. While it is not possible to know the full extent of these impacts as of the date of this filing, detailed below are potentially material items of which we are aware.

As noted above, net interest income could be reduced. In accordance with regulatory guidance, Washington Trust is actively working with borrowers impacted by the COVID-19 pandemic to defer payments. While interest will continue to be recognized in accordance with GAAP, should eventual credit losses on these deferments emerge, interest income would be negatively impacted.

- 10-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The provision for credit losses could increase. Continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects will continue to affect the accounting for credit losses. It also is possible that asset quality could worsen, expenses associated with collection efforts could increase and loan charge-offs could increase. Washington Trust is actively participating in the SBA’s PPP, providing loans to small businesses negatively impacted by the COVID-19 pandemic. PPP loans are fully guaranteed by the U.S. government, if that should change, Washington Trust could be required to increase its allowance for credit losses through an additional provision for credit losses charged to earnings. PPP loans amounted to $212.2 million as of June 30, 2020.

•

Valuation and fair value measurement challenges may occur. As of June 30, 2020, the Corporation had $63.9 million in goodwill, of which $41.3 million was allocated to the Wealth Management Services reporting unit and $22.6 million was allocated to the Commercial Bankingreporting unit. Goodwill represents the excess of the purchase price over the net fair value of the acquired businesses. In the first quarter of 2020, management performed an interim impairment assessment on goodwill as a result of changes in the macroeconomic environment resulting from the COVID-19 pandemic. The results of that interim impairment assessment indicated that the remaining fair value significantly exceeded the carrying value for both reporting units. Management has also taken into consideration events and circumstances that arose since the interim assessment and has concluded that it is more-likely-than-not that the fair value of both reporting units continue to exceed their carrying value. The COVID-19 pandemic could cause a further or sustained decline in the Corporation’s stock price or the occurrence of additional valuation triggering events that could result in an impairment charge to earnings.

The extent to which the COVID-19 pandemic will continue to impact the Corporation’s business, results of operations, and financial condition, as well as regulatory capital and liquidity ratios, will depend on future developments, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic, as well as further actions the Corporation may take as may be required by government authorities or that the Corporation determines is in the best interests of its employees and customers. There is no certainty that such measures will be sufficient to mitigate the risks posed by the pandemic.

Note 2 - Recently Issued Accounting Pronouncements

Accounting Standards Adopted in ~~2019~~

~~Leases - Topic 842~~

Accounting Standards Update No. 2016-02, “Leases” (“ASU 2016-02”), was issued in February 2016 and provides revised guidance related to the accounting and reporting of leases. ASU 2016-02 requires lessees to recognize most leases on the balance sheet. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee depends on its classification as a finance or operating lease. ASU 2016-02 requires a modified retrospective transition, with a package of practical expedients that entities may elect to apply. In January 2018, Accounting Standards Update No. 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” was issued to address concerns about the costs and complexity of complying with the transition provisions of ASU 2016-02. In July 2018, Accounting Standards Update No. 2018-10, “Codification Improvements to Topic 842, Leases” was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02. Also in July 2018, Accounting Standards Update No. 2018-11, “Targeted Improvements” (“ASU 2018-11”) was issued and allows for an optional transition method in which the provisions of Topic 842 would be applied upon the adoption date and would not have to be retroactively applied to the earliest reporting period presented in the consolidated financial statements. The Corporation used this optional transition method for the adoption of Topic 842. In December 2018, Accounting Standards Update No. 2018-20, “Leases (Topic 842) Narrow-Scope Improvement for Lessors” was issued to address lessors’ concerns about sales taxes and other similar taxes collected from lessees, certain lessor costs, and recognition of variable payments for contracts with lease and non-lease components. These ASUs were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.

~~- 10-~~

~~Condensed Notes to Unaudited Consolidated Financial Statements – (continued)~~

Management assembled a project team to address the changes pursuant to Topic 842. The project team identified and reviewed all lease agreements in scope of Topic 842. The Corporation rents premises used in business operations under non-cancelable operating leases, which as of December 31, 2018 were not reflected in its Consolidated Balance Sheets. The Corporation has no finance leases.

The Corporation adopted Topic 842 “Leases” effective January 1, 2019 and has applied the guidance to all operating leases within the scope of Topic 842 at that date. The Corporation elected to adopt the package of practical expedients, which among other things, does not require reassessment of lease classification. The Corporation recognized $28.9 million in operating lease right-of-use-assets, $30.9 million in operating lease liabilities, a reduction in rent-related liabilities of $2.9 million, a reduction of net deferred tax assets of $222 thousand and a cumulative effect adjustment (net of taxes) that increased beginning retained earnings by $722 thousand in the Consolidated Balance Sheets. The cumulative effect adjustment represented the recognition of unamortized deferred gains associated with two leases. There was no change to the timing in recognition of operating lease rent expense on the Corporation’s consolidated financial statements associated with our leases.

In March 2019, Accounting Standards Update No. 2019-01, “Leases (Topic 842) Codification Improvements” (“ASU 2019-01”) was issued to address lessors’ concerns about determining fair value of underlying leased assets and presentation issues in the statement of cash flows for sales-type and direct financing leases. ASU 2019-01 also clarified for both lessees and lessors that transition disclosures related to Topic 250 were not required for annual periods are also not required for interim periods. ASU 2019-01 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. The Corporation early adopted this ASU 2019-01 effective January 1, 2019 and it did not have a material impact on the Corporation’s consolidated financial statements.

~~Derivatives and Hedging - Topic 815~~

Accounting Standards Update No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), was issued in August 2017 to better align financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 was effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. In addition, ASU 2017-12 also permitted the reclassification of eligible securities from the held to maturity classification to the available for sale classification. The Corporation adopted the provisions of ASU 2017-12 on January 1, 2019 using a modified retrospective transition method. As permitted by ASU 2017-12, qualifying debt securities classified as held to maturity with an amortized cost of $10.4 million and a fair value of $10.3 million were reclassified to available for sale upon the adoption date. An unrealized loss of $75 thousand (net of taxes) was recognized in the accumulated other comprehensive income component of shareholders’ equity at the date of adoption. The adoption of ASU 2017-12 did not have a material impact on the Corporation’s consolidated financial statements.

Accounting Standards Update No. 2018-16, “Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes” (“ASU 2018-16”), was issued in October 2018 to permit the use of the Overnight Index Swap rate based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to existing benchmark interest rates that are currently used for hedge accounting. ASU 2018-16 was effective for fiscal years beginning after December 15, 2018, and interim periods with those fiscal years. The provisions required prospective application for qualifying new or re-designated hedging relationships entered into on or after the date of adoption. The Corporation adopted the provisions of ASU 2018-16 on January 1, 2019 and it did not have a material impact on the Corporation’s consolidated financial statements.

~~Accounting Standards Pending Adoption~~

~~Financial Instruments - Credit Losses - Topic 326~~2020

Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses” (“ASU 2016-13”), was issued in June 2016. ASU 2016-13 requires the measurement of ~~all~~ expected lifetime credit losses for financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures at the reporting date. The measurement is based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. For available for sale debt securities with unrealized losses, Topic 326 requires credit losses to be recognized as an allowance rather than a reduction in the amortized cost of the securities. As a result, improvements to estimated credit losses are recognized immediately in earnings rather than as interest income over time. ASU 2016-13 provides for a modified retrospective transition, resulting in a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective, except for debt securities for which an other-than-temporary impairment has previously been recognized. For these debt securities, a prospective transition approach will be adopted in order to maintain the same amortized cost prior to and subsequent to the effective date of ASU 2016-13.effective. This ASU iswas effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The Corporation adopted ASU 2016-13, including the subsequent ASUs issued to clarify Topic 326 (“Topic 326”), on January 1, 2020.

The Corporation assembled a cross-functional project team that met regularly to address the additional data requirements, to determine the approach for implementation and to identify new internal controls over enhanced accounting processes for estimating the allowance for credit losses (“ACL”). This included assessing the adequacy of existing loan and loss data, assessing models for default and loss estimates, conducting limited “trial” runs and analytical reviews through December 31, 2019, and completing independent model validation and documentation of ACL processes and controls in the first quarter of 2020.

In accordance with Topic 326, the Corporation has updated its ACL accounting policies. Required policy disclosures are provided in Notes 4, 5, 6 and 18.

Upon adoption of Topic 326 on January 1, 2020, the ACL for loans (a contra-asset) increased by $6.5 million and the ACL for unfunded commitments (a liability) increased by $1.5 million, as compared to December 31, 2019. The increases in the ACL on loans and unfunded commitments upon adoption resulted in a one-time cumulative-effect adjustment that decreased retained earnings by $6.1 million, net of deferred tax balances of $1.9 million.

- 11-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

~~Corporation will adopt ASU 2016-13 on January 1, 2020 and continues to evaluate the effect that this ASU will have on the consolidated financial statements and disclosures.~~

In April 2019, Accounting Standards Update No. 2019-04, “Codification Improvements to Topic 326 Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU 2019-04”) wasThe Corporation has elected the five-year phase-in option, provided by regulatory guidance issued ~~to provide additional clarification on the scope and disclosure requirements of Topic 326. ASU 2019-04 includes provisions related to accounting policy elections that can be made~~ by the ~~entity related to accrued interest receivable and expected prepayments on financial assets,~~Federal Deposit Insurance Corporation (“FDIC”) in March 2020, which delays the inclusion of recoveries in estimating the allowance for credit losses (“ACL”) and consideration of contract extension and renewals when determining the contractual term. This ASU also provides clarification on the tabular vintage disclosures related to line-of-credit arrangements that convert term loans. In May 2019, Accounting Standards Update No. 2019-05, “Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief” (“ASU 2019-05”) was issued to allow an entity to make an irrevocable fair value option election on instruments within the scopeestimated impact of Topic 326 ~~that are measured at amortized cost, except for held to maturity debt securities. This election can be applied~~ on ~~an instrument-by-instrument basis upon the adoption of Topic 326. The effective dates of ASU 2019-04 and ASU 2019-05 are the same as the effective date of ASU 2016-13.~~

~~To prepare~~regulatory capital for the ~~adoption of ASU 2016-13~~first two years and related updates, the Corporation assembled a cross-functional project team that meets regularly to address the additional data requirements necessary, to determine the approach for implementation and to identify new internal controls over enhanced accounting processes that will be put into place for estimating the ACL. This has included assessing the adequacy of existing loan and loss data, as well as validating models for default and loss estimates. The Corporation has substantially completed the development of its Topic 326 compliant methodology. The new methodology will include models that contain additional assumptions used to calculate credit losses over the estimated life of financial assets and off-balance sheet credit exposures and will include the impact of forecasted economic conditions. For available for sale debt securities with unrealized losses, credit losses will be recognized as an allowance rather than a reduction in the amortized cost of the securities. As a result, improvements to estimated credit losses will be recognized immediately in earnings rather than as interest income over time. Based on the credit quality of our existing available for sale debt securities portfolio, the Corporation does not expect the adoption of ASU 2016-13, asthen phases it ~~relates to debt securities, to be significant.~~

The project team continues to review the output from “trial” runs and is in the process of assessing qualitative factors. The Corporation is also updating its accounting processes and policies and internal controls associated with the Topic 326 compliant methodology.

The Corporation plans to finalize its Topic 326 compliant methodology, accounting policies and internal controls in the fourth quarter of 2019. Upon adoption, an increase to the ACL will be recorded with a corresponding one-time cumulative-effect adjustment to retained earnings. The FDIC approved a final rule that provides banking organizations the option to phase in over a three-year period ~~the day-one adverse effects~~beginning in 2022. See Note 8 for additional disclosure on regulatory ~~capital that may result from the adoption of the new accounting standard. The Corporation is planning on adopting the capital transition relief over the permissible three-year period.~~capital.

Fair Value Measurement - Topic 820

Accounting Standards Update No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), was issued in August 2018 to modify the disclosure requirements related to fair value. ASU 2018-13 iswas effective for fiscal years beginning after December 15, ~~2019, with early adoption permitted, including adoption in an interim period.~~2019. Certain provisions under ASU 2018-13 ~~require~~required prospective application, while other provisions ~~require~~required retrospective application to all periods presented in the consolidated financial statements upon adoption. The ~~adoption~~Corporation adopted the provisions of ASU 2018-13 iseffective January 1, 2020 and the adoption did not ~~expected to~~ have a material impact on the Corporation’s consolidated financial statements.

Intangibles - Goodwill and Other - Internal-Use Software - Topic 350

Accounting Standards Update No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” (“ASU 2018-15”), was issued in August 2018 to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those requirements that currently exist in GAAP for capitalizing implementation costs incurred to develop or obtain internal-use software. Implementation costs would either be capitalized or expensed as incurred depending on the project stage. All costs in the preliminary and post-implementation project stages are expensed as incurred, while certain costs within the application development stage are capitalized. ASU 2018-15 was effective for fiscal years beginning after December 15, 2019. Effective January 1, 2020, the Corporation adopted the provision of ASU 2018-15 prospectively, as permitted, and the adoption did not have a material impact on the Corporation’s consolidated financial statements.

Accounting Standards Pending Adoption

Compensation - Retirement Benefits - Topic 715

Accounting Standards Update No. 2018-14, “Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”), was issued in August 2018 to modify the disclosure requirements associated with defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The provisions under ASU 2018-14 are required to be applied retrospectively. The adoption of ASU 2018-14 is not expected to have a material impact on the Corporation’s consolidated financial statements.

~~Intangibles - Goodwill and Other - Internal-Use Software~~Income Taxes - Topic ~~350~~745

Accounting Standards Update No. ~~2018-15, “Customer’s~~2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for ~~Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract”~~Income Taxes” (“ASU ~~2018-15”~~2019-12”), was issued in ~~August 2018~~December 2019 to ~~align~~simplify the ~~requirements~~accounting for ~~capitalizing~~income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective application through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The adoption of ASU 2019-12 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Reference Rate Reform - Topic 848

Accounting Standards Update No. 2020-04, “Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), was issued in March 2020 to ease the potential burden in accounting for recognizing the effects of reference rate reform on financial reporting. Such challenges include the accounting and operational implications for contract modifications and hedge accounting. The provisions in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to loan and lease agreements, contracts, hedging relationships, and other transactions affected by reference rate reform. These provisions apply to contract modifications that reference LIBOR or another reference rate expected to be discounted because of reference rate reform. Qualifying modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification would be considered "minor" so that any existing unamortized deferred loan origination fees and costs would carry forward and continue to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge accounting.

- 12-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

~~implementation costs incurred in~~The Corporation has assembled a ~~hosting arrangement~~cross-functional project team that meets periodically to discuss the approach for implementing ASU 2020-04. The Corporation has completed an inventory of contracts that reference LIBOR and is currently reviewing underlying documents and contracts, as well as assessing the risks with the transition to a ~~service contract~~new reference rate.

ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with ~~those requirements~~adoption permitted as of any date from the beginning of an interim period that ~~currently exist in GAAP for capitalizing implementation costs incurred~~includes or is subsequent to ~~develop~~March 12, 2020, or ~~obtain internal-use software. Implementation costs would either~~prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be ~~capitalized or expensed as incurred depending on~~issued. Once elected, the project stage. All costs in the preliminary and post-implementation project stages are expensed as incurred, while certain costs within the application development stage are capitalized. The provisions under ASU 2018-15 can eitheramendments must be applied ~~retrospectively or prospectively.~~prospectively for all eligible contract modifications. The Corporation is currently evaluating the effect that this ASU ~~2018-15 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted, including adoption in an interim period. The adoption of ASU 2018-15 is not expected to~~will have ~~a material impact~~ on the Corporation’s consolidated financial statements.

Note 3 - Cash and Due from Banks

The Bank maintains certain average reserve balances to meet the requirements of the ~~Board of Governors of the Federal Reserve System (the “FRB”).~~FRB. Some or all of these reserve requirements may be satisfied with vault cash. ~~Reserve~~Effective March 26, 2020, the FRB reduced the reserve requirement ratios to zero percent to eliminate the need for depository institutions, such as the Bank, to maintain balances am~~ounted~~in accounts at the FRB to ~~$27.6 million~~ at ~~September 30, 2019~~ ~~and $21.6 million at~~ satisfy reserve requirements. At December 31, ~~2018~~2019, the reserve balance was $27.9 million and ~~were~~was included in cash and due from banks in the Unaudited Consolidated Balance Sheets.

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019, cash and due from banks ~~included~~includes interest-bearing deposits in other banks of $~~81.9~~161.7 million and $~~33.7~~83.4 million, respectively. See Note 9 for additional disclosure regarding cash collateral pledged to derivative counterparties.

Note 4 - Securities

Adoption of Topic 326

Effective January 1, 2020, the Corporation adopted the provisions of Topic 326 using the modified retrospective method. Therefore, prior period comparative information has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 326. There was no ACL on available for sale debt securities recognized upon the adoption of Topic 326.

Accounting Policy Updates

Effective January 1, 2020, the Corporation has modified its accounting policy for the assessment of available for sale debt securities for impairment. The updated policy is detailed below.

The Corporation has made an accounting policy election to exclude accrued interest from the amortized cost basis of debt securities and reports accrued interest separately in other assets in the Unaudited Consolidated Balance Sheets. The Corporation also excludes accrued interest from the estimate of credit losses. Accrued interest receivable on available for sale debt securities totaled $2.7 million and $2.9 million, respectively, as of June 30, 2020 and December 31, 2019.

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 and therefore there was no accrued interest related to debt securities reversed against interest income for the three and six months ended June 30, 2020 and 2019.

For available for sale debt securities in an unrealized loss position, management first assesses whether the Corporation intends to sell, or if it is likely that the Corporation will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit losses charge to earnings. For debt securities available for sale that do not meet either these criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers both quantitative and qualitative factors.

A substantial portion of available for sale debt securities held by the Corporation are obligations issued by U.S. government agency and U.S. government-sponsored enterprises, including mortgage-backed securities. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies and have a long history of no credit losses. For these securities, management takes into consideration the long history of no credit losses and other factors to assess the risk of nonpayment even if the U.S. government were to default. As such, the Corporation utilized a zero credit loss estimate for these securities. For available for sale debt securities that are not guaranteed by U.S. government agencies and U.S. government-sponsored enterprises, such as individual name issuer trust preferred debt securities and corporate bonds, management utilizes a third party credit modeling tool based on observable market data, which assists management in identifying

- 13-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

any potential credit risk associated with its available for sale debt securities. This model estimates probability of default, loss given default and exposure at default for each security. In addition, qualitative factors are also considered, including the extent to which fair value is less than amortized cost, changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If a credit loss exists based on the results of this assessment, an ACL (contra asset) is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is considered market-related and is recognized in other comprehensive income, net of taxes.

Changes in the ACL on available for sale debt securities are recorded as provision for (or reversal of) credit losses. Losses are charged against the ACL when management believes the uncollectibility of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Available for Sale Debt Securities

The following ~~tables present~~table presents 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)
June 30, 2020	Amortized Cost		Unrealized Gains		Unrealized Losses			Allowance for Credit Losses		Fair Value
Available for Sale Debt Securities:
Obligations of U.S. government-sponsored enterprises		$155,270		$1,368		$—			$—		$156,638
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	740,104		20,985		(33		)	—		761,056
Individual name issuer trust preferred debt securities	13,332		—		(1,603		)	—		11,729
Corporate bonds	11,147		—		(2,124		)	—		9,023
Total available for sale debt securities		$919,853		$22,353		($3,760	)		$—		$938,446

The following table presents the amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of securities by major security type and class of security:

(Dollars in thousands)
September 30, 2019 Amortized Cost Unrealized Gains Unrealized Losses Fair Value
Available for Sale Debt Securities:
Obligations of U.S. government-sponsored enterprises
$196,734

$927

($337 )
$197,324
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 659,096
8,614
(2,805 ) 664,905
Individual name issuer trust preferred debt securities 13,320
—
(899 ) 12,421
Corporate bonds 13,715
32
(1,377 ) 12,370
Total available for sale debt securities
$882,865

$9,573

($5,418 )
$887,020
Total securities
$882,865

$9,573

($5,418 )
$887,020

~~- 13-~~

~~Condensed Notes to Unaudited Consolidated Financial Statements – (continued)~~


(Dollars in thousands)
December 31, 2018	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
December 31, 2019										Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Available for Sale Debt Securities:
Obligations of U.S. government-sponsored enterprises		$246,708		$442		($4,467	)		$242,683		$157,255		$626		($233	)		$157,648
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	675,368		1,943		(16,518		)	660,793		713,553		8,491		(2,964		)	719,080
Obligations of states and political subdivisions	935		2		—			937
Individual name issuer trust preferred debt securities	13,307		—		(1,535		)	11,772		13,324		—		(745		)	12,579
Corporate bonds	13,402		—		(1,777		)	11,625		11,141		—		(958		)	10,183
Total available for sale debt securities		$949,720		$2,387		($24,297	)		$927,810		$895,273		$9,117		($4,900	)		$899,490
Held to Maturity Debt Securities:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$10,415		$—		($99	)		$10,316
Total held to maturity debt securities		$10,415		$—		($99	)		$10,316
Total securities		$960,135		$2,387		($24,396	)		$938,126

As ~~discussed in Note 2, on January 1, 2019, the Corporation adopted ASU 2017-12. As permitted by ASU 2017-12, qualifying debt securities classified as held to maturity with an amortized cost~~ of $10.4 million and a fair value of $10.3 million were reclassified to available for sale upon the adoption date. An unrealized loss of $75 thousand (net of taxes) was recognized in the accumulated other comprehensive income component of shareholders’ equity at the date of adoption.

~~As of September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, debt securities with a fair value of ~~$435.3~~$353.1 million and ~~$439.7~~$431.9 million, respectively, were pledged as collateral for FHLB borrowings, potential borrowings with the ~~FRB,~~FRB’s discount window, certain public deposits and for other purposes. See Note 7 for additional disclosure on FHLB borrowings.

- 14-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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)	Available for Sale				Available for Sale
September 30, 2019	Amortized Cost		Fair Value
June 30, 2020					Amortized Cost		Fair Value
Due in one year or less		$105,671		$106,401		$108,361		$111,419
Due after one year to five years	340,179		342,582		320,989		329,271
Due after five years to ten years	289,520		290,083		315,206		319,219
Due after ten years	147,495		147,954		175,297		178,537
Total debt securities		$882,865		$887,020		$919,853		$938,446

Included in the above table are debt securities with an amortized cost balance of ~~$222.5~~$178.4 million and a fair value of ~~$220.8~~$176.0 million at ~~September~~June 30, ~~2019~~2020 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 3 ~~months~~years to 17 years, with call features ranging from 1 month to ~~3 years.~~1 year.

~~Other-Than-Temporary~~The following table summarizes amounts relating to sales of securities:




(Dollars in thousands)	Three Months					Six Months
For the periods ended June 30,	2020		2019			2020		2019
Proceeds from sales		$—		$9,920			$—		$9,920

Gross realized gains		$—		$—			$—		$—
Gross realized losses	—		(80		)	—		(80		)
Net realized losses on securities		$—		($80	)		$—		($80	)

Assessment of Available for Sale Debt Securities for Impairment ~~Assessment~~

Management assesses ~~whether~~ the decline in fair value of investment securities ~~is other-than-temporary~~ 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, ~~volatility~~volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates ~~impairments in value~~ both ~~qualitatively~~qualitative and ~~quantitatively~~quantitative factors to assess whether ~~they are other-than-temporary.~~an impairment exists. For the accounting policy on the assessment of available for sale debt securities for impairment that was in effect prior to the adoption of Topic 326 on January 1, 2020, see Note 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The following table summarizes available for sale debt securities in an unrealized loss position for which an allowance for credit losses on securities has not been recorded at June 30, 2020, segregated by length of time the securities have been in a continuous unrealized loss position:



(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
June 30, 2020	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	2		$10,612		($33	)	—		$—		$—		2		$10,612		($33	)
Individual name issuer trust preferred debt securities	—	—		—			5	11,729		(1,603		)	5	11,729		(1,603		)
Corporate bonds	—	—		—			3	9,023		(2,124		)	3	9,023		(2,124		)
Total	2		$10,612		($33	)	8		$20,752		($3,727	)	10		$31,364		($3,760	)

- ~~14-~~15-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following tables summarize temporarily impaired securities, segregated by length of time the securities have been in a continuous unrealized loss position:

(Dollars in thousands) Less than 12 Months 12 Months or Longer Total
September 30, 2019 # Fair
Value Unrealized
Losses #

Fair
Value
Unrealized
Losses
#

Fair
Value
Unrealized
Losses
Obligations of U.S. government-sponsored enterprises 3

$20,331

($169 ) 4

$50,832

($168 ) 7

$71,163

($337 )
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 2
692
(1 ) 25
239,550
(2,804 ) 27
240,242
(2,805 )
Individual name issuer trust preferred debt securities —
—
—
5
12,421
(899 ) 5
12,421
(899 )
Corporate bonds —
—
—
3
10,425
(1,377 ) 3
10,425
(1,377 )
Total temporarily impaired securities 5

$21,023

($170 ) 37

$313,228

($5,248 ) 42

$334,251

($5,418 )


(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total						Less than 12 Months						12 Months or Longer						Total
December 31, 2018	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
December 31, 2019																			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored enterprises	—		$—		$—		16		$157,032		($4,467	)	16		$157,032		($4,467	)	3		$20,364		($136	)	3		$49,902		($97	)	6		$70,266		($233	)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	10	47,060		(439		)	51	438,701		(16,178		)	61	485,761		(16,617		)	4	41,150		(56		)	23	216,804		(2,908		)	27	257,954		(2,964		)
Individual name issuer trust preferred debt securities	—	—		—			5	11,772		(1,535		)	5	11,772		(1,535		)	—	—		—			5	12,579		(745		)	5	12,579		(745		)
Corporate bonds	3	1,198		(9		)	5	10,427		(1,768		)	8	11,625		(1,777		)	—	—		—			3	10,183		(958		)	3	10,183		(958		)
Total temporarily impaired securities	13		$48,258		($448	)	77		$617,932		($23,948	)	90		$666,190		($24,396	)
Total																			7		$61,514		($192	)	34		$289,468		($4,708	)	41		$350,982		($4,900	)

Further 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 additional 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 ~~other-than-temporary in future periods,~~credit losses, and the Corporation may incur write-downs.

Obligations of U.S. Government Agency and U.S. Government-Sponsored Enterprise Securities, including Mortgage-Backed Securities

The gross unrealized losses on U.S. government agency and U.S. government-sponsored debt securities, including mortgage-backed securities, were primarily attributable to relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at June 30, 2020. Management believes that the unrealized losses on these debt ~~security holdings~~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 ~~not more-likely-than-not~~likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, ~~management does not consider these investments to be other-than-temporarily impaired~~no allowance for credits losses on securities was recorded at ~~September~~June 30, ~~2019.~~2020.

Individual Name Issuer Trust Preferred Debt Securities

Included in debt securities in an unrealized loss position at ~~September~~June 30, ~~2019~~2020 were 5 trust preferred securities issued by 4 individual companies in the banking sector. Management believes the unrealized losses on these debt security holdings 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. 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. ~~As of September 30, 2019, individual name issuer trust preferred debt securities with an amortized cost of~~ ~~$6.1 million~~ ~~and unrealized losses of~~ ~~$458 thousand~~ ~~were rated below investment grade by Standard & Poors, Inc. (“S&P”).~~ Management reviewed the collectibility of these securities taking into consideration such factors as the

~~- 15-~~

~~Condensed Notes to Unaudited Consolidated Financial Statements – (continued)~~

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 June 30, 2020, individual name issuer trust preferred debt securities with an amortized cost of $2.0 million and unrealized losses of $254 thousand were rated below investment grade by Standard & Poors, Inc. (“S&P”). Another individual name issuer trust preferred security with an amortized cost of $2.0 million and an unrealized loss of $245 thousand as of June 30, 2020 was downgraded by S&P to a rating of BB+ (below investment grade) on July 22, 2020. We noted no additional downgrades to below investment grade between ~~September~~June 30, ~~2019~~2020 and the filing date of this report. ~~Based~~Management believes the unrealized losses on ~~this review, management concluded that it~~these debt securities are primarily attributable to changes in the investment spreads and interest rates and not material 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 ~~not more-likely-than-not~~likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, ~~management does not consider these investments to be other-than-temporarily impaired~~no allowance for credit losses on securities was recorded at ~~September~~June 30, ~~2019.~~2020.

Corporate Bonds

At ~~September~~June 30, ~~2019,~~2020, the Corporation had 3 corporate bond holdings with unrealized losses totaling ~~$1.4~~$2.1 million. These investment grade corporate bonds were issued by large corporations ~~primarily~~ in the financial services industry. The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at June 30, 2020.

- 16-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information. Management believes the unrealized losses on these ~~bonds~~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 ~~not more-likely-than-not~~likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, ~~management does not consider these investments to be other-than-temporarily impaired~~no allowance for credit losses was recorded at ~~September~~June 30, ~~2019.~~2020.

~~The following table summarizes amounts relating to sales of securities:~~

(Dollars in thousands) Three Months Nine Months
For the periods ended September 30, 2019 2018 2019 2018
Proceeds from sales
$—

$—

$9,920

$—

Gross realized gains
$—

$—

$—

$—
Gross realized losses —
—
(80 ) —
Net realized losses on securities
$—

$—

($80 )
$—

~~- 16-~~

~~Condensed Notes to Unaudited Consolidated Financial Statements – (continued)~~

Note 5 - Loans

The following is a summary of loans:


(Dollars in thousands)	September 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019
Commercial:
Commercial real estate (1)		$1,517,320		$1,392,408		$1,630,998		$1,547,572
Commercial & industrial (2)	566,426		620,704		852,445		585,289
Total commercial	2,083,746		2,013,112		2,483,443		2,132,861
Residential Real Estate:
Residential real estate (3)	1,378,518		1,360,387		1,508,223		1,449,090
Consumer:
Home equity	294,250		280,626		277,632		290,874
Other (4)	21,592		26,235		18,343		20,174
Total consumer	315,842		306,861		295,975		311,048
Total loans (5)		$3,778,106		$3,680,360		$4,287,641		$3,892,999


(1)	~~Consists~~Commercial real estate (“CRE”) consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.


(2)	~~Consists~~Commercial and industrial (“C&I”) consists of loans to businesses and individuals, a ~~substantial~~ portion of which are fully or partially collateralized by real estate. C&I also includes $212.2 million of PPP loans as of June 30, 2020.


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


(4)	~~Consists~~Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans.

(5)

Includes net unamortized loan origination fees of $453 thousand at June 30, 2020 and net unamortized loan origination costs of ~~$5.7~~$5.3 million, ~~and $4.7 million, respectively,~~ at ~~September 30, 2019 and~~ December 31, ~~2018~~2019 and net unamortized premiums on purchased loans of ~~$575 thousand~~$1.1 million and ~~$703~~$995 thousand, respectively, at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

As of ~~both~~ ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019, loans amounting to ~~$2.0~~$2.2 billion and $2.1 billion, respectively, were pledged as collateral to the FHLB under a blanket pledge agreement and to the ~~FRB for the discount window.~~FRB. See Note 7 for additional disclosure regarding borrowings.

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.

- 17-

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 age analysis of past due loans, segregated by class of loans:

(Dollars in thousands) Days Past Due
September 30, 2019 30-59 60-89 Over 90 Total Past Due Current Total Loans
Commercial:
Commercial real estate
$—

$—

$684

$684

$1,516,636

$1,517,320
Commercial & industrial 1
—
—
1
566,425
566,426
Total commercial 1
—
684
685
2,083,061
2,083,746
Residential Real Estate:
Residential real estate 4,333
2,506
4,760
11,599
1,366,919
1,378,518
Consumer:
Home equity 744
417
812
1,973
292,277
294,250
Other 11
—
88
99
21,493
21,592
Total consumer 755
417
900
2,072
313,770
315,842
Total loans
$5,089

$2,923

$6,344

$14,356

$3,763,750

$3,778,106



(Dollars in thousands)	Days Past Due
June 30, 2020	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Commercial real estate		$—		$—		$431		$431		$1,630,567		$1,630,998
Commercial & industrial	2		1		—		3		852,442		852,445
Total commercial	2		1		431		434		2,483,009		2,483,443
Residential Real Estate:
Residential real estate	3,858		3,545		5,096		12,499		1,495,724		1,508,223
Consumer:
Home equity	829		16		788		1,633		275,999		277,632
Other	16		2		88		106		18,237		18,343
Total consumer	845		18		876		1,739		294,236		295,975
Total loans		$4,705		$3,564		$6,403		$14,672		$4,272,969		$4,287,641

~~- 17-~~

~~Condensed Notes to Unaudited Consolidated Financial Statements – (continued)~~


(Dollars in thousands)	Days Past Due												Days Past Due
December 31, 2018	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
December 31, 2019													30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Commercial real estate		$155		$925		$—		$1,080		$1,391,328		$1,392,408		$830		$—		$603		$1,433		$1,546,139		$1,547,572
Commercial & industrial	—		—		—		—		620,704		620,704		1		—		—		1		585,288		585,289
Total commercial	155		925		—		1,080		2,012,032		2,013,112		831		—		603		1,434		2,131,427		2,132,861
Residential Real Estate:
Residential real estate	6,318		2,693		1,509		10,520		1,349,867		1,360,387		4,574		2,155		4,700		11,429		1,437,661		1,449,090
Consumer:
Home equity	1,281		156		552		1,989		278,637		280,626		971		729		996		2,696		288,178		290,874
Other	33		—		—		33		26,202		26,235		42		—		88		130		20,044		20,174
Total consumer	1,314		156		552		2,022		304,839		306,861		1,013		729		1,084		2,826		308,222		311,048
Total loans		$7,787		$3,774		$2,061		$13,622		$3,666,738		$3,680,360		$6,418		$2,884		$6,387		$15,689		$3,877,310		$3,892,999

Included in past due loans as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, were nonaccrual loans of ~~$9.8~~$10.6 million and ~~$8.6~~$11.5 million, respectively.

