UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period endedSEPTEMBER
September 30, 20182019
or
o
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

WASHINGTONTRUSTBANCORP,INC.
(Exact name of registrant as specified in its charter)

RHODE ISLANDRhode Island 05-0404671
(State or other jurisdiction of incorporation or organization) (I.R.S.IRS Employer Identification No.)
23 BROAD STREETBroad Street  
WESTERLY, RHODE ISLANDWesterly,Rhode Island 02891
(Address of principal executive offices) (Zip Code)


(401) 348-1200
(Registrant’s telephone number, including area code)
(401) 348-1200
(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
COMMON STOCK, $.0625 PAR VALUE PER SHAREWASHThe 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. x Yes o 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). xYes o 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. (Mark one)
Large accelerated filerx
 
Accelerated filero
Non-accelerated filero
 
Smaller reporting companyo
(Do not check if a smaller reporting company)
Emerging growth companyo


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. o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No

The number of shares of common stock of the registrant outstanding as of October 31, 20182019 was 17,294,570.17,350,703.




FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended September 30, 20182019
  
TABLE OF CONTENTS
 Page Number
 
 
 





- 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,
2018
 December 31,
2017
September 30,
2019
 December 31,
2018
Assets:      
Cash and due from banks
$72,934
 
$79,853

$141,768
 
$89,923
Short-term investments2,917
 3,070
4,336
 3,552
Mortgage loans held for sale, at fair value22,571
 26,943
44,657
 20,996
Securities:      
Available for sale, at fair value812,647
 780,954
Held to maturity, at amortized cost (fair value $10,657 at September 30, 2018 and $12,721 at December 31, 2017)10,863
 12,541
Available for sale debt securities, at fair value887,020
 927,810
Held to maturity debt securities, at amortized cost (fair value $10,316 at December 31, 2018)
 10,415
Total securities823,510
 793,495
887,020
 938,225
Federal Home Loan Bank stock, at cost44,525
 40,517
45,030
 46,068
Loans:      
Total loans3,556,203
 3,374,071
3,778,106
 3,680,360
Less allowance for loan losses26,509
 26,488
26,997
 27,072
Net loans3,529,694
 3,347,583
3,751,109
 3,653,288
Premises and equipment, net28,195
 28,333
29,293
 29,005
Operating lease right-of-use assets27,500
 
Investment in bank-owned life insurance79,891
 73,267
81,920
 80,463
Goodwill63,909
 63,909
63,909
 63,909
Identifiable intangible assets, net8,400
 9,140
7,448
 8,162
Other assets94,126
 63,740
114,888
 77,175
Total assets
$4,770,672
 
$4,529,850

$5,198,878
 
$5,010,766
Liabilities:      
Deposits:      
Noninterest-bearing deposits
$611,829
 
$578,410

$619,839
 
$603,216
Interest-bearing deposits2,802,519
 2,664,297
2,966,314
 2,920,832
Total deposits3,414,348
 3,242,707
3,586,153
 3,524,048
Federal Home Loan Bank advances828,392
 791,356
956,786
 950,722
Junior subordinated debentures22,681
 22,681
22,681
��22,681
Operating lease liabilities29,541
 
Other liabilities77,342
 59,822
105,892
 65,131
Total liabilities4,342,763
 4,116,566
4,701,053
 4,562,582
Commitments and contingencies (Note 18)

 



 


Shareholders’ Equity:      
Common stock of $.0625 par value; authorized 60,000,000 shares; issued and outstanding 17,290,443 shares at September 30, 2018 and 17,226,508 shares at December 31, 20171,081
 1,077
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, 20181,084
 1,081
Paid-in capital119,220
 117,961
121,900
 119,888
Retained earnings346,685
 317,756
383,765
 355,524
Accumulated other comprehensive loss(39,077) (23,510)(8,924) (28,309)
Total shareholders’ equity427,909
 413,284
497,825
 448,184
Total liabilities and shareholders’ equity
$4,770,672
 
$4,529,850

$5,198,878
 
$5,010,766




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 Nine Months
Periods ended September 30,Periods ended September 30,2018 2017 2018 2017Periods ended September 30,2019 2018 2019 2018
Interest income:Interest income:       Interest income:       
Interest and fees on loansInterest and fees on loans
$38,877
 
$32,509
 
$110,556
 
$94,503
Interest and fees on loans
$41,558
 
$38,493
 
$125,440
 
$109,633
Taxable interest on securities5,383
 4,655
 15,859
 14,208
Nontaxable interest on securities9
 41
 52
 225
Interest on mortgage loans held for saleInterest on mortgage loans held for sale410
 384
 878
 923
Taxable interest on debt securitiesTaxable interest on debt securities6,318
 5,383
 20,550
 15,859
Nontaxable interest on debt securitiesNontaxable interest on debt securities1
 9
 18
 52
Dividends on Federal Home Loan Bank stockDividends on Federal Home Loan Bank stock634
 467
 1,700
 1,293
Dividends on Federal Home Loan Bank stock747
 634
 2,162
 1,700
Other interest incomeOther interest income261
 197
 723
 457
Other interest income493
 261
 1,232
 723
Total interest and dividend incomeTotal interest and dividend income45,164
 37,869
 128,890
 110,686
Total interest and dividend income49,527
 45,164
 150,280
 128,890
Interest expense:Interest expense: 
  
    Interest expense: 
  
    
DepositsDeposits6,546
 3,835
 16,222
 10,928
Deposits9,792
 6,546
 27,957
 16,222
Federal Home Loan Bank advancesFederal Home Loan Bank advances4,937
 3,816
 13,627
 10,669
Federal Home Loan Bank advances6,512
 4,937
 20,153
 13,627
Junior subordinated debenturesJunior subordinated debentures232
 159
 629
 446
Junior subordinated debentures245
 232
 750
 629
Other interest expense
 