All loans 90 days or more past due at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 were classified as nonaccrual.

~~- 18-~~

~~Condensed Notes to Unaudited Consolidated Financial Statements – (continued)~~

~~Impaired Loans~~

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will not be able to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans include nonaccrual loans and loans restructured in a troubled debt restructuring. The Corporation identifies loss allocations for impaired loans on an individual loan basis.

~~The following is a summary of impaired loans:~~

(Dollars in thousands)
Recorded Investment (1)
Unpaid Principal Related Allowance
Sep 30,
2019 Dec 31,
2018 Sep 30,
2019 Dec 31,
2018 Sep 30,
2019 Dec 31,
2018
No Related Allowance Recorded
Commercial:
Commercial real estate
$684

$925

$926

$926

$—

$—
Commercial & industrial —
4,681
—
4,732
—
—
Total commercial 684
5,606
926
5,658
—
—
Residential Real Estate:
Residential real estate 12,531
9,347
13,368
9,695
—
—
Consumer:
Home equity 1,379
1,360
1,379
1,360
—
—
Other 88
—
88
—
—
—
Total consumer 1,467
1,360
1,467
1,360
—
—
Subtotal 14,682
16,313
15,761
16,713
—
—
With Related Allowance Recorded
Commercial:
Commercial real estate
$—

$—

$—

$—

$—

$—
Commercial & industrial —
52
—
73
—
—
Total commercial —
52
—
73
—
—
Residential Real Estate:
Residential real estate 360
364
386
390
96
100
Consumer:
Home equity 220
85
220
85
220
24
Other 19
22
19
22
5
3
Total consumer 239
107
239
107
225
27
Subtotal 599
523
625
570
321
127
Total impaired loans
$15,281

$16,836

$16,386

$17,283

$321

$127
Total:
Commercial
$684

$5,658

$926

$5,731

$—

$—
Residential real estate 12,891
9,711
13,754
10,085
96
100
Consumer 1,706
1,467
1,706
1,467
225
27
Total impaired loans
$15,281

$16,836

$16,386

$17,283

$321

$127

~~(1)~~

The recorded investment in impaired loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs. For accruing impaired loans (troubled debt restructurings for which management has concluded that the collectibility of the loan is not in doubt), the recorded investment also includes accrued interest.

~~- 19-~~

~~Condensed Notes to Unaudited Consolidated Financial Statements – (continued)~~

~~The following tables present the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class.~~

(Dollars in thousands) Average Recorded Investment Interest Income Recognized
Three months ended September 30, 2019 2018 2019 2018
Commercial:
Commercial real estate
$886

$—

$—

$—
Commercial & industrial —
5,324
—
62
Total commercial 886
5,324
—
62
Residential Real Estate:

Residential real estate 12,017
9,265
109
96
Consumer:

Home equity 1,414
1,424
16
22
Other 108
25
3
—
Total consumer 1,522
1,449
19
22
Totals
$14,425

$16,038

$128

$180

(Dollars in thousands) Average Recorded Investment Interest Income Recognized
Nine months ended September 30, 2019 2018 2019 2018
Commercial:
Commercial real estate
$929

$1,352

$1

$—
Commercial & industrial 2,835
5,599
103
201
Total commercial 3,764
6,951
104
201
Residential Real Estate:
Residential real estate 10,972
9,709
331
293
Consumer:
Home equity 1,409
1,045
43
41
Other 55
85
2
5
Total consumer 1,464
1,130
45
46
Totals
$16,200

$17,790

$480

$540

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~~collectibility 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.

- ~~20-~~18-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following is a summary of nonaccrual loans, segregated by class of loans:


(Dollars in thousands)	Sep 30, 2019		Dec 31, 2018		Jun 30, 2020		Dec 31, 2019
Commercial:
Commercial real estate		$684		$925		$431		$603
Commercial & industrial	—		—		—		657
Total commercial	684		925		431		1,260
Residential Real Estate:
Residential real estate	12,531		9,346		13,850		14,297
Consumer:
Home equity	1,599		1,436		1,648		1,763
Other	88		—		88		88
Total consumer	1,687		1,436		1,736		1,851
Total nonaccrual loans		$14,902		$11,707		$16,017		$17,408
Accruing loans 90 days or more past due		$—		$—		$—		$—

For nonaccrual loans with a carrying value of $1.4 million as of June 30, 2020, no ACL was deemed necessary.

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, loans secured by one- to four-family residential property amounting to ~~$5.9~~$3.4 million and ~~$761 thousand,~~$5.8 million, respectively, were in process of foreclosure.

Nonaccrual loans of ~~$5.1~~$5.5 million and ~~$3.1~~$5.9 million, respectively, were current as to the payment of principal and interest at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at ~~September~~June 30, ~~2019.~~2020.

The following table presents interest income recognized on nonaccrual loans segregated by loan class:



(Dollars in thousands)	Interest Income Recognized
Periods ended June 30, 2020	Three Months		Six Months
Commercial:
Commercial real estate		$—		$—
Commercial & industrial	—		—
Total commercial	—		—
Residential Real Estate:
Residential real estate	103		271
Consumer:
Home equity	17		40
Other	—		—
Total consumer	17		40
Total		$120		$311

Troubled Debt Restructurings

~~Loans are~~A loan that has been modified or renewed is considered to be a troubled debt ~~restructurings~~restructuring (“TDR”) when two conditions are met: 1) the ~~Corporation has granted~~borrower is experiencing financial difficulty and 2) concessions toare made for the borrower’s benefit that would not otherwise be considered for a borrower ~~due to the borrower’s financial condition that it otherwise would not have considered.~~or a transaction with similar credit risk characteristics. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may

- 19-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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. Troubled debt restructurings 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.

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the ~~collectability~~collectibility of the loan. Loans which 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.~~term and full collection of principal and interest is in doubt.

~~Troubled debt restructurings~~TDRs are reported as such for at least one year from the date of the restructuring. In years after the restructuring, ~~troubled debt restructured loans~~TDRs are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is ~~not deemed to be impaired based on the~~performing in accordance with their modified contractual terms ~~specified in the restructuring agreement.~~for a reasonable period of time.

The recorded investment in ~~troubled debt restructurings~~TDRs consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs, at the time of the restructuring. For accruing ~~troubled debt restructured loans,~~TDRs, the recorded investment also includes accrued interest.

The recorded investment in ~~troubled debt restructurings~~TDRs was ~~$876~~$6.5 million and $869 thousand, ~~and $5.6 million,~~ respectively, at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. The ~~allowance for loan losses~~ACL on loans included specific reserves for these ~~troubled debt restructurings~~TDRs of ~~$101~~$137 thousand and ~~$103~~$97 thousand, respectively, at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

~~For the three and nine months ended September~~As of June 30, ~~2019,~~2020, there were 0no significant commitments to lend additional funds to borrowers whose loans had been restructured in a TDR.

The Corporation has elected to account for eligible loan modifications under Section 4013 of the CARES Act. To be eligible under Section 4013 of the CARES Act, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) December 31, 2020. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status in accordance with the nonaccrual loans accounting policy described above. As of June 30, 2020, Washington Trust has executed 583 modifications on loan balances of $652.2 million. The majority of these modifications qualified as eligible loan modifications under Section 4013 of the CARES Act and therefore, were not required to be classified as TDRs and were not reported as past due. NaN of these modifications on loan balances of $5.6 million were past due before the COVID-19 pandemic and therefore, were classified as TDRs and were included in past due loans as of June 30, 2020.

- 20-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following tables present loans modified as a ~~troubled debt restructuring. For the three months ended September 30, 2018, there~~TDR:




(Dollars in thousands)			Outstanding Recorded Investment (1)
	# of Loans		Pre-Modifications				Post-Modifications
Three months ended June 30,	2020	2019	2020		2019		2020		2019
Commercial:
Commercial real estate	1	—		$841		$—		$841		$—
Commercial & industrial	2	—	460		—		460		—
Total commercial	3	—	1,301		—		1,301		—
Residential Real Estate:
Residential real estate	6	—	3,512		—		3,512		—
Consumer:
Home equity	3	—	802		—		802		—
Other	—	—	—		—		—		—
Total consumer	3	—		$802		$—		$802		$—
Total	12	—		$5,615		$—		$5,615		$—


(1)	The recorded investment in TDRs consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs, at the time of the restructuring. For accruing TDRs, the recorded investment also includes accrued interest.




(Dollars in thousands)			Outstanding Recorded Investment (1)
	# of Loans		Pre-Modifications				Post-Modifications
Six months ended June 30,	2020	2019	2020		2019		2020		2019
Commercial:
Commercial real estate	1	—		$841		$—		$841		$—
Commercial & industrial	2	—	460		—		460		—
Total commercial	3	—	1,301		—		1,301		—
Residential Real Estate:
Residential real estate	6	—	3,512		—		3,512		—
Consumer:
Home equity	3	—	802		—		802		—
Other	—	—	—		—		—		—
Total consumer	3	—		$802		$—		$802		$—
Total	12	—		$5,615		$—		$5,615		$—


(1)	The recorded investment in TDRs consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs, at the time of the restructuring. For accruing TDRs, the recorded investment also includes accrued interest.

The following table presents information on how loans were ~~0 loans~~ modified as a ~~troubled debt restructuring. For the nine months~~TDR:




(Dollars in thousands)	Three Months				Six Months
Periods ended June 30,	2020		2019		2020		2019
Below-market interest rate concession		$—		$—		$—		$—
Payment deferral	5,202		—		5,202		—
Maturity / amortization concession	—		—		—		—
Interest only payments	—		—		—		—
Combination (1)	413		—		413		—
Total		$5,615		$—		$5,615		$—


(1)	Loans included in this classification were modified with a combination of any two of the concessions listed in this table.

- 21-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

ended September 30, 2018, there was 1 loan modified as a troubled debt restructuring with a pre-modification and post-modification recorded investment of $608 thousand. This troubled debt restructuring included a combination of concessions pertaining to maturity and interest only payment terms.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019 there were no~~2020, payment defaults on ~~troubled debt restructured loans modified within the previous 12 months. For the three and nine months ended September 30, 2018, payment defaults on troubled debt restructured loans~~TDRs modified within the previous 12 months occurred on 1 loan with a carrying value of ~~$608~~$47 thousand at the time of the default.

~~As of September~~ For the three and six months ended June 30, 2019, there were ~~no significant commitments to lend additional funds to borrowers whose loans had been restructured.~~

0 payment defaults on TDRs modified within the previous 12 months.

Individually Analyzed Loans

Effective January 1, 2020, individually analyzed loans include nonaccrual commercial loans, loans classified as TDRs, and certain other loans based on the underlying risk characteristics and the discretion of management to individuallyanalyze such loans. As of June 30, 2020, the carrying value of individually analyzed loans amounted to $7.1 million, of which $4.3 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)
As of June 30, 2020	Carrying Value		Related Allowance
Commercial:
Commercial real estate (1)		$431		$—
Commercial & industrial (2)	414		—
Total commercial	845		—
Residential Real Estate:
Residential real estate (3)	2,664		—
Consumer:
Home equity (3)	754		233
Other	—		—
Total consumer	754		233
Total		$4,263		$233



(1)							Secured by income-producing property.


(2)	Secured by business assets.


(3)	Secured by one- to four-family residential properties.

- 22-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Prior to January 1, 2020, impaired loans included nonaccrual loans and loans restructured in a TDR. The Corporation identified loss allocations for impaired loans on an individual loan basis. The following is a summary of impaired loans:



(Dollars in thousands)
As of December 31, 2019	Recorded Investment (1)		Unpaid Principal		Related Allowance
No Related Allowance Recorded
Commercial:
Commercial real estate		$—		$—		$—
Commercial & industrial	—		—		—
Total commercial	—		—		—
Residential Real Estate:
Residential real estate	13,968		14,803		—
Consumer:
Home equity	1,471		1,472		—
Other	88		88		—
Total consumer	1,559		1,560		—
Subtotal	15,527		16,363		—
With Related Allowance Recorded
Commercial:
Commercial real estate		$603		$926		$—
Commercial & industrial	657		657		580
Total commercial	1,260		1,583		580
Residential Real Estate:
Residential real estate	687		714		95
Consumer:
Home equity	292		291		291
Other	18		18		2
Total consumer	310		309		293
Subtotal	2,257		2,606		968
Total impaired loans		$17,784		$18,969		$968
Total:
Commercial		$1,260		$1,583		$580
Residential real estate	14,655		15,517		95
Consumer	1,869		1,869		293
Total impaired loans		$17,784		$18,969		$968


(1)	The recorded investment in impaired loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs. For accruing impaired loans (TDRs for which management has concluded that the collectibility of the loan is not in doubt), the recorded investment also includes accrued interest.

- 23-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class.



(Dollars in thousands)	Three Months				Six Months
For the periods ended June 30, 2019	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial:
Commercial real estate		$926		$—		$951		$1
Commercial & industrial	3,868		49		4,276		103
Total commercial	4,794		49		5,227		104
Residential Real Estate:
Residential real estate	10,728		107		10,441		222
Consumer:
Home equity	1,332		13		1,406		27
Other	35		—		28		—
Total consumer	1,367		13		1,434		27
Total		$16,889		$169		$17,102		$353

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 rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. ~~For non-impaired loans, the~~The Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for ~~loan losses.~~credit losses on loans. See Note 6 for additional information.

A description of the commercial loan categories is as follows:

Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality, but may exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, ~~secondary sources of repayment, or~~ performance ~~inconsistency~~ 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.~~collectibility. 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.

- 24-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The Corporation’s procedures call for loan ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. On a quarterly basis, management reviews the ~~criticized loan portfolio,~~watched asset list, which generally consists of commercial loans that are risk-rated ~~special mention~~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 and strategies to improve the credit. An annual loan 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

~~- 22-~~

~~Condensed Notes to Unaudited Consolidated Financial Statements – (continued)~~

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.

~~The following table presents the commercial loan portfolio, segregated by category of credit quality indicator:~~

(Dollars in thousands) Pass Special Mention Classified
Sep 30,
2019 Dec 31,
2018 Sep 30,
2019 Dec 31,
2018 Sep 30,
2019 Dec 31,
2018
Commercial:
Commercial real estate
$1,498,212

$1,387,666

$18,224

$205

$884

$4,537
Commercial & industrial 529,219
559,019
25,679
50,426
11,528
11,259
Total commercial
$2,027,431

$1,946,685

$43,903

$50,631

$12,412

$15,796

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. ~~For non-impaired residential real estate and consumer loans, the Corporation assigns loss allocation factors to each respective loan type.~~

~~Other techniques~~The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment:



(Dollars in thousands)	Term Loans Amortized Cost by Origination Year
As of June 30, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost		Revolving Loans Converted to Term Loans		Total
Commercial:
CRE:
Pass		$204,928		$376,942		$338,798		$249,371		$150,315		$285,727		$11,917		$2,422		$1,620,420
Special Mention	—		—		—		9,301		—		846		—		—		10,147
Classified	—		—		—		—		—		431		—		—		431
Total CRE	204,928		376,942		338,798		258,672		150,315		287,004		11,917		2,422		1,630,998
C&I:
Pass	286,230		103,671		84,136		63,842		68,551		112,282		100,844		1,462		821,018
Special Mention	271		—		—		2,434		—		16,897		1,630		68		21,300
Classified	414		—		—		—		—		7,592		2,121		—		10,127
Total C&I	286,915		103,671		84,136		66,276		68,551		136,771		104,595		1,530		852,445
Residential Real Estate:
Residential real estate:
Current	227,967		321,681		205,996		201,423		160,586		378,071		—		—		1,495,724
Past Due	—		510		631		2,139		111		9,108		—		—		12,499
Total residential real estate	227,967		322,191		206,627		203,562		160,697		387,179		—		—		1,508,223
Consumer:
Home equity:
Current	6,958		8,591		5,204		2,108		1,375		5,026		234,470		12,267		275,999
Past Due	—		—		—		176		—		13		497		947		1,633
Total home equity	6,958		8,591		5,204		2,284		1,375		5,039		234,967		13,214		277,632
Other:
Current	1,132		2,645		1,842		2,113		742		9,434		327		2		18,237
Past Due	8		—		—		11		87		—		—		—		106
Total other	1,140		2,645		1,842		2,124		829		9,434		327		2		18,343
Total Loans		$727,908		$814,040		$636,607		$532,918		$381,767		$825,427		$351,806		$17,168		$4,287,641

Consistent with industry practice, Washington Trust may renew commercial loans at or immediately prior to their maturity. Renewals subject to full credit evaluation before being granted are ~~utilized~~reported as current period originations in the table above.

- 25-

Condensed Notes to ~~monitor indicators~~Unaudited Consolidated Financial Statements – (continued)

The following table presents the commercial loan portfolio, segregated by category of credit deterioration in the residential real estate loans and consumer loan portfolios. Among these techniques is the periodic tracking of loans with an updated Fair Isaac Corporation (“FICO”) score and an estimated loan to value (“LTV”) ratio. LTV ratio is determined via statistical modeling analyses. The indicated LTV levels are estimated based on such factors as the location, the original LTV ratio, and the date of origination of the loan and do not reflect actual appraisal amounts. The results of these analyses and other loan review procedures are taken into consideration in the determination of loss allocation factors for residential real estate and home equity consumer credits.quality indicator:



(Dollars in thousands)
As of December 31, 2019	Pass		Special Mention		Classified
Commercial:
Commercial real estate		$1,546,139		$830		$603
Commercial & industrial	549,416		24,961		10,912
Total commercial		$2,095,555		$25,791		$11,515

The following table presents the residential and consumer loan portfolios, segregated by ~~loan type and~~category of credit quality indicator:


(Dollars in thousands)	Current				Past Due
	Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018
As of December 31, 2019									Current		Past Due
Residential Real Estate:
Self-originated mortgages		$1,261,364		$1,238,402		$10,503		$9,079
Purchased mortgages	105,555		111,465		1,096		1,441
Total residential real estate		$1,366,919		$1,349,867		$11,599		$10,520
Residential real estate										$1,437,661		$11,429
Consumer:
Home equity		$292,277		$278,637		$1,973		$1,989		$288,178		$2,696
Other	21,493		26,202		99		33		20,044		130
Total consumer		$313,770		$304,839		$2,072		$2,022		$308,222		$2,826

Note 6 - Allowance for ~~Loan~~Credit Losses on Loans

Adoption of Topic 326

Effective January 1, 2020, the Corporation adopted the provisions of Topic 326 using the modified retrospective method. Therefore, prior period comparative information has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 326. As a result of adopting Topic 326, the Corporation increased the ACL on loans by $6.5 million on January 1, 2020.

Accounting Policy Updates

Effective January 1, 2020, the Corporation has modified its accounting policy for the ACL on loans. The ~~allowance for loan losses~~updated policy is detailed below.

The Corporation has made an accounting policy election to exclude accrued interest from the amortized cost basis of loans and reports accrued interest separately in other assets in the Unaudited Consolidated Balance Sheets. The Corporation also excludes accrued interest from the estimate of credit losses. Accrued interest receivable on loans totaled $9.2 million and $11.0 million, respectively, as of June 30, 2020 and December 31, 2019.

The ACL on loans is management’s ~~best~~ estimate of ~~incurred~~expected credit losses ~~inherent~~over the expected life of the loans at the reporting date. The ACL on loans is increased through a provision for credit losses recognized in the ~~loan portfolio as~~Unaudited Consolidated Statements of Income and by recoveries of amounts previously charged-off. The ACL on loans is reduced by charge-offs on loans. Loan charge-offs are recognized when management believes the collectibility of the principal balance ~~sheet date. The Corporation uses a methodology to systematically measure~~outstanding is unlikely. Full or partial charge-offs on collateral dependent individually analyzed loans are generally recognized when the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes: (1) the identification of loss allocations for individual loanscollateral is deemed to be ~~impaired~~insufficient to support the carrying value of the loan.

The level of the ACL on loans is based on management’s ongoing review of all relevant information, from internal and ~~(2)~~external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the ~~application~~basis for the calculation of loss ~~allocation~~given default and the estimation of expected credit losses. As discussed further below, adjustments to historical information are made for differences in specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, that may not be reflected in historical loss rates.

- 26-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

pooling loans into portfolio segments for ~~non-impaired~~loans that share similar risk characteristics. Pooled loan portfolio segments include commercial real estate (including commercial construction), commercial and industrial (including PPP loans), residential real estate (including homeowner construction), home equity and other consumer loans. The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments. Individually analyzed loans include nonaccrual commercial loans, loans classified as TDRs and certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans.

For loans that are individually analyzed, the ACL is measured using a discounted cash flow method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan is collateral dependent, at the fair value of the collateral. Factors management considers when measuring the extent of expected credit loss include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due. For collateral dependent loans for which repayment is to be provided substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral dependent loans for which repayment is to be provided substantially through the operation of the collateral, such as accruing TDRs, estimated costs to sell are not incorporated into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the collateral.

For pooled loans, the Corporation utilizes a discounted cash flow (“DCF”) methodology to estimate credit losses over the expected life of the loan. The life of the loan excludes expected extensions, renewal and modifications, unless 1) the extension or renewal options are included in the original or modified contract terms and not unconditionally cancellable by the Corporation, or 2) management reasonably expects at the reporting date that a TDR will be executed with an individual borrower. The methodology incorporates the probability of default and loss given default, which are identified by default triggers such as past due by 90 or more days, whether a charge-off has occurred, the loan has been placed on nonaccrual status, the loan has been modified in a TDR or the loan is risk-rated as special mention or classified. The probability of default for the life of the loan is determined by the use of an econometric factor. Management utilizes the national unemployment rate as an econometric factor with a one-year forecast period and one-year straight-line reversion period to the historical mean of its macroeconomic assumption in order to estimate the probability of default for each loan portfolio segment. Utilizing a third party regression model, the forecasted national unemployment rate is correlated with the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, maturity date and prepayment speeds to estimate a reserve for each loan. The sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived.

Quantitative loss factors are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. These qualitative risk factors include: 1) changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; 2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments; 3) changes in the nature and volume of the portfolio and in the terms of loans; 4) changes in the experience, ability, and depth of lending management and other relevant staff; 5) changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or rated loans; 6) changes in the quality of the institution’s loan review system; 7) changes in the value of underlying collateral for collateral dependent loans; 8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and 9) the effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. Qualitative loss factors are applied to each portfolio segment with the amounts determined by historical loan charge-offs of a peer group of similar-sized regional banks.

Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. While significant deterioration in the economic forecast due to the COVID-19 pandemic was estimated ~~loss emergence period, with adjustments for~~in the ACL on loans, continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the ACL. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans. In addition, various ~~exposures that management believes are not adequately represented by historical loss experience.~~regulatory agencies periodically review the ACL on loans. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. The ACL on loans is an estimate, and ultimate losses may vary from management’s estimate.

- ~~23-~~27-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the activity in the ~~allowance for loan losses~~ACL on loans for the three months ended ~~September~~June 30, ~~2019:~~2020:


(Dollars in thousands)	Commercial											Consumer											Commercial											Consumer
	CRE (1)			C&I (2)			Total Commercial			Residential Real Estate		Home Equity		Other			Total Consumer			Total			CRE			C&I			Total Commercial			Residential Real Estate		Home Equity			Other			Total Consumer			Total
Beginning Balance		$16,882			$4,453			$21,335			$4,857		$913		$293			$1,206			$27,398			$19,736			$10,331			$30,067			$7,729		$1,435			$434			$1,869			$39,665
Charge-offs	(947		)	(1		)	(948		)	—		—		(18		)	(18		)	(966		)	(19		)	(289		)	(308		)	—		(1		)	(17		)	(18		)	(326		)
Recoveries	—			123			123			—		36		6			42			165			—			5			5			—		6			7			13			18
Provision	866			(1,128		)	(262		)	554		64		44			108			400			566			1,231			1,797			324		(46		)	9			(37		)	2,084
Ending Balance		$16,801			$3,447			$20,248			$5,411		$1,013		$325			$1,338			$26,997			$20,283			$11,278			$31,561			$8,053		$1,394			$433			$1,827			$41,441

~~(1) Commercial real estate loans.~~

~~(2) Commercial & industrial loans.~~

The following table presents the activity in the ACL on loans for the six months ended June 30, 2020:




(Dollars in thousands)	Commercial											Consumer
	CRE			C&I			Total Commercial			Residential Real Estate		Home Equity			Other			Total Consumer			Total
Beginning Balance		$14,741			$3,921			$18,662			$6,615		$1,390			$347			$1,737			$27,014
Adoption of Topic 326 (1)	3,405			3,029			6,434			221		(106		)	(48		)	(154		)	6,501
Charge-offs	(172		)	(583		)	(755		)	—		(174		)	(32		)	(206		)	(961		)
Recoveries	—			9			9			—		7			14			21			30
Provision	2,309			4,902			7,211			1,217		277			152			429			8,857
Ending Balance		$20,283			$11,278			$31,561			$8,053		$1,394			$433			$1,827			$41,441


(1)	Adoption of the CECL accounting standard effective January 1, 2020.

For the accounting policy on the allowance for loan losses that was in effect prior to the adoption of Topic 326, see Note 1 to our Annual Report on Form 10-K for the ~~nine months~~fiscal year ended ~~September 30, 2019:~~

(Dollars in thousands) Commercial Consumer
CRE (1) C&I (2) Total Commercial Residential Real Estate Home Equity Other Total Consumer Total
Beginning Balance
$15,381

$5,847

$21,228

$3,987

$1,603

$254

$1,857

$27,072
Charge-offs (947 ) (19 ) (966 ) (486 ) (372 ) (64 ) (436 ) (1,888 )
Recoveries —
151
151
—
71
16
87
238
Provision 2,367
(2,532 ) (165 ) 1,910
(289 ) 119
(170 ) 1,575
Ending Balance
$16,801

$3,447

$20,248

$5,411

$1,013

$325

$1,338

$26,997

~~(1) Commercial real estate loans.~~

~~(2) Commercial & industrial loans.~~December 31, 2019.

The following table presents the activity in the allowance for loan losses for the three months ended ~~September~~June 30, ~~2018:~~2019:

(Dollars in thousands) Commercial Consumer
CRE (1) C&I (2) Total Commercial Residential Real Estate Home Equity Other Total Consumer Total
Beginning Balance
$12,443

$6,642

$19,085

$5,314

$1,375

$400

$1,775

$26,174
Charge-offs —
(1 ) (1 ) (68 ) —
(27 ) (27 ) (96 )
Recoveries —
71
71
—
2
8
10
81
Provision 1,052
535
1,587
(1,131 ) 12
(118 ) (106 ) 350
Ending Balance
$13,495

$7,247

$20,742

$4,115

$1,389

$263

$1,652

$26,509

~~(1) Commercial real estate loans.~~

~~(2) Commercial & industrial loans.~~



(Dollars in thousands)	Commercial												Consumer
	CRE			C&I			Total Commercial			Residential Real Estate			Home Equity			Other			Total Consumer			Total
Beginning Balance		$17,191			$4,498			$21,689			$4,009			$1,589			$357			$1,946			$27,644
Charge-offs	—			(4		)	(4		)	(486		)	(311		)	(18		)	(329		)	(819		)
Recoveries	—			20			20			—			22			6			28			48
Provision	(309		)	(61		)	(370		)	1,334			(387		)	(52		)	(439		)	525
Ending Balance		$16,882			$4,453			$21,335			$4,857			$913			$293			$1,206			$27,398

The following table presents the activity in the allowance for loan losses for the ~~nine~~six months ended ~~September~~June 30, ~~2018:~~2019:



(Dollars in thousands)	Commercial												Consumer												Commercial											Consumer
	CRE (1)			C&I (2)			Total Commercial			Residential Real Estate			Home Equity			Other			Total Consumer			Total			CRE		C&I			Total Commercial			Residential Real Estate			Home Equity			Other			Total Consumer			Total
Beginning Balance		$12,729			$5,580			$18,309			$5,427			$2,412			$340			$2,752			$26,488			$15,381		$5,847			$21,228			$3,987			$1,603			$254			$1,857			$27,072
Charge-offs	(627		)	(8		)	(635		)	(73		)	(111		)	(70		)	(181		)	(889		)	—		(18		)	(18		)	(486		)	(372		)	(46		)	(418		)	(922		)
Recoveries	25			104			129			—			12			19			31			160			—		28			28			—			35			10			45			73
Provision	1,368			1,571			2,939			(1,239		)	(924		)	(26		)	(950		)	750			1,501		(1,404		)	97			1,356			(353		)	75			(278		)	1,175
Ending Balance		$13,495			$7,247			$20,742			$4,115			$1,389			$263			$1,652			$26,509			$16,882		$4,453			$21,335			$4,857			$913			$293			$1,206			$27,398

~~(1) Commercial real estate loans.~~

~~(2) Commercial & industrial loans.~~

- ~~24-~~28-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the Corporation’s loan portfolio and associated allowance for loan losses by portfolio segment and by impairment ~~methodology:~~methodology as of December 31, 2019:


(Dollars in thousands)	September 30, 2019				December 31, 2018				Loans		Related Allowance
	Loans		Related Allowance		Loans		Related Allowance
Loans Individually Evaluated for Impairment
Loans Individually Analyzed for Credit Losses
Commercial:
Commercial real estate		$684		$—		$925		$—		$603		$—
Commercial & industrial	—		—		4,714		—		657		580
Total commercial	684		—		5,639		—		1,260		580
Residential Real Estate:
Residential real estate	12,890		96		9,710		100		14,654		95
Consumer:
Home equity	1,599		220		1,445		24		1,763		291
Other	107		5		22		3		106		2
Total consumer	1,706		225		1,467		27		1,869		293
Subtotal	15,280		321		16,816		127		17,783		968
Loans Collectively Evaluated for Impairment
Loans Collectively Evaluated for Credit Losses
Commercial:
Commercial real estate	1,516,636		16,801		1,391,483		15,381		1,546,969		14,741
Commercial & industrial	566,426		3,447		615,990		5,847		584,632		3,341
Total commercial	2,083,062		20,248		2,007,473		21,228		2,131,601		18,082
Residential Real Estate:
Residential real estate	1,365,628		5,315		1,350,677		3,887		1,434,436		6,520
Consumer:
Home equity	292,651		793		279,182		1,579		289,111		1,099
Other	21,485		320		26,212		251		20,068		345
Total consumer	314,136		1,113		305,394		1,830		309,179		1,444
Subtotal	3,762,826		26,676		3,663,544		26,945		3,875,216		26,046
Total		$3,778,106		$26,997		$3,680,360		$27,072		$3,892,999		$27,014

- ~~25-~~29-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 7 - ~~Federal Home Loan Bank Advances~~Borrowings

Advances payable to the FHLB amounted to ~~$956.8 million~~$1.0 billion and $~~950.7 million~~1.1 billion, respectively, at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019.

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Bank had access to a $40.0 million unused line of credit ~~with the FHLB~~ and also had remaining available borrowing capacity of ~~$601.5~~$647.9 million and ~~$628.5~~$535.0 million, ~~respectively.~~respectively, with the FHLB. The Bank pledges certain qualified investment securities and loans as collateral to the FHLB.

The following table presents maturities and weighted average interest rates on FHLB advances outstanding as of ~~September~~June 30, ~~2019:~~2020:


(Dollars in thousands)	Scheduled Maturity		Weighted Average Rate		Scheduled Maturity		Weighted Average Rate
October 1, 2019 to December 31, 2019		$355,822	2.56	%
2020	444,533		2.34
July 1, 2020 to December 31, 2020						$759,621	1.17	%
2021	86,222		2.73		155,222		1.48
2022	55,447		3.65		813		5.12
2023	9,428		4.01		5,238		3.80
2024 and thereafter	5,334		5.06
Balance at September 30, 2019		$956,786	2.56	%
2024					40,900		2.51
2025 and thereafter					43,257		3.29
Balance at June 30, 2020						$1,005,051	1.38	%

In ~~October 2019, FHLB advances~~June 2020, Washington Trust began participating in the FRB’s Paycheck Protection Program Liquidity Facility ("PPPLF"). PPPLF extends credit to depository institutions at a fixed interest rate of 0.35%. Only PPP loans can be pledged as collateral to access the facility. The maturity date of the PPPLF borrowings matches the maturity date of the pledged PPP loans. As of June 30, 2020, PPPLF borrowings amounted to $38.9 million and have a scheduled maturity in April 2022. PPP loans totaling ~~$78.8~~$38.9 million were ~~modified~~pledged as collateral to ~~lower interest rates and~~ the maturities of these advances were extended. Original maturity dates ranging from 2021 to 2023 were modified to 2024 to 2026. The original weighted average interest rate was 3.52% and was revised to 2.76%. The table below presents the original termsFRB as of ~~September~~June 30, ~~2019, as well as the revised terms associated with these FHLB advances:~~2020.

(Dollars in thousands) Original Terms Revised Terms
Scheduled
Maturity Weighted
Average Rate Scheduled
Maturity Weighted
Average Rate
2021
$20,000
3.07 %
$—
— %
2022 54,634
3.63
—
—
2023 4,190
4.27
—
—
2024 —
—
40,000
2.45
2025 —
—
—
—
2026 —
—
38,824
3.09
Total
$78,824
3.52 %
$78,824
2.76 %

~~- 26-~~

~~Condensed Notes to Unaudited Consolidated Financial Statements – (continued)~~

Note 8 - Shareholders' Equity

2019 Stock Repurchase Program

The Corporation’s 2019 Stock 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 2019 Stock Repurchase Program expires on October 31, 2020 and may be modified, suspended, or discontinued at any time. As of June 30, 2020, 124,863 shares have been repurchased under the 2019 Stock Repurchase Program, totaling $4.3 million, at an average price of $34.61. Due to the economic uncertainty resulting from the COVID-19 pandemic, Washington Trust suspended its 2019 Stock Repurchase Program effective March 25, 2020.