 
 1
Total interest expenseTotal interest expense11,715
 7,810
 30,478
 22,044
Total interest expense16,549
 11,715
 48,860
 30,478
Net interest incomeNet interest income33,449
 30,059
 98,412
 88,642
Net interest income32,978
 33,449
 101,420
 98,412
Provision for loan lossesProvision for loan losses350
 1,300
 750
 2,400
Provision for loan losses400
 350
 1,575
 750
Net interest income after provision for loan lossesNet interest income after provision for loan losses33,099
 28,759
 97,662
 86,242
Net interest income after provision for loan losses32,578
 33,099
 99,845
 97,662
Noninterest income:Noninterest income:       Noninterest income:       
Wealth management revenuesWealth management revenues9,454
 10,013
 29,329
 29,432
Wealth management revenues9,153
 9,454
 27,954
 29,329
Mortgage banking revenuesMortgage banking revenues2,624
 3,036
 8,403
 8,295
Mortgage banking revenues4,840
 2,624
 11,126
 8,403
Card interchange feesCard interchange fees1,099
 983
 3,114
 2,791
Service charges on deposit accountsService charges on deposit accounts885
 942
 2,651
 2,726
Service charges on deposit accounts939
 885
 2,743
 2,651
Card interchange fees983
 894
 2,791
 2,598
Loan related derivative incomeLoan related derivative income1,407
 278
 2,877
 1,087
Income from bank-owned life insuranceIncome from bank-owned life insurance572
 546
 1,624
 1,624
Income from bank-owned life insurance569
 572
 1,784
 1,624
Loan related derivative income278
 1,452
 1,087
 2,744
Net realized losses on securitiesNet realized losses on securities
 
 (80) 
Other incomeOther income419
 400
 1,066
 1,180
Other income335
 419
 944
 1,066
Total noninterest incomeTotal noninterest income15,215
 17,283
 46,951
 48,599
Total noninterest income18,342
 15,215
 50,462
 46,951
Noninterest expense:Noninterest expense:       Noninterest expense:       
Salaries and employee benefitsSalaries and employee benefits17,283
 17,362
 52,359
 51,697
Salaries and employee benefits18,332
 17,283
 54,387
 52,359
Outsourced servicesOutsourced services1,951
 1,793
 6,174
 4,960
Outsourced services2,722
 1,951
 7,846
 6,174
Net occupancyNet occupancy2,013
 1,928
 5,945
 5,662
Net occupancy1,933
 2,013
 5,835
 5,945
EquipmentEquipment1,080
 1,380
 3,329
 4,160
Equipment1,046
 1,080
 3,085
 3,329
Legal, audit and professional feesLegal, audit and professional fees559
 534
 1,840
 1,732
Legal, audit and professional fees645
 559
 1,843
 1,840
FDIC deposit insurance costsFDIC deposit insurance costs410
 308
 1,236
 1,258
FDIC deposit insurance costs(460) 410
 509
 1,236
Advertising and promotionAdvertising and promotion440
 416
 946
 1,015
Advertising and promotion368
 440
 1,132
 946
Amortization of intangiblesAmortization of intangibles245
 253
 740
 787
Amortization of intangibles236
 245
 714
 740
Change in fair value of contingent consideration
 
 
 (310)
Other expensesOther expenses2,081
 2,780
 6,911
 7,385
Other expenses2,048
 2,081
 6,634
 6,911
Total noninterest expenseTotal noninterest expense26,062
 26,754
 79,480
 78,346
Total noninterest expense26,870
 26,062
 81,985
 79,480
Income before income taxesIncome before income taxes22,252
 19,288
 65,133
 56,495
Income before income taxes24,050
 22,252
 68,322
 65,133
Income tax expenseIncome tax expense4,741
 6,326
 13,737
 18,552
Income tax expense5,236
 4,741
 14,740
 13,737
Net incomeNet income
$17,511
 
$12,962
 
$51,396
 
$37,943
Net income
$18,814
 
$17,511
 
$53,582
 
$51,396
               
Net income available to common shareholdersNet income available to common shareholders
$18,778
 
$17,475
 
$53,477
 
$51,284
Weighted average common shares outstanding - basicWeighted average common shares outstanding - basic17,283
 17,212
 17,263
 17,201
Weighted average common shares outstanding - basic17,338
 17,283
 17,324
 17,263
Weighted average common shares outstanding - dilutedWeighted average common shares outstanding - diluted17,382
 17,318
 17,392
 17,320
Weighted average common shares outstanding - diluted17,414
 17,382
 17,406
 17,392
Per share information:Basic earnings per common share
$1.01
 
$0.75
 
$2.97
 
$2.20
Basic earnings per common share
$1.08
 
$1.01
 
$3.09
 
$2.97
Diluted earnings per common share
$1.01
 
$0.75
 
$2.95
 
$2.19
Diluted earnings per common share
$1.08
 
$1.01
 
$3.07
 
$2.95
Cash dividends declared per share
$0.43
 
$0.39
 
$1.29
 
$1.15
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 MonthsThree Months Nine Months
Periods ended September 30,2018 2017 2018 20172019 2018 2019 2018
Net income
$17,511
 
$12,962
 
$51,396
 
$37,943

$18,814
 
$17,511
 
$53,582
 
$51,396
Other comprehensive income (loss), net of tax:              
Net change in fair value of securities available for sale(4,531) 1,094
 (18,057) 3,323
Net change in fair value of available for sale debt securities2,886
 (4,531) 19,940
 (18,057)
Net change in fair value of cash flow hedges155
 (13) 1,409
 (364)(171) 155
 (1,235) 1,409
Net change in defined benefit plan obligations361
 217
 1,081
 427
227
 361
 680
 1,081
Total other comprehensive (loss) income, net of tax(4,015) 1,298
 (15,567) 3,386
Total other comprehensive income (loss), net of tax2,942
 (4,015) 19,385
 (15,567)
Total comprehensive income
$13,496
 
$14,260
 
$35,829
 
$41,329

$21,756
 
$13,496
 
$72,967
 
$35,829








Washington Trust Bancorp, Inc. and Subsidiaries




 
Consolidated Statements of Changes in Shareholders' Equity (unaudited)
(Dollars and shares in thousands)




 Common
Shares Outstanding
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 Total
Balance at January 1, 201817,227
 
$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
 
 
 (22,467) 
 (22,467)
Share-based compensation
 
 1,977
 
 
 1,977
Exercise of stock options, issuance of other compensation-related equity awards63
 4
 (718) 
 
 (714)
Balance at September 30, 201817,290
 
$1,081
 
$119,220
 
$346,685
 
($39,077) 
$427,909
For the three months ended September 30, 2019Common
Shares Outstanding
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 Total
Balance at July 1, 201917,336
 
$1,083
 
$121,115
 
$373,873
 
($11,866) 
$484,205
Net income
 
 
 18,814
 
 18,814
Total other comprehensive income, net of tax
 
 
 
 2,942
 2,942
Cash dividends declared ($0.51 per share)
 
 
 (8,922) 
 (8,922)
Share-based compensation
 
 792
 
 
 792
Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered2
 1
 (7) 
 
 (6)
Balance at September 30, 201917,338
 
$1,084
 
$121,900
 
$383,765
 
($8,924) 
$497,825



 Common
Shares Outstanding
 Common
Stock
 Paid-in
Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
(Loss) Income
 Total
Balance at January 1, 201717,171
 
$1,073
 
$115,123
 
$294,365
 
($19,757) 
$390,804
Net income
 
 
 37,943
 
 37,943
Total other comprehensive income, net of tax
 
 
 
 3,386
 3,386
Cash dividends declared
 
 
 (19,974) 
 (19,974)
Share-based compensation
 
 1,872
 
 
 1,872
Exercise of stock options, issuance of other compensation-related equity awards43
 3
 194
 
 
 197
Balance at September 30, 201717,214
 
$1,076
 
$117,189
 
$312,334
 
($16,371) 
$414,228
For the nine months ended September 30, 2019Common
Shares Outstanding
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 Total
Balance at January 1, 201917,302
 
$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 surrendered36
 3
 (283) 
 
 (280)
Cumulative effect of change in accounting principle
 
 
 722
 
 722
Balance at September 30, 201917,338
 
$1,084
 
$121,900
 
$383,765
 
($8,924) 
$497,825





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, 2018Common
Shares Outstanding
 Common
Stock
 Paid-in
Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
Loss
 Total
Balance at July 1, 201817,278
 
$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 surrendered12
 1
 (321) 
 
 (320)
Balance at September 30, 201817,290
 
$1,081
 
$119,220
 
$346,685
 
($39,077) 
$427,909

For the nine months ended September 30, 2018Common
Shares Outstanding
 Common
Stock
 Paid-in
Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
Loss
 Total
Balance at January 1, 201817,227
 
$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 surrendered63
 4
 (718) 
 
 (714)
Balance at September 30, 201817,290
 
$1,081
 
$119,220
 
$346,685
 
($39,077) 
$427,909



Washington Trust Bancorp, Inc. and Subsidiaries


Consolidated Statement of Cash Flows (unaudited)
(Dollars in thousands)




Nine months ended September 30,2018
 2017
Cash flows from operating activities:   
Net income
$51,396
 
$37,943
Adjustments to reconcile net income to net cash provided by operating activities:   
Provision for loan losses750
 2,400
Depreciation of premises and equipment2,454
 2,613
Net amortization of premiums and discounts on securities and loans2,157
 2,560
Amortization of intangibles740
 787
Goodwill impairment
 150
Share-based compensation1,977
 1,872
Tax benefit from stock option exercises and other equity awards454
 414
Income from bank-owned life insurance(1,624) (1,624)
Net gains on loan sales and commissions on loans originated for others, including fair value adjustments(7,950) (8,004)
Proceeds from sales of loans306,095
 345,539
Loans originated for sale(296,367) (337,772)
Change in fair value of contingent consideration liability
 (310)
Increase in other assets(20,903) (9,548)
Increase in other liabilities19,256
 6,537
Net cash provided by operating activities58,435
 43,557
Cash flows from investing activities:   
Purchases of:Mortgage-backed securities available for sale(96,867) (35,213)
 Other investment securities available for sale(30,964) (19,963)
Maturities and principal payments of:Mortgage-backed securities available for sale63,918
 62,745
 Other investment securities available for sale6,795
 21,269
 Mortgage-backed securities held to maturity1,603
 2,283
(Purchases) remittance of Federal Home Loan Bank stock(4,008) 956
Net increase in loans(181,853) (88,914)
Purchases of loans(1,750) (737)
Proceeds from the sale of property acquired through foreclosure or repossession49
 513
Purchases of premises and equipment(2,320) (2,184)
Purchases of bank-owned life insurance(5,000) 
Net cash used in investing activities(250,397) (59,245)
Cash flows from financing activities:   
Net increase in deposits171,641
 93,329
Proceeds from Federal Home Loan Bank advances1,462,500
 1,000,000
Repayment of Federal Home Loan Bank advances(1,425,464) (1,034,885)
Payment of contingent consideration liability(1,217) 
Net proceeds from stock option exercises and issuance of other equity awards(714) 194
Cash dividends paid(21,856) (19,567)
Net cash provided by financing activities184,890
 39,071
Net (decrease) increase in cash and cash equivalents(7,072) 23,383
Cash and cash equivalents at beginning of period82,923
 107,797
Cash and cash equivalents at end of period
$75,851
 
$131,180
Noncash Investing and Financing Activities:   
Loans charged off
$889
 
$1,415
Loans transferred to property acquired through foreclosure or repossession3,074
 576
Supplemental Disclosures:   
Interest payments
$28,596
 
$21,512
Income tax payments12,585
 19,272
Nine months ended September 30,2019
 2018
Cash flows from operating activities:   
Net income
$53,582
 