- 30-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Regulatory Capital Requirements

Capital levels at ~~September~~June 30, ~~2019~~2020 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				Actual				For Capital Adequacy Purposes				To Be “Well Capitalized” Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2019
June 30, 2020
Total Capital (to Risk-Weighted Assets):
Corporation		$486,454	12.94	%		$300,835	8.00	%	N/A		N/A			$515,264	12.78	%		$322,590	8.00	%	N/A		N/A
Bank	483,783		12.87		300,790		8.00			$375,988	10.00	%	504,621		12.52		322,556		8.00			$403,195	10.00	%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation	459,140		12.21		225,627		6.00		N/A		N/A		481,728		11.95		241,942		6.00		N/A		N/A
Bank	456,469		12.14		225,593		6.00		300,790		8.00		471,085		11.68		241,917		6.00		322,556		8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
Corporation	437,142		11.62		169,220		4.50		N/A		N/A		459,729		11.40		181,457		4.50		N/A		N/A
Bank	456,469		12.14		169,195		4.50		244,392		6.50		471,085		11.68		181,438		4.50		262,076		6.50
Tier 1 Capital (to Average Assets): (1)
Corporation	459,140		8.97		204,810		4.00		N/A		N/A		481,728		8.42		228,756		4.00		N/A		N/A
Bank	456,469		8.92		204,722		4.00		255,903		5.00		471,085		8.24		228,672		4.00		285,839		5.00

December 31, 2018
December 31, 2019
Total Capital (to Risk-Weighted Assets):
Corporation	455,699		12.56		290,146		8.00		N/A		N/A		494,603		12.94		305,728		8.00		N/A		N/A
Bank	453,033		12.49		290,128		8.00		362,660		10.00		490,993		12.85		305,693		8.00		382,116		10.00
Tier 1 Capital (to Risk-Weighted Assets):
Corporation	428,338		11.81		217,609		6.00		N/A		N/A		467,296		12.23		229,296		6.00		N/A		N/A
Bank	425,672		11.74		217,596		6.00		290,128		8.00		463,686		12.13		229,270		6.00		305,693		8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
Corporation	406,340		11.20		163,207		4.50		N/A		N/A		445,298		11.65		171,972		4.50		N/A		N/A
Bank	425,672		11.74		163,197		4.50		235,729		6.50		463,686		12.13		171,952		4.50		248,375		6.50
Tier 1 Capital (to Average Assets): (1)
Corporation	428,338		8.89		192,690		4.00		N/A		N/A		467,296		9.04		206,682		4.00		N/A		N/A
Bank	425,672		8.84		192,652		4.00		240,815		5.00		463,686		8.98		206,596		4.00		258,245		5.00


(1)	Leverage ratio.

In addition to the minimum regulatory capital required for capital adequacy purposes ~~included~~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 ~~required amount of~~Corporation’s capital levels exceeded the minimum regulatory capital requirements plus the capital conservation buffer ~~was 1.875% on January 1, 2018. The capital conservation buffer increased another 0.625% on January 1, 2019, reaching the full requirement of 2.50%.~~at June 30, 2020 and December 31, 2019.

The Bancorp owns the common stock of two capital trusts, which have issued trust preferred securities. In accordance with GAAP, the capital trusts are treated as unconsolidated subsidiaries. At both ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, $22.0 million in trust preferred securities were included in the Tier 1 Capital of the Corporation for regulatory capital reporting purposes pursuant to the FRB’s capital adequacy guidelines.

In response to the recent disruptions in economic conditions caused by the COVID-19 pandemic and the uncertainty of its overall effects on the economy, the FDIC issued an interim final rule (“IFR”) on March 27, 2020 that delays the estimated impact on regulatory capital stemming from the adoption of Topic 326, often referred to as CECL. The amount of capital relief provided in the CECL IFR is an estimate of the approximate difference in ACL under the CECL accounting methodology relative to the

- ~~27-~~31-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

previously used incurred loss accounting methodology for the first two years of the five-year transition period. The cumulative difference at the end of the second year of the transition period will then be phased-in to regulatory capital over a three-year transition period beginning in 2022. As discussed in Note 2, the Corporation has elected this five-year phase-in option.

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 ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the ~~Bancorp~~Corporation had 2 interest rate caps with a total notional amount of $22.7 million that were designated as cash flow hedges to hedge the interest rate risk associated with our variable rate junior subordinated debentures. For both interest rate caps, the ~~Bancorp~~Corporation obtained the right to receive the difference between 3-month LIBOR and a 4.5% strike. The caps mature in November and December of 2020.

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the ~~Bank~~Corporation had 2 interest rate swap contracts with a total notional amount of $60.0 million that were designated as cash flow hedges to hedge the interest rate risk associated with short-term variable rate FHLB advances. The interest rate swaps mature in 2021 and 2023.

As of ~~September~~June 30, ~~2019 and December 31, 2018,~~2020, the ~~Bank~~Corporation had 31 interest rate floor contract, compared to three interest rate floor contracts ~~with a~~as of December 31, 2019. The total notional amount of the interest rate floor contracts were $100.0 million and $300.0 million, ~~that~~respectively, as of June 30, 2020 and December 31, 2019. These contracts were designated as cash flow hedges to hedge the interest rate risk associated with a pool of variable rate commercial loans. The ~~Bank~~Corporation obtained the right to receive the difference between 1-month LIBOR and a 1.0% strike for each of the interest rate floors. During the six months ended June 30, 2020, 2 interest rate floor contracts matured. The ~~floors mature~~remaining floor matures in September of 2020.

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 has entered 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 ~~we enter~~the Corporation enters into an interest rate swap contract with a commercial loan borrower, weit simultaneously ~~enter~~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. ~~We retain~~The Corporation retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Washington Trust had interest rate swap contracts with commercial loan borrowers with notional amounts of ~~$729.9~~$958.6 million and ~~$648.0~~$813.5 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.

- 32-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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

~~- 28-~~

~~Condensed Notes to Unaudited Consolidated Financial Statements – (continued)~~

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 ~~September~~June 30, ~~2019,~~2020, the notional amounts of risk participation-out agreements and risk participation-in agreements were ~~$44.5~~$60.7 million and ~~$73.0~~$93.1 million, respectively, compared to ~~$57.3~~$61.2 million and ~~$46.5~~$72.9 million, respectively, as of December 31, ~~2018.~~2019.

~~Foreign Exchange Contracts~~

Foreign exchange contracts represent contractual commitments to buy or sell a foreign currency on a future date at a specified price. The Corporation uses these foreign exchange contracts on a limited basis to reduce its exposure to fluctuations in currency exchange rates associated with a commercial loan that is denominated in a foreign currency. These derivatives are not designated as hedges and therefore changes in fair value are recognized in earnings. The changes in fair value on the foreign exchange contracts substantially offset the foreign currency translation gains and losses on the related commercial loan.

~~As of September 30, 2019 and December 31, 2018, the notional amount of foreign exchange contracts was $2.6 million and $2.8 million, respectively.~~

Mortgage Loan Commitments

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

As of ~~September~~June 30, ~~2019,~~2020, the notional amounts of interest rate lock commitments and forward sale commitments were ~~$84.8~~$203.5 million and ~~$156.6~~$291.7 million, respectively, compared to $~~30.8~~51.4 million and $~~62.0~~94.8 million, respectively, as of December 31, ~~2018.~~2019.

- ~~29-~~33-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the fair values of derivative instruments in the ~~Corporation’s~~ Unaudited Consolidated Balance Sheets:


(Dollars in thousands)	Asset Derivatives					Liability Derivatives					Derivative Assets					Derivative Liabilities
		Fair Value					Fair Value					Fair Value					Fair Value
	Balance Sheet Location	Sep 30, 2019		Dec 31, 2018		Balance Sheet Location	Sep 30, 2019		Dec 31, 2018		Balance Sheet Location	Jun 30, 2020		Dec 31, 2019		Balance Sheet Location	Jun 30, 2020		Dec 31, 2019
Derivatives Designated as Cash Flow Hedging Instruments:
Interest rate risk management contracts:
Interest rate caps	Other assets		$—		$20	Other liabilities		$—		$—	Other assets		$—		$—	Other liabilities		$—		$—
Interest rate swaps	Other assets	2		903		Other liabilities	1,000		—		Other assets	—		—		Other liabilities	2,503		730
Interest rate floors	Other assets	69		37		Other liabilities	—		—		Other assets	212		3		Other liabilities	—		—
Derivatives not Designated as Hedging Instruments:
Loan related derivative contracts:
Interest rate swaps with customers	Other assets	37,765		5,340		Other liabilities	80		7,719		Other assets	90,122		27,736		Other liabilities	1		358
Mirror swaps with counterparties	Other assets	80		7,592		Other liabilities	37,913		5,392		Other assets	—		351		Other liabilities	90,534		27,819
Risk participation agreements	Other assets	1		—		Other liabilities	3		—		Other assets	27		1		Other liabilities	3		1
Foreign exchange contracts	Other assets	6		—		Other liabilities	—		7
Forward loan commitments:
Mortgage loan commitments:
Interest rate lock commitments	Other assets	1,762		806		Other liabilities	1		—		Other assets	8,381		1,097		Other liabilities	—		—
Forward sale commitments	Other assets	393		—		Other liabilities	977		816		Other assets	9		30		Other liabilities	2,545		827
Gross amounts		40,078		14,698			39,974		13,934			98,751		29,218			95,586		29,735
Less amounts offset in Consolidated Balance Sheets (1)		157		10,732			157		10,732			212		354			212		354
Net amounts presented in Consolidated Balance Sheets		39,921		3,966			39,817		3,202			98,539		28,864			95,374		29,381
Less collateral pledged (2)		—		—			37,695		1,460			—		—			54,041		27,105
Net amounts			$39,921		$3,966			$2,122		$1,742			$98,539		$28,864			$41,333		$2,276


(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 tables present the effect of derivative instruments in the ~~Corporation’s~~ Unaudited Consolidated Statements of Changes in Shareholders’ Equity and Unaudited Consolidated Statements of Income:


(Dollars in thousands)	Gain (Loss) Recognized in Other Comprehensive Income, Net of Tax											Gain (Loss) Recognized in Other Comprehensive Income, Net of Tax
	Three Months						Nine Months					Three Months						Six Months
Periods ended September 30,	2019			2018			2019			2018
Periods ended June 30,												2020			2019			2020			2019
Derivatives Designated as Cash Flow Hedging Instruments:
Interest rate risk management contracts:
Interest rate caps		$18			$17			$32			$66		$24			$14			$46			$14
Interest rate swaps	(211		)	189			(1,442		)	1,322		1			(765		)	(1,323		)	(1,231		)
Interest rate floors	22			(51		)	175			21		(17		)	129			235			153
Total		($171	)		$155			($1,235	)		$1,409		$8			($622	)		($1,042	)		($1,064	)

For derivatives designated as cash flow hedging instruments, see Note 15 for additional disclosure pertaining to the amounts and location of reclassifications from accumulated other comprehensive income into earnings.

- ~~30-~~34-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


(Dollars in thousands)		Amount of Gain (Loss) Recognized in Income on Derivatives													Amount of Gain (Loss) Recognized in Income on Derivatives
		Three Months						Nine Months							Three Months						Six Months
Periods ended September 30,	Statement of Income Location	2019			2018			2019			2018
Periods ended June 30,														Statement of Income Location	2020			2019			2020			2019
Derivatives not Designated as Hedging Instruments:														Derivatives not Designated as Hedging Instruments:
Loan related derivative contracts:
Interest rate swaps with customers	Loan related derivative income		$12,284			($3,178	)	39,568			(15,374		)	Loan related derivative income		$7,960			$16,974			$66,491			$27,284
Mirror swaps with counterparties	Loan related derivative income	(11,108		)	3,415			(36,958		)	16,384			Loan related derivative income	(7,964		)	(16,246		)	(64,154		)	(25,850		)
Risk participation agreements	Loan related derivative income	213			25			213			25			Loan related derivative income	103			—			217			—
Foreign exchange contracts	Loan related derivative income	18			16			54			52			Loan related derivative income	—			18			—			36
Forward loan commitments:
Mortgage loan commitments:
Interest rate lock commitments	Mortgage banking revenues	(340		)	(504		)		$955			($327	)	Mortgage banking revenues	3,548			610			7,284			1,295
Forward sale commitments	Mortgage banking revenues	(101		)	316			(1,969		)	1,552			Mortgage banking revenues	(2,356		)	(1,439		)	(5,990		)	(1,868		)
Total			$966			$90			$1,863			$2,312				$1,291			($83	)		$3,848			$897

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 / impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets.

Fair value is a market-based measurement, not an entity-specific measurement. Fair value measurements are determined based on the assumptions the market participants would use in pricing the asset or liability. In addition, GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Corporation’s market assumptions. These two types of inputs have created the following fair value hierarchy:


•	Level 1 – Quoted prices for identical assets or liabilities in active markets.


•	Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.


•	Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in the markets and which reflect the Corporation’s market assumptions.

Fair Value Option Election

GAAP allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation has elected the fair value option for mortgage loans held for sale to better match changes in fair value of the loans with changes in the fair value of the forward sale commitment contracts used to economically hedge them.

The following table presents a summary of mortgage loans held for sale accounted for under the fair value option:


(Dollars in thousands)	September 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019
Aggregate fair value		$44,657		$20,996		$43,997		$27,833
Aggregate principal balance	43,696		20,498		42,296		27,168
Difference between fair value and principal balance		$961		$498		$1,701		$665

Changes in fair value of mortgage loans held for sale accounted for under the fair value option election amounted to ~~a decrease~~increases of ~~$82~~$149 thousand and ~~an increase of $462 thousand~~$1.0 million, respectively, in the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, respectively,~~2020, compared to increases of

- ~~31-~~35-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

~~to decreases of $352~~$679 thousand and ~~$240~~$544 thousand, respectively, in the three and ~~nine~~six months ended ~~September~~June 30, ~~2018, respectively.~~2019. These amounts were partially offset in earnings by the changes in fair value of forward sale commitments used to economically hedge them. The changes in fair value are reported as a component of mortgage banking revenues in the Unaudited Consolidated Statements of Income.

There were no mortgage loans held for sale 90 days or more past due as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

Valuation Techniques

Debt Securities

Available for sale debt securities are recorded at fair value on a recurring basis. When available, the Corporation uses quoted market prices to determine the fair value of debt securities; such items are classified as Level 1. There were no Level 1 debt securities held at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

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, obligations of states and political subdivisions, individual name issuer trust preferred debt securities and corporate bonds.

Debt securities not actively traded whose fair value is determined through the use of cash flows utilizing inputs that are unobservable are classified as Level 3. There were no Level 3 debt securities held at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

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 / Impaired Loans

The fair value of collateral dependent loans that are individually analyzed or were previously deemed ~~to be~~ impaired 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 for which repayment is ~~dependent on~~to be provided substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral dependent loans for which repayment is ~~dependent on~~to be provided substantially through the operation of the collateral, such as accruing ~~troubled debt restructured loans,~~TDRs, estimated costs to sell are not incorporated into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the ~~property.~~collateral. Internal valuations ~~are~~may be utilized to determine the fair value of other business assets. Collateraldependent individually analyzed / impaired loans are categorized as Level 3.

Property Acquired Through Foreclosure or Repossession

Property acquired through foreclosure or repossession included in other assets in the Unaudited Consolidated Balance Sheets is adjusted to fair value less costs to sell upon transfer out of loans through a charge to allowance for ~~loan losses.~~credit losses on loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Such subsequent valuation charges are charged through earnings. Fair value is generally based upon appraised values of the collateral. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.

Derivatives

Interest rate cap, swap and floor contracts are traded in over-the-counter markets where quoted market prices are not readily available. Fair value measurements are determined using independent pricing models that utilize primarily market observable inputs, such as swap rates of different maturities and LIBOR rates. The Corporation also 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. Although the Corporation has determined that the majority of the inputs used to value its interest rate swap, cap and floor contracts fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with interest rate contracts and risk participation agreements utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Corporation and its counterparties. However, as of June 30, 2020 and December 31, 2019, the Corporation has assessed the significance of the impact of the credit

- ~~32-~~36-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

~~However, as of September 30, 2019 and December 31, 2018, 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.

~~Contingent Consideration Liability~~

A contingent consideration liability was recognized upon the completion of the Halsey Associates, Inc. acquisition on August 1, 2015 representing the estimated present value of future earn-outs to be paid based on the future revenue growth of the acquired business during the five-year period following the acquisition.

The fair value measurement was based upon unobservable inputs; therefore, the contingent liability was classified within Level 3 of the fair value hierarchy. The unobservable inputs included probability estimates regarding the likelihood of achieving revenue growth targets and the discount rates utilized the discounted cash flow calculations applied to the estimated earn-outs to be paid. The contingent consideration liability was remeasured to fair value at each reporting period taking into consideration changes in those unobservable inputs. Changes in the fair value of the contingent consideration liability were included in noninterest expenses in the Consolidated Statements of Income.

One of the two earn-out periods associated with this contingent consideration liability ended December 31, 2017 and a payment of $1.2 million was made by the Corporation in the first quarter of 2018. The likelihood of payout on the remaining earn-out period had been deemed remote and as a result the fair value of the contingent consideration liability was reduced to 0 in the fourth quarter of 2018. There have been no changes to the fair value of the contingent consideration liability for the three and nine months ended September 30, 2019.

~~- 33-~~

~~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)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2019	Total				Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total				Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2020									Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:									Total				Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale debt securities:
Obligations of U.S. government-sponsored enterprises		$197,324		$—		$197,324		$—		$156,638		$—		$156,638		$—
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	664,905		—		664,905		—		761,056		—		761,056		—
Individual name issuer trust preferred debt securities	12,421		—		12,421		—		11,729		—		11,729		—
Corporate bonds	12,370		—		12,370		—		9,023		—		9,023		—
Mortgage loans held for sale	44,657		—		44,657		—		43,997		—		43,997		—
Derivative assets	39,921		—		39,921		—		98,539		—		98,539		—
Total assets at fair value on a recurring basis		$971,598		$—		$971,598		$—		$1,080,982		$—		$1,080,982		$—
Liabilities:
Derivative liabilities		$39,817		$—		$39,817		$—		$95,374		$—		$95,374		$—
Total liabilities at fair value on a recurring basis		$39,817		$—		$39,817		$—		$95,374		$—		$95,374		$—

(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, 2018
Assets:
Available for sale debt securities:
Obligations of U.S. government-sponsored enterprises
$242,683

$—

$242,683

$—
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 660,793
—
660,793
—
Obligations of states and political subdivisions 937
—
937
—
Individual name issuer trust preferred debt securities 11,772
—
11,772
—
Corporate bonds 11,625
—
11,625
—
Mortgage loans held for sale 20,996
—
20,996
—
Derivative assets 3,966
—
3,966
—
Total assets at fair value on a recurring basis
$952,772

$—

$952,772

$—
Liabilities:
Derivative liabilities
$3,202

$—

$3,202

$—
Total liabilities at fair value on a recurring basis
$3,202

$—

$3,202

$—

- 37-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)



(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, 2019	Total				Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available for sale debt securities:
Obligations of U.S. government-sponsored enterprises		$157,648		$—		$157,648		$—
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	719,080		—		719,080		—
Individual name issuer trust preferred debt securities	12,579		—		12,579		—
Corporate bonds	10,183		—		10,183		—
Mortgage loans held for sale	27,833		—		27,833		—
Derivative assets	28,864		—		28,864		—
Total assets at fair value on a recurring basis		$956,187		$—		$956,187		$—
Liabilities:
Derivative liabilities		$29,381		$—		$29,381		$—
Total liabilities at fair value on a recurring basis		$29,381		$—		$29,381		$—

It is the Corporation’s policy to review and reflect transfers between Levels as of the financial statement reporting date. There were no transfers in and/or out of Level 1, 2 or 3 during the nine months ended September 30, 2019 and 2018.

~~- 34-~~

~~Condensed Notes to Unaudited Consolidated Financial Statements – (continued)~~

Items Recorded at Fair Value on a Nonrecurring Basis

The following table presents the carrying value of assets held at ~~September~~June 30, ~~2019,~~2020, which were written down to fair value during the ~~nine~~six months ended ~~September~~June 30, ~~2019:~~2020:


(Dollars in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
(Dollars in thousands)	Total						Significant Unobservable Inputs (Level 3)		Total				Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:					Significant Other Observable Inputs (Level 2)
Collateral dependent impaired loans		$1,451		$—		$—		$1,451
Property acquired through foreclosure or repossession	2,000		—		—		2,000
Collateral dependent individually analyzed CRE loan										$431		$—		$—		$431
Total assets at fair value on a nonrecurring basis		$3,451		$—		$—		$3,451		$431		$—		$—		$431

The ~~allowance for loan losses~~ACL on all collateral dependent ~~impaired~~individually analyzed loans amounted to ~~$221~~$233 thousand at ~~September~~June 30, ~~2019.~~2020.

The following table presents the carrying value of assets held at December 31, ~~2018,~~2019, which were written down to fair value during the year ended December 31, ~~2018:~~2019:

(Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets
(Level 1) Significant Other Observable Inputs
(Level 2) Significant Unobservable Inputs
(Level 3)

Assets:
Collateral dependent impaired loans
$883

$—

$—

$883
Property acquired through foreclosure or repossession 2,142
—
—
2,142
Total assets at fair value on a nonrecurring basis
$3,025

$—

$—

$3,025



(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)
(Dollars in thousands)	Total				Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Collateral dependent impaired loans		$1,448		$—		$—		$1,448
Property acquired through foreclosure or repossession	1,109		—		—		1,109
Total assets at fair value on a nonrecurring basis		$2,557		$—		$—		$2,557

The allowance for loan losses on all collateral dependent impaired loans amounted to ~~$24~~$871 thousand at December 31, ~~2018.~~2019.

- 38-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following tables present valuation techniques and unobservable inputs for assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value:

(Dollars in thousands) Fair Value Valuation Technique Unobservable Input
Range of Inputs Utilized
(Weighted Average)
September 30, 2019
Collateral dependent impaired loans
$1,451
Appraisals of collateral Discount for costs to sell 0% - 18% (13%)
Appraisal adjustments (1) 0% - 100% (19%)
Property acquired through foreclosure or repossession
$2,000
Appraisals of collateral Discount for costs to sell 20%
Appraisal adjustments (1) 13%



(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Range of Inputs Utilized (Weighted Average)
June 30, 2020	Fair Value		Valuation Technique	Unobservable Input	Range of Inputs Utilized (Weighted Average)
Collateral dependent individually analyzed CRE loan		$431	Appraisals of collateral	Discount for costs to sell	0% - 20% (12%)
				Appraisal adjustments (1)	0% - 100% (43%)


(1)	Management may adjust appraisal values to reflect market value declines or other discounts resulting from its knowledge of the property.

~~- 35-~~

~~Condensed Notes to Unaudited Consolidated Financial Statements – (continued)~~

(Dollars in thousands)

Fair Value

Valuation Technique

Unobservable Input

Range of Inputs Utilized

(Weighted Average)

Fair Value

Valuation Technique

Unobservable Input

Range of Inputs Utilized

(Weighted Average)

December 31, 2018

December 31, 2019

Fair Value

Valuation Technique

Unobservable Input

Range of Inputs Utilized

(Weighted Average)

Collateral dependent impaired loans

$883

Appraisals of collateral

Discount for costs to sell

0% - 10% (10%)

Appraisal adjustments (1)

0% - 100% (2%)

Appraisal adjustments (1)

0% - 100% (67%)

Property acquired through foreclosure or repossession

$2,142

Appraisals of collateral

Discount for costs to sell

13%

$1,109

Appraisals of collateral

Discount for costs to sell

12%

Appraisal adjustments (1)

12% - 28% (20%)

Appraisal adjustments (1)

22%


(1)	Management may adjust appraisal values to reflect market value declines or other discounts resulting from its knowledge of the property.

Valuation of Financial Instruments

The estimated fair values and related carrying amounts for financial instruments for which fair value is only disclosed are presented below as of the periods indicated. The tables exclude financial instruments for which the carrying value approximates fair value such as cash and cash equivalents, FHLB stock, accrued interest receivable, bank-owned life insurance, non-maturity deposits and accrued interest payable.

(Dollars in thousands)
September 30, 2019 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 loan losses
$3,751,109

$3,749,391

$—

$—

$3,749,391

Financial Liabilities:
Time deposits
$1,223,662

$1,239,646

$—

$1,239,646

$—
FHLB advances 956,786
962,160
—
962,160
—
Junior subordinated debentures 22,681
19,265
—
19,265
—


(Dollars in thousands)
December 31, 2018	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)
June 30, 2020											Carrying Amount		Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets:
Held to maturity debt securities		$10,415		$10,316		$—		$10,316		$—
Loans, net of allowance for loan losses	3,653,288		3,598,025		—		—		3,598,025
Loans, net of allowance for credit losses on loans												$4,246,200		$4,249,310		$—		$—		$4,249,310

Financial Liabilities:
Time deposits		$1,255,108		$1,269,433		$—		$1,269,433		$—		$1,257,382		$1,267,644		$—		$1,267,644		$—
FHLB advances	950,722		950,691		—		950,691		—		1,005,051		1,017,218		—		1,017,218		—
Junior subordinated debentures	22,681		19,226		—		19,226		—		22,681		18,077		—		18,077		—

- ~~36-~~39-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)



(Dollars in thousands)
December 31, 2019	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 loan losses		$3,865,985		$3,869,192		$—		$—		$3,869,192

Financial Liabilities:
Time deposits		$1,069,323		$1,082,830		$—		$1,082,830		$—
FHLB advances	1,141,464		1,145,242		—		1,145,242		—
Junior subordinated debentures	22,681		19,628		—		19,628		—

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 ~~which~~that are from contracts with customers within the scope of Topic 606. As shown below, a substantial portion of our revenues are specifically excluded from the scope of Topic 606.


For the three months ended September 30,	2019				2018
For the three months ended June 30,									2020				2019
(Dollars in thousands)	As reported in Consolidated Statements of Income		Revenue from contracts in scope of Topic 606		As reported in Consolidated Statements of Income		Revenue from contracts in scope of Topic 606		Revenue (1)		ASC 606 Revenue (2)		Revenue (1)			ASC 606 Revenue (2)
Net interest income		$32,978		$—		$33,449		$—		$30,945		$—		$33,858			$—
Noninterest income:
Asset-based wealth management revenues	9,013		9,013		9,322		9,322		8,156		8,156		9,141			9,141
Transaction-based wealth management revenues	140		140		132		132		449		449		408			408
Total wealth management revenues	9,153		9,153		9,454		9,454		8,605		8,605		9,549			9,549
Mortgage banking revenues	4,840		—		2,624		—		14,851		—		3,640			—
Card interchange fees	1,099		1,099		983		983		1,031		1,031		1,018			1,018
Service charges on deposit accounts	939		939		885		885		517		517		929			929
Loan related derivative income	1,407		—		278		—		99		—		746			—
Income from bank-owned life insurance	569		—		572		—		791		—		566			—
Net realized losses on securities	—		—		—		—		—		—		(80		)	—
Other income	335		323		419		419		426		288		385			371
Total noninterest income	18,342		11,514		15,215		11,741		26,320		10,441		16,753			11,867
Total revenues		$51,320		$11,514		$48,664		$11,741		$57,265		$10,441		$50,611			$11,867

For the nine months ended September 30, 2019 2018
(Dollars in thousands) As reported in Consolidated Statements of Income Revenue from contracts in scope of Topic 606 As reported in Consolidated Statements of Income Revenue from contracts in scope of Topic 606
Net interest income
$101,420

$—

$98,412

$—
Noninterest income:
Asset-based wealth management revenues 27,075
27,075
28,413
28,413
Transaction-based wealth management revenues 879
879
916
916
Total wealth management revenues 27,954
27,954
29,329
29,329
Mortgage banking revenues 11,126
—
8,403
—
Card interchange fees 3,114
3,114
2,791
2,791
Service charges on deposit accounts 2,743
2,743
2,651
2,651
Loan related derivative income 2,877
—
1,087
—
Income from bank-owned life insurance 1,784
—
1,624
—
Net realized losses on securities (80 ) —
—
—
Other income 944
917
1,066
1,051
Total noninterest income 50,462
34,728
46,951
35,822
Total revenues
$151,882

$34,728

$145,363

$35,822


(1)	As reported in the Consolidated Statements of Income.


(2)	Revenue from contracts with customers in scope of ASC 606.

- ~~37-~~40-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)




For the six months ended June 30,	2020				2019
(Dollars in thousands)	Revenue (1)		ASC 606 Revenue (2)		Revenue (1)			ASC 606 Revenue (2)
Net interest income		$63,547		$—		$68,442			$—
Noninterest income:
Asset-based wealth management revenues	16,511		16,511		18,062			18,062
Transaction-based wealth management revenues	783		783		739			739
Total wealth management revenues	17,294		17,294		18,801			18,801
Mortgage banking revenues	20,947		—		6,286			—
Card interchange fees	1,978		1,978		2,015			2,015
Service charges on deposit accounts	1,377		1,377		1,804			1,804
Loan related derivative income	2,554		—		1,470			—
Income from bank-owned life insurance	1,355		—		1,215			—
Net realized losses on securities	—		—		(80		)	—
Other income	742		535		609			595
Total noninterest income	46,247		21,184		32,120			23,215
Total revenues		$109,794		$21,184		$100,562			$23,215


(1)	As reported in the Consolidated Statements of Income.


(2)	Revenue from contracts with customers in scope of ASC 606.

The Corporation recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), 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 financial planning fees, tax preparation fees, commissions and other service fees. Fee revenue from service charges on deposit accounts represent service charges assessed to customers who hold deposit accounts at the Bank.

The following table presents revenue from contracts with customers based on the timing of revenue recognition:


(Dollars in thousands)	Three Months				Nine Months				Three Months				Six Months
Periods ended September 30,	2019		2018		2019		2018
Periods ended June 30,									2020		2019		2020		2019
Revenue recognized at a point in time:
Card interchange fees		$1,099		$983		$3,114		$2,791		$1,031		$1,018		$1,978		$2,015
Service charges on deposit accounts	728		670		2,109		2,045		374		719		1,041		1,381
Other income	268		258		771		732		254		324		454		503
Revenue recognized over time:
Wealth management revenues	9,153		9,454		27,954		29,329		8,605		9,549		17,294		18,801
Service charges on deposit accounts	211		215		634		606		143		210		336		423
Other income	55		161		146		319		34		47		81		92
Total revenues from contracts in scope of Topic 606		$11,514		$11,741		$34,728		$35,822		$10,441		$11,867		$21,184		$23,215

- 41-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Receivables for revenue from contracts with customers primarily consist of amounts due ~~from customers~~ for wealth management services performed for which the Corporation’s performance obligations have been fully satisfied. Receivables amounted to ~~$4.8~~$4.2 million at ~~both September~~June 30, ~~2019 and~~2020, compared to $4.5 million at December 31, ~~2018~~2019 and were included in other assets in the Unaudited Consolidated Balance Sheets.

Deferred revenues, which are considered contract liabilities under Topic 606, represent advance consideration received from customers for which the Corporation has a remaining performance obligation to fulfill. Contract liabilities are recognized as revenue over the life of the contract as the performance obligations are satisfied. The balances of contract liabilities were insignificant at both ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 and were included in other liabilities in the Unaudited Consolidated Balance Sheets.

For commissions and incentives that are in-scope of Topic 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 ~~$683 thousand~~$1.0 million at ~~September~~June 30, ~~2019,~~2020, compared to ~~$458~~$905 thousand at December 31, ~~2018~~2019 and were included in other assets in the Unaudited Consolidated Balance Sheets.

~~- 38-~~

~~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 qualified pension plan is funded on a current basis, in compliance with the requirements of ERISA.

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								Qualified Pension Plan												Non-Qualified Retirement Plans
	Three Months						Nine Months						Three Months				Nine Months				Three Months						Six Months						Three Months				Six Months
Periods ended September 30,	2019			2018			2019			2018			2019		2018		2019		2018
Periods ended June 30,																					2020			2019			2020			2019			2020		2019		2020		2019
Net Periodic Benefit Cost:
Service cost (1)		$510			$561			$1,528			$1,683			$31		$27		$94		$81		$541			$509			$1,082			$1,018			$42		$32		$85		$63
Interest cost (2)	741			679			2,225			2,036			140		119		422		356		627			742			1,253			1,484			117		141		233		282
Expected return on plan assets (2)	(1,124		)	(1,318		)	(3,371		)	(3,954		)	—		—		—		—		(1,134		)	(1,123		)	(2,269		)	(2,247		)	—		—		—		—
Amortization of prior service credit (2)	(4		)	(6		)	(12		)	(17		)	—		—		—		—		—			(4		)	—			(8		)	—		—		—		—
Recognized net actuarial loss (2)	198			374			594			1,122			104		103		307		308		395			198			791			396			140		101		280		203
Net periodic benefit cost		$321			$290			$964			$870			$275		$249		$823		$745		$429			$322			$857			$643			$299		$274		$598		$548


(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		Qualified Pension Plan		Non-Qualified Retirement Plans
For the nine months ended September 30,	2019	2018		2019	2018
For the six months ended June 30,						2020	2019	2020	2019
Measurement date	Dec 31, 2018	Dec 31, 2017		Dec 31, 2018	Dec 31, 2017	Dec 31, 2019	Dec 31, 2018	Dec 31, 2019	Dec 31, 2018
Equivalent single discount rate for benefit obligations	4.38%	3.69%		4.28%	3.58%	3.42%	4.38%	3.30%	4.28%
Equivalent single discount rate for service cost	4.44	3.76	��	4.48	3.79	3.54	4.44	3.62	4.48
Equivalent single discount rate for interest cost	4.12	3.42		3.98	3.22	3.07	4.12	2.93	3.98
Expected long-term return on plan assets	5.75	6.75		N/A	N/A	5.75	5.75	N/A	N/A
Rate of compensation increase	3.75	3.75		3.75	3.75	3.75	3.75	3.75	3.75

- ~~39-~~42-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 13 - Share-Based Compensation Arrangements

During the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, the Corporation granted performance share unit awards and nonvested share unit awards.

Performance share awards were granted to certain ~~executive and non-executive officers~~key employees of the Corporation to provide them with the opportunity to earn shares of common stock of the Corporation. The performance share awards were valued at fair market value as determined by the closing price of the Corporation’s common stock on the award date. The weighted average fair value of the performance share awards was ~~$52.83.~~$34.22. The number of shares to be vested will be contingent upon the Corporation’s attainment of certain performance measures as detailed in the performance share award agreements. The performance share awards will be earned over a 3-year performance period and the current performance assumption ~~results in 43,360~~estimates that 65,632 shares ~~being~~will be earned.

The Corporation granted to certain key employees and non-executive ~~officers and~~ directors ~~10,870~~11,765 nonvested share units, with 3-year cliff vesting. The weighted average grant date fair value of the nonvested share units was ~~$51.43.~~$39.56.

Note 14 - Business Segments

Washington Trust segregates financial information in assessing its results among its Commercial Banking and Wealth Management Services operating segments. The amounts in the Corporate unit include activity not related to the segments.

Management uses certain methodologies to allocate income and expenses to the business lines. The methodologies are periodically reviewed and revised. Results may be restated, when necessary, to reflect changes in organizational structure or allocation methodology. A funds transfer pricing (“FTP”) methodology is used to assign interest income and interest expense to each interest-earning asset and interest-bearing liability on a matched maturity funding basis. The matched maturity funding concept considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated. Loans are assigned a FTP rate for funds used and deposits are assigned a FTP rate for funds provided. Certain indirect expenses are allocated to segments. These include ~~support unit~~indirect expenses such as technology, operations and other support functions.

Commercial Banking

The Commercial Banking segment includes commercial, residential and consumer lending activities; mortgage banking activities; deposit generation; cash management activities; and direct banking activities, which include the operation of ~~ATMs,~~automated teller machines (“ATMs”), telephone and internet banking services and customer support and sales.

Wealth Management Services

Wealth Management Services includes investment management; financial planning; personal trust and estate services, including services as trustee, personal representative, custodian and guardian; and settlement of decedents’ estates. Institutional trust services are also provided, including fiduciary services.

Corporate

Corporate includes the Treasury Unit, which is responsible for managing the wholesale investment portfolio and wholesale funding needs. It also includes income from bank-owned life insurance (“BOLI”), as well as administrative and executive expenses not allocated to the operating segments and the residual impact of methodology allocations such as FTP offsets.

- ~~40-~~43-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the statement of operations and total assets for Washington Trust’s reportable segments:



(Dollars in thousands)	Commercial Banking				Wealth Management Services						Corporate				Consolidated Total				Commercial Banking				Wealth Management Services						Corporate					Consolidated Total
Three months ended September 30,	2019		2018		2019			2018			2019		2018		2019		2018
Three months ended June 30,																			2020		2019		2020			2019			2020			2019		2020		2019
Net interest income (expense)		$28,515		$27,036		($114	)		($90	)		$4,577		$6,503		$32,978		$33,449		$32,580		$27,867		($26	)		($120	)		($1,609	)		$6,111		$30,945		$33,858
Provision for loan losses	400		350		—			—			—		—		400		350
Net interest income (expense) after provision for loan losses	28,115		26,686		(114		)	(90		)	4,577		6,503		32,578		33,099
Provision for credit losses																			2,200		525		—			—			—			—		2,200		525
Net interest income (expense) after provision for credit losses																			30,380		27,342		(26		)	(120		)	(1,609		)	6,111		28,745		33,333
Noninterest income	8,607		5,174		9,153			9,454			582		587		18,342		15,215		16,910		6,690		8,605			9,557			805			506		26,320		16,753
Noninterest expenses:
Depreciation and amortization expense	642		654		360			371			40		44		1,042		1,069		611		672		354			363			39			39		1,004		1,074
Other noninterest expenses	16,255		15,599		6,217			6,194			3,356		3,200		25,828		24,993		17,615		16,660		6,225			6,937			3,634			3,480		27,474		27,077
Total noninterest expenses	16,897		16,253		6,577			6,565			3,396		3,244		26,870		26,062		18,226		17,332		6,579			7,300			3,673			3,519		28,478		28,151
Income before income taxes	19,825		15,607		2,462			2,799			1,763		3,846		24,050		22,252
Income tax expense	4,347		3,344		646			710			243		687		5,236		4,741
Net income		$15,478		$12,263		$1,816			$2,089			$1,520		$3,159		$18,814		$17,511
Income (loss) before income taxes																			29,064		16,700		2,000			2,137			(4,477		)	3,098		26,587		21,935
Income tax expense (benefit)																			6,177		3,603		457			582			(1,087		)	477		5,547		4,662
Net income (loss)																				$22,887		$13,097		$1,543			$1,555			($3,390	)		$2,621		$21,040		$17,273

Total assets at period end		$3,994,458		$3,694,991		$78,812			$69,494			$1,125,608		$1,006,187		$5,198,878		$4,770,672		$4,579,720		$3,916,915		$74,803			$77,757			$1,222,437			$1,195,000		$5,876,960		$5,189,672
Expenditures for long-lived assets	662		612		87			14			48		19		797		645		261		297		13			—			23			19		297		316



(Dollars in thousands)	Commercial Banking				Wealth Management Services						Corporate				Consolidated Total				Commercial Banking				Wealth Management Services						Corporate					Consolidated Total
Nine months ended September 30,	2019		2018		2019			2018			2019		2018		2019		2018
Six months ended June 30,																			2020		2019		2020			2019			2020			2019		2020		2019
Net interest income (expense)		$83,684		$79,656		($361	)		($225	)		$18,097		$18,981		$101,420		$98,412		$61,590		$55,169		($93	)		($247	)		$2,050			$13,520		$63,547		$68,442
Provision for loan losses	1,575		750		—			—			—		—		1,575		750
Provision for credit losses																			9,236		1,175		—			—			—			—		9,236		1,175
Net interest income (expense) after provision for loan losses	82,109		78,906		(361		)	(225		)	18,097		18,981		99,845		97,662		52,354		53,994		(93		)	(247		)	2,050			13,520		54,311		67,267
Noninterest income	20,753		15,947		27,961			29,329			1,748		1,675		50,462		46,951		27,575		12,146		17,294			18,808			1,378			1,166		46,247		32,120
Noninterest expenses:
Depreciation and amortization expense	1,985		1,928		1,089			1,137			118		129		3,192		3,194		1,231		1,342		708			729			78			79		2,017		2,150
Other noninterest expenses	48,676		46,574		19,631			19,986			10,486		9,726		78,793		76,286		36,298		32,421		13,230			13,414			7,386			7,130		56,914		52,965
Total noninterest expenses	50,661		48,502		20,720			21,123			10,604		9,855		81,985		79,480		37,529		33,763		13,938			14,143			7,464			7,209		58,931		55,115
Income before income taxes	52,201		46,351		6,880			7,981			9,241		10,801		68,322		65,133
Income tax expense	11,371		9,834		1,845			2,008			1,524		1,895		14,740		13,737
Net income		$40,830		$36,517		$5,035			$5,973			$7,717		$8,906		$53,582		$51,396
Income (loss) before income taxes																			42,400		32,377		3,263			4,418			(4,036		)	7,477		41,627		44,272
Income tax expense (benefit)																			8,941		7,024		813			1,199			(1,068		)	1,281		8,686		9,504
Net income (loss)																				$33,459		$25,353		$2,450			$3,219			($2,968	)		$6,196		$32,941		$34,768

Total assets at period end		$3,994,458		$3,694,991		$78,812			$69,494			$1,125,608		$1,006,187		$5,198,878		$4,770,672		$4,579,720		$3,916,915		$74,803			$77,757			$1,222,437			$1,195,000		$5,876,960		$5,189,672
Expenditures for long-lived assets	2,259		1,864		379			327			130		129		2,768		2,320		787		1,597		66			292			72			82		925		1,971

- ~~41-~~44-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 15 - Other Comprehensive Income (Loss)

The following tables present the activity in other comprehensive income (loss):

Three months ended September 30, 2019 2018
(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
$3,772

$886

$2,886

($5,924 )
($1,393 )
($4,531 )
Net losses on debt securities reclassified into earnings (1)
—
—
—
—
—
—
Net change in fair value of available for sale debt securities 3,772
886
2,886
(5,924 ) (1,393 ) (4,531 )
Cash flow hedges:
Change in fair value of cash flow hedges (283 ) (66 ) (217 ) (626 ) (148 ) (478 )
Net cash flow hedge losses reclassified into earnings (2)
60
14
46
830
197
633
Net change in fair value of cash flow hedges (223 ) (52 ) (171 ) 204
49
155
Defined benefit plan obligations:
Amortization of net actuarial losses (3)
300
70
230
477
112
365
Amortization of net prior service credits (3)
(4 ) (1 ) (3 ) (6 ) (2 ) (4 )
Net change in defined benefit plan obligations 296
69
227
471
110
361
Total other comprehensive income (loss)
$3,845

$903

$2,942

($5,249 )
($1,234 )
($4,015 )


~~(1)~~	~~The pre-tax amount is reported as net realized losses on securities in the Unaudited Consolidated Statements of Income.~~


~~(2)~~	The pre-tax amounts are included in interest expense on FHLB advances, interest expense on junior subordinated debentures and interest and fees on loans in the Unaudited Consolidated Statements of Income.


~~(3)~~	~~The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income.~~



Nine months ended September 30,	2019									2018
Three months ended June 30,																			2020									2019
(Dollars in thousands)	Pre-tax Amounts			Income Taxes			Net of Tax			Pre-tax Amounts			Income Taxes			Net of Tax			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		$25,985			$6,106			$19,879			($23,605	)		($5,548	)		($18,057	)		($2,364	)		($556	)		($1,808	)		$7,807			$1,835			$5,972
Net losses on debt securities reclassified into earnings (1)	80			19			61			—			—			—			—			—			—			80			19			61
Net change in fair value of available for sale debt securities	26,065			6,125			19,940			(23,605		)	(5,548		)	(18,057		)	(2,364		)	(556		)	(1,808		)	7,887			1,854			6,033
Cash flow hedges:
Change in fair value of cash flow hedges	(1,653		)	(388		)	(1,265		)	632			50			582			(293		)	(69		)	(224		)	(824		)	(194		)	(630		)
Net cash flow hedge losses reclassified into earnings (2)	39			9			30			1,082			255			827
Net cash flow hedge gains reclassified into earnings (2)																			305			73			232			10			2			8
Net change in fair value of cash flow hedges	(1,614		)	(379		)	(1,235		)	1,714			305			1,409			12			4			8			(814		)	(192		)	(622		)
Defined benefit plan obligations:
Amortization of net actuarial losses (3)	900			211			689			1,430			337			1,093			535			126			409			300			71			229
Amortization of net prior service credits (3)	(12		)	(3		)	(9		)	(17		)	(5		)	(12		)	—			—			—			(4		)	(1		)	(3		)
Net change in defined benefit plan obligations	888			208			680			1,413			332			1,081			535			126			409			296			70			226
Total other comprehensive (loss) income		$25,339			$5,954			$19,385			($20,478	)		($4,911	)		($15,567	)		($1,817	)		($426	)		($1,391	)		$7,369			$1,732			$5,637


(1)	The pre-tax amount is reported asin net realized losses on securities in the Unaudited Consolidated Statements of Income.


(2)	The pre-tax amounts are included in interest expense on FHLB advances, interest expense on junior subordinated debentures and interest and fees on loans in the Unaudited Consolidated Statements of Income.


(3)	The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income.




Six months ended June 30,	2020									2019
(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		$14,376			$3,378			$10,998			$22,213			$5,220			$16,993
Net losses on debt securities reclassified into earnings (1)	—			—			—			80			19			61
Net change in fair value of available for sale debt securities	14,376			3,378			10,998			22,293			5,239			17,054
Cash flow hedges:
Change in fair value of cash flow hedges	(1,848		)	(434		)	(1,414		)	(1,370		)	(322		)	(1,048		)
Net cash flow hedge gains (losses) reclassified into earnings (2)	485			113			372			(21		)	(5		)	(16		)
Net change in fair value of cash flow hedges	(1,363		)	(321		)	(1,042		)	(1,391		)	(327		)	(1,064		)
Defined benefit plan obligations:
Amortization of net actuarial losses (3)	1,071			252			819			600			141			459
Amortization of net prior service credits (3)	—			—			—			(8		)	(2		)	(6		)
Net change in defined benefit plan obligations	1,071			252			819			592			139			453
Total other comprehensive income		$14,084			$3,309			$10,775			$21,494			$5,051			$16,443


(1)	The pre-tax amount is reported in net realized losses on securities in the Unaudited Consolidated Statements of Income.


(2)	The pre-tax amounts are included in interest expense on FHLB advances, interest expense on junior subordinated debentures and interest and fees on loans in the Unaudited Consolidated Statements of Income.


(3)	The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income.

- ~~42-~~45-

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) Gains on Available For Sale Debt Securities Net Unrealized (Losses) Gains on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total
For the three months ended September 30, 2019
Balance at July 1, 2019
$292

($873 )
($11,285 )
($11,866 )
Other comprehensive income (loss) before reclassifications 2,886
(217 ) —
2,669
Amounts reclassified from accumulated other comprehensive income —
46
227
273
Net other comprehensive income (loss) 2,886
(171 ) 227
2,942
Balance at September 30, 2019
$3,178

($1,044 )
($11,058 )
($8,924 )

(Dollars in thousands) Net Unrealized (Losses) Gains on Available For Sale Debt Securities Net Unrealized Gains (Losses) on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total
For the nine months ended September 30, 2019
Balance at January 1, 2019
($16,762 )
$191

($11,738 )
($28,309 )
Other comprehensive income (loss) before reclassifications 19,879
(1,265 ) —
18,614
Amounts reclassified from accumulated other comprehensive income 61
30
680
771
Net other comprehensive income (loss) 19,940
(1,235 ) 680
19,385
Balance at September 30, 2019
$3,178

($1,044 )
($11,058 )
($8,924 )



(Dollars in thousands)	Net Unrealized Gains (Losses) on Available For Sale Debt Securities			Net Unrealized (Losses) Gains on Cash Flow Hedges			Defined Benefit Pension Plan Adjustment			Total
For the three months ended June 30, 2020				Net Unrealized (Losses) Gains on Cash Flow Hedges			Defined Benefit Pension Plan Adjustment			Total
Balance at March 31, 2020		$16,032			($1,843	)		($13,260	)		$929
Other comprehensive loss before reclassifications	(1,808		)	(224		)	—			(2,032		)
Amounts reclassified from accumulated other comprehensive income	—			232			409			641
Net other comprehensive (loss) income	(1,808		)	8			409			(1,391		)
Balance at June 30, 2020		$14,224			($1,835	)		($12,851	)		($462	)

(Dollars in thousands) Net Unrealized Losses on Available For Sale Debt Securities Net Unrealized Gains on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total
For the three months ended September 30, 2018
Balance at July 1, 2018
($21,060 )
$826

($14,828 )
($35,062 )
Other comprehensive loss before reclassifications (4,531 ) (478 ) —
(5,009 )
Amounts reclassified from accumulated other comprehensive income —
633
361
994
Net other comprehensive (loss) income (4,531 ) 155
361
(4,015 )
Balance at September 30, 2018
($25,591 )
$981

($14,467 )
($39,077 )




(Dollars in thousands)	Net Unrealized Gains on Available For Sale Debt Securities		Net Unrealized (Losses) Gains on Cash Flow Hedges			Defined Benefit Pension Plan Adjustment			Total
For the six months ended June 30, 2020	Net Unrealized Gains on Available For Sale Debt Securities		Net Unrealized (Losses) Gains on Cash Flow Hedges			Defined Benefit Pension Plan Adjustment			Total
Balance at December 31, 2019		$3,226		($793	)		($13,670	)		($11,237	)
Other comprehensive income (loss) before reclassifications	10,998		(1,414		)	—			9,584
Amounts reclassified from accumulated other comprehensive income	—		372			819			1,191
Net other comprehensive income (loss)	10,998		(1,042		)	819			10,775
Balance at June 30, 2020		$14,224		($1,835	)		($12,851	)		($462	)

(Dollars in thousands) Net Unrealized Losses on Available For Sale Debt Securities Net Unrealized (Losses) Gains on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total
For the nine months ended September 30, 2018
Balance at January 1, 2018
($7,534 )
($428 )
($15,548 )
($23,510 )
Other comprehensive (loss) income before reclassifications (18,057 ) 582
—
(17,475 )
Amounts reclassified from accumulated other comprehensive income —
827
1,081
1,908
Net other comprehensive (loss) income (18,057 ) 1,409
1,081
(15,567 )
Balance at September 30, 2018
($25,591 )
$981

($14,467 )
($39,077 )



(Dollars in thousands)	Net Unrealized (Losses) Gains on Available For Sale Debt Securities			Net Unrealized (Losses) Gains on Cash Flow Hedges			Defined Benefit Pension Plan Adjustment			Total
For the three months ended June 30, 2019				Net Unrealized (Losses) Gains on Cash Flow Hedges			Defined Benefit Pension Plan Adjustment			Total
Balance at March 31, 2019		($5,741	)		($251	)		($11,511	)		($17,503	)
Other comprehensive income (loss) before reclassifications	5,972			(630		)	—			5,342
Amounts reclassified from accumulated other comprehensive income	61			8			226			295
Net other comprehensive income (loss)	6,033			(622		)	226			5,637
Balance at June 30, 2019		$292			($873	)		($11,285	)		($11,866	)




(Dollars in thousands)	Net Unrealized (Losses) Gains on Available For Sale Debt Securities			Net Unrealized Gains (Losses) on Cash Flow Hedges			Defined Benefit Pension Plan Adjustment			Total
For the six months ended June 30, 2019				Net Unrealized Gains (Losses) on Cash Flow Hedges			Defined Benefit Pension Plan Adjustment			Total
Balance at December 31, 2018		($16,762	)		$191			($11,738	)		($28,309	)
Other comprehensive income (loss) before reclassifications	16,993			(1,048		)	—			15,945
Amounts reclassified from accumulated other comprehensive income	61			(16		)	453			498
Net other comprehensive income (loss)	17,054			(1,064		)	453			16,443
Balance at June 30, 2019		$292			($873	)		($11,285	)		($11,866	)

- ~~43-~~46-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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						Nine Months						Three Months						Six Months
Periods ended September 30,	2019			2018			2019			2018
Periods ended June 30,													2020			2019			2020			2019
Earnings per common share - basic:
Net income		$18,814			$17,511			$53,582			$51,396			$21,040			$17,273			$32,941			$34,768
Less dividends and undistributed earnings allocated to participating securities	(36		)	(36		)	(105		)	(112		)	(40		)	(35		)	(72		)	(69		)
Net income available to common shareholders		$18,778			$17,475			$53,477			$51,284			$21,000			$17,238			$32,869			$34,699
Weighted average common shares	17,338			17,283			17,324			17,263			17,257			17,330			17,301			17,317
Earnings per common share - basic		$1.08			$1.01			$3.09			$2.97			$1.22			$0.99			$1.90			$2.00
Earnings per common share - diluted:
Net income		$18,814			$17,511			$53,582			$51,396			$21,040			$17,273			$32,941			$34,768
Less dividends and undistributed earnings allocated to participating securities	(36		)	(36		)	(105		)	(112		)	(40		)	(35		)	(72		)	(69		)
Net income available to common shareholders		$18,778			$17,475			$53,477			$51,284			$21,000			$17,238			$32,869			$34,699
Weighted average common shares	17,338			17,283			17,324			17,263			17,257			17,330			17,301			17,317
Dilutive effect of common stock equivalents	76			99			82			129			35			75			76			86
Weighted average diluted common shares	17,414			17,382			17,406			17,392			17,292			17,405			17,377			17,403
Earnings per common share - diluted		$1.08			$1.01			$3.07			$2.95			$1.21			$0.99			$1.89			$1.99

Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled ~~93,075~~256,721 and ~~87,775,~~220,305, respectively for the three and ~~nine~~six months ended ~~September~~ June 30, ~~2019,~~2020, compared to ~~41,525~~87,950 and ~~46,692,~~87,863, respectively, for the same periods in ~~2018.~~2019.

- ~~44-~~47-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 17 - Leases

The Corporation has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception.

The Corporation adopted the provisions of ASU 2016-02 (Topic 842) on January 1, 2019. Operating lease right-of-use (“ROU”) assets represent a right to use an underlying asset for the contractual lease term. Operating lease liabilities represent an obligation to make lease payments arising from the lease. Upon adoption, operating lease ROU assets totaling $28.9 million and operating lease liabilities totaling $30.9 million were recognized in our Unaudited Consolidated Balance Sheets for leases that existed at the adoption date, based on the present value of lease payments over the remaining lease term. Operating leases entered into after the adoption date will be recognized as an operating lease ROU asset and operating lease liability at the commencement date of the new lease.

The Corporation’s leases do not provide an implicit interest rate, therefore the Corporation used its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine the present value of operating lease liabilities. The weighted average discount rate used to discount operating lease liabilities at September 30, 2019 was 3.66%.

The Corporation’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Corporation’s lease agreements do not contain any residual value guarantees.

Operating leases with terms of 12 months or less are included in ROU assets and operating lease liabilities recorded in the Corporation’s Unaudited Consolidated Balance Sheets. Operating lease terms include options to extend when it is reasonably certain that the Corporation will exercise such options, determined on a lease-by-lease basis. As of September 30, 2019, the Corporation has 1 lease that has not yet commenced. At September 30, 2019, lease expiration dates ranged from 2 months to 21 years, with additional renewal options on certain leases ranging from 1 to 5 years. At September 30, 2019, the weighted average remaining lease term for the Corporation’s operating leases was 14.1 years.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to ~~$944~~$973 thousand and ~~$2.8~~$1.9 million respectively, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~$942~~$940 thousand and ~~$2.8~~$1.9 million, respectively, for the same periods in ~~2018.~~2019. Variable lease components, such as consumer price index adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

The following table presents information regarding Corporation’s operating leases:



	Jun 30, 2020		Dec 31, 2019
Weighted average discount rate	3.56	%	3.67	%
Operating leases not yet commenced	—		1
Range of lease expiration dates	1 year - 21 years		4 months - 21 years
Range of lease renewal options	1 year - 5 years		1 year - 5 years
Weighted average remaining lease term	13.3 years		14.0 years

The following table presents the undiscounted annual lease payments under the terms of the Corporation’s operating leases at ~~September~~June 30, ~~2019,~~2020, including a reconciliation to the present value of operating lease liabilities recognized in the ~~Corporation’s~~ Unaudited Consolidated Balance Sheets:



(Dollars in thousands)
October 1, 2019 to December 31, 2019		$930
2020	3,515
July 1, 2020 to December 31, 2020				$3,718
2021	3,312		3,499
2022	3,165		3,493
2023	3,090		3,356
2024 and thereafter	24,716
2024			2,921
2025 and thereafter			20,567
Total operating lease payments (1)	38,728		37,554
Less interest	9,187		8,429
Present value of operating lease liabilities (2)		$29,541		$29,125

~~(1) Includes $4.2 million related to options to extend lease terms that are reasonably certain of being exercised.~~

~~(2) Includes short-term operating lease liabilities of $2.3 million.~~

~~- 45-~~

~~Condensed Notes to Unaudited Consolidated Financial Statements – (continued)~~


(1)	Includes $2.6 million related to options to extend lease terms that are reasonably certain of being exercised.


(2)	Includes short-term operating lease liabilities of $2.7 million.

The following table presents the components of total lease expense and operating cash flows:


(Dollars in thousands)
Periods ended September 30, 2019	Three Months		Nine Months
					Three Months				Six Months
Periods ended June 30,					2020		2019		2020		2019
Lease Expense:
Operating lease expense		$931		$2,787		$959		$928		$1,909		$1,856
Variable lease expense	13		36		14		12		28		23
Total lease expense (1)		$944		$2,823		$973		$940		$1,937		$1,879
Cash Paid:
Cash paid reducing operating lease liabilities		$926		$2,677		$942		$831		$1,875		$1,751

~~(1)~~


(1)	Included in net occupancy expenses in the Unaudited Consolidated Income Statement.

- 48-

Condensed Notes to Unaudited Consolidated ~~Income Statement.~~Financial Statements – (continued)

~~The following table presents the minimum annual lease payments under the terms of these leases, exclusive of renewal provisions at December 31, 2018:~~

(Dollars in thousands)
Years ending December 31: 2019
$3,544
2020 2,980
2021 2,677
2022 2,293
2023 2,059
2024 and thereafter 22,648
Total minimum lease payments
$36,201

~~At December 31, 2018, lease expiration dates ranged from 5 months to 22 years, with additional renewal options on certain leases ranging from 1 to 5 years.~~

Note 18 - Commitments and Contingencies

Adoption of Topic 326

As disclosed in Note 2, Topic 326 requires the measurement of expected lifetime credit losses for unfunded commitments that are considered off-balance sheet credit exposures. The Corporation adopted the provisions of Topic 326 effective January 1, 2020 using the modified retrospective method. Therefore, the prior period comparative information has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 326. As a result of adopting Topic 326, the Corporation recognized an increase in the ACL on unfunded commitments of $1.5 million on January 1, 2020.

Accounting Policy Updates

Effective January 1, 2020, the Corporation has modified its accounting policy for the ACL on unfunded commitments. The updated policy is detailed below.

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.

Financial Instruments with Off-Balance Sheet Risk

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the ~~Corporation’s~~ 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. The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers, commitments to extend credit and financial guarantees are similar to those used for loans. The interest rate swaps with other counterparties are generally subject to bilateral collateralization terms. The following table presents the contractual and notional amounts of financial instruments with off-balance sheet risk:

~~- 46-~~

~~Condensed Notes to Unaudited Consolidated~~ Financial ~~Statements – (continued)~~

(Dollars in thousands) Sep 30,
2019 Dec 31,
2018
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Commercial loans
$481,350

$533,884
Home equity lines 290,442
270,462
Other loans 74,931
46,698
Standby letters of credit 9,343
7,706
Financial instruments whose notional amounts exceed the amount of credit risk:
Forward loan commitments:
Interest rate lock commitments 84,820
30,766
Forward sale commitments 156,594
61,993
Loan related derivative contracts:
Interest rate swaps with customers 729,913
648,050
Mirror swaps with counterparties 729,913
648,050
Risk participation-in agreements 73,040
46,510
Foreign exchange contracts 2,648
2,784
Interest rate risk management contracts:
Interest rate swaps 60,000
60,000

~~See Note 9 for additional disclosure pertaining to derivative financial instruments.~~

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 ~~$9.3~~$10.1 million and ~~$7.7~~$13.7 million, respectively, as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, there were no liabilities to beneficiaries resulting from standby letters of credit. Fee income on standby letters of credit was insignificant for the three and ~~nine~~six months ended ~~September~~ June 30, ~~2019~~2020 and ~~2018.~~2019.

~~Forward~~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.

- 49-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Financial Instruments Whose Notional Amounts Exceed the Amount of Credit Risk

Mortgage Loan Commitments

Loan Related Derivative Contracts

The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers are similar to those used for loans. The interest rate swaps with other counterparties are generally subject to bilateral collateralization terms.

The following table presents the contractual and notional amounts of financial instruments with off-balance sheet risk:



(Dollars in thousands)	Jun 30, 2020		Dec 31, 2019
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
Commercial loans		$457,035		$471,338
Home equity lines	311,474		295,687
Other loans	100,549		88,613
Standby letters of credit	10,101		13,710
Financial instruments whose notional amounts exceed the amounts of credit risk:
Mortgage loan commitments:
Interest rate lock commitments	203,522		51,439
Forward sale commitments	291,690		94,829
Loan related derivative contracts:
Interest rate swaps with customers	958,628		813,458
Mirror swaps with counterparties	958,628		813,458
Risk participation-in agreements	93,146		72,866
Interest rate risk management contracts:
Interest rate swaps	60,000		60,000

See Note 9 for additional disclosure pertaining to derivative financial instruments.

The ACL on unfunded commitments amounted to $2.2 million at June 30, 2020, compared to $293 thousand at December 31, 2019.

The activity in the ACL on unfunded commitments for the three months ended June 30, 2020 is presented below:



(Dollars in thousands)	Commercial									Consumer
	CRE			C&I		Total Commercial		Residential Real Estate		Home Equity		Other		Total Consumer		Total
Beginning Balance		$1,132			$847		$1,979		$42		$—		$18		$18		$2,039
Provision	(245		)	360		115		—		—		1		1		116
Ending Balance		$887			$1,207		$2,094		$42		$—		$19		$19		$2,155

- ~~47-~~50-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The activity in the ACL on unfunded commitments for the six months ended June 30, 2020 is presented below:



(Dollars in thousands)	Commercial									Consumer
	CRE			C&I		Total Commercial		Residential Real Estate		Home Equity		Other		Total Consumer		Total
Beginning Balance		$136			$144		$280		$6		$—		$7		$7		$293
Adoption of Topic 326 (1)	817			626		1,443		34		—		6		6		1,483
Provision	(66		)	437		371		2		—		6		6		379
Ending Balance		$887			$1,207		$2,094		$42		$—		$19		$19		$2,155


(1)	Adoption of the CECL accounting standard effective January 1, 2020.

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.

- 51-

Management's Discussion and Analysis

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Corporation’s Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019, and in conjunction with the condensed Unaudited Consolidated Financial Statements and notes thereto included in Item 1 of this report. Operating results for the three and ~~nine~~six months ended~~September~~June 30, ~~2019~~2020 are not necessarily indicative of the results for the full-year ended December 31, ~~2019~~2020 or any future period. ~~Certain previously reported amounts have been reclassified to conform to current year’s presentation.~~

Forward-Looking Statements

This report contains statements that are “forward-looking statements.” We may also make forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “outlook,” “will,” “should,” and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different than the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

Some of the factors that might cause these differences include the following: ~~weakness~~the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; the length and extent of the economic contraction as a result of the COVID-19 pandemic; continued deterioration in local, regional, national ~~regional~~ or international economic conditions or conditions affecting the banking or financial services industries, or financial capital ~~markets;~~markets and the customers and communities we serve; changes in consumer behavior due to changing political, business and economic conditions, including increased unemployment, or legislative or regulatory initiatives; the possibility that future credits losses are higher than currently expected due to changes in economic assumptions or adverse economic developments; volatility in national and international financial markets; reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits; reductions in the market value or outflows of wealth management assets under administration; ~~changes~~decreases in the value of securities and other assets; reductions in loan demand; changes in loan ~~collectability, default~~collectibility, increases in defaults and charge-off rates; changes in the size and nature of our competition; changes in legislation or regulation and accounting principles, policies and guidelines; operational risks including, but not limited to, cybersecurity ~~breaches,~~incidents, fraud, natural disasters and ~~natural disasters;~~future pandemics; reputational risk relating to our participation in the Paycheck Protection Program and other pandemic-related legislative and regulatory initiatives and programs; and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018~~,2019, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC, may result in these differences. You should carefully review all of these factors and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

Critical Accounting Policies and Estimates

Accounting policies involving significant judgments, estimates and assumptions by management, which have, or could have, a material impact on the Corporation’s consolidated financial statements are considered critical accounting policies. ~~Management~~As of June 30, 2020 management considers the following to be its critical accounting policies: the determination of allowance for ~~loan~~credit losses on loans, the valuation of goodwill and identifiable intangible assets, ~~the assessment of investment securities for impairment~~ and accounting for defined benefit pension plans.T~~here have been no significant changes in the Corporation’s critical accounting policies and estimates from those disclosed in~~

See our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019 for a description of the Corporation’s critical accounting policies for the valuation of goodwill and identifiable intangible assets and accounting for defined benefit pension plans. Given the composition and nature of the Corporation’s investment security portfolio, management no longer considers the assessment of investment securities for impairment as a critical accounting policy.

As a result of the adoption of Topic 326 effective January 1, 2020, Washington Trust updated its critical accounting policy for the Allowance of Credit Losses on Loans. The updated policy is described in detail below.

Allowance for Credit Losses on Loans

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

- 52-

Management's Discussion and Analysis

The level of the ACL on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the calculation of loss given default and the estimation of expected credit losses. As discussed further below, adjustments to historical information are made for differences in specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, that may not be reflected in historical loss rates.

Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components. The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics. Pooled loan portfolio segments include commercial real estate (including commercial construction), commercial and industrial (including PPP loans), residential real estate (including homeowner construction), home equity and other consumer loans. The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments. Individually analyzed loans include nonaccrual commercial loans, loans classified as TDRs and certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans.

- 53-

Management's Discussion and Analysis

Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. While significant deterioration in the economic forecast due to the COVID-19 pandemic was estimated in the ACL on loans, continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the ACL. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans. In addition, various regulatory agencies periodically review the ACL on loans. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. The ACL on loans is an estimate, and ultimate losses may vary from management’s estimate.

Recently Issued Accounting Pronouncements

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

Overview

The Corporation offers a comprehensive product line of banking and financial services to individuals and businesses, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut; its ~~ATM networks;~~ATMs; telephone banking; mobile banking and its internet website ~~at www.washtrust.com.~~(www.washtrust.com).

Our largest source of operating income is net interest income, which is the difference between interest earned on loans and securities and interest paid on deposits and borrowings. In addition, we generate noninterest income from a number of sources, including wealth management services, mortgage banking activities and deposit services. Our principal noninterest expenses include salaries and employee benefit costs, outsourced services provided by third-party vendors, occupancy and facility-related costs and other administrative expenses.

~~- 48-~~

~~Management's Discussion and Analysis~~

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

The COVID-19 pandemic has caused an unprecedented disruption to the economy and the communities we serve. In response, we are committed to working with and supporting our customers experiencing financial difficulty due to the COVID-19 pandemic, including loan payment deferrals and participation in the SBA’s PPP. In addition, in the first quarter of 2020, we implemented our business continuity and pandemic plans, which included remote working arrangements for the majority of our workforce, closing our branches and offering drive-through banking or special banking services by appointment only, and promoting social distancing. In July 2020, we reopened our branch lobbies to customers while adhering to social distancing guidelines. Remote working arrangements continue for a significant portion of our workforce.