$51,396
Adjustments to reconcile net income to net cash provided by operating activities:   
Provision for loan losses1,575
 750
Depreciation of premises and equipment2,478
 2,454
Net amortization of premiums and discounts on securities and loans3,113
 2,157
Amortization of intangibles714
 740
Share-based compensation2,295
 1,977
Tax benefit from stock option exercises and other equity awards202
 454
Income from bank-owned life insurance(1,784) (1,624)
Net gains on loan sales, including fair value adjustments(10,749) (7,950)
Net realized losses on securities80
 
Proceeds from sales of loans, net365,057
 306,095
Loans originated for sale(380,635) (296,367)
Decrease in operating lease right-of-use assets1,422
 
Decrease in operating lease liabilities(1,312) 
Increase in other assets(41,239) (20,903)
Increase in other liabilities42,575
 19,256
Net cash provided by operating activities37,374
 58,435
Cash flows from investing activities:   
Purchases of:Available for sale debt securities: Mortgage-backed(72,262) (96,867)
 Available for sale debt securities: Other(10,507) (30,964)
Proceeds from sale of:Other investment securities available for sale9,920
 
Maturities, calls and principal payments of:Available for sale debt securities: Mortgage-backed96,521
 63,918
 Available for sale debt securities: Other51,135
 6,795
 Held to maturity debt securities: Mortgage-backed
 1,603
Remittance (purchases) of Federal Home Loan Bank stock1,038
 (4,008)
Net increase in loans(92,135) (181,853)
Purchases of loans(7,324) (1,750)
Proceeds from the sale of property acquired through foreclosure or repossession
 49
Purchases of premises and equipment(2,768) (2,320)
Purchases of bank-owned life insurance
 (5,000)
Proceeds from surrender of bank-owned life insurance326
 
Equity investment in real estate limited partnership(1,256) 
Net cash used in investing activities(27,312) (250,397)
Cash flows from financing activities:   
Net increase in deposits62,105
 171,641
Proceeds from Federal Home Loan Bank advances1,334,000
 1,462,500
Repayment of Federal Home Loan Bank advances(1,327,936) (1,425,464)
Payment of contingent consideration liability
 (1,217)
Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered(280) (714)
Cash dividends paid(25,322) (21,856)
Net cash provided by financing activities42,567
 184,890
Net increase (decrease) in cash and cash equivalents52,629
 (7,072)
Cash and cash equivalents at beginning of period93,475
 82,923
Cash and cash equivalents at end of period
$146,104
 
$75,851


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


Nine months ended September 30,2019
 2018
Noncash Activities:   
Loans charged off
$1,888
 
$889
Loans transferred to property acquired through foreclosure or repossession2,000
 3,074
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 assets28,923
 
Operating lease liabilities30,853
 
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 sale10,316
 
Supplemental Disclosures:   
Interest payments
$47,168
 
$28,596
Income tax payments14,531
 12,585




Condensed Notes to Unaudited Consolidated Financial Statements




(1) General InformationNote 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 comprehensivecomplete product line of banking and 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).


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 the 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 reflectiveindicative 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, 2017.2018.


(2)Note 2 - Recently Issued Accounting Pronouncements
Revenue from Contracts with Customers - Topic 606
Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), was issuedAdopted in May 2014 and provides a revenue recognition framework for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other accounting standards. As issued, ASU 2014-09 was effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period with early adoption not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, Accounting Standards Update No. 2015-14, “Deferral of the Effective Date” (“ASU 2015-14”) was issued and delayed the effective date of ASU 2014-09 to annual and interim periods in fiscal years beginning after December 15, 2017. In 2016, Accounting Standards Update No. 2016-08, “Principal versus Agent Considerations” (“ASU 2016-08”), Accounting Standards Update No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”) and Accounting Standards Update No. 2016-12, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”) were issued. These ASUs did not change the core principle for revenue recognition in Topic 606; instead, the amendments provided more detailed guidance in a few areas and additional implementation guidance and examples to reduce the degree of judgment necessary to comply with Topic 606. The effective date and transition requirements for ASU 2016-08, ASU 2016-10 and ASU 2016-12 were the same as those provided by ASU 2015-14. Management assembled a project team to address the changes pursuant to Topic 606. The project team completed a scope assessment and contract review for in-scope revenue streams. Washington Trust's largest source of revenue is net interest income on financial assets and liabilities, which was explicitly excluded from the scope of this ASU. Revenue streams that were within the scope of Topic 606 include wealth management revenues, service charges on deposit accounts and card interchange fees. Management adopted the provisions of ASU 2014-09 effective January 1, 2018, using the modified retrospective transition method. The adoption did not have a material impact on the Corporation’s consolidated financial statements. See Note 12 for further details.

Financial Instruments - Overall - Topic 825
Accounting Standards Update No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), was issued in January 2016 and provides revised guidance related to the accounting for and reporting of financial instruments. Some of the main provisions include: requiring most equity securities to be reported at fair value with unrealized gains and losses reported in the income statement; requiring separate presentation of financial assets and liabilities by


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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

measurement category and form (i.e. securities or loans); clarifying that entities must assess valuation allowances on a deferred tax asset related to available for sale debt securities in combination with their other deferred tax assets; and eliminating the requirement to disclose the method and significant assumptions used to estimate fair value for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Management adopted the provisions of ASU 2016-01 effective January 1, 2018. The adoption did not have a material impact on the Corporation’s consolidated financial statements.

Accounting Standards Update No. 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2018-03”), was issued in February 2018 to clarify certain aspects of the guidance issued in ASU 2016-01. Companies, such as Washington Trust, were not required to adopt the provisions of ASU 2018-03 until the interim period beginning after June 15, 2018. However, early adoption was permitted, as long as ASU 2016-01 provisions were adopted. Management early adopted the provisions of ASU 2018-03 effective January 1, 2018. The adoption did not have an impact on the Corporation’s consolidated financial statements.

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 will dependdepends on its classification as a finance or operating lease. ASU 2016-02 requires a modified retrospective transition, with a numberpackage 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 (“ASU 2018-01”)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” (“ASU 2018-10”) 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 intends to useused 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 arewere effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.



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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Management assembled a project team that meets regularly 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 currently areas of December 31, 2018 were not reflected in its Consolidated Balance Sheets. As disclosedThe 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 Note 18,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 committedissued in August 2017 to $36.6 millionbetter align financial reporting for hedging activities with the economic objectives of future minimum lease payments under these non-cancelable operating leases. Uponthose 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 2016-022017-12 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 Corporation expects to report increased assets and liabilitiesadoption 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 resultBenchmark Interest Rate for Hedge Accounting Purposes” (“ASU 2018-16”), was issued in October 2018 to permit the use of recognizing right-of-use assetsthe 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 lease liabilities in its Consolidated Balance Sheets.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 doesadopted the provisions of ASU 2018-16 on January 1, 2019 and it did not expecthave a material change toimpact on the timing of expense recognition in the Consolidated Statements of Income.Corporation’s consolidated financial statements.


Accounting Standards Pending Adoption
Financial Instruments - Credit Losses - Topic 326
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 credit losses for financial assets heldmeasured at amortized cost, as well as off-balance sheet credit exposures at the reporting datedate. 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-saleavailable for sale debt securities and purchased financial assets with credit deterioration. 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. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted in 2019. Washington Trust is evaluating the effect that this ASU will have on consolidated financial statements and disclosures. Management assembled a project team that meets regularly to evaluate the provisions of this ASU, to address the additional data requirements necessary and to determine the approach for implementation. The Corporation does not plan to early adopt ASU 2016-13 and it has not yet determined the impact it will have on its consolidated financial statements.

Statement of Cash Flows - Topic 230
Accounting Standards Update No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), was issued in August 2016. ASU 2016-15 provides classification guidance on certain cash receipts and cash payments, including,




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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


but not limited to, debt prepayment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance policies and distributions received from equity method investees. The adoption ofCorporation will adopt ASU 2016-15 requires a retrospective transition method applied to each period presented. This ASU was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Management adopted the provisions of ASU 2016-15 effective2016-13 on January 1, 2018. The adoption did not2020 and continues to evaluate the effect that this ASU will have a material impact on the Corporation’s consolidated financial statements.statements and disclosures.


In April 2019, Accounting Standards Update No. 2016-18, “Restricted Cash”2019-04, “Codification Improvements to Topic 326 Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU 2016-18”2019-04”), was issued in November 2016. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash. Restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shownto provide additional clarification on the statementscope and disclosure requirements of cash flows. The adoptionTopic 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, the inclusion of ASU 2016-18 requires a retrospective transition method applied to each period presented.recoveries in estimating the allowance for credit losses (“ACL”) and consideration of contract extension and renewals when determining the contractual term. This ASU was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Management adopted the provisions of ASU 2016-18 effective January 1, 2018. The adoption did not have a material impactalso provides clarification on the Corporation’s consolidated financial statements.

Compensation - Retirement Benefits - Topic 715
tabular vintage disclosures related to line-of-credit arrangements that convert term loans. In May 2019, Accounting Standards Update No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”2019-05, “Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief” (“ASU 2017-07”2019-05”), was issued in March 2017.to allow an entity to make an irrevocable fair value option election on instruments within the scope 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 2017-07 requires that employers include the service cost component of net periodic benefit cost in2019-04 and ASU 2019-05 are the same line item as other employee compensation costs and all other components of net periodic benefit cost in a separate line item(s) in the statement of income. In addition, the line item in which the components of net periodic benefit cost other than the service cost are included shall be identified as such on the statement of income or in the notes to the financial statements. ASU 2017-07 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 requiring retrospective application for all periods presented. Management adopted the provisionsdate of ASU 2017-07 effective January 1, 2018, utilizing2016-13.

To prepare for the practical expedient that permitted employers to use the amounts previously disclosed in notes to financial statements as an estimation basis for applying the retrospective application requirements. The adoption of ASU 2017-07 resulted2016-13 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 an increasethe amortized cost of the securities. As a result, improvements to estimated credit losses will be recognized immediately in salaries and employee benefits, a decreasein other expenses and no change to net income. The adoption did not have a material impactearnings rather than as interest income over time. Based on the Corporation’s consolidated financial statements. See Note 13credit quality of our existing available for further details.

Accounting Standards Update No. 2018-14, “Disclosure Framework - Changes tosale debt securities portfolio, the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”), was issued in August 2018 to modifyCorporation does not expect the disclosure requirements associated with defined benefit pension plans and other postretirement plans. ASU 2018-13 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The provisions under ASU 2018-13 are required to be applied retrospectively. The adoption of ASU 2018-142016-13, as it relates to debt securities, to be significant.

The project team continues to review the output from “trial” runs and is not expectedin 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 have a material impact onfinalize its Topic 326 compliant methodology, accounting policies and internal controls in the Corporation’s consolidated financial statements.

Compensation - Stock Compensation - Topic 718
Accounting Standards Update No. 2017-09, “Scopefourth quarter of Modification Accounting” (“ASU 2017-09”), was issued in May 2017 to provide clarity when applying the guidance in Topic 718 to a change2019. Upon adoption, an increase to the terms or conditions ofACL will be recorded with a share-based payment award. ASU 2017-09 was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with provisions appliedcorresponding 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 on a prospective basis.  Management adoptedregulatory capital that may result from the provisions of ASU 2017-09 effective January 1, 2018. The adoption 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 is effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The provisions of ASU 2017-12 should be applied on a modified retrospective transition method in which the Corporation will recognize the cumulative effect of the change in the opening balance of retained earnings as of the adoption date.new accounting standard. The Corporation has not yet determinedis planning on adopting the impact ASU 2017-12 will have on its consolidated financial statements.capital transition relief over the permissible three-year period.