On March 27, 2020, the CARES Act was enacted to address the economic effects of the COVID-19 pandemic. The CARES Act initially appropriated $349 billion for “paycheck protection loans” through the PPP. The amount appropriated was subsequently increased to $659 billion. Loans under the PPP that meet SBA requirements may be forgiven in certain circumstances, and are 100% guaranteed by SBA. As of June 30, 2020, there were 1,690 PPP loans totaling $212.2 million included in the commercial and industrial loan portfolio. PPP loans are fully guaranteed by the U.S. government, have either a two-year or five-year term and earn interest at a rate of 1%. We currently expect a significant portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. In conjunction with the PPP, the FRB has created the PPPLF, a lending facility for qualified financial institutions. Only loans issued under the PPP can be pledged as collateral to access the facility. The PPPLF extends credit to depository institutions at a fixed interest rate of 0.35% with maturity terms matching the maturity date of the pledged PPP loans. In June 2020, Washington Trust began participating in PPPLF and as of June 30, 2020, PPPLF borrowings amounted to $38.9 million.

The CARES Act also provided TDR accounting relief. From March 1, 2020 through the earlier of December 31, 2020 or 60 days after the termination date of the National Emergency, a financial institution may elect to suspend the requirements under GAAP for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR, including impairment accounting. This TDR relief applies for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. Financial institutions are required to maintain records of the volume of loans involved in modifications to which TDR relief is applicable. Washington Trust has made this election. As of June 30, 2020, we have executed 583 short-term deferments on loan balances of $652 million, which represented

- 54-

Management's Discussion and Analysis

15% of total loan balances as of June 30, 2020. Eligible short-term deferments are not classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms.

Risk Management

The Corporation has a comprehensive enterprise risk management (“ERM”) program through which the Corporation identifies, measures, monitors and controls current and emerging material risks.

The Board of Directors is responsible for oversight of the ERM program. The ERM program enables the aggregation of risk across the Corporation and ensures the Corporation has the tools, programs and processes in place to support informed decision making, to anticipate risks before they materialize and to ~~ensure~~maintain the Corporation’s risk profile is consistent with its risk strategy.

The Board of Directors has approved an ~~ERM Policy~~enterprise risk management policy that addresses each category of risk. The risk categories include: credit risk, interest rate risk, liquidity risk, price and market risk, compliance risk, strategic and reputation risk, and operational risk. A description of each risk category is provided below.

Credit risk represents the possibility that borrowers or other counterparties may not repay loans or other contractual obligations according to their terms due to changes in the financial capacity, ability and willingness of such borrowers or counterparties to meet their obligations. In some cases, the collateral securing payment of the loans may be sufficient to assure repayment, but in other cases the Corporation may experience significant credit losses which could have an adverse effect on its operating results. The Corporation makes various assumptions and judgments about the ~~collectability~~collectibility of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of the real estate and other assets serving as collateral for the repayment of loans. Credit risk also exists with respect to investment securities. For further discussion regarding the credit risk and the credit quality of the Corporation’s loan portfolio, see Note 5 and Note 6 to the Unaudited Consolidated Financial Statements. For further discussion regarding credit risk associated with unfunded commitments, see Note 18 to the Unaudited Consolidated Financial Statements. For further discussion regarding the Corporation’s securities portfolio, see Note 4 to the Unaudited Consolidated Financial Statements.

Interest rate risk is the risk of loss to future earnings due to changes in interest rates. It exists because the repricing frequency and magnitude of ~~interest earning~~interest-earning assets and ~~interest bearing~~interest-bearing liabilities are not identical. Liquidity risk is the risk that the Corporation will not have the ability to generate adequate amounts of cash ~~in the most economical way~~ for it to meet its maturing liability obligations and customer loan demand. For detailed disclosure regarding liquidity management, asset/liability management and interest rate risk, see “Liquidity and Capital Resources” and ~~Asset/~~“Asset/Liability Management and Interest Rate ~~Risk~~Risk” sections below.

Price and market risk refers to the risk of loss arising from adverse changes in interest rates and other relevant market rates and prices, such as equity prices. Interest rate risk, discussed above, is the most significant market risk to which the Corporation is exposed. The Corporation is also exposed to financial market risk and housing market risk.

Compliance risk represents the risk of regulatory sanctions or financial loss resulting from the failure to comply with laws, rules and regulations and standards of good banking practice. Activities ~~that~~which may expose the Corporation to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, adherence to all applicable laws and regulations, and employment and tax matters.

Strategic and reputation risk represent the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, and failure to assess existing and new opportunities and threats in business, markets, and products.

Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, natural disasters and security risks.

ERM is an overarching program that includes all areas of the Corporation. A framework approach is utilized to assign responsibility and to ensure that the various business units and activities involved in the risk management life-cycle are effectively integrated. The Corporation has adopted the “three lines of defense” concept that is an industry best practice for ERM. Business units are the first line of defense in managing risk. They are responsible for identifying, measuring, monitoring, and controlling current and emerging risks. They must report on and escalate their concerns. Corporate functions such as Credit Risk Management, Financial Administration, Information Assurance and Compliance, comprise the second line of defense. They are

~~- 49-~~

~~Management's Discussion and Analysis~~

responsible for policy setting and for reviewing and challenging the risk management activities of the business units. They collaborate closely with business units on planning and resource allocation with respect to risk management. Internal Audit is a

- 55-

Management's Discussion and Analysis

the third line of defense. They provide independent assurance to the Board of Directors of the effectiveness of the first and second lines in fulfilling their risk management responsibilities.

For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC.

Results of Operations

The following table presents a summarized consolidated statement of operations:


(Dollars in thousands)	Three Months									Nine Months								Three Months									Six Months
					Change									Change								Change									Change
For the periods ended September 30,	2019		2018		$			%		2019		2018		$		%
For the periods ended June 30,																		2020		2019		$			%		2020		2019		$			%
Net interest income		$32,978		$33,449		($471	)	(1	%)		$101,420		$98,412		$3,008	3	%		$30,945		$33,858		($2,913	)	(9	%)		$63,547		$68,442		($4,895	)	(7	%)
Noninterest income	18,342		15,215		3,127			21		50,462		46,951		3,511		7		26,320		16,753		9,567			57		46,247		32,120		14,127			44
Total revenues	51,320		48,664		2,656			5		151,882		145,363		6,519		4		57,265		50,611		6,654			13		109,794		100,562		9,232			9
Provision for loan losses	400		350		50			14		1,575		750		825		110
Provision for credit losses																		2,200		525		1,675			319		9,236		1,175		8,061			686
Noninterest expense	26,870		26,062		808			3		81,985		79,480		2,505		3		28,478		28,151		327			1		58,931		55,115		3,816			7
Income before income taxes	24,050		22,252		1,798			8		68,322		65,133		3,189		5		26,587		21,935		4,652			21		41,627		44,272		(2,645		)	(6	)
Income tax expense	5,236		4,741		495			10		14,740		13,737		1,003		7		5,547		4,662		885			19		8,686		9,504		(818		)	(9	)
Net income		$18,814		$17,511		$1,303		7	%		$53,582		$51,396		$2,186	4	%		$21,040		$17,273		$3,767		22	%		$32,941		$34,768		($1,827	)	(5	%)

The following table presents a summary of performance metrics and ratios:


	Three Months						Nine Months						Three Months						Six Months
For the periods ended September 30,	2019			2018			2019			2018
For the periods ended June 30,													2020			2019			2020			2019
Diluted earnings per common share		$1.08			$1.01			$3.07			$2.95			$1.21			$0.99			$1.89			$1.99
Return on average assets (net income divided by average assets)	1.44		%	1.47		%	1.39		%	1.48		%	1.46		%	1.34		%	1.18		%	1.37		%
Return on average equity (net income available for common shareholders divided by average equity)	15.20		%	16.26		%	15.09		%	16.41		%	16.51		%	14.58		%	13.03		%	15.04		%
Net interest income as a percentage of total revenues	64		%	69		%	67		%	68		%	54		%	67		%	58		%	68		%
Noninterest income as a percentage of total revenues	36		%	31		%	33		%	32		%	46		%	33		%	42		%	32		%

Net income totaled ~~$18.8~~$21.0 million and $32.9 million, respectively, for the three and six months ended ~~September~~June 30, ~~2019, up by $1.3~~2020, compared to $17.3 million ~~or 7%, over~~and $34.8 million, respectively, for the same ~~period~~periods in ~~2018. This increase was mainly driven by increased mortgage banking activities and loan related derivative transactions.~~2019.

Net ~~income totaled $53.6 million for the nine months ended September 30, 2019, up by $2.2 million, or 4%, over the same period in 2018. This largely reflected growth in net~~ interest income ~~increased~~in 2020 was negatively impacted by the decline in market interest rates, as interest-earning asset yields declined faster than the downward repricing of interest-bearing liabilities. However, the decline in market interest rates also spurred mortgage origination and sales activity, resulting in strong mortgage banking ~~activities and loan related derivative transactions, partially offset by lower wealth management revenues and increased salaries and employee benefits expense.~~

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

- ~~50-~~56-

Management's Discussion and Analysis

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

The following table presents average balance and interest rate information. Tax-exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. Unrealized gains (losses) on available for sale securities and fair value adjustments on mortgage loans held for sale are excluded from the average balance and yield calculations. Nonaccrual loans, as well as interest recognized on these loans, are included in amounts presented for loans.


Three months ended September 30,	2019					2018					Change
Three months ended June 30,																			2020					2019					Change
(Dollars in thousands)	Average Balance		Interest		Yield/ Rate	Average Balance		Interest		Yield/ Rate	Average Balance			Interest			Yield/ Rate		Average Balance		Interest		Yield/ Rate	Average Balance		Interest		Yield/ Rate	Average Balance			Interest			Yield/ Rate
Assets:
Cash, federal funds sold and short-term investments		$96,231		$493	2.03		$52,218		$261	1.98		$44,013			$232		0.05			$187,306		$36	0.08		$72,976		$399	2.19		$114,330			($363	)	(2.11	)
Mortgage loans held for sale	39,771		410		4.09	34,571		384		4.41	5,200			26			(0.32	)	53,443		440		3.31	28,532		288		4.05	24,911			152			(0.74	)
Taxable debt securities	920,910		6,318		2.72	825,302		5,383		2.59	95,608			935			0.13		904,792		5,477		2.43	996,590		7,006		2.82	(91,798		)	(1,529		)	(0.39	)
Nontaxable debt securities	75		3		15.87	935		11		4.67	(860		)	(8		)	11.20		—		—		—	805		11		5.48	(805		)	(11		)	(5.48	)
Total securities	920,985		6,321		2.72	826,237		5,394		2.59	94,748			927			0.13		904,792		5,477		2.43	997,395		7,017		2.82	(92,603		)	(1,540		)	(0.39	)
FHLB stock	47,982		747		6.18	45,181		634		5.57	2,801			113			0.61		51,967		654		5.06	49,574		720		5.83	2,393			(66		)	(0.77	)
Commercial real estate	1,490,878		17,314		4.61	1,233,230		13,931		4.48	257,648			3,383			0.13		1,635,431		12,580		3.09	1,468,382		17,509		4.78	167,049			(4,929		)	(1.69	)
Commercial & industrial	584,601		6,946		4.71	642,005		7,720		4.77	(57,404		)	(774		)	(0.06	)	791,672		6,739		3.42	606,835		7,482		4.95	184,837			(743		)	(1.53	)
Total commercial	2,075,479		24,260		4.64	1,875,235		21,651		4.58	200,244			2,609			0.06		2,427,103		19,319		3.20	2,075,217		24,991		4.83	351,886			(5,672		)	(1.63	)
Residential real estate	1,367,017		13,728		3.98	1,331,304		13,362		3.98	35,713			366			—		1,497,665		14,330		3.85	1,350,865		13,606		4.04	146,800			724			(0.19	)
Home equity	291,058		3,615		4.93	284,080		3,469		4.84	6,978			146			0.09		282,470		2,382		3.39	284,195		3,579		5.05	(1,725		)	(1,197		)	(1.66	)
Other	22,270		278		4.95	27,635		344		4.94	(5,365		)	(66		)	0.01		18,956		229		4.86	24,189		292		4.84	(5,233		)	(63		)	0.02
Total consumer	313,328		3,893		4.93	311,715		3,813		4.85	1,613			80			0.08		301,426		2,611		3.48	308,384		3,871		5.03	(6,958		)	(1,260		)	(1.55	)
Total loans	3,755,824		41,881		4.42	3,518,254		38,826		4.38	237,570			3,055			0.04		4,226,194		36,260		3.45	3,734,466		42,468		4.56	491,728			(6,208		)	(1.11	)
Total interest-earning assets	4,860,793		49,852		4.07	4,476,461		45,499		4.03	384,332			4,353			0.04		5,423,702		42,867		3.18	4,882,943		50,892		4.18	540,759			(8,025		)	(1.00	)
Noninterest-earning assets	320,223					248,437					71,786								365,990					288,619					77,371
Total assets		$5,181,016					$4,724,898					$456,118								$5,789,692					$5,171,562					$618,130
Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits		$137,980		$649	1.87		$134,632		$465	1.37		$3,348			$184		0.50			$162,388		$142	0.35		$129,334		$624	1.94		$33,054			($482	)	(1.59	)
NOW accounts	471,302		69		0.06	458,143		104		0.09	13,159			(35		)	(0.03	)	570,739		84		0.06	462,217		75		0.07	108,522			9			(0.01	)
Money market accounts	699,138		2,094		1.19	631,570		1,104		0.69	67,568			990			0.50		821,063		1,370		0.67	659,021		1,831		1.11	162,042			(461		)	(0.44	)
Savings accounts	362,142		72		0.08	375,528		60		0.06	(13,386		)	12			0.02		403,286		67		0.07	366,449		71		0.08	36,837			(4		)	(0.01	)
Time deposits (in-market)	800,571		4,181		2.07	706,726		2,806		1.58	93,845			1,375			0.49		746,750		3,507		1.89	796,606		3,992		2.01	(49,856		)	(485		)	(0.12	)
Total interest-bearing in-market deposits	2,471,133		7,065		1.13	2,306,599		4,539		0.78	164,534			2,526			0.35		2,704,226		5,170		0.77	2,413,627		6,593		1.10	290,599			(1,423		)	(0.33	)
Wholesale brokered time deposits	475,026		2,727		2.28	438,604		2,007		1.82	36,422			720			0.46		559,822		1,942		1.40	507,376		2,876		2.27	52,446			(934		)	(0.87	)
Total interest-bearing deposits	2,946,159		9,792		1.32	2,745,203		6,546		0.95	200,956			3,246			0.37		3,264,048		7,112		0.88	2,921,003		9,469		1.30	343,045			(2,357		)	(0.42	)
FHLB advances	980,091		6,512		2.64	852,904		4,937		2.30	127,187			1,575			0.34		1,068,034		4,382		1.65	1,050,660		6,980		2.66	17,374			(2,598		)	(1.01	)
Junior subordinated debentures	22,681		245		4.29	22,681		232		4.06	—			13			0.23		22,681		171		3.03	22,681		252		4.46	—			(81		)	(1.43	)
Other borrowings																			2,565		2		0.31	—		—		—	2,565			2			0.31
Total interest-bearing liabilities	3,948,931		16,549		1.66	3,620,788		11,715		1.28	328,143			4,834			0.38		4,357,328		11,667		1.08	3,994,344		16,701		1.68	362,984			(5,034		)	(0.60	)
Noninterest-bearing demand deposits	626,408					612,597					13,811								745,050					608,099					136,951
Other liabilities	115,480					65,207					50,273								175,563					94,766					80,797
Shareholders’ equity	490,197					426,306					63,891								511,751					474,353					37,398
Total liabilities and shareholders’ equity		$5,181,016					$4,724,898					$456,118								$5,789,692					$5,171,562					$618,130
Net interest income (FTE)				$33,303					$33,784						($481	)						$31,200					$34,191						($2,991	)
Interest rate spread					2.41					2.75							(0.34	)					2.10					2.50							(0.40	)
Net interest margin					2.72					2.99							(0.27	)					2.31					2.81							(0.50	)

- ~~51-~~57-

Management's Discussion and Analysis

Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:


(Dollars in thousands)
Three months ended September 30,	2019		2018		Change
Three months ended June 30,								2020		2019		Change
Commercial loans		$323		$333		($10	)		$254		$330		($76	)
Nontaxable debt securities	2		2		—			—		3		(3		)
Total		$325		$335		($10	)		$254		$333		($79	)



Nine months ended September 30,	2019					2018					Change
Six months ended June 30,																			2020					2019					Change
(Dollars in thousands)	Average Balance		Interest		Yield/ Rate	Average Balance		Interest		Yield/ Rate	Average Balance			Interest			Yield/ Rate		Average Balance		Interest		Yield/ Rate	Average Balance		Interest		Yield/ Rate	Average Balance			Interest			Yield/ Rate
Assets:
Cash, federal funds sold and short-term investments		$75,333		$1,232	2.19		$53,828		$723	1.80		$21,505			$509		0.39			$150,325		$385	0.52		$64,713		$739	2.30		$85,612			($354	)	(1.78	)
Mortgage loans held for sale	28,379		878		4.14	29,770		923		4.15	(1,391		)	(45		)	(0.01	)	42,265		725		3.45	22,588		468		4.18	19,677			257			(0.73	)
Taxable debt securities	972,511		20,550		2.83	817,274		15,859		2.59	155,237			4,691			0.24		905,043		11,311		2.51	998,738		14,232		2.87	(93,695		)	(2,921		)	(0.36	)
Nontaxable debt securities	602		24		5.33	1,743		65		4.99	(1,141		)	(41		)	0.34		—		—		—	870		21		4.87	(870		)	(21		)	(4.87	)
Total debt securities	973,113		20,574		2.83	819,017		15,924		2.60	154,096			4,650			0.23		905,043		11,311		2.51	999,608		14,253		2.88	(94,565		)	(2,942		)	(0.37	)
FHLB stock	48,185		2,162		6.00	43,149		1,700		5.27	5,036			462			0.73		51,964		1,294		5.01	48,288		1,415		5.91	3,676			(121		)	(0.90	)
Commercial real estate	1,461,736		51,702		4.73	1,225,875		39,740		4.33	235,861			11,962			0.40		1,609,193		28,677		3.58	1,446,923		34,388		4.79	162,270			(5,711		)	(1.21	)
Commercial & industrial	603,143		21,972		4.87	624,563		22,113		4.73	(21,420		)	(141		)	0.14		699,586		13,294		3.82	612,568		15,026		4.95	87,018			(1,732		)	(1.13	)
Total commercial	2,064,879		73,674		4.77	1,850,438		61,853		4.47	214,441			11,821			0.30		2,308,779		41,971		3.66	2,059,491		49,414		4.84	249,288			(7,443		)	(1.18	)
Residential real estate	1,358,606		41,099		4.04	1,278,662		37,717		3.94	79,944			3,382			0.10		1,483,473		28,613		3.88	1,354,330		27,371		4.08	129,143			1,242			(0.20	)
Home equity	284,657		10,757		5.05	285,143		9,908		4.65	(486		)	849			0.40		284,151		5,483		3.88	281,404		7,142		5.12	2,747			(1,659		)	(1.24	)
Other	24,017		887		4.94	29,328		1,073		4.89	(5,311		)	(186		)	0.05		19,406		478		4.95	24,905		609		4.93	(5,499		)	(131		)	0.02
Total consumer	308,674		11,644		5.04	314,471		10,981		4.67	(5,797		)	663			0.37		303,557		5,961		3.95	306,309		7,751		5.10	(2,752		)	(1,790		)	(1.15	)
Total loans	3,732,159		126,417		4.53	3,443,571		110,551		4.29	288,588			15,866			0.24		4,095,809		76,545		3.76	3,720,130		84,536		4.58	375,679			(7,991		)	(0.82	)
Total interest-earning assets	4,857,169		151,263		4.16	4,389,335		129,821		3.95	467,834			21,442			0.21		5,245,406		90,260		3.46	4,855,327		101,411		4.21	390,079			(11,151		)	(0.75	)
Noninterest-earning assets	292,702					239,187					53,515								346,914					278,714					68,200
Total assets		$5,149,871					$4,628,522					$521,349								$5,592,320					$5,134,041					$458,279
Liabilities and Shareholders’ Equity:
Interest-bearing demand deposits		$144,306		$1,959	1.82		$100,644		$595	0.79		$43,662			$1,364		1.03			$158,902		$642	0.81		$147,522		$1,311	1.79		$11,380			($669	)	(0.98	)
NOW accounts	462,856		228		0.07	456,083		215		0.06	6,773			13			0.01		538,010		154		0.06	458,563		159		0.07	79,447			(5		)	(0.01	)
Money market accounts	668,330		5,534		1.11	671,135		2,944		0.59	(2,805		)	2,590			0.52		808,166		3,462		0.86	652,671		3,440		1.06	155,495			22			(0.20	)
Savings accounts	365,911		204		0.07	373,105		173		0.06	(7,194		)	31			0.01		388,831		128		0.07	367,826		131		0.07	21,005			(3		)	—
Time deposits (in-market)	795,559		11,900		2.00	662,850		6,890		1.39	132,709			5,010			0.61		763,552		7,556		1.99	793,012		7,719		1.96	(29,460		)	(163		)	0.03
Total interest-bearing in-market deposits	2,436,962		19,825		1.09	2,263,817		10,817		0.64	173,145			9,008			0.45		2,657,461		11,942		0.90	2,419,594		12,760		1.06	237,867			(818		)	(0.16	)
Wholesale brokered time deposits	485,405		8,132		2.24	426,096		5,405		1.70	59,309			2,727			0.54		475,822		3,706		1.57	490,680		5,405		2.22	(14,858		)	(1,699		)	(0.65	)
Total interest-bearing deposits	2,922,367		27,957		1.28	2,689,913		16,222		0.81	232,454			11,735			0.47		3,133,283		15,648		1.00	2,910,274		18,165		1.26	223,009			(2,517		)	(0.26	)
FHLB advances	1,019,172		20,153		2.64	846,359		13,627		2.15	172,813			6,526			0.49		1,095,894		10,147		1.86	1,039,037		13,641		2.65	56,857			(3,494		)	(0.79	)
Junior subordinated debentures	22,681		750		4.42	22,681		629		3.71	—			121			0.71		22,681		384		3.40	22,681		505		4.49	—			(121		)	(1.09	)
Other borrowings																			1,282		2		0.31	—		—		—	1,282			2			0.31
Total interest-bearing liabilities	3,964,220		48,860		1.65	3,558,953		30,478		1.14	405,267			18,382			0.51		4,253,140		26,181		1.24	3,971,992		32,311		1.64	281,148			(6,130		)	(0.40	)
Noninterest-bearing demand deposits	613,917					590,573					23,344								677,961					607,569					70,392
Other liabilities	98,012					61,042					36,970								153,781					89,133					64,648
Shareholders’ equity	473,722					417,954					55,768								507,438					465,347					42,091
Total liabilities and shareholders’ equity		$5,149,871					$4,628,522					$521,349								$5,592,320					$5,134,041					$458,279
Net interest income (FTE)			$102,403						$99,343						$3,060						$64,079						$69,100						($5,021	)
Interest rate spread					2.51					2.81							(0.30	)					2.22					2.57							(0.35	)
Net interest margin					2.82					3.03							(0.21	)					2.46					2.87							(0.41	)

- ~~52-~~58-

Management's Discussion and Analysis

Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency:



(Dollars in thousands)
Nine months ended September 30,	2019		2018		Change
Six months ended June 30,								2020		2019		Change
Commercial loans		$977		$918		$59			$532		$654		($122	)
Nontaxable debt securities	6		13		(7		)	—		4		(4		)
Total		$983		$931		$52			$532		$658		($126	)

Net Interest Income

Net interest income continues to be the primary source of our operating income. Net interest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 totaled ~~$33.0~~$30.9 million, and ~~$101.4~~$63.5 million, respectively, compared to ~~$33.4~~$33.9 million and ~~$98.4~~$68.4 million, respectively, for the same periods in ~~2018.~~2019. Net interest income is affected by the level of, and changes in, interest rates, and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Prepayment penalty income associated with loan payoffs is included in net interest income.

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

The analysis of net interest income, net interest margin and the yield on loans may be impacted by the ~~amount~~periodic recognition of prepayment penalty income associated with loan ~~payoffs recognized in each period. For the three and nine months ended September 30, 2019, prepayment~~payoffs. Prepayment penalty income associated with loan payoffs for both the three and six months ended June 30, 2020 and 2019 was not material. The analysis of net interest income, net interest margin and the yield on loans is also impacted by changes in the level of net amortization of premiums and discounts on securities and loans, which is included in interest income. As market interest rates decline, loan prepayments and the receipt of payments on mortgage-backed securities generally increase. This results in accelerated levels of amortization reducing net interest income and may also result in the proceeds having to be reinvested at a lower rate than the loan or mortgage-backed security being prepaid. As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans amounted to ~~$130 thousand and $215 thousand, respectively, compared to $173 thousand and $703 thousand, respectively,~~$2.7 million for the six months ended June 30, 2020, up by $822 thousand from the same ~~periods~~period in ~~2018.~~2019.

FTE net interest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 amounted to ~~$33.3~~$31.2 million and ~~$102.4~~$64.1 million, respectively, down by ~~$481 thousand~~$3.0 million and ~~up by $3.1~~$5.0 million, respectively, from the same periods in ~~2018. Excluding the impact~~2019. Growth in average interest-earning assets, net of ~~prepayment penalty income associated with loan payoffs from each period,~~increased average interest-bearing liability balances, contributed approximately $4.3 million and $6.6 million, respectively, of additional net interest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019 decreased~~2020, however, this was offset by ~~$438 thousand and increased by $3.5 million, respectively, from the same periods~~declines in ~~2018. The decline~~asset yields out-pacing declines in ~~third quarter~~funding costs, which reduced net interest income ~~reflected an increase in cost of funds, partially offset~~ by ~~growth in average loan balances. On a year-to-date basis, the increase in net interest income reflected growth in average loans~~$7.3 million and ~~securities and relatively higher market interest rates on variable rate loans, partially offset by higher cost of funds and growth in higher cost time deposits.~~$11.6 million, respectively.

The net interest margin was ~~2.72%~~2.31% and ~~2.82%~~2.46%, respectively, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~2.99%~~2.81% and ~~3.03%~~2.87%, respectively, for the same periods a year ago. ~~Excluding the impact of prepayment penalty income associated with loan payoffs from each period, the~~Compression in net interest margin ~~was 2.71% and 2.81%, respectively, for~~resulted from the ~~three and nine months ended September 30, 2019, compared to 2.98% and 3.00%, respectively, for~~downward repricing of assets, which occurred at a faster pace than the ~~same periods in 2018. The decrease in the net interest margin was driven by higher cost~~repricing of ~~funds, partially offset by relatively higher market interest rates on variable rate loans.~~liabilities.

Total average securities for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019 increased~~2020 decreased by ~~$94.7~~$92.6 million and ~~$154.1~~$94.6 million, respectively, from the average balances for the same periods a year earlier. The decline in the average balance of securities was due to timing of reinvestment of security portfolio cash flows. The FTE rate of return on the securities portfolio for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was ~~2.72%~~2.43% and ~~2.83%~~2.51%, respectively, compared to ~~2.59%~~2.82% and ~~2.60%~~2.88%, respectively, for the same periods in ~~2018,~~2019, reflecting purchases of relatively ~~higher~~lower yielding debt securities ~~in the fourth quarter of 2018~~ and ~~first half of 2019.~~lower market interest rates.

Total average loan balances for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 increased by ~~$237.6~~$491.7 million and ~~$288.6~~$375.7 million, respectively, from the average loan balances for the comparable ~~2018 periods, primarily due to~~2019 period. This reflected growth in average commercial ~~real estate~~loan balances, which included the origination of PPP loans in the second quarter of 2020, and growth in average residential real estate loan ~~balances.~~balances, which included purchases of residential mortgage loans in the latter portion of 2019 and first quarter of 2020. The yield on total loans for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was ~~4.42%~~3.45% and ~~4.53%~~3.76%, respectively, compared to ~~4.38%~~4.56% and ~~4.29%~~4.58%, respectively, for the same periods in ~~2018.~~2019. Yields on LIBOR-based and prime-based loans reflected ~~relatively higher~~lower market interest rates.

- 59-

Management's Discussion and Analysis

The average balance of FHLB advances for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 increased by ~~$127.2~~$17.4 million and ~~$172.8~~$56.9 million, respectively, compared to the average balances for the same periods in ~~2018 to fund loan growth and purchases of securities.~~2019. The average rate paid on such advances for ~~both~~ the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was ~~2.64%~~1.65% and 1.86%, respectively, compared to ~~2.30%~~2.66% and ~~2.15%~~2.65%, respectively, for the same periods in ~~2018,~~2019, due to ~~relatively higher~~lower rates on short-term advances.

~~- 53-~~

~~Management's Discussion and Analysis~~

Included in total average interest-bearing deposits were of out-of-market wholesale brokered time deposits, which increased by ~~$36.4~~$52.4 million and ~~$59.3~~decreased by $14.9 million, respectively, from the same periods in ~~2018.~~2019. The average rate paid on wholesale brokered time deposits for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was ~~2.28%~~1.40% and ~~2.24%~~1.57%, respectively, compared to ~~1.82%~~2.27% and ~~1.70%~~2.22%, respectively, for the same periods in ~~2018, as maturities were replaced with~~2019. The decline in the yield on average wholesale brokered time deposits ~~with higher~~reflected lower market interest rates.

Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 increased by ~~$164.5~~$290.6 million and ~~$173.1~~$237.9 million, respectively, from the average balances for the same periods in ~~2018.~~2019. The ~~year-over-year increase~~increases largely reflected growth in average ~~in-market interest bearing deposits was largely due to growth in~~money market account balances, partially offset by maturities of higher-cost promotional time deposits. The average rate paid on in-market interest-bearing deposits for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019 increased~~2020 decreased by 3533 basis points and 4516 basis points, respectively, compared to the same periods in ~~2018,~~2019, largely due to ~~higher rates paid on promotional time deposits, as well as competitive pricing on~~downward repricing of interest-bearing demand deposit and money market accounts ~~and interest-bearing demand deposits.~~as market interest rates have declined from the prior periods.

The average balance of noninterest-bearing demand deposits for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 increased by ~~$13.8~~$137.0 million and ~~$23.3~~$70.4 million, respectively, from the average balances for the same periods in ~~2018.~~2019. See additional disclosure regarding PPP loan funding deposits under the caption “Sources of Funds.”

- ~~54-~~60-

Management's Discussion and Analysis

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

The following table presents certain information on a FTE basis regarding changes in our interest income and interest expense for the period indicated. The net change attributable to both volume and rate has been allocated proportionately.


(Dollars in thousands)	Three Months Ended September 30, 2019 vs. 2018									Nine Months Ended September 30, 2019 vs. 2018									Three Months Ended June 30, 2020 vs. 2019									Six Months Ended June 30, 2020 vs. 2019
	Change Due to									Change Due to									Change Due to									Change Due to
	Volume			Rate			Net Change			Volume			Rate			Net Change			Volume			Rate			Net Change			Volume			Rate			Net Change
Interest on Interest-Earning Assets:
Cash, federal funds sold and other short-term investments		$225			$7			$232			$330			$179			$509			$251			($614	)		($363	)		$497			($851	)		($354	)
Mortgage loans held for sale	55			(29		)	26			(43		)	(2		)	(45		)	213			(61		)	152			349			(92		)	257
Taxable debt securities	652			283			935			3,153			1,538			4,691			(605		)	(924		)	(1,529		)	(1,264		)	(1,657		)	(2,921		)
Nontaxable debt securities	(17		)	9			(8		)	(45		)	4			(41		)	(6		)	(5		)	(11		)	(11		)	(10		)	(21		)
Total securities	635			292			927			3,108			1,542			4,650			(611		)	(929		)	(1,540		)	(1,275		)	(1,667		)	(2,942		)
FHLB stock	41			72			113			211			251			462			34			(100		)	(66		)	102			(223		)	(121		)
Commercial real estate	2,970			413			3,383			8,082			3,880			11,962			1,821			(6,750		)	(4,929		)	3,559			(9,270		)	(5,711		)
Commercial & industrial	(679		)	(95		)	(774		)	(778		)	637			(141		)	1,937			(2,680		)	(743		)	1,956			(3,688		)	(1,732		)
Total commercial	2,291			318			2,609			7,304			4,517			11,821			3,758			(9,430		)	(5,672		)	5,515			(12,958		)	(7,443		)
Residential real estate	366			—			366			2,405			977			3,382			1,424			(700		)	724			2,546			(1,304		)	1,242
Home equity	83			63			146			(17		)	866			849			(22		)	(1,175		)	(1,197		)	69			(1,728		)	(1,659		)
Other	(67		)	1			(66		)	(197		)	11			(186		)	(63		)	—			(63		)	(135		)	4			(131		)
Total consumer	16			64			80			(214		)	877			663			(85		)	(1,175		)	(1,260		)	(66		)	(1,724		)	(1,790		)
Total loans	2,673			382			3,055			9,495			6,371			15,866			5,097			(11,305		)	(6,208		)	7,995			(15,986		)	(7,991		)
Total interest income	3,629			724			4,353			13,101			8,341			21,442			4,984			(13,009		)	(8,025		)	7,668			(18,819		)	(11,151		)
Interest on Interest-Bearing Liabilities:
Interest-bearing demand deposits	12			172			184			341			1,023			1,364			129			(611		)	(482		)	94			(763		)	(669		)
NOW accounts	3			(38		)	(35		)	1			12			13			20			(11		)	9			22			(27		)	(5		)
Money market accounts	127			863			990			(12		)	2,602			2,590			378			(839		)	(461		)	730			(708		)	22
Savings accounts	(2		)	14			12			(3		)	34			31			6			(10		)	(4		)	(3		)	—			(3		)
Time deposits (in-market)	412			963			1,375			1,570			3,440			5,010			(243		)	(242		)	(485		)	(297		)	134			(163		)
Total interest-bearing in-market deposits	552			1,974			2,526			1,897			7,111			9,008			290			(1,713		)	(1,423		)	546			(1,364		)	(818		)
Wholesale brokered time deposits	178			542			720			831			1,896			2,727			270			(1,204		)	(934		)	(160		)	(1,539		)	(1,699		)
Total interest-bearing deposits	730			2,516			3,246			2,728			9,007			11,735			560			(2,917		)	(2,357		)	386			(2,903		)	(2,517		)
FHLB advances	791			784			1,575			3,084			3,442			6,526			113			(2,711		)	(2,598		)	716			(4,210		)	(3,494		)
Junior subordinated debentures	—			13			13			—			121			121			—			(81		)	(81		)	—			(121		)	(121		)
Other borrowings																			2			—			2			2			—			2
Total interest expense	1,521			3,313			4,834			5,812			12,570			18,382			675			(5,709		)	(5,034		)	1,104			(7,234		)	(6,130		)
Net interest income (FTE)		$2,108			($2,589	)		($481	)		$7,289			($4,229	)		$3,060			$4,309			($7,300	)		($2,991	)		$6,564			($11,585	)		($5,021	)

Provision ~~and Allowance~~ for ~~Loan~~Credit Losses

~~The~~Effective January 1, 2020, Washington Trust adopted Topic 326, often referred to as CECL, which requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures. CECL requires that the allowance for credit losses, or ACL, be calculated based on current expected credit losses over the full remaining expected life of the financial assets and also consider expected future changes in macroeconomic conditions. See Note 2 to the Unaudited Consolidated Financial Statements for additional disclosure on the impact of adopting Topic 326.