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 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted, including adoption in an interim period. Certain provisions under ASU 2018-13 require prospective application, while other provisions require


- 10-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

retrospective application to all periods presented in the consolidated financial statements upon adoption. The adoption of ASU 2018-13 is not expected to have a material impact on the Corporation’s consolidated financial statements.


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 - 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


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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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. The provisions under ASU 2018-15 can either be applied retrospectively or prospectively. 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 have a material impact on the Corporation’s consolidated financial statements.


(3)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 (“FRB”(the “FRB”).  Some or all of these reserve requirements may be satisfied with vault cash.Reserve balances amounted to $20.727.6 million at September 30, 20182019 and $14.1$21.6 million at December 31, 20172018 and were included in cash and due from banks in the Unaudited Consolidated Balance Sheets.


As of September 30, 20182019 and December 31, 20172018, cash and due from banks included interest-bearing deposits in other banks of $20.881.9 million and $31.933.7 million, respectively.


(4)Note 4 - Securities
The following tables present 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, 2018Amortized Cost Unrealized Gains Unrealized Losses Fair Value
Securities Available for Sale:       
September 30, 2019Amortized Cost Unrealized Gains Unrealized Losses Fair Value
Available for Sale Debt Securities:       
Obligations of U.S. government-sponsored enterprises
$201,398
 
$9
 
($7,934) 
$193,473

$196,734
 
$927
 
($337) 
$197,324
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises616,552
 1,143
 (24,833) 592,862
659,096
 8,614
 (2,805) 664,905
Obligations of states and political subdivisions935
 2
 
 937
Individual name issuer trust preferred debt securities13,303
 
 (839) 12,464
13,320
 
 (899) 12,421
Corporate bonds13,911
 
 (1,000) 12,911
13,715
 32
 (1,377) 12,370
Total securities available for sale
$846,099
 
$1,154
 
($34,606) 
$812,647
Held to Maturity:       
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
$10,863
 
$—
 
($206) 
$10,657
Total securities held to maturity
$10,863
 
$—
 
($206) 
$10,657
Total available for sale debt securities
$882,865
 
$9,573
 
($5,418) 
$887,020
Total securities
$856,962
 
$1,154
 
($34,812) 
$823,304

$882,865
 
$9,573
 
($5,418) 
$887,020








- 11-13-





Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


(Dollars in thousands) 
December 31, 2018Amortized 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
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises675,368
 1,943
 (16,518) 660,793
Obligations of states and political subdivisions935
 2
 
 937
Individual name issuer trust preferred debt securities13,307
 
 (1,535) 11,772
Corporate bonds13,402
 
 (1,777) 11,625
Total available for sale debt securities
$949,720
 
$2,387
 
($24,297) 
$927,810
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

(Dollars in thousands) 
December 31, 2017Amortized Cost Unrealized Gains Unrealized Losses Fair Value
Securities Available for Sale:       
Obligations of U.S. government-sponsored enterprises
$161,479
 
$—
 
($3,875) 
$157,604
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises594,944
 3,671
 (7,733) 590,882
Obligations of states and political subdivisions2,355
 4
 
 2,359
Individual name issuer trust preferred debt securities18,106
 
 (1,122) 16,984
Corporate bonds13,917
 13
 (805) 13,125
Total securities available for sale
$790,801
 
$3,688
 
($13,535) 
$780,954
Held to Maturity:       
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
$12,541
 
$180
 
$—
 
$12,721
Total securities held to maturity
$12,541
 
$180
 
$—
 
$12,721
Total securities
$803,342
 
$3,868
 
($13,535) 
$793,675


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 30, 20182019 and December 31, 2017,2018, debt securities with a fair value of $356.5$435.3 million and $357.8$439.7 million,, respectively, were pledged as collateral for Federal Home Loan Bank of Boston (“FHLB”)FHLB borrowings, potential borrowings with the FRB, certain public deposits and for other purposes. See Note 7 for additional disclosure on FHLB borrowings.


The schedule of maturities of debt securities available for sale and held to maturitydebt 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 Held to MaturityAvailable for Sale
September 30, 2018Amortized Cost Fair Value Amortized Cost Fair Value
September 30, 2019Amortized Cost Fair Value
Due in one year or less
$64,023
 
$61,577
 
$1,370
 
$1,344

$105,671
 
$106,401
Due after one year to five years314,353
 302,124
 4,529
 4,443
340,179
 342,582
Due after five years to ten years278,106
 266,878
 3,709
 3,639
289,520
 290,083
Due after ten years189,617
 182,068
 1,255
 1,231
147,495
 147,954
Total securities
$846,099
 
$812,647
 
$10,863
 
$10,657
Total debt securities
$882,865
 
$887,020


Included in the above table are debt securities with an amortized cost balance of $228.6$222.5 million and a fair value of $218.9$220.8 million at September 30, 20182019 that are callable at the discretion of the issuers.  Final maturities of the callable securities range from 83 months to 1817 years, with call features ranging from 1 month to 3 years.


Other-Than-Temporary Impairment Assessment
Washington TrustManagement 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 of earnings of a specific issuer, or deterioration in credit quality of the issuer.  Management evaluates impairments in value both qualitatively and quantitatively to assess whether they are other-than-temporary.