Prior to January 1, 2020, the provision for loan losses iswas based on an incurred loss model. The incurred loss model was based on management’s periodic assessment of the adequacy of the allowance for ~~loan~~credit losses on loans which, in turn, iswas based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics; the levels of nonperforming

- 61-

Management's Discussion and Analysis

loans, past due loans and net charge-offs, both current and historic; local economic and credit conditions; the direction of real estate values; and regulatory guidelines. The provision for loan losses iswas charged against earnings in order to maintain an allowance ~~for loan losses~~ that ~~reflects~~reflected management’s best estimate of probable losses inherent in the loan portfolio at the balance sheet date.

~~Loan loss provisions~~Provisions for credit losses of ~~$400 thousand~~$2.2 million and ~~$1.6~~$9.2 million, respectively, were charged to earnings for the three and ~~nine~~six months ended ~~September~~ June 30, ~~2019,~~2020, compared to ~~$350~~$525 thousand and ~~$750 thousand,~~$1.2 million, respectively, for the ~~three~~same periods in 2019. In addition to the change in accounting methodologies described above, the year-over-year increase in the provision was attributable to the significant deterioration in the economic forecast due to the COVID-19 pandemic and ~~nine months ended~~ ~~September 30, 2018. These provisions were based on management’s assessment of loss exposure, as well as loss allocations commensurate with~~also reflected loan growth and changes in the ~~loan portfolio, including changes~~underlying portfolio. Estimating an appropriate level of ACL in ~~asset quality~~loans necessarily involves a high degree of judgment and ~~credit quality metrics.~~

~~- 55-~~

~~Management's Discussion~~continued uncertainty regarding the severity and ~~Analysis~~

duration of the pandemic and related economic effects will continue to affect the ACL.

Net charge-offs totaled ~~$801~~$308 thousand and ~~$1.7 million,~~$931 thousand, respectively, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019. This~~2020, compared to ~~net charge-offs of $15~~$771 thousand and ~~$729~~$849 thousand, respectively, for the same periods in ~~2018.~~2019.

The allowance for ~~loan~~credit losses on loans was ~~$27.0~~$41.4 million, or ~~0.71%~~0.97% of total loans, at ~~September~~June 30, ~~2019,~~2020, compared to ~~$27.1~~an allowance for loan losses of $27.0 million, or ~~0.74%~~0.69% of total loans, at December 31, ~~2018.~~2019. See additional discussion under the caption “Asset Quality” for further information on the allowance for ~~loan losses.~~credit losses on loans.

Noninterest Income

Noninterest income is an important source of revenue for Washington Trust. The principal categories of noninterest income are shown in the following table:


(Dollars in thousands)	Three Months									Nine Months										Three Months										Six Months
					Change										Change										Change										Change
Periods ended September 30,	2019		2018		$			%		2019			2018		$			%
Periods ended June 30,																				2020		2019			$			%		2020		2019			$			%
Noninterest income:
Wealth management revenues		$9,153		$9,454		($301	)	(3	%)		$27,954			$29,329		($1,375	)	(5	)%		$8,605		$9,549			($944	)	(10	%)		$17,294		$18,801			($1,507	)	(8	%)
Mortgage banking revenues	4,840		2,624		2,216			84		11,126			8,403		2,723			32		14,851		3,640			11,211			308		20,947		6,286			14,661			233
Card interchange fees	1,099		983		116			12		3,114			2,791		323			12		1,031		1,018			13			1		1,978		2,015			(37		)	(2	)
Service charges on deposit accounts	939		885		54			6		2,743			2,651		92			3		517		929			(412		)	(44	)	1,377		1,804			(427		)	(24	)
Loan related derivative income	1,407		278		1,129			406		2,877			1,087		1,790			165		99		746			(647		)	(87	)	2,554		1,470			1,084			74
Income from bank-owned life insurance	569		572		(3		)	(1	)	1,784			1,624		160			10		791		566			225			40		1,355		1,215			140			12
Net realized gains on securities	—		—		—			100		(80		)	—		(80		)	100		—		(80		)	80			100		—		(80		)	80			100
Other income	335		419		(84		)	(20	)	944			1,066		(122		)	(11	)	426		385			41			11		742		609			133			22
Total noninterest income		$18,342		$15,215		$3,127		21	%		$50,462			$46,951		$3,511		7	%		$26,320		$16,753			$9,567		57	%		$46,247		$32,120			$14,127		44	%

Noninterest Income Analysis

Revenue from wealth management services ~~is our largest source of noninterest income, representing 55%~~represented 37% of total noninterest income for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~62%~~59% for the same period in ~~2018.~~2019. A substantial portion of wealth management revenues is dependent on the value of wealth management assets under administration and is closely tied to the performance of the financial markets. This portion of wealth management revenues is referred to as “asset-based” and includes trust and investment management fees. Wealth management revenues also include “transaction-based” revenues, such as financial planning, commissions and other service fees that are not primarily derived from the value of assets.

- 62-

Management's Discussion and Analysis

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


(Dollars in thousands)	Three Months									Nine Months									Three Months									Six Months
					Change									Change									Change									Change
Periods ended September 30,	2019		2018		$			%		2019		2018		$			%
Periods ended June 30,																			2020		2019		$			%		2020		2019		$			%
Wealth management revenues:
Asset-based revenues		$9,013		$9,322		($309	)	(3	)%	27,075		28,413		(1,338		)	(5	)		$8,156		$9,141		($985	)	(11	%)		$16,511		$18,062		($1,551	)	(9	%)
Transaction-based revenues	140		132		8			6		879		916		(37		)	(4	)	449		408		41			10		783		739		44			6
Total wealth management revenues		$9,153		$9,454		($301	)	(3	)%		$27,954		$29,329		($1,375	)	(5	)%		$8,605		$9,549		($944	)	(10	%)		$17,294		$18,801		($1,507	)	(8	%)

Wealth management revenues for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 decreased by ~~$301~~$944 thousand and ~~$1.4~~$1.5 million, respectively, from the comparable periods in ~~2018,~~2019, due to a decline in asset-based revenues.

~~- 56-~~

~~Management's Discussion and Analysis~~

The decrease in asset-based revenues correlated to declines in the average balances of assets under administration (“AUA”) for the comparable periods in 2019.

The following table presents the changes in wealth management ~~assets under administration:~~AUA:


(Dollars in thousands)	Three Months					Nine Months						Three Months					Six Months
Periods ended September 30,	2019			2018		2019			2018
Periods ended June 30,												2020		2019			2020			2019
Wealth management assets under administration:
Balance at the beginning of period		$6,478,890			$6,220,155		$5,910,814			$6,714,637			$5,337,733		$6,350,128			$6,235,801			$5,910,814
Net investment appreciation & income	66,514			232,245		809,060			333,671
Net client asset flows	(419,077		)	9,940		(593,547		)	(585,968		)
Net investment appreciation (depreciation) & income												671,602		222,489			(101,133		)	742,546
Net client asset inflows (outflows)												129,510		(93,727		)	4,177			(174,470		)
Balance at the end of period		$6,126,327			$6,462,340		$6,126,327			$6,462,340			$6,138,845		$6,478,890			$6,138,845			$6,478,890

Wealth management ~~assets under administration were~~AUA amounted to $6.1 billion at ~~September~~June 30, ~~2019,~~2020, down by ~~$336.0~~$340.0 million, or 5%, from ~~a year ago. Wealth management assets and related asset-based revenues were~~the balance at June 30, 2019. AUA was adversely impacted by net client outflows in the second half of 2019, which was largely associated with the departures of ~~certain client-facing personnel in the first quarter of 2018 and~~ two senior counselors atin June 2019. AUA was also adversely impacted by the ~~end~~volatility in financial markets in 2020. The average balance of AUA for the ~~second quarter of~~three and six months ended June 30, 2020 decreased by approximately 10% and 6%, respectively, from the average balances for the same periods in 2019.

Mortgage banking revenues represented ~~22%~~45% of total noninterest income for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to ~~18%~~20% for the same period in ~~2018.~~2019. These revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets.

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

(Dollars in thousands) Three Months Nine Months
Change Change
Periods ended September 30, 2019 2018 $ % 2019 2018 $ %
Mortgage banking revenues:
Gains on loan sales, net (1)
$4,752

$2,485

$2,267
91 %
$10,749

$7,950

$2,799
35 %
Loan servicing fee income, net (2) 88
139
(51 ) (37 ) 377
453
(76 ) (17 )
Total mortgage banking revenues
$4,840

$2,624

$2,216
84 %
$11,126

$8,403

$2,723
32 %

Loans sold to the secondary market (3)

$184,976

$132,116

$52,860
40 %
$414,469

$334,677

$79,792
24 %



(Dollars in thousands)	Three Months										Six Months
						Change										Change
Periods ended June 30,	2020			2019		$			%		2020			2019		$			%
Mortgage banking revenues:
Realized gains on loan sales, net (1)		$10,646			$2,924		$7,722		264	%		$14,334			$4,861		$9,473		195	%
Unrealized gains (losses), net (2)	4,415			599		3,816			637		6,740			1,136		5,604			493
Loan servicing fee income, net (3)	(210		)	117		(327		)	(279	)	(127		)	289		(416		)	(144	)
Total mortgage banking revenues		$14,851			$3,640		$11,211		308	%		$20,947			$6,286		$14,661		233	%

Loans sold to the secondary market (4)		$305,224			$137,414		$167,810		122	%		$467,415			$229,493		$237,922		104	%


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


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


~~(2)~~(3)	Represents loan servicing fee income, net of servicing right amortization and valuation adjustments.


~~(3)~~(4)	Includes brokered loans (loans originated for others).

For the three and nine months ended September 30, 2019, mortgage banking revenues were up by $2.2 million and $2.7 million, respectively, compared to the same periods in 2018. The increase in mortgage banking revenues reflected higher sales volume and an increase in the sales yield on loans sold in the secondary market. Also included was an increase in fair value adjustments on mortgage loan commitments and loans held for sale, reflecting growth in the mortgage pipeline and corresponding loan commitment balances.

~~Loan related derivative income for the three and nine months ended~~ ~~September 30, 2019 increased by $1.1 million and $1.8 million, respectively, from the comparable periods in 2018, due to a higher volume of commercial borrower interest rate swap transactions.~~

- ~~57-~~63-

Management's Discussion and Analysis

For the three and six months ended June 30, 2020, mortgage banking revenues were up by $11.2 million and $14.7 million, respectively, compared to the same periods in 2019, reflecting increases in both realized and unrealized gains associated with mortgage banking activities. Net realized gains rose due to increases in both sales volume and sales yield on loans sold to the secondary market. For the three and six months ended June 30, 2020, mortgage loans sold to the secondary market totaled $305.2 million and $467.4 million, respectively, compared to $137.4 million and $229.5 million, respectively, for the same periods in 2019. Net unrealized gains also increased, reflecting growth in the mortgage pipeline and a corresponding increase in the fair value of mortgage loan commitments. Mortgage origination and sales activity increased year-over-year in response to declines in market interest rates.

Loan related derivative income for the three months ended June 30, 2020 decreased by $647 thousand from the same period in 2019, reflecting a lower volume of commercial borrower interest rate swap transactions. Loan-related derivative income for the six months ended June 30, 2020 increased by $1.1 million from the comparable period in 2019, reflecting higher gains on commercial borrower interest rate swap transactions.

For the three and six months ended June 30, 2020, service charges on deposit accounts decreased by $412 thousand and $427 thousand, respectively, compared to the same periods in 2019, primarily due to lower overdraft fee income.

Income from BOLI for the three and six months ended June 30, 2020 was up by $225 thousand and $140 thousand, respectively, from the same periods in 2019. Included in income from BOLI for the three and six months ended June 30, 2020 was a $229 thousand non-taxable gain due to the receipt of life insurance proceeds.

Noninterest Expense

The following table presents noninterest expense comparisons:


(Dollars in thousands)	Three Months										Nine Months									Three Months									Six Months
						Change									Change									Change									Change
Periods ended September 30,	2019			2018		$			%		2019		2018		$			%
Periods ended June 30,																				2020		2019		$			%		2020		2019		$			%
Noninterest expense:
Salaries and employee benefits		$18,332			$17,283		$1,049		6	%		$54,387		$52,359		$2,028		4	%		$19,464		$18,436		$1,028		6	%		$38,932		$36,055		$2,877		8	%
Outsourced services	2,722			1,951		771			40		7,846		6,174		1,672			27		2,784		2,518		266			11		5,784		5,124		660			13
Net occupancy	1,933			2,013		(80		)	(4	)	5,835		5,945		(110		)	(2	)	1,909		1,904		5			—		3,928		3,902		26			1
Equipment	1,046			1,080		(34		)	(3	)	3,085		3,329		(244		)	(7	)	895		1,028		(133		)	(13	)	1,872		2,039		(167		)	(8	)
Legal, audit and professional fees	645			559		86			15		1,843		1,840		3			—		659		664		(5		)	(1	)	1,481		1,198		283			24
FDIC deposit insurance costs	(460		)	410		(870		)	(212	)	509		1,236		(727		)	(59	)	674		540		134			25		1,096		969		127			13
Advertising and promotion	368			440		(72		)	(16	)	1,132		946		186			20		186		525		(339		)	(65	)	445		764		(319		)	(42	)
Amortization of intangibles	236			245		(9		)	(4	)	714		740		(26		)	(4	)	230		239		(9		)	(4	)	460		478		(18		)	(4	)
Other	2,048			2,081		(33		)	(2	)	6,634		6,911		(277		)	(4	)	1,677		2,297		(620		)	(27	)	4,933		4,586		347			8
Total noninterest expense		$26,870			$26,062		$808		3	%		$81,985		$79,480		$2,505		3	%		$28,478		$28,151		$327		1	%		$58,931		$55,115		$3,816		7	%

Noninterest Expense Analysis

Salaries and employee benefits expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 increased by $1.0 million and ~~$2.0~~$2.9 million, respectively, compared to the same periods in ~~2018,~~2019, largely reflecting ~~annual merit increases and~~ volume-related increases in mortgage banking commission expense and annual merit increases. These increases were partially offset by an increase in deferred labor costs (a contra expense) associated with PPP loan originations in the second quarter of 2020, as well as lower wealth management compensation costs associated with the departure of personnel. Year-to-date salaries and employee benefits expense was also impacted by one-time incentive bonuses of approximately $450 thousand that were recognized in the first quarter of 2018. There were no such one-time bonuses recognized in 2019.

Outsourced services expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 increased by ~~$771~~$266 thousand and $1.7 million, respectively, compared to the same periods in 2018. Equipment expense for the three and nine months ended September 30, 2019 decreased by $34 thousand and $244 thousand, respectively, from the same periods a year ago. Both the increase in outsourced services and decline in equipment expense reflected changes to and expansion of services provided by third party vendors, including software application processing and operational services, as well as volume-related increases in third party processing costs.

~~FDIC deposit insurance costs for the three and nine months ended September 30, 2019 decreased by $870 thousand and $727~~$660 thousand, respectively, compared to the same periods in ~~2018,~~2019, reflecting volume-related increases in third party processing costs and the expansion of services provided by third party vendors.

Advertising and promotion expense for the three and six months ended June 30, 2020 decreased by $339 thousand and $319 thousand, respectively, compared to the same periods in 2019, reflecting timing of promotional activities.

- 64-

Management's Discussion and Analysis

Other expenses for the three and six months ended June 30, 2020 decreased by $620 thousand and increased by $347 thousand, respectively, compared to the same periods in 2019. Included in other expenses in the first quarter of 2020, was a contingency reserve of approximately $800 thousand that was established largely due to ~~approximately $900 thousand of FDIC assessment credits recognized~~a potential loss associated with counterfeit checks drawn on a commercial customer’s account. This matter was resolved in the ~~third~~second quarter of ~~2019.~~2020 and resulted in a reduction of $170 thousand from the previously established reserve, which was recognized as a reduction of other expenses in the second quarter of 2020. Excluding the impact of the aforementioned item, other expenses for the three and six months ended June 30, 2020 decreased by $450 thousand and $283 thousand, respectively, from the same periods in 2019, reflecting lower levels of business travel and entertainment expenses and modest declines in a variety of other expense categories.

Income Taxes

The following table presents the Corporation’s income tax provision and applicable tax rates for the periods indicated:


(Dollars in thousands)
	Three Months						Nine Months						Three Months						Six Months
Periods ended September 30,	2019			2018			2019			2018
Periods ended June 30,													2020			2019			2020			2019
Income tax expense		$5,236			$4,741			$14,740			$13,737			$5,547			$4,662			$8,686			$9,504
Effective income tax rate	21.8		%	21.3		%	21.6		%	21.1		%	20.9		%	21.3		%	20.9		%	21.5		%

The effective income tax rates for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 differed from the federal rate of 21%, primarily due to state income tax expense, offset by the benefits of tax-exempt income, income from BOLI, federal tax credits and the recognition of excess tax benefits (expense) associated with the settlement of share-based awards.

~~- 58-~~

~~Management's Discussion and Analysis~~

The ~~increase~~decrease in the effective tax rate for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to the same periods in ~~2018~~2019 largely reflected ~~a decrease in excess tax benefits recognized upon the settlement of share-based compensation awards, as well as an increase in~~lower state tax ~~expense.~~exposure.

Segment Reporting

The Corporation manages its operations through two business segments, Commercial Banking and Wealth Management Services. Activity not related to the segments, including activity related to the investment securities portfolio, wholesale funding matters and administrative units are considered Corporate. The Corporate unit also includes income from BOLI and the residual impact of methodology allocations such as funds transfer pricing offsets. Methodologies used to allocate income and expenses to business lines are periodically reviewed and revised. See Note 14 to the Unaudited Consolidated Financial Statements for additional disclosure related to business segments.

Commercial Banking

The following table presents a summarized statement of operations for the Commercial Banking business segment:


(Dollars in thousands)	Three Months								Nine Months								Three Months								Six Months
					Change								Change								Change								Change
Periods ended September 30,	2019		2018		$		%		2019		2018		$		%
Periods ended June 30,																	2020		2019		$		%		2020		2019		$			%
Net interest income		$28,515		$27,036		$1,479	5	%		$83,684		$79,656		$4,028	5	%		$32,580		$27,867		$4,713	17	%		$61,590		$55,169		$6,421		12	%
Provision for loan losses	400		350		50		14		1,575		750		825		110
Net interest income after provision for loan losses	28,115		26,686		1,429		5		82,109		78,906		3,203		4
Provision for credit losses																	2,200		525		1,675		319		9,236		1,175		8,061			686
Net interest income after provision for credit losses																	30,380		27,342		3,038		11		52,354		53,994		(1,640		)	(3	)
Noninterest income	8,607		5,174		3,433		66		20,753		15,947		4,806		30		16,910		6,690		10,220		153		27,575		12,146		15,429			127
Noninterest expense	16,897		16,253		644		4		50,661		48,502		2,159		4		18,226		17,332		894		5		37,529		33,763		3,766			11
Income before income taxes	19,825		15,607		4,218		27		52,201		46,351		5,850		13		29,064		16,700		12,364		74		42,400		32,377		10,023			31
Income tax expense	4,347		3,344		1,003		30		11,371		9,834		1,537		16		6,177		3,603		2,574		71		8,941		7,024		1,917			27
Net income		$15,478		$12,263		$3,215	26	%		$40,830		$36,517		$4,313	12	%		$22,887		$13,097		$9,790	75	%		$33,459		$25,353		$8,106		32	%

Net interest income for the Commercial Banking segment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, increased by ~~$1.5~~$4.7 million and ~~$4.0~~$6.4 million, respectively, from the same periods in ~~2018, largely~~2019, reflecting growth in loans ~~which was~~ partially offset by ~~a shift~~lower yields on loans due to declines in ~~the mix of deposits to higher cost categories and increases in rates paid on in-market deposits.~~market interest rates.

~~Loan loss provisions~~

- 65-

Management's Discussion and Analysis

Provisions for credit losses of ~~$400 thousand~~$2.2 million and ~~$1.6~~$9.2 million, respectively, were charged to earnings for the three and ~~nine~~six months ended ~~September~~ June 30, ~~2019,~~2020, compared to ~~$350~~$525 thousand and ~~$750 thousand,~~$1.2 million, respectively, for the ~~three~~same periods in 2019. In addition to the change in accounting methodologies described above under the caption “Provision for Credit Losses,” the year-over-year increase in the provision was attributable to the significant deterioration in the economic forecast due to the COVID-19 pandemic and ~~nine months ended~~ ~~September 30, 2018. These provisions were based on management’s assessment of loss exposure, as well as loss allocations commensurate with~~also reflected loan growth and changes in the ~~loan portfolio, including changes in asset quality and credit quality metrics.~~underlying portfolio.

Noninterest income derived from the Commercial Banking segment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was up by ~~$3.4~~$10.2 million and ~~$4.8~~$15.4 million, respectively, from the comparable periods in ~~2018. The increase~~2019 largely ~~reflected~~due to higher mortgage banking revenues. See additional discussion regarding mortgage banking revenues, ~~and~~ loan related derivative ~~income. See additional discussion~~income and service charges on deposits under the caption “Noninterest Income” above.

Commercial Banking noninterest expenses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 were up by ~~$644~~$894 thousand and ~~$2.2~~$3.8 million, respectively, from the same periods in ~~2018,~~2019, reflecting increases in salaries and employee benefits and outsourced services ~~expenses, partially offset by lower FDIC deposit insurance costs.~~expenses. See ~~further~~additional discussion under the caption “Noninterest Expense” above.

~~- 59-~~

~~Management's Discussion and Analysis~~

Wealth Management Services

The following table presents a summarized statement of operations for the Wealth Management Services business segment:


(Dollars in thousands)	Three Months											Nine Months											Three Months											Six Months
							Change											Change											Change											Change
Periods ended September 30,	2019			2018			$			%		2019			2018			$			%
Periods ended June 30,																							2020			2019			$			%		2020			2019			$			%
Net interest expense		($114	)		($90	)		($24	)	27	%		($361	)		($225	)		($136	)	60	%		($26	)		($120	)		$94		78	%		($93	)		($247	)		$154		62	%
Noninterest income	9,153			9,454			(301		)	(3	)	27,961			29,329			(1,368		)	(5	)	8,605			9,557			(952		)	(10	)	17,294			18,808			(1,514		)	(8	)
Noninterest expense	6,577			6,565			12			—		20,720			21,123			(403		)	(2	)	6,579			7,300			(721		)	(10	)	13,938			14,143			(205		)	(1	)
Income before income taxes	2,462			2,799			(337		)	(12	)	6,880			7,981			(1,101		)	(14	)	2,000			2,137			(137		)	(6	)	3,263			4,418			(1,155		)	(26	)
Income tax expense	646			710			(64		)	(9	)	1,845			2,008			(163		)	(8	)	457			582			(125		)	(21	)	813			1,199			(386		)	(32	)
Net income		$1,816			$2,089			($273	)	(13	%)		$5,035			$5,973			($938	)	(16	%)		$1,543			$1,555			($12	)	(1	%)		$2,450			$3,219			($769	)	(24	%)

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, noninterest income derived from the Wealth Management Services segment decreased by ~~$301~~$952 thousand and ~~$1.4~~$1.5 million, respectively, compared to the same periods in ~~2018.~~2019, due to a decline in asset-based revenues. See further discussion of wealth management revenues under the caption “Noninterest Income” above.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, noninterest expenses for the Wealth Management Services segment ~~increased~~decreased by ~~$12~~$721 thousand and ~~decreased by $403~~$205 thousand, ~~respectively.~~respectively, from the same periods in 2019, largely reflecting lower salaries and employee benefits expense. The ~~modest increase~~decline in ~~third~~year-over-year second quarter noninterest expenses ~~reflected higher outsourced services and legal expenses, offset by lower compensation costs.~~also included modest decreases across a variety of noninterest expense categories. See further discussion under the caption “Noninterest Expense” above. ~~The decrease in year-to-date noninterest expenses was attributable to software system implementation costs incurred in 2018 associated with an April 2018 system implementation.~~

Corporate

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

(Dollars in thousands) Three Months Nine Months
Change Change
Periods ended September 30, 2019 2018 $ % 2019 2018 $ %
Net interest income
$4,577

$6,503

($1,926 ) (30 %)
$18,097

$18,981

($884 ) (5 %)
Noninterest income 582
587
(5 ) (1 ) 1,748
1,675
73
4
Noninterest expense 3,396
3,244
152
5
10,604
9,855
749
8
Income before income taxes 1,763
3,846
(2,083 ) (54 ) 9,241
10,801
(1,560 ) (14 )
Income tax expense 243
687
(444 ) (65 ) 1,524
1,895
(371 ) (20 )
Net income
$1,520

$3,159

($1,639 ) (52 %)
$7,717

$8,906

($1,189 ) (13 %)



(Dollars in thousands)	Three Months										Six Months
						Change										Change
Periods ended June 30,	2020			2019		$			%		2020			2019		$			%
Net interest (expense) income		($1,609	)		$6,111		($7,720	)	(126	%)		$2,050			$13,520		($11,470	)	(85	%)
Noninterest income	805			506		299			59		1,378			1,166		212			18
Noninterest expense	3,673			3,519		154			4		7,464			7,209		255			4
(Loss) income before income taxes	(4,477		)	3,098		(7,575		)	(245	)	(4,036		)	7,477		(11,513		)	(154	)
Income tax (benefit) expense	(1,087		)	477		(1,564		)	(328	)	(1,068		)	1,281		(2,349		)	(183	)
Net (loss) income		($3,390	)		$2,621		($6,011	)	(229	%)		($2,968	)		$6,196		($9,164	)	(148	%)

Net interest income for the Corporate unit for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 was down by ~~$1.9~~$7.7 million and ~~$884 thousand,~~$11.5 million, respectively, compared to the same periods in ~~2018. Higher wholesale funding costs were partially offset by increased investment~~2019. Lower interest income on ~~debt~~ securities resulting from ~~growth in the investment securities portfolio and higher dividend income on FHLB stock.~~

~~Noninterest expense for the Corporate unit for the three and nine months endedSeptember 30, 2019 was up by $152 thousand and $749 thousand, respectively, from the same periods in 2018,reflecting increases in staffing levels.~~

a decline

- ~~60-~~66-

Management's Discussion and Analysis

in average balances of securities and lower yields was partially offset by lower wholesale funding costs. The decline in net interest income for the Corporate unit also reflected unfavorable net funds transfer pricing allocations with the Commercial Banking segment as the downward repricing of assets occurred at a faster pace than the repricing of liabilities.

Financial Condition

Summary

The following table presents selected financial condition data:


(Dollars in thousands)					Change									Change
	September 30, 2019		December 31, 2018		$			%		June 30, 2020		December 31, 2019		$			%
Cash and due from banks		$141,768		$89,923		$51,845		58	%		$215,601		$132,193		$83,408		63	%
Total securities	887,020		938,225		(51,205		)	(5	)	938,446		899,490		38,956			4
Total loans	3,778,106		3,680,360		97,746			3		4,287,641		3,892,999		394,642			10
Allowance for loan losses	26,997		27,072		(75		)	—
Allowance for credit losses on loans										41,441		27,014		14,427			53
Total assets	5,198,878		5,010,766		188,112			4		5,876,960		5,292,659		584,301			11
Total deposits	3,586,153		3,524,048		62,105			2		4,101,436		3,498,882		602,554			17
FHLB advances	956,786		950,722		6,064			1		1,005,051		1,141,464		(136,413		)	(12	)
Total shareholders’ equity	497,825		448,184		49,641			11		520,163		503,492		16,671			3

Total assets amounted to ~~$5.2~~$5.9 billion at ~~September~~June 30, ~~2019,~~2020, up by ~~$188.1~~$584.3 million, or 4%11%, from the end of 2018. Included in the increase in total assets was the recognition of operating lease right-of-use assets totaling $28.9 million due to the adoption of ASU 2016-02 on January 1, 2019 as disclosed in Note 2 to the Unaudited Consolidated Financial Statements. The remaining increase2019. This growth in total assets reflected increases in total loans, ~~and~~ the balance of cash and due from banks ~~partially offset by a decrease in~~and total securities. ~~The increase in cash~~Cash and due from banks ~~was~~balances rose largely due to increased levels of cash collateral pledged to derivative counterparties. See Note 9 to the Unaudited Consolidated Financial Statements for additional disclosure regarding derivative financial instruments.

The allowance for credit losses on loans increased by $14.4 million, or 53%, from the end of 2019. The increase reflects the adoption of the CECL accounting methodology, as well as the impact of the COVID-19 pandemic. See additional disclosure in the Asset Quality section under the caption “Allowance for credit losses on loans.”

Total deposits increased by ~~$62.1~~$602.6 million, or 2%17%, reflecting increases in both in-market deposits and wholesale brokered time deposits. FHLB advances ~~increased~~decreased by ~~$6.1~~$136.4 million, or 1%12%, from ~~September 30, 2018.~~December 31, 2019. Shareholders’ equity amounted to ~~$497.8~~$520.2 million at ~~September~~June 30, ~~2019,~~2020, up by ~~$49.6~~$16.7 million, or 3%, from the balance at December 31, ~~2018.~~2019. As of ~~September~~June 30, ~~2019,~~2020, the Bancorp and the Bank were “well capitalized.” See Note 8 to the Unaudited Consolidated Financial Statements for additional discussion on regulatory capital requirements.

Securities

Investment security activity is monitored by the Investment Committee, the members of which also sit on the Asset/Liability Committee (“ALCO”). Asset and liability management objectives are the primary influence on the Corporation’s investment activities. However, the Corporation also recognizes that there are certain specific risks inherent in investment ~~portfolio activity.~~activities. The securities portfolio is managed in accordance with regulatory guidelines and established internal corporate investment policies that provide limitations on specific risk factors such as market risk, credit risk and concentration, liquidity risk and operational risk to help monitor risks associated with investing in securities. Reports on the activities conducted by Investment Committee and the ALCO are presented to the Board of Directors on a regular basis.

The Corporation’s securities portfolio is managed to generate interest income, to implement interest rate risk management strategies, and to provide a readily available source of liquidity for balance sheet management. Securities are designated as either available for sale, held to maturity or trading at the time of purchase. The Corporation has not maintained a portfolio of trading securities. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Debt securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized. ~~Debt securities held to maturity are reported at amortized cost.~~

Determination of Fair Value

The Corporation uses an independent pricing service to obtain quoted prices. The prices provided by the independent pricing service are generally based on observable market data in active markets. The determination of whether markets are active or

- 67-

Management's Discussion and Analysis

inactive is based upon the level of trading activity for a particular security class. ~~The Corporation~~Management reviews the independent pricing service’s documentation to gain an understanding of the appropriateness of the pricing methodologies. ~~The Corporation~~Management also reviews the prices provided by the independent pricing service for reasonableness based upon current trading levels for similar securities. If the prices appear unusual, they are re-examined and the value is either confirmed or revised. In addition, ~~the Corporation~~management periodically performs independent price tests of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018, the Corporation~~2019, management did not make any adjustments to the prices provided by the pricing service.

~~- 61-~~

~~Management's Discussion and Analysis~~

Our fair value measurements generally utilize Level 2 inputs, representing quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and model-derived valuations in which all significant input assumptions are observable in active markets.

See Notes 4 and 10 to the Unaudited Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities.

Securities Portfolio

The carrying amounts of securities held are as follows:

(Dollars in thousands) September 30, 2019 December 31, 2018
Amount
%
Amount
%
Available for Sale Debt Securities:
Obligations of U.S. government-sponsored enterprises
$197,324
22 %
$242,683
26 %
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 664,905
76
660,793
72
Obligations of states and political subdivisions —
—
937
—
Individual name issuer trust preferred debt securities 12,421
1
11,772
1
Corporate bonds 12,370
1
11,625
1
Total available for sale debt securities
$887,020
100 %
$927,810
100 %

(Dollars in thousands) September 30, 2019 December 31, 2018
Amount
%
Amount
%
Held to Maturity Debt Securities:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
$—
— %
$10,415
100 %
Total held to maturity debt securities
$—
— %
$10,415
100 %

As noted above, the securities portfolio is managed to generate interest income, for interest rate risk management purposes, and to provide an available source of liquidity for balance sheet management. Debt securities totaling $82.8 million and $127.8 million, respectively, were purchased during the nine months ended September 30, 2019 and 2018. The 2019 purchases had a weighted average yield of 3.61%, while the 2018 purchases had a weighted average yield of 3.34%. In 2019, the purchases were partially offset by routine principal pay-downs on mortgage-backed securities, calls, maturities and the sale of one debt security.

As disclosed in Note 2 to the Unaudited Consolidated Financial Statements, on January 1, 2019, the Corporation adopted the provisions of ASU 2017-12. As permitted by ASU 2017-12, debt securities classified as held to maturity with an amortized cost of $10.4 million and a fair value of $10.3 million were reclassified to available for sale upon the adoption date.



(Dollars in thousands)	June 30, 2020				December 31, 2019
	Amount		%		Amount		%
Available for Sale Debt Securities:
Obligations of U.S. government-sponsored enterprises		$156,638	17	%		$157,648	18	%
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	761,056		81		719,080		80
Individual name issuer trust preferred debt securities	11,729		1		12,579		1
Corporate bonds	9,023		1		10,183		1
Total available for sale debt securities		$938,446	100	%		$899,490	100	%

The securities portfolio stood at ~~$887.0~~$938.4 million as of ~~September~~June 30, ~~2019,~~2020, or ~~17%~~16% of total assets, compared to ~~$938.2~~$899.5 million as of December 31, ~~2018,~~2019, or ~~19%~~17% of total assets. The largest component of the securities portfolio is mortgage-backed securities, all of which are issued by U.S. government agencies or U.S. government-sponsored enterprises.

The securities portfolio increased by $39.0 million, or 4%, from the end of 2019, reflecting purchases of debt securities totaling $248.2 million, with a weighted average yield of 2.10%, as well as an increase in the fair value of available for sale securities. These increases were partially offset by routine pay-downs on mortgage-backed securities, calls and maturities of debt securities.

As of ~~September~~June 30, ~~2019,~~2020, the net unrealized gain position on ~~securities~~ available for sale debt securities amounted to $18.6 million, compared to $4.2 million ~~compared to a net unrealized loss position of $22.0 million on securities available for sale and held to maturity~~ as of December 31, ~~2018.~~2019. These net positions included gross unrealized losses of ~~$5.4~~$3.8 million and ~~$24.4~~$4.9 million, respectively, of as ~~September~~June 30, ~~2019~~2020 and December 31, 2018. The decrease in gross unrealized losses in 2019 was primarily concentrated in obligations of U.S. government agencies and U.S. government-sponsored enterprises, including mortgage-backed securities, and largely attributable to relative changes in interest rates since the time of purchase. 2019.

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

Loans

Total loans amounted to $4.3 billion at June 30, 2020, up by $394.6 million, or 10%, from the end of 2019, largely due to commercial loan growth and purchases of residential real estate mortgage loans in the first quarter 2020. Growth in commercial loans was largely concentrated in the commercial and industrial portfolio, reflecting originations of PPP loans in the second quarter of 2020.

- ~~62-~~68-

Management's Discussion and Analysis

~~Loans~~

~~Total loans amounted to $3.8 billion at September 30, 2019, up by $97.7 million, or 3%, from the end of 2018, largely due to growth in commercial real estate loans.~~

The following is a summary of loans:


(Dollars in thousands)	September 30, 2019				December 31, 2018				June 30, 2020				December 31, 2019
	Amount		%		Amount		%		Amount		%		Amount		%
Commercial:
Commercial real estate (1)		$1,517,320	40	%		$1,392,408	38	%		$1,630,998	38	%		$1,547,572	40	%
Commercial & industrial (2)	566,426		15		620,704		17		852,445		20		585,289		15
Total commercial	2,083,746		55		2,013,112		55		2,483,443		58		2,132,861		55
Residential Real Estate:
Residential real estate (3)	1,378,518		36		1,360,387		37		1,508,223		35		1,449,090		37
Consumer:
Home equity	294,250		8		280,626		8		277,632		7		290,874		7
Other (4)	21,592		1		26,235		—		18,343		—		20,174		1
Total consumer	315,842		9		306,861		8		295,975		7		311,048		8
Total loans		$3,778,106	100	%		$3,680,360	100	%		$4,287,641	100	%		$3,892,999	100	%


(1)	~~Consists~~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)	~~Consists~~C&I consists of loans to businesses and individuals, a ~~substantial~~ portion of which are fully or partially collateralized by real estate. C&I also includes PPP loans.


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


(4)	~~Consists~~Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans.

Washington Trust continues to work with and support our customers experiencing financial difficulty due to the COVID-19 pandemic. As of June 30, 2020, we have executed 583 short-term loan payment deferments on loan balances of $652.2 million, which represented 15% of total loan balances as of June 30, 2020. The majority of these deferments qualified as eligible loan modifications under Section 4013 of the CARES Act and therefore, were not required to be classified as TDRs and were not reported as past due. Twelve of these short-term deferments executed on loan balances of $5.6 million were past due before the COVID-19 pandemic and therefore, were classified as TDRs and were included in past due loans as of June 30, 2020.

Management is actively monitoring the short-term deferments and a significant portion will reach their initial expiration date in the third quarter of 2020. We expect that some borrowers will seek extensions and it is also possible that asset quality metrics could worsen. Interest income will continue to be recognized on loans with short-term deferments, unless the loan is placed on nonaccrual status in accordance with the nonaccrual loans accounting policy described in Note 5 to the Unaudited Consolidated Financial Statements.

Commercial Loans

The commercial loan portfolio represented ~~55%~~58% of total loans at ~~September~~June 30, ~~2019.~~2020.

In making commercial loans, we may occasionally solicit the participation of other banks. The Bank also participates in commercial loans originated by other banks. In such cases, these loans are individually underwritten by us using standards similar to those employed for our self-originated loans. Our participation in commercial loans originated by other banks amounted to ~~$394.4~~$439.5 million and ~~$406.4~~$399.7 million, respectively, at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. Our participation in commercial loans originated by other banks also includes shared national credits. Shared national credits are defined as participations in loans or loan commitments of at least $100.0 million that are shared by three or more banks.

Commercial loans fall into two major categories, commercial real estate and commercial and industrial loans. Commercial real estate loans consist of commercial mortgages secured by real property where the primary source of repayment is derived from rental income associated with the property or the proceeds of the sale, refinancing or permanent financing of the property. Commercial real estate loans also include construction loans made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. Commercial and industrial loans primarily provide working capital, equipment financing and financing for other business-related purposes. Commercial and industrial loans are frequently collateralized by equipment, inventory, accounts receivable, and/or general business assets. A ~~significant~~ portion of the Bank’s commercial and industrial loans is also collateralized by real estate. Commercial and industrial loans also include tax-exempt loans made to states and political subdivisions, as well as industrial development or revenue bonds issued through quasi-public corporations for the benefit of a private or non-profit entity where that entity rather than the governmental entity is obligated to pay the debt service.

- 69-

Management's Discussion and Analysis

Commercial Real Estate Loans

Commercial real estate loans totaled ~~$1.5~~$1.6 billion at ~~September~~June 30, ~~2019,~~2020, up by ~~$124.9~~$83.4 million, or 9%5%, from the balance at December 31, ~~2018.~~2019. Included in commercial real estate loans were construction and development loans of ~~$192.1~~$138.7 million and

~~- 63-~~

~~Management's Discussion and Analysis~~

~~$190.9~~ $211.5 million, respectively, as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, commercial real estate loan originations and advances ~~were~~totaled approximately ~~$265~~$167 million, which were partially offset by payoffs.

Commercial real estate loans are secured by a variety of property types, with approximately 90% of the total at September 30, 2019 composed of multi-family dwellings, retail facilities, office buildings, lodging, healthcare facilities, industrial and warehouse properties and commercial mixed use properties. The average commercial real estate loan size was $3.0 million and the largest individual commercial real estate loan outstanding was $26.0 million as of September 30, 2019.

The following table presents a geographic summary of commercial real estate loans ~~including commercial construction,~~ by property location:


(Dollars in thousands)	September 30, 2019				December 31, 2018				June 30, 2020				December 31, 2019
	Amount		% of Total		Amount		% of Total		Outstanding Balance		% of Total		Outstanding Balance		% of Total
Rhode Island		$378,337	25	%		$377,249	27	%		$420,197	26	%		$394,929	25	%
Connecticut	618,262		41		570,116		41		639,961		39		616,484		40
Massachusetts	432,424		28		356,615		26		492,703		30		458,029		30
Subtotal	1,429,023		94		1,303,980		94		1,552,861		95		1,469,442		95
All other states	88,297		6		88,428		6		78,137		5		78,130		5
Total		$1,517,320	100	%		$1,392,408	100	%		$1,630,998	100	%		$1,547,572	100	%

The following table presents a summary of commercial real estate loans by property type segmentation:



(Dollars in thousands)	June 30, 2020					December 31, 2019
	Count	Outstanding Balance		% of Total		Count	Outstanding Balance		% of Total
CRE Portfolio Segmentation:
Multi-family dwelling	141		$526,009	32	%	123		$430,502	28	%
Retail	133	327,139		20		110	314,661		20
Office	76	288,671		18		78	294,910		19
Hospitality	40	144,988		9		32	128,867		8
Healthcare	16	120,181		7		16	110,409		7
Industrial and warehouse	26	96,549		6		25	82,432		5
Commercial mixed use	21	41,892		3		48	73,895		5
Other	44	85,569		5		70	111,896		8
Total commercial real estate loans	497		$1,630,998	100	%	502		$1,547,572	100	%

Average CRE loan size			$3,282					$3,083
Largest individual CRE loan outstanding			$32,200					$25,962

- 70-

Management's Discussion and Analysis

The following table presents a summary of commercial real estate loan deferments by industry segmentation:



(Dollars in thousands)	June 30, 2020
	Count	Deferment Balance		% of Outstanding Balance
CRE Portfolio Segmentation:
Multi-family dwelling	20		$34,318	7	%
Retail	43	124,071		38
Office	15	74,099		26
Hospitality	31	117,665		81
Healthcare	5	64,326		54
Industrial and warehouse	—	—		—
Commercial mixed use	6	3,089		7
Other	12	29,838		35
Total commercial real estate loans	132		$447,406	27	%

As of June 30, 2020, we have executed 132 short-term deferments on commercial real estate loan balances totaling $447.4 million, which represented 27% of the total commercial real estate loan portfolio at June 30, 2020.

Office and multi-family dwelling property types consisted of 217 loans totaling $814.7 million as of June 30, 2020 and together represented 50% of the total commercial real estate portfolio. Our office properties tend to be for smaller-footprint suburban tenants. Our multi-family properties are located primarily in southern New England. As of June 30, 2020, we have executed 35 short-term deferments on loan balances of $108.4 million, which represented 13% of these segments’ aggregate balances as of June 30, 2020.

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

•

Retail consisted of 133 loans with balances totaling $327.1 million at June 30, 2020, representing 20% of the total commercial real estate portfolio. Our retail properties generally have single tenant drugstores or strong anchor tenants, often national grocery store chains. As of June 30, 2020, we have executed 43 short-term deferments on loan balances totaling $124.1 million, which represented 38% of this segment’s balance at June 30, 2020.

Hospitality consisted of 40 loans with balances totaling $145.0 million at June 30, 2020, representing 9% of the total commercial real estate portfolio. We generally underwrite this portfolio at an LTV of 65% or less. As of June 30, 2020, about 65% of the hospitality portfolio balances were with limited service properties with no restaurants and limited meeting space and 35% was with leisure travel properties that are located on the New England coastline. As of June 30, 2020, we have executed 31 short-term deferments on loan balances totaling $117.7 million, which represented 81% of this segment’s balance at June 30, 2020.

Healthcare consisted of 16 loans with balances totaling $120.2 million at June 30, 2020, representing 7% of the total commercial real estate portfolio. This segment is composed of assisted living, nursing homes and continuing care retirement communities. As of June 30, 2020, we have executed 5 short-term deferments on loan balances totaling $64.3 million, which represented 54% of this segment’s balance at June 30, 2020.

Commercial and Industrial Loans

~~Commercial and industrial~~C&I loans amounted to ~~$566.4~~$852.4 million at ~~September~~June 30, ~~2019, down~~2020, up by ~~$54.3~~$267.2 million, or 9%46%, from the balance at December 31, ~~2018.~~2019. For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, C&I loan originations ~~were approximately $43~~amounted to $284 million and were partially offset by ~~lower~~payoffs, paydowns and a modest decline in line ~~utilization, payoffs~~utilization. C&I originations were concentrated in PPP loans.

As of June 30, 2020, there were 1,690 PPP loans with a carrying value of $212.2 million included in the C&I portfolio.

- 71-

Management's Discussion and ~~paydowns.~~Analysis

Shared national credit balances outstanding included in the ~~commercial and industrial~~C&I loan portfolio totaled ~~$65.6~~$55.0 million at ~~September~~June 30, ~~2019.~~2020. All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at ~~September~~June 30, ~~2019.~~2020.

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



(Dollars in thousands)	June 30, 2020					December 31, 2019
	Count	Outstanding Balance		% of Total		Count	Outstanding Balance		% of Total
C&I Portfolio Segmentation:
Healthcare and social assistance	262		$188,725	22	%	86		$138,857	24	%
Manufacturing	152	91,364		11		65	53,561		9
Educational services	59	73,172		9		22	56,556		10
Owner occupied and other real estate	278	71,516		8		157	46,033		8
Retail	206	67,461		8		75	43,386		7
Professional, scientific and technical	270	48,452		6		66	37,599		6
Accommodation and food services	278	45,257		5		64	16,562		3
Finance and insurance	106	38,213		4		57	28,501		5
Entertainment and recreation	94	35,626		4		35	30,807		5
Transportation and warehousing	46	30,208		4		23	20,960		4
Information	34	29,575		3		11	22,162		4
Public administration	25	23,534		3		23	25,107		4
Other	764	109,342		13		225	65,198		11
Total commercial & industrial loans	2,574		$852,445	100	%	909		$585,289	100	%

Average C&I loan size			$331					$644
Largest individual C&I loan outstanding			$18,701					$19,001

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



(Dollars in thousands)	June 30, 2020
	Count	Deferment Balance		% of Outstanding Balance
C&I Portfolio Segmentation:
Healthcare and social assistance	6		$15,384	8	%
Manufacturing	4	2,505		3
Educational services	4	7,329		10
Owner occupied and other real estate	21	5,128		7
Retail	5	2,693		4
Professional, scientific and technical	1	41		—
Accommodation and food services	18	12,252		27
Finance and insurance	—	—		—
Entertainment and recreation	11	13,045		37
Transportation and warehousing	5	1,414		5
Information	—	—		—
Public administration	1	98		—
Other	24	14,533		13
Total commercial & industrial loans	100		$74,422	9	%

- 72-

Management's Discussion and Analysis

As of June 30, 2020, we have executed 100 short-term deferments on C&I loan balances totaling $74.4 million, which represented 9% of the total commercial and industrial loan portfolio at June 30, 2020.

Healthcare and social assistance totaled $189 million as of June 30, 2020 and is our largest single C&I industry segment, representing 22% of the total C&I portfolio. This segment includes specialty medical practices, elder services and community and mental health centers. As of June 30, 2020, we have executed 6 short-term deferments on loan balances of $15.4 million, which represented 8% of this industry segment’s balances as of June 30, 2020. It is possible that there will be further short-term disruption in this industry segment.

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

Retail consisted of 206 loans towith balances totaling $67.5 million as of June 30, 2020, representing 8% of the total C&I portfolio. As of June 30, 2020, we have executed 5 short-term deferments on loan balances totaling $2.7 million, which represented 4% of this industry segment’s balance at June 30, 2020. The deferments were executed primarily for small retail stores and a gas station.

Educational services consisted of 59 loans with balances totaling $73.2 million as of June 30, 2020, representing 9% of the total C&I portfolio. As of June 30, 2020, we have executed 4 short-term deferments on loan balances totaling $7.3 million, which represented 10% of this industry segment’s balance at June 30, 2020. The deferments were executed for a trade school for which remote learning was not an option.

Accommodation and food services consisted of 278 loans with balances totaling $45.3 million as of June 30, 2020, representing 5% of the total C&I portfolio. As of June 30, 2020, we have executed 18 short-term deferments on loan balances totaling $12.3 million, which represented 27% of this industry segment’s balance at June 30, 2020. The deferments have been executed for a variety of ~~business types,~~restaurant and food establishments.

Entertainment and recreation consisted of 94 loans with ~~90%~~balances totaling $35.6 million as of June 30, 2020, representing 4% of the total C&I portfolio. This industry segment consists largely of golf courses and marinas. As of June 30, 2020, we have executed 11 short-term deferments on loan balances totaling $13.0 million, which represented 37% of this industry segment’s balance at ~~September~~June 30, 2019 composed of health care/social assistance, educational services, manufacturing, owner occupied and other real estate, professional, scientific and technical, retail trade, transportation and warehousing, entertainment and recreation, other services, finance and insurance services, public administration and construction businesses.2020. The ~~average commercial and industrial loan size was $618 thousand and the largest individual commercial and industrial loan outstanding was $19.1 million as of September 30, 2019.~~deferments have been executed primarily for golf courses.

Residential Real Estate Loans

The residential real estate loan portfolio represented ~~36%~~35% of total loans at ~~September~~June 30, ~~2019.~~2020.

Residential real estate loans are originated both for sale to the secondary market as well as for retention in the Bank’s loan portfolio. We also originate residential real estate loans for various investors in a broker capacity, including conventional mortgages and reverse mortgages.

The table below presents residential real estate loan origination activity:



(Dollars in thousands)	Three Months								Six Months
Periods ended June 30,	2020				2019				2020				2019
	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Originations for retention in portfolio (1)		$126,894	30	%		$69,736	30	%		$235,392	33	%		$121,433	33	%
Originations for sale to the secondary market (2)	299,321		70		162,123		70		482,543		67		247,949		67
Total		$426,215	100	%		$231,859	100	%		$717,935	100	%		$369,382	100	%


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


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

- ~~64-~~73-

Management's Discussion and Analysis

The table below presents residential real estate loan ~~origination activity:~~

(Dollars in thousands) Three Months Nine Months
Periods ended September 30, 2019 2018 2019 2018
Amount % of Total Amount % of Total Amount % of Total Amount % of Total
Originations for retention in portfolio
$105,075
36 %
$80,751
40 %
$226,508
34 %
$277,070
46 %
Originations for sale to the secondary market (1) 189,979
64
119,832
60
437,928
66
330,245
54
Total
$295,054
100 %
$200,583
100 %
$664,436
100 %
$607,315
100 %


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

~~The table below presents residential real estate loan~~ sales activity:


(Dollars in thousands)	Three Months								Nine Months
Periods ended September 30,	2019				2018				2019				2018
																	Three Months								Six Months
Periods ended June 30,																	2020				2019				2020				2019
	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Loans sold with servicing rights retained		$25,766	14	%		$24,422	18	%		$53,548	13	%		$82,634	25	%		$246,945	81	%		$18,292	13	%		$291,443	62	%		$27,782	12	%
Loans sold with servicing rights released (1)	159,210		86		107,694		82		360,921		87		252,043		75		58,279		19		119,122		87		175,972		38		201,711		88
Total		$184,976	100	%		$132,116	100	%		$414,469	100	%		$334,677	100	%		$305,224	100	%		$137,414	100	%		$467,415	100	%		$229,493	100	%


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

Loans are sold with servicing retained or released. Loans sold with servicing rights retained result in the capitalization of servicing rights. Loan servicing rights are included in other assets and are subsequently amortized as an offset to mortgage banking revenues over the estimated period of servicing. The net balance of capitalized servicing rights amounted to ~~$3.4~~$5.0 million and ~~$3.7~~$3.5 million, respectively, as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to ~~$573.6~~$797.8 million and ~~$588.5~~$587.0 million, respectively, as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

Residential real estate loans held in portfolio amounted to ~~$1.4~~$1.5 billion at ~~September~~June 30, ~~2019,~~2020, up by ~~$18.1~~$59.1 million, or 4%, from the balance at December 31, ~~2018. While year-over-year residential real estate mortgage loan origination volumes were higher, a lower percentage~~2019. During the six months ended June 30, 2020, Washington Trust purchased $51.2 million of residential real estate mortgage loans with a weighted average yield of 3.38% from another financial institution. These loans were ~~originated for retention~~individually evaluated to Washington Trust’s underwriting standards and predominantly secured by properties in ~~portfolio during the three and nine months ended September 30, 2019, compared to the same periods in 2018.~~Massachusetts.

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


(Dollars in thousands)	September 30, 2019				December 31, 2018				June 30, 2020				December 31, 2019
	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Rhode Island		$347,847	25	%		$352,141	26	%		$349,143	23	%		$356,392	25	%
Connecticut	142,744		11		141,775		10		131,856		9		140,574		10
Massachusetts	871,309		63		849,435		63		1,006,616		67		932,726		64
Subtotal	1,361,900		99		1,343,351		99		1,487,615		99		1,429,692		99
All other states	16,618		1		17,036		1		20,608		1		19,398		1
Total (1)		$1,378,518	100	%		$1,360,387	100	%		$1,508,223	100	%		$1,449,090	100	%


(1)	Includes residential real estate loans purchased from other financial institutions totaling ~~$106.7~~$171.0 million and ~~$112.9~~$151.8 million, respectively, as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

As of June 30, 2020, we executed 265 short-term deferments on residential real estate loan balances of $121.8 million, which represented 8% of total residential real estate portfolio balances as of June 30, 2020. The average size of the loans with deferments was approximately $460 thousand and these loans have an estimated loan-to-value ratio of 60%.

Consumer Loans

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

~~- 65-~~

~~Management's Discussion and Analysis~~

The consumer loan portfolio totaled ~~$315.8~~$296.0 million at ~~September~~June 30, ~~2019, up~~2020, down by ~~$9.0~~$15.1 million, or 3%5%, from December 31, ~~2018.~~2019. Home equity lines of credit and home equity loans represented ~~93%~~94% of the total consumer portfolio at ~~September~~June 30, ~~2019.~~2020. The Bank estimates that approximately ~~65%~~60% of the combined home equity lines of credit and home equity loan balances are first lien positions or subordinate to other Washington Trust mortgages. Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to ~~$14.1~~$11.3 million and ~~$17.6~~$12.8 million, respectively, at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

- 74-

Management's Discussion and Analysis

As of June 30, 2020, we executed 86 short-term deferments on consumer loan balances of $8.6 million, which represented 3% of total consumer portfolio balances as of June 30, 2020.

Asset Quality

Nonperforming Assets

Nonperforming assets include nonaccrual loans and property acquired through foreclosure or repossession.

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


(Dollars in thousands)	Sep 30, 2019			Dec 31, 2018			Jun 30, 2020			Dec 31, 2019
Commercial:
Commercial real estate		$684			$925			$431			$603
Commercial & industrial	—			—			—			657
Total commercial	684			925			431			1,260
Residential Real Estate:
Residential real estate	12,531			9,346			13,850			14,297
Consumer:
Home equity	1,599			1,436			1,648			1,763
Other	88			—			88			88
Total consumer	1,687			1,436			1,736			1,851
Total nonaccrual loans	14,902			11,707			16,017			17,408
Property acquired through foreclosure or repossession, net	4,142			2,142			—			1,109
Total nonperforming assets		$19,044			$13,849			$16,017			$18,517

Nonperforming assets to total assets	0.37		%	0.28		%	0.27		%	0.35		%
Nonperforming loans to total loans	0.39		%	0.32		%	0.37		%	0.45		%
Total past due loans to total loans	0.38		%	0.37		%	0.34		%	0.40		%
Accruing loans 90 days or more past due		$—			$—			$—			$—

Total nonperforming assets ~~increased~~decreased by ~~$5.2~~$2.5 million from December 31, ~~2018.~~2019. This included a ~~net increase of $3.2~~$1.4 million decrease in nonaccrual ~~residential real estate~~ loans and ~~an increase of $2.0~~a $1.1 million decrease in property acquired through ~~foreclosure. At September 30, 2019, property acquired through~~ foreclosure ~~consisted~~(“OREO”). The decrease in OREO reflected sales of two ~~commercial properties.~~properties essentially at their carrying value during the six months ended June 30, 2020. At June 30, 2020, there were no properties held in OREO.

Nonaccrual Loans

During the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.

The following table presents the activity in nonaccrual loans:



(Dollars in thousands)	Three Months						Six Months
For the periods ended June 30,	2020			2019			2020			2019
Balance at beginning of period		$17,918			$12,365			$17,408			$11,707
Additions to nonaccrual status	237			1,620			1,966			3,544
Loans returned to accruing status	(154		)	(118		)	(547		)	(973		)
Loans charged-off	(325		)	(819		)	(960		)	(922		)
Loans transferred to other real estate owned	—			—			(28		)	—
Payments, payoffs and other changes	(1,659		)	(181		)	(1,822		)	(489		)
Balance at end of period		$16,017			$12,867			$16,017			$12,867

- ~~66-~~75-

Management's Discussion and Analysis

The following table presents ~~the activity in nonaccrual loans:~~

(Dollars in thousands) Three Months Nine Months
For the periods ended September 30, 2019 2018 2019 2018
Balance at beginning of period
$12,867

$11,745

$11,707

$15,211
Additions to nonaccrual status 5,672
2,179
9,216
5,846
Loans returned to accruing status (597 ) (361 ) (1,570 ) (1,180 )
Loans charged-off (966 ) (96 ) (1,888 ) (889 )
Loans transferred to other real estate owned (2,000 ) —
(2,000 ) (3,074 )
Payments, payoffs and other changes (74 ) (2,658 ) (563 ) (5,105 )
Balance at end of period
$14,902

$10,809

$14,902

$10,809

~~The following table presents~~ additional detail on nonaccrual loans:


(Dollars in thousands)	September 30, 2019								December 31, 2018								June 30, 2020								December 31, 2019
	Days Past Due								Days Past Due								Days Past Due								Days Past Due
	Over 90		Under 90		Total		% (1)		Over 90		Under 90		Total		% (1)		Over 90		Under 90		Total		% (1)		Over 90		Under 90		Total		% (1)
Commercial:
Commercial real estate		$684		$—		$684	0.05	%		$—		$925		$925	0.07	%		$431		$—		$431	0.03	%		$603		$—		$603	0.04	%
Commercial & industrial	—		—		—		—		—		—		—		—		—		—		—		—		—		657		657		0.11
Total commercial	684		—		684		0.03		—		925		925		0.05		431		—		431		0.02		603		657		1,260		0.06
Residential Real Estate:
Residential real estate	4,760		7,771		12,531		0.91		1,509		7,837		9,346		0.69		5,096		8,754		13,850		0.92		4,700		9,597		14,297		0.99
Consumer:
Home equity	812		787		1,599		0.54		552		884		1,436		0.51		788		860		1,648		0.59		996		767		1,763		0.61
Other	88		—		88		0.41		—		—		—		—		88		—		88		0.48		88		—		88		0.44
Total consumer	900		787		1,687		0.53		552		884		1,436		0.47		876		860		1,736		0.59		1,084		767		1,851		0.60
Total nonaccrual loans		$6,344		$8,558		$14,902	0.39	%		$2,061		$9,646		$11,707	0.32	%		$6,403		$9,614		$16,017	0.37	%		$6,387		$11,021		$17,408	0.45	%


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

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at ~~September~~June 30, ~~2019.~~2020.

As of ~~September~~June 30, ~~2019,~~2020, the composition of nonaccrual loans was ~~95%~~97% residential and consumer and 5%3% commercial, compared to ~~92%~~93% and 8%7%, respectively, at December 31, ~~2018.~~2019.

Nonaccrual residential real estate mortgage loans amounted to ~~$12.5~~$13.9 million at ~~September~~June 30, ~~2019,~~2020, up by ~~$3.2 million~~$447 thousand from the end of ~~2018.~~2019. As of ~~September~~June 30, ~~2019,~~2020, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Rhode Island and Connecticut. Included in total nonaccrual residential real estate loans at ~~September~~June 30, ~~2019~~2020 were ~~five~~four loans purchased for portfolio and serviced by others amounting ~~to $1.5~~to$1.4 million. Management monitors the collection efforts of its third party servicers as part of its assessment of the collectibility of nonperforming loans.

~~- 67-~~

~~Management's Discussion and Analysis~~

The following table sets forth information on troubled debt restructured loans as of the dates indicated. The amounts below consist of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. Accrued interest is not included in the carrying amounts set forth below. See Note 5 to the Unaudited Consolidated Financial Statements for additional information.

(Dollars in thousands) Sep 30,
2019 Dec 31,
2018
Accruing troubled debt restructured loans
Commercial:
Commercial & industrial
$—

$4,714
Residential Real Estate:
Residential real estate 359
363
Consumer:
Home equity —
10
Other 19
21
Total consumer 19
31
Total accruing troubled debt restructured loans 378
5,108

Nonaccrual troubled debt restructured loans
Residential Real Estate:
Residential real estate
$497

$510
Total nonaccrual troubled debt restructured loans 497
510
Total troubled debt restructured loans
$875

$5,618

Troubled Debt Restructurings

~~Loans~~A loan that has been modified or renewed is considered to be a TDR when two conditions are ~~considered restructured in a troubled debt restructuring when~~met: 1) the ~~Corporation has granted~~borrower is experiencing financial difficulty and 2) concessions are made for the borrower’s benefit that ~~it otherwise~~ would not ~~have~~otherwise be considered tofor a borrower ~~experiencing financial difficulties.~~or a transaction with similar credit risk characteristics. These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection.

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the ~~collectability~~collectibility 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.~~term and full collection of principal and interest is in doubt.

As of ~~September~~June 30, ~~2019,~~2020, there were no significant commitments to lend additional funds to borrowers whose loans had been ~~restructured.~~

~~Troubled debt~~ restructured ~~loans decreased by $4.7 million from the end of December 31, 2018 due to the payoff of one accruing commercial and industrial loan that occurred~~ in ~~the second quarter of 2019.~~

~~The allowance for loans losses included specific reserves for troubled debt restructurings of $101 thousand and $103 thousand, respectively, at September 30, 2019 and December 31, 2018.~~a TDR.

- ~~68-~~76-

Management's Discussion and Analysis

See Note 5 for disclosure regarding the Corporation’s election to account for eligible loan modifications under Section 4013 of the CARES Act.

The following table sets forth information on TDRs as of the dates indicated. The amounts below consist of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. Accrued interest is not included in the carrying amounts set forth below.



(Dollars in thousands)	Jun 30, 2020		Dec 31, 2019
Accruing TDRs
Commercial:
Commercial real estate		$846		$—
Commercial & industrial	462		—
Total commercial	1,308		—
Residential Real Estate:
Residential real estate	3,345		358
Consumer:
Home equity	804		—
Other	16		18
Total consumer	820		18
Accruing TDRs	5,473		376
Nonaccrual TDRs
Residential Real Estate:
Residential real estate	998		492
Nonaccrual TDRs	998		492
Total TDRs		$6,471		$868

TDRs amounted to $6.5 million at June 30, 2020, up by $5.6 million from the end of 2019, due to twelve short-term deferments executed on loans that were past due before the COVID-19 pandemic and, therefore, were not eligible for TDR accounting relief provided under the CARES Act.

The allowance for credit losses on loans included specific reserves for TDRs of $137 thousand and $97 thousand, respectively, at June 30, 2020 and December 31, 2019.

Past Due Loans

The following table presents past due loans by category:


(Dollars in thousands)	September 30, 2019				December 31, 2018				June 30, 2020				December 31, 2019
	Amount		% (1)		Amount		% (1)		Amount		% (1)		Amount		% (1)
Commercial:
Commercial real estate		$684	0.05	%		$1,080	0.08	%		$431	0.03	%		$1,433	0.09	%
Commercial & industrial	1		—		—		—		3		—		1		—
Total commercial	685		0.03		1,080		0.05		434		0.02		1,434		0.07
Residential Real Estate:
Residential real estate	11,599		0.84		10,520		0.77		12,499		0.83		11,429		0.79
Consumer:
Home equity	1,973		0.67		1,989		0.71		1,633		0.59		2,696		0.93
Other	99		0.46		33		0.13		106		0.58		130		0.64
Total consumer	2,072		0.66		2,022		0.66		1,739		0.59		2,826		0.91
Total past due loans		$14,356	0.38	%		$13,622	0.37	%		$14,672	0.34	%		$15,689	0.40	%


(1)	Percentage of past due loans to the total loans outstanding within the respective category.

- 77-

Management's Discussion and Analysis

As of ~~September~~June 30, ~~2019,~~2020, the composition of past due loans (loans past due 30 days or more) was ~~95%~~97% residential and consumer and 5%3% commercial, compared to ~~92%~~91% and 8%9%, respectively, at December 31, ~~2018.~~2019. Total past due loans ~~increased~~decreased by ~~$734 thousand~~$1.0 million from the end of ~~2018,~~2019, as decreases in past due commercial and consumer loans were partially offset by an increase in ~~past due~~ residential ~~real estate loans was partially offset by a decline in past due commercial~~ real estate loans.

Total past due loans included ~~$9.8~~$10.6 million of nonaccrual loans as of ~~September~~June 30, ~~2019,~~2020, compared to ~~$8.6~~$11.5 million as of December 31, ~~2018.~~2019. All loans 90 days or more past due at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 were classified as nonaccrual.

Potential Problem Loans

The Corporation classifies certain loans as “substandard,” “doubtful,” or “loss” based on criteria consistent with guidelines provided by banking regulators. Potential problem loans consist of classified accruing commercial loans that were less than 90 days past due at ~~September~~June 30, ~~2019~~2020 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future. These loans are not included in the amounts of nonaccrual or restructured loans presented above. Management cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require increased allowance coverage and provision for loan losses.

Management has identified approximately ~~$11.7~~$9.7 million in potential problem loans at ~~September~~June 30, ~~2019,~~2020, compared to ~~$14.9~~$10.3 million at December 31, 2018. The decrease in potential problem loan from December 31, 2018 was largely due to one commercial real estate loan that was placed on nonaccrual status, partially charged-off and transferred to other real estate owned in 2019. As of ~~September~~June 30, ~~2019, 98% of~~2020, the balance of potential problem loans consisted of three commercial relationships, ~~and~~which were all ~~of these commercial relationships were~~ current with respect to payment terms. Potential problem loans are assessed for loss exposure using the methods described in Note 5 to the Unaudited Consolidated Financial Statements under the caption “Credit Quality Indicators.”