- 12-14-





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 TotalLess than 12 Months 12 Months or Longer Total
September 30, 2018# Fair
Value
Unrealized
Losses
 #
 
Fair
Value
Unrealized
Losses
 #
 
Fair
Value
Unrealized
Losses
September 30, 2019# Fair
Value
Unrealized
Losses
 #
 
Fair
Value
Unrealized
Losses
 #
 
Fair
Value
Unrealized
Losses
Obligations of U.S. government-sponsored enterprises8
 
$77,958

($2,040) 11
 
$105,606

($5,894) 19
 
$183,564

($7,934)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 enterprises37
 235,900
(6,567) 34
 304,937
(18,472) 71
 540,837
(25,039)2
 692
(1) 25
 239,550
(2,804) 27
 240,242
(2,805)
Individual name issuer trust preferred debt securities
 

 5
 12,464
(839) 5
 12,464
(839)
 

 5
 12,421
(899) 5
 12,421
(899)
Corporate bonds4
 1,706
(13) 5
 11,205
(987) 9
 12,911
(1,000)
 

 3
 10,425
(1,377) 3
 10,425
(1,377)
Total temporarily impaired securities49
 
$315,564

($8,620) 55
 
$434,212

($26,192) 104
 
$749,776

($34,812)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 TotalLess than 12 Months 12 Months or Longer Total
December 31, 2017#
 
Fair
Value
Unrealized
Losses
 #
 
Fair
Value
Unrealized
Losses
 #
 
Fair
Value
Unrealized
Losses
December 31, 2018#
 
Fair
Value
Unrealized
Losses
 #
 
Fair
Value
Unrealized
Losses
 #
 
Fair
Value
Unrealized
Losses
Obligations of U.S. government-sponsored enterprises8
 
$69,681

($798) 8
 
$87,923

($3,077) 16
 
$157,604

($3,875)
 
$—

$—
 16
 
$157,032

($4,467) 16
 
$157,032

($4,467)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises20
 128,965
(613) 22
 279,693
(7,120) 42
 408,658
(7,733)10
 47,060
(439) 51
 438,701
(16,178) 61
 485,761
(16,617)
Individual name issuer trust preferred debt securities
 

 7
 16,984
(1,122) 7
 16,984
(1,122)
 

 5
 11,772
(1,535) 5
 11,772
(1,535)
Corporate bonds3
 921
(5) 3
 10,980
(800) 6
 11,901
(805)3
 1,198
(9) 5
 10,427
(1,768) 8
 11,625
(1,777)
Total temporarily impaired securities31
 
$199,567

($1,416) 40
 
$395,580

($12,119) 71
 
$595,147

($13,535)13
 
$48,258

($448) 77
 
$617,932

($23,948) 90
 
$666,190

($24,396)


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, 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.SU.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. Management believes that the unrealized losses on these debt security holdings 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, Washington Trustthe Corporation does not intend to sell these securities and it is not more-likely-than-not that Washington Trustthe Corporation will 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 at September 30, 2018.2019.


Individual Name Issuer Trust Preferred Debt Securities of Individual Name Issuers
Included in debt securities in an unrealized loss position at September 30, 20182019 were five5 trust preferred securities issued by four4 individual companies in the banking sector.  Management believes the unrealized losses on these debt security holdings wereare primarily attributable to changes in the general wideninginvestment spreads and interest rates and not changes in the credit quality of spreads for this categorythe issuers of the debt securities issued by financial services companies since the time these securities were purchased.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, 2018,2019, individual name issuer trust preferred debt securities with an amortized cost of $6.1$6.1 million and unrealized losses of $411$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


- 13-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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.  We noted no additional downgrades to below investment grade between September 30, 20182019 and the filing date of this report.  Based on this review, management concluded that it expects to recover the entire amortized cost basis of these securities.  Furthermore, Washington Trustthe Corporation does not intend to sell these securities and it is not more-likely-than-not that Washington Trustthe Corporation will 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 at September 30, 2018.2019.


Corporate Bonds
At September 30, 2018, Washington Trust2019, the Corporation had nine3 corporate bond holdings with unrealized losses totaling $1.0$1.4 million. These investment grade corporate bonds were issued by large corporations, primarily in the financial services industry. Management believes the unrealized losses on these bonds are a function of theprimarily attributable to changes in the investment spreads and interest rate movementsrates 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, Washington Trustthe Corporation does not intend to sell these securities and it is not more-likely-than-not that Washington Trustthe Corporation will 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 at September 30, 2018.2019.


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-

(5)


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 5 - Loans
The following is a summary of loans:
(Dollars in thousands)September 30, 2018 December 31, 2017September 30,
2019
December 31, 2018
Amount
 %
 Amount
 %
Commercial:        
Commercial real estate (1)
$1,240,350
 35% 
$1,210,495
 36%
$1,517,320

$1,392,408
Commercial & industrial (2)656,882
 18
 612,334
 18
566,426
620,704
Total commercial1,897,232
 53
 1,822,829
 54
2,083,746
2,013,112
Residential Real Estate:        
Residential real estate (3)1,349,340
 38
 1,227,248
 36
1,378,518
1,360,387
Consumer:        
Home equity282,331
 8
 292,467
 9
294,250
280,626
Other (4)27,300
 1
 31,527
 1
21,592
26,235
Total consumer309,631
 9
 323,994
 10
315,842
306,861
Total loans (5)
$3,556,203
 100% 
$3,374,071
 100%
$3,778,106

$3,680,360
(1)
Commercial real estate loans consistConsists of commercial mortgages primarily secured by income producingincome-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.
(2)
Commercial & industrial consistConsists of loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.
(3)
Residential real estate loans consistConsists of mortgage and homeowner construction loans secured by one- to four- familyfour-family residential properties.
(4)
Other consumer loans consistsConsists of loans to individuals secured by general aviation aircraft and other personal installment loans.
(5)Includes net unamortized loan origination costs of $4.8$5.7 million and $3.8$4.7 million, respectively, at September 30, 20182019 and December 31, 20172018 and net unamortized premiums on purchased loans of $746$575 thousand and $878$703 thousand, respectively, at September 30, 20182019 and December 31, 2017.2018.


As of both September 30, 20182019 and December 31, 20172018, thereloans amounting to $2.0 billion were $1.9 billion and $1.6 billion, respectively, of loans pledged as collateral to the FHLB under a blanket pledge agreement and to the FRB for the discount window. See Note 7 for additional disclosure regarding borrowings.