~~Allowance for Loan Losses~~

~~Establishing an appropriate level~~In addition, see discussion of ~~allowance for loan losses necessarily involves a high degree~~commercial industry segments that management considers to be "at-risk" of ~~judgment. The Corporation uses a methodology to systematically measure~~significant impact from the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient allowance for loan losses. See additional discussion regarding the allowance for loan losses, in Item 7COVID-19 pandemic under the caption ~~“Critical Accounting Policies and Estimates” of Washington Trust’s Annual Report~~"Commercial Loans" within the Financial Condition section.

Allowance for Credit Losses on ~~Form 10-K~~Loans

The ACL on loans is management’s estimated valuation allowance at each reporting date in accordance with GAAP. The ACL on loans is increased through a provision for ~~the fiscal year ended December 31, 2018 and~~credit losses recognized in ~~Note 6 to~~ the Unaudited Consolidated ~~Financial Statements.~~Statements of Income and by recoveries of amounts previously charged-off. The ACL on loans is reduced by charge-offs on loans. Loan charge-offs are recognized when management believes the collectibility of the principal balance outstanding is unlikely. Full or partial charge-offs on collateral dependent individually analyzed loans are generally recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.

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



(Dollars in thousands)	June 30, 2020						December 31, 2019
	Loans		Related Allowance		Allowance / Loans		Loans		Related Allowance		Allowance / Loans
Individually analyzed loans		$7,134		$370	5.19	%		$17,783		$968	5.44	%
Pooled (collectively evaluated) loans	4,280,507		41,071		0.96		3,875,216		26,046		0.67
Total		$4,287,641		$41,441	0.97	%		$3,892,999		$27,014	0.69	%

In 2020, Washington Trust utilizes a DCF methodology to estimate credit losses for each pooled portfolio segment. The methodology incorporates the probability of default and loss given default. Management utilizes the national unemployment rate as an econometric factor with a one-year forecast period and one-year straight-line reversion period to its historical mean in order to estimate the probability of default for each loan portfolio segment. Utilizing a third party regression model, the forecasted national unemployment rate is correlated with the probability of default for each loan portfolio segment. The DCF

- ~~69-~~78-

Management's Discussion and Analysis

methodology combines the probability of default, the loss given default, maturity date and prepayment speeds to estimate a reserve for each loan. The ~~allowance~~sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived. Quantitative loss factors for pooled loans are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates.

In 2020, for loans that are individually analyzed, the ACL is measured using a DCF method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan ~~losses~~ is ~~management’s best estimate~~collateral dependent, at the fair value of ~~incurred losses inherent~~the collateral. With the adoption of CECL on January 1, 2020, management reassessed the underlying risk characteristics of individually analyzed loans and concluded that certain nonaccrual residential and consumer loans previously classified as impaired individually evaluated for impairment shared similar risk characteristics as their pooled loan segment. The decline in individually analyzed loans from December 31, 2019 was a result of this reassessment, partially offset by an increase in TDRs in the loan portfolio as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged-off, and is reduced by charge-offs on loans. The status of nonaccrual loans, past due loans and performing loans were all taken into consideration in the assessment of the adequacy of the allowance for loans losses. In addition, the balance and trends of credit quality indicators, including the commercial loan categories of Pass, Special Mention and Classified, are integrated into the process used to determine the allocation of loss exposure. second quarter 2020.

See Note 56 to the Unaudited Consolidated Financial Statements ~~under the caption “Credit Quality Indicators”~~ for additional ~~information. Management believes that~~disclosure regarding the ~~level of allowance for loan losses at September 30, 2019 is adequate~~process and ~~consistent with asset quality and credit quality indicators. Management will continue~~methodology to ~~assess~~estimate the ~~adequacy~~ACL on loans.

The following table presents the allocation of the ~~allowance~~ACL on loans by portfolio segment. The total ACL on loans is available to absorb losses from any segment of the loan portfolio.



(Dollars in thousands)	June 30, 2020						December 31, 2019
	Allocated ACL		ACL to Loans		Loans to Total Portfolio (1)		Allocated ACL		ACL to Loans		Loans to Total Portfolio (1)
Commercial:
Commercial real estate		$20,283	1.24	%	38	%		$14,741	0.95	%	40	%
Commercial & industrial	11,278		1.32	%	20		3,921		0.67	%	15
Total commercial	31,561		1.27	%	58		18,662		0.87	%	55
Residential Real Estate:
Residential real estate	8,053		0.53	%	35		6,615		0.46	%	37
Consumer:
Home equity	1,394		0.50	%	6		1,390		0.48	%	7
Other	433		2.36	%	1		347		1.72	%	1
Total consumer	1,827		0.62	%	7		1,737		0.56	%	8
Total allowance for credit losses on loans at end of period		$41,441	0.97	%	100	%		$27,014	0.69	%	100	%


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

The ACL on loans amounted to $41.4 million at June 30, 2020, up by $14.4 million from the balance at December 31, 2019. Upon adoption of CECL on January 1, 2020, Washington Trust's ACL on loans increased by $6.5 million, or 24%. See Note 2 to the Unaudited Consolidated Financial Statements for additional disclosure on the impact of adopting Topic 326.

Provisions for credit losses of $2.2 million and $9.2 million, respectively, were charged to earnings for the three and six months ended June 30, 2020, compared to $525 thousand and $1.2 million, respectively, for the same periods in 2019. In addition to the change in accounting methodologies described above, the year-over-year increase in the provision was attributable to the significant deterioration in the economic forecast due to the COVID-19 pandemic and also reflected loan ~~losses~~growth and changes in ~~accordance with its established policies.~~the underlying portfolio.

Net charge-offs totaled $308 thousand and $931 thousand, respectively, for the three and six months ended June 30, 2020, compared to $771 thousand and $849 thousand, respectively, for the same periods in 2019.

The Corporation’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely. Full or partial charge-offs on collateral dependent ~~impaired~~individually analyzed loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan. The Corporation does not recognize a recovery when an updated appraisal indicates a subsequent increase in value.

- 79-

Management's Discussion and Analysis

Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status. Updates to appraisals are generally obtained for troubled or nonaccrual loans or when management believes it is warranted. The Corporation has continued to maintain appropriate professional standards regarding the professional qualifications of appraisers and has an internal review process to monitor the quality of appraisals.

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

~~The estimation~~Estimating an appropriate level of ~~loan loss exposure inherent~~ACL in loans necessarily involves a high degree of judgment. While significant deterioration in the ~~loan portfolio includes, among other procedures,~~economic forecast due to the ~~identification~~COVID-19 pandemic was estimated in the ACL on loans, continued uncertainty regarding the severity and duration of ~~loss allocations for individual loans deemed~~the pandemic and related economic effects will continue to ~~be impaired; and~~affect the ~~application of loss allocation factors for non-impaired loans~~ACL. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans. In addition, various regulatory agencies periodically review the ACL on loans. Such agencies may require additions to the allowance based on ~~historical loss experience and estimated loss emergence period, with adjustments for various exposures that management believes are not adequately represented by historical loss experience.~~

~~A loan is considered impaired when, based on current~~their judgments about information and events, it is probable that the Corporation will not be able to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans include nonaccrual loans and loans restructured in a troubled debt restructuring. The following is a summary of impaired loans by measurement type:

(Dollars in thousands) Sep 30,
2019 Dec 31,
2018
Collateral dependent impaired loans (1)

$13,264

$10,466
Impaired loans measured on discounted cash flow method (2)
2,016
6,350
Total impaired loans
$15,280

$16,816


~~(1)~~	~~Net of partial charge-offs of $840 thousand and $289 thousand, respectively, at September 30, 2019 and December 31, 2018.~~


~~(2)~~	~~Net of partial charge-offs of $262 thousand and $85 thousand, respectively, at September 30, 2019 and December 31, 2018.~~

Various loan loss allowance coverage ratios are affected by the timing and extent of charge-offs, particularly with respect to impaired collateral dependent loans. For such loans, the Bank generally recognizes a partial charge-off equal to the identified loss exposure; therefore, the remaining allocation of loss is minimal.

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

(Dollars in thousands) September 30, 2019 December 31, 2018
Loans Related Allowance Allowance / Loans Loans Related Allowance Allowance / Loans
Impaired loans individually evaluated for impairment
$15,280

$321
2.10 %
$16,816

$127
0.76 %
Loans collectively evaluated for impairment 3,762,826
26,676
0.71
3,663,544
26,945
0.74
Total
$3,778,106

$26,997
0.71 %
$3,680,360

$27,072
0.74 %

~~- 70-~~

~~Management's Discussion and Analysis~~

Loan loss provisions of $400 thousand and $1.6 million, respectively, were charged to earnings for the three and nine months ended September 30, 2019, compared to $350 thousand and $750 thousand, respectively, for the three and nine months ended September 30, 2018. These provisions were based on management’s assessment of loss exposure, as well as loss allocations commensurate with growth and changes in the loan portfolio, including changes in asset quality and credit quality metrics.

Net charge-offs totaled $801 thousand and $1.7 million, respectively, for the three and nine months ended September 30, 2019. This compared to net charge-offs of $15 thousand and $729 thousand, respectively, for the same periods in 2018. The increase in year-to-date net charge-offs was concentrated in residential real estate and consumer home equity.

~~As of September 30, 2019, the allowance for loan losses was $27.0 million, or 0.71% of total loans, compared to $27.1 million, or 0.74% of total loans, at December 31, 2018.~~

The following table presents the allocation of the allowance for loan losses. The allocation below is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of any future loss trends. The total allowance is available to ~~absorb~~them at the time of their examination. The ACL on loans is an estimate, and ultimate losses may vary from ~~any segment of the loan portfolio.~~management’s estimate.

(Dollars in thousands) September 30, 2019 December 31, 2018
Amount

% (1)
Amount
% (1)
Allocation of Allowance for Loan Losses
Commercial:
Commercial real estate
$16,801
40 %
$15,381
38 %
Commercial & industrial 3,447
15
5,847
17
Total commercial 20,248
55
21,228
55
Residential Real Estate:
Residential real estate 5,411
36
3,987
37
Consumer:
Home equity 1,013
8
1,603
8
Other 325
1
254
—
Total consumer 1,338
9
1,857
8
Total allowance for loan losses at end of period
$26,997
100 %
$27,072
100 %


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

Sources of Funds

Our sources of funds include deposits, brokered time deposits, FHLB advances, other borrowings and proceeds from the sales, maturities and payments of loans and investment securities. The Corporation uses funds to originate and purchase loans, purchase investment securities, conduct operations, expand the branch network and pay dividends to shareholders.

Deposits

The Corporation offers a wide variety of deposit products to consumer and business customers. Deposits provide an important source of funding for the Bank as well as an ongoing stream of fee revenue.

The Bank is a participant in the Demand Deposit Marketplace ~~(“DDM”)~~ program, Insured Cash Sweep ~~(“ICS”)~~ program and the Certificate of Deposit Account Registry Service ~~(“CDARS”)~~ program. The Bank uses these deposit sweep services to place customer and client funds into interest-bearing demand accounts, money market accounts, and/or time deposits issued by other participating banks. Customer and client funds are placed at one or more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a program participant, we receive reciprocal amounts of deposits from other participating banks. We consider these reciprocal deposit balances to be in-market deposits as distinguished from traditional out-of-market wholesale brokered deposits.

~~- 71-~~

~~Management's Discussion and Analysis~~

The following table presents a summary of deposits:


(Dollars in thousands)					Change									Change
	September 30, 2019		December 31, 2018		$			%		June 30, 2020		December 31, 2019		$			%
Noninterest-bearing demand deposits		$619,839		$603,216		$16,623		3	%		$815,770		$609,924		$205,846		34	%
Interest-bearing demand deposits	152,200		178,733		(26,533		)	(15	)	158,343		159,938		(1,595		)	(1	)
NOW accounts	478,462		466,568		11,894			3		617,792		520,295		97,497			19
Money market accounts	749,122		646,878		102,244			16		834,954		765,899		69,055			9
Savings accounts	362,868		373,545		(10,677		)	(3	)	417,195		373,503		43,692			12
Time deposits (in-market)	792,941		778,105		14,836			2		728,801		784,481		(55,680		)	(7	)
Total in-market deposits	3,155,432		3,047,045		108,387			4		3,572,855		3,214,040		358,815			11
Wholesale brokered time deposits	430,721		477,003		(46,282		)	(10	)	528,581		284,842		243,739			86
Total deposits		$3,586,153		$3,524,048		$62,105		2	%		$4,101,436		$3,498,882		$602,554		17	%

Total deposits amounted to ~~$3.6~~$4.1 billion at ~~September~~June 30, ~~2019,~~2020, up by ~~$62.1~~$602.6 million, or 2%17%, from December 31, ~~2018.~~2019. This included ~~a decrease~~an increase of ~~$46.3~~$243.7 million, ofor 86%, in out-of-market brokered time deposits. Excluding out-of-market brokered time deposits, in-market deposits were up by ~~$108.4~~$358.8 million, or 4%11%, from the balance at December 31, ~~2018, largely due~~2019. In-market deposit growth included PPP loan fundings deposited into customer accounts at Washington Trust. These funds are expected to ~~an increase of $102.2 million in money market accounts.~~decrease as customers use them for business needs.

~~FHLB Advances~~

- 80-

Management's Discussion and Analysis

Borrowings

FHLB advances are used to meet short-term liquidity needs and also to fund loan growth and additions to the securities portfolio. FHLB advances totaled ~~$956.8 million~~$1.0 billion at ~~September~~June 30, ~~2019, up~~2020, down by ~~$6.1~~$136.4 million, or 1%12%, from the balance at the end of ~~2018.~~2019.

In June 2020, Washington Trust began participating in the FRB’s PPPLF, which extends credit to depository institutions at a fixed interest rate of 0.35%. Only PPP loans can be pledged as collateral to access the facility. The maturity date of the PPPLF borrowings matches the maturity date of the pledged PPP loans. As of June 30, 2020, PPPLF borrowings amounted to $38.9 million, with a corresponding amount of PPP loans pledged as collateral. As of July 31, 2020, PPPLF borrowings totaled $200.6 million, with a corresponding amount of PPP loans pledged as collateral.

See Note 7 to the Unaudited Consolidated Financial Statements for additional information regarding ~~the October 2019 modification of certain FHLB advances.~~Borrowings.

Liquidity and Capital Resources

Liquidity Management

Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. The Corporation’s primary source of liquidity is in-market deposits, which funded approximately ~~59%~~60% of total average assets in the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and brokered time deposits), cash flows from the Corporation’s securities portfolios and loan repayments. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs, although management has no intention to do so at this time.

The Corporation has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management employs stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as usual” cash flows. In management’s estimation, risks are concentrated in two major categories: (1) runoff of in-market deposit balances; and (2) unexpected drawdown of loan commitments. Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our stress test scenarios, therefore, emphasize attempts to quantify deposits at risk over selected time horizons. In addition to these unexpected outflow risks, several other “business as usual” factors enter into the calculation of the adequacy of contingent liquidity including: (1) payment proceeds from loans and investment securities; (2) maturing debt obligations; and (3) maturing time deposits. The Corporation has established collateralized borrowing capacity with the FRB and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business. Borrowing capacity is impacted by the amount and type of assets available to be pledged.

~~- 72-~~

~~Management's Discussion and Analysis~~

See additional disclosure regarding Washington Trust’s participation in the FRB’s PPPLF under the caption “Borrowings” in the section “Sources of Funds.”

The table below presents unused funding capacity by source as of the dates indicated:


(Dollars in thousands)					June 30, 2020		December 31, 2019
	September 30, 2019		December 31, 2018
Additional Funding Capacity:
Federal Home Loan Bank of Boston (1)		$601,520		$628,468		$647,911		$534,990
Federal Reserve Bank of Boston (2)	25,070		27,608		21,699		24,686
Unencumbered investment securities	445,994		493,623		580,016		461,850
Total		$1,072,584		$1,149,699		$1,249,626		$1,021,526


(1)	As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, loans with a carrying value of ~~$2.0~~$2.2 billion and ~~$2.0~~$2.1 billion, respectively, and securities available for sale with carrying values of ~~$262.6~~$205.4 million and ~~$236.7~~$271.4 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.


(2)	As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, loans with a carrying value of ~~$17.4~~$14.7 million and ~~$22.9~~$16.6 million, respectively, and securities available for sale with a carrying value of ~~$17.2~~$15.4 million and ~~$16.4~~$17.0 million, respectively, were pledged to the FRB for the discount window resulting in this additional unused borrowing capacity.

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

- 81-

Management's Discussion and Analysis

The ALCO establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained within target ranges established by the ALCO during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Based on its assessment of the liquidity considerations described above, management believes the Corporation’s sources of funding meet anticipated funding needs.

Net cash provided by operating activities amounted to ~~$37.4~~$14.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019, which was generated by net~~2020. Net income of ~~$53.6~~$32.9 million ~~and~~was offset by mortgage banking related adjustments to reconcile net income to net cash ~~provided by~~used in operating activities. Net cash used in investing activities totaled ~~$27.3~~$412.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, reflecting outflows to fund ~~growth~~the increase in and purchases of loans, ~~and~~as well as purchases of debt securities. These outflows were partially offset by net inflows from maturities, calls ~~sales~~ and principal payments of securities. For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, net cash provided by financing activities amounted to ~~$42.6~~$482.5 million, with net increases in deposits, ~~and~~ FHLB advances and PPPLF borrowings, partially offset by the payment of dividends to ~~shareholders.~~shareholders and treasury stock purchases. See the ~~Corporation’s~~ Unaudited Consolidated Statements of Cash Flows for further information about sources and uses of cash.

Capital Resources

Total shareholders’ equity amounted to ~~$497.8~~$520.2 million at ~~September~~June 30, ~~2019,~~2020, up by ~~$49.6~~$16.7 million from December 31, ~~2018, including~~2019. This included net income of ~~$53.6~~$32.9 million and an increase of ~~$19.4~~$10.8 million in the accumulated comprehensive income component of shareholders’ equity, largely reflecting an increase in the fair value of available for sale debt securities. These increases were partially offset by ~~$26.1~~$17.8 million ~~for~~in dividend ~~declarations.~~declarations, a $6.1 million decrease to retained earnings due to the adoption of CECL, and a net increase in treasury stock of $3.5 million.

The Corporation declared a quarterly dividend of 51 cents per share for the three months ended ~~September~~June 30, ~~2019, compared to 43~~2020, unchanged from the 51 cents per share declared for the same period in ~~2018.~~2019.

The ratio of total equity to total assets amounted to ~~9.58%~~8.85% at ~~September~~June 30, ~~2019~~2020 compared to a ratio of ~~8.94%~~9.51% at December 31, ~~2018.~~ 2019. Book value per share at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 amounted to ~~$28.71~~$30.14 and ~~$25.90,~~$29.00, respectively.

The Bancorp and the Bank are subject to various regulatory capital ~~requirements. Total~~requirements and are considered “well capitalized” with a total risk-based capital ratio ~~amounted~~of 12.78% at June 30, 2020, compared to 12.94% at ~~September 30, 2019, compared to 12.56% at~~ December 31, ~~2018. Capital levels exceeded the regulatory minimum levels to be considered “well capitalized.”~~2019. See Note 8 to the Unaudited Consolidated Financial Statements for additional discussion of regulatory capital ~~requirements.~~requirements and the election of the CECL phase-in option provided by regulatory guidance, which delays the estimated impact of CECL on regulatory capital and phases it in over a three-year period beginning in 2022.

Off-Balance Sheet Arrangements

In the normal course of business, the Corporation engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. Such transactions are used to meet the financing needs of its customers and to manage the exposure to fluctuations in interest rates. These financial

~~- 73-~~

~~Management's Discussion and Analysis~~

transactions include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers,commitments to extend credit, and standby letters of credit are similar to those used for loans. Interest rate risk management contracts with other counterparties are generally subject to bilateral collateralization terms.

For additional information on derivative financial instruments and financial instruments with off-balance sheet risk see Notes 9 and 18 to the Unaudited Consolidated Financial Statements.

Asset/Liability Management and Interest Rate Risk

Interest rate risk is the risk of loss to future earnings due to changes in interest rates. The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. Periodically, the ALCO reports on the status of liquidity and interest rate risk matters to the Bank’s Board of Directors. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with the Corporation’s liquidity, capital adequacy, growth, risk and profitability goals.

The Corporation utilizes the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, off-balance sheet interest rate contracts and the pricing and structure of loans and deposits, to manage interest rate risk. The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a

- 82-

Management's Discussion and Analysis

counterparty to a transaction fails to perform according to terms of the contract. The notional amount of the interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk. See Notes 9 and 18 to the Unaudited Consolidated Financial Statements for additional information.

The ALCO uses income simulation to measure interest rate risk inherent in the Corporation’s on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 12-month horizon, a 13- to 24-month horizon and a 60-month horizon. The simulations assume that the size and general composition of the Corporation’s balance sheet remain static over the simulation horizons, with the exception of certain deposit mix shifts from low-cost core savings to higher-cost time deposits in selected interest rate scenarios. Additionally, the simulations take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency.

The ALCO reviews simulation results to determine whether the Corporation’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation. All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where both interest rates and the composition of the Corporation’s balance sheet remain stable for a 60-month period. In addition to measuring the change in net interest income as compared to an unchanged rate scenario, the ALCO also measures the trend of both net interest income and net interest margin over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.

The ALCO regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve of up to 500 basis points, as well as parallel changes in interest rates of up to 400 basis points. Because income simulations assume that the Corporation’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

The following table sets forth the estimated change in net interest income from an unchanged rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on- and off-balance sheet financial instruments as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. Interest rates are assumed to shift by a parallel 100, 200 or 300 basis points upward or 100 basis points downward over a 12-month period, except for core savings deposits, which are assumed to shift by lesser amounts due to their relative historical insensitivity to market interest rate movements. Further, deposits are assumed to

~~- 74-~~

~~Management's Discussion and Analysis~~

have certain minimum rate levels below which they will not fall. It should be noted that the rate scenarios shown do not necessarily reflect the ALCO’s view of the “most likely” change in interest rates over the periods indicated.


	September 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019
	Months 1 - 12	Months 13 - 24	Months 1 - 12	Months 13 - 24	Months 1 - 12	Months 13 - 24	Months 1 - 12	Months 13 - 24
100 basis point rate decrease	(3.67)%	(5.57)%	(3.60)%	(5.30)%	(1.10)%	(0.98)%	(3.71)%	(5.57)%
100 basis point rate increase	2.72	0.77	1.94	(0.46)	4.08	4.45	2.88	1.02
200 basis point rate increase	6.53	3.52	5.85	2.62	8.46	8.74	6.60	3.37
300 basis point rate increase	10.35	5.99	9.75	5.49	12.74	12.13	10.35	5.53

The ALCO estimates that the negative exposure of net interest income to falling rates as compared to an unchanged rate scenario results from a more rapid decline in earning asset yields compared to rates paid on deposits. If market interest rates were to fall and remain lower for a sustained period, certain core savings and time deposit rates could decline more slowly and by a lesser amount than other market interest rates. Asset yields would likely decline more rapidly than deposit costs as current asset holdings mature or reprice, since cash flow from mortgage-related prepayments and redemption of callable securities would increase as market interest rates fall.

The overall positive exposure of net interest income to rising rates as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term. For simulation purposes, deposit rate changes are anticipated to lag behind other market interest rates in both timing and magnitude. The ALCO’s estimate

- 83-

Management's Discussion and Analysis

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

The relative change in interest rate sensitivity for declining rates from December 31, 2019 as shown in the above table was attributable to a lower absolute level of market interest rates with certain rates and yields reaching floors or zero in declining rate scenarios. The relative increase in interest rate sensitivity for rising rates from December 31, 2019 was attributable to a relative increase in the proportion of low-cost core deposits to total sources of funds. Interest rate risk modeling assumes that core deposits reprice more slowly and by a lesser amount than the repricing of wholesale funding in response to changes in market interest rates.

While the ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the repricing, maturity and prepayment characteristics of financial instruments and the composition of the Corporation’s balance sheet may change to a different degree than estimated. Simulation modeling assumes a static balance sheet, with the exception of certain modeled deposit mix shifts from low-cost core savings deposits to higher-cost time deposits in rising rate scenarios as noted above.

~~The~~As market interest rates have declined, the banking industry has attracted ~~and retained~~ low-cost core savings ~~deposits during the low interest rate cycle that lasted several years.~~deposits. The ALCO recognizes that a portion of these increased levels of low-cost balances could ~~continue to~~ shift into higher yielding alternatives in the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above. Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment, which may cause interest rate sensitivity to differ from the results as presented. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The relationship between short-term interest rate changes and core deposit rate and balance changes may differ from the ALCO’s estimates used in income simulation.

It should also be noted that the static balance sheet assumption does not necessarily reflect the Corporation’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior.

Mortgage-backed securities and residential real estate loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.

The Corporation also monitors the potential change in market value of its available for sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to the Corporation’s capital position. Results are calculated using industry-standard analytical techniques and securities data.

~~- 75-~~

~~Management's Discussion and Analysis~~

The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 resulting from immediate parallel rate shifts:


(Dollars in thousands)
Security Type	Down 100 Basis Points			Up 200 Basis Points			Down 100 Basis Points			Up 200 Basis Points
U.S. government-sponsored enterprise securities (callable)		$1,222			($8,472	)		$988			($8,115	)
Obligations of states and political subdivisions	—			—
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	14,108			(63,966		)	7,830			(50,495		)
Trust preferred debt and other corporate debt securities	(107		)	173			(261		)	436
Total change in market value as of September 30, 2019		$15,223			($72,265	)
Total change in market value as of December 31, 2018		$31,617			($85,191	)
Total change in market value as of June 30, 2020								$8,557			($58,174	)
Total change in market value as of December 31, 2019								$17,741			($81,705	)

- ~~76-~~84-

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information regarding quantitative and qualitative disclosures about market risk appears under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Interest Rate Risk.”

For factors that could adversely impact Washington Trust’s future results of operations and financial condition, see the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, as amended (the “Exchange Act”), the Corporation carried out an evaluation under the supervision and with the participation of the Corporation’s management, including the Corporation’s principal executive officer and principal financial officer, of the Corporation’s disclosure controls and procedures as of the period ended ~~September~~June 30, ~~2019~~2020. Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Corporation’s disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by the Corporation in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Corporation’s management including its Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosures. The Corporation will continue to review and document its disclosure controls and procedures and consider such changes in future evaluations of the effectiveness of such controls and procedures, as it deems appropriate.

Internal Control Over Financial Reporting

There has been no change in ~~our~~the Corporation’s internal controls over financial reporting during the quarter ended ~~September~~June 30, ~~2019~~2020 that has materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

- ~~77-~~85-

PART II. Other Information

Item 1. Legal Proceedings

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 financial position or results of operations of the Corporation.

Item 1A. Risk Factors

~~There have been no material changes in~~This section supplements and updates certain of the ~~risk factors described in Item IA to~~information found under Part I, Item 1A. “Risk Factors” of ~~Washington Trust’s~~our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019 filed with the SEC on February 25, 2020 (“Annual Report”) and Part II. Item 1A. “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as filed with the SEC on May 7, 2020 (the “First Quarter 10-Q”), based on information currently known to us and recent developments since the date of the First Quarter 10-Q filing. The matters discussed below should be read in conjunction with the risks described in Part I. Item 1A. “Risk Factors” of our Annual Report and Part II. Item 1A. “Risk Factors” of our First Quarter 10-Q. However, the risks and uncertainties that we face are not limited to those described below and those set forth in the Annual Report and First Quarter 10-Q. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our common stock, particularly in light of the fast-changing nature of the COVID-19 pandemic, containment measures and the related impacts to economic and operating conditions.

The COVID-19 pandemic, and the measures taken to control its spread, will continue to adversely impact our employees, customers, business operations and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted.

The COVID-19 pandemic has impacted and is likely to continue to impact the national economy and the regional and local markets in which we operate, lower equity market valuations, create significant volatility and disruption in capital and debt markets, and increase unemployment levels. Our business operations may be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. We are subject to heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements that we and our third party service providers have put in place for employees. Federal Reserve actions to combat the economic contraction caused by the COVID-19 pandemic, including the reduction of the target federal funds rate and quantitative easing programs, could, if prolonged, adversely affect our net interest income and margins, and our profitability. The continued closures of many businesses and the institution of social distancing, shelter in place and stay home orders in the states and communities we serve, have reduced business activity and financial transactions. While certain of these restrictions have been eased and workplaces in the communities we serve are beginning to reopen, the pace of reopening is measured and these government policies and directives are subject to change as the effects and spread of the COVID-19 pandemic continue to evolve. It is unclear whether any COVID-19 pandemic-related businesses losses that we or our customers may suffer will be recovered by existing insurance policies. Changes in customer behavior due to worsening business and economic conditions or legislative or regulatory initiatives may impact the demand for our products and services, which could adversely affect our revenue. Pandemic-related delays in our ability to execute appraisals of collateral securing loans may cause disruption in the loan origination process and add uncertainty about the adequacy of our allowance for credit losses. The measures we have taken to aid our customers, including short-term loan payment deferments, may be insufficient to help our customers who have been negatively impacted by the economic fallout from the COVID-19 pandemic. Loans that are currently in deferral status may become nonperforming loans. Mortgage banking revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets. Further deterioration in economic and financial market conditions may require us to increase our provision for credit losses or recognize impairments on investment securities we hold, goodwill, intangible assets and right-of-use-assets. A substantial portion of wealth management revenues is dependent on the value of wealth management assets under administration and is closely tied to the performance of the financial markets. The increase in financial market volatility and a corresponding increase in trading frequency also means that our Wealth Management Services business is subject to an increased risk of trading errors, and the risk that any trading errors are of an increased magnitude.

While the COVID-19 pandemic negatively impacted our results of operations for the first half of 2020, the extent to which the COVID-19 pandemic will continue to impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic, as well as further actions we may take as may be required by government authorities or that we determine is in the best interests of our employees and customers. There is no certainty that such measures will be sufficient to mitigate the risks posed by the pandemic.

- 86-

Our participation in the SBA’s PPP may expose us to reputational harm, increased litigation risk, as well as the risk that the SBA may not fund some or all of the guarantees associated with PPP loans.

As of June 30, 2020, there were 1,690 PPP loans with a carrying value of $212.2 million included in our commercial and industrial loan portfolio. Lenders participating in the PPP have faced increased public scrutiny about their loan application process and procedures, and the nature and type of the borrowers receiving PPP loans. We depend on our reputation as a trusted and responsible financial services company to compete effectively in the communities that we serve, and any negative public or customer response to, or any litigation or claims that might arise out of, our participation in the PPP and any other legislative or regulatory initiatives and programs that may be enacted in response to the COVID-19 pandemic, could adversely impact our business. Other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP, and we may be subject to the same or similar litigation, in addition to litigation in connection with our processing of PPP loan forgiveness applications. In addition, if the SBA determines that there is a deficiency in the manner in which a PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency or the processing fee from us.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 6. Exhibits

(a) Exhibits. The following exhibits are included as part of this Form 10-Q:



Exhibit Number
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Filed herewith.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Filed herewith.
32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Furnished herewith. (1)
101	The following materials from Washington Trust Bancorp, Inc.’s Quarterly Report on Form 10-Q for the period ended ~~September~~June 30, ~~2019~~2020 formatted in Inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related Notes to these consolidated financial statements.
104	The cover page from the Corporation’s Quarterly Report on Form 10-Q for the period ended ~~September~~June 30, ~~2019~~2020 has been formatted in Inline XBRL and contained in Exhibit 101.

____________________


(1)	These certifications are not “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Securities Exchange Act.

- ~~78-~~87-

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



			WASHINGTON TRUST BANCORP, INC.
			(Registrant)

Date:	~~November 4, 2019~~August 6, 2020	By:	/s/ Edward O. Handy III
			Edward O. Handy III
			Chairman and Chief Executive Officer
			(principal executive officer)

Date:	~~November 4, 2019~~August 6, 2020	By:	/s/ Ronald S. Ohsberg
			Ronald S. Ohsberg
			Senior Executive Vice President, Chief Financial Officer and Treasurer
			(principal financial officer)

Date:	~~November 4, 2019~~August 6, 2020	By:	/s/ Maria N. Janes
			Maria N. Janes
			Executive Vice President and Controller
			(principal accounting officer)

- ~~79-~~88-



(Dollars in thousands)	Original Terms				Revised Terms
	Scheduled Maturity		Weighted Average Rate		Scheduled Maturity		Weighted Average Rate
2021		$20,000	3.07	%		$—	—	%
2022	54,634		3.63		—		—
2023	4,190		4.27		—		—
2024	—		—		40,000		2.45
2025	—		—		—		—
2026	—		—		38,824		3.09
Total		$78,824	3.52	%		$78,824	2.76	%



(Dollars in thousands)	Net Unrealized Losses on Available For Sale Debt Securities			Net Unrealized Gains on Cash Flow Hedges			Defined Benefit Pension Plan Adjustment			Total
For the three months ended September 30, 2018	Net Unrealized Losses on Available For Sale Debt Securities			Net Unrealized Gains on Cash Flow Hedges			Defined Benefit Pension Plan Adjustment			Total
Balance at July 1, 2018		($21,060	)		$826			($14,828	)		($35,062	)
Other comprehensive loss before reclassifications	(4,531		)	(478		)	—			(5,009		)
Amounts reclassified from accumulated other comprehensive income	—			633			361			994
Net other comprehensive (loss) income	(4,531		)	155			361			(4,015		)
Balance at September 30, 2018		($25,591	)		$981			($14,467	)		($39,077	)




(Dollars in thousands)
Years ending December 31:	2019		$3,544
	2020	2,980
	2021	2,677
	2022	2,293
	2023	2,059
	2024 and thereafter	22,648
Total minimum lease payments			$36,201