- 14-



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      Days Past Due      
September 30, 201830-59 60-89 Over 90 Total Past Due Current Total Loans
September 30, 201930-59 60-89 Over 90 Total Past Due Current Total Loans
Commercial:                      
Commercial real estate
$—
 
$931
 
$—
 
$931
 
$1,239,419
 
$1,240,350

$—
 
$—
 
$684
 
$684
 
$1,516,636
 
$1,517,320
Commercial & industrial
 20
 122
 142
 656,740
 656,882
1
 
 
 1
 566,425
 566,426
Total commercial
 951
 122
 1,073
 1,896,159
 1,897,232
1
 
 684
 685
 2,083,061
 2,083,746
Residential Real Estate:                      
Residential real estate5,322
 2,936
 1,140
 9,398
 1,339,942
 1,349,340
4,333
 2,506
 4,760
 11,599
 1,366,919
 1,378,518
Consumer:                      
Home equity1,854
 534
 551
 2,939
 279,392
 282,331
744
 417
 812
 1,973
 292,277
 294,250
Other109
 
 
 109
 27,191
 27,300
11
 
 88
 99
 21,493
 21,592
Total consumer1,963
 534
 551
 3,048
 306,583
 309,631
755
 417
 900
 2,072
 313,770
 315,842
Total loans
$7,285
 
$4,421
 
$1,813
 
$13,519
 
$3,542,684
 
$3,556,203

$5,089
 
$2,923
 
$6,344
 
$14,356
 
$3,763,750
 
$3,778,106




- 17-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
(Dollars in thousands)Days Past Due      
December 31, 201730-59 60-89 Over 90 Total Past Due Current Total Loans
Commercial:           
Commercial real estate
$6
 
$—
 
$4,954
 
$4,960
 
$1,205,535
 
$1,210,495
Commercial & industrial3,793
 2
 281
 4,076
 608,258
 612,334
Total commercial3,799
 2
 5,235
 9,036
 1,813,793
 1,822,829
Residential Real Estate:           
Residential real estate1,678
 2,274
 3,903
 7,855
 1,219,393
 1,227,248
Consumer:           
Home equity2,798
 75
 268
 3,141
 289,326
 292,467
Other29
 
 14
 43
 31,484
 31,527
Total consumer2,827
 75
 282
 3,184
 320,810
 323,994
Total loans
$8,304
 
$2,351
 
$9,420
 
$20,075
 
$3,353,996
 
$3,374,071


(Dollars in thousands)Days Past Due      
December 31, 201830-59 60-89 Over 90 Total Past Due Current Total Loans
Commercial:           
Commercial real estate
$155
 
$925
 
$—
 
$1,080
 
$1,391,328
 
$1,392,408
Commercial & industrial
 
 
 
 620,704
 620,704
Total commercial155
 925
 
 1,080
 2,012,032
 2,013,112
Residential Real Estate:           
Residential real estate6,318
 2,693
 1,509
 10,520
 1,349,867
 1,360,387
Consumer:           
Home equity1,281
 156
 552
 1,989
 278,637
 280,626
Other33
 
 
 33
 26,202
 26,235
Total consumer1,314
 156
 552
 2,022
 304,839
 306,861
Total loans
$7,787
 
$3,774
 
$2,061
 
$13,622
 
$3,666,738
 
$3,680,360


Included in past due loans as of September 30, 20182019 and December 31, 2017,2018, were nonaccrual loans of $6.4$9.8 million and $11.8$8.6 million, respectively.


All loans 90 days or more past due at September 30, 20182019 and December 31, 20172018 were classified as nonaccrual.






- 15-18-





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
Recorded Investment (1)
 Unpaid Principal Related Allowance
Sep 30,
2018
 Dec 31,
2017
 Sep 30,
2018
 Dec 31,
2017
 Sep 30,
2018
 Dec 31,
2017
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 & industrial4,825
 4,986
 4,877
 5,081
 
 

 4,681
 
 4,732
 
 
Total commercial4,825
 4,986
 4,877
 5,081
 
 
684
 5,606
 926
 5,658
 
 
Residential Real Estate:                      
Residential real estate8,737
 9,069
 8,896
 9,256
 
 
12,531
 9,347
 13,368
 9,695
 
 
Consumer:                      
Home equity1,582
 557
 1,583
 557
 
 
1,379
 1,360
 1,379
 1,360
 
 
Other
 14
 
 14
 
 
88
 
 88
 
 
 
Total consumer1,582
 571
 1,583
 571
 
 
1,467
 1,360
 1,467
 1,360
 
 
Subtotal15,144
 14,626
 15,356
 14,908
 
 
14,682
 16,313
 15,761
 16,713
 
 
With Related Allowance RecordedWith Related Allowance Recorded          With Related Allowance Recorded          
Commercial:                      
Commercial real estate
$—
 
$4,954
 
$—
 
$9,910
 
$—
 
$1,018

$—
 
$—
 
$—
 
$—
 
$—
 
$—
Commercial & industrial54
 191
 75
 212
 
 1

 52
 
 73
 
 
Total commercial54
 5,145
 75
 10,122
 
 1,019

 52
 
 73
 
 
Residential Real Estate:                      
Residential real estate692
 715
 722
 741
 101
 104
360
 364
 386
 390
 96
 100
Consumer:                      
Home equity52
 
 51
 
 8
 
220
 85
 220
 85
 220
 24
Other23
 133
 23
 132
 3
 6
19
 22
 19
 22
 5
 3
Total consumer75
 133
 74
 132
 11
 6
239
 107
 239
 107
 225
 27
Subtotal821
 5,993
 871
 10,995
 112
 1,129
599
 523
 625
 570
 321
 127
Total impaired loans
$15,965
 
$20,619
 
$16,227
 
$25,903
 
$112
 
$1,129

$15,281
 
$16,836
 
$16,386
 
$17,283
 
$321
 
$127
Total:                      
Commercial
$4,879
 
$10,131
 
$4,952
 
$15,203
 
$—
 
$1,019

$684
 
$5,658
 
$926
 
$5,731
 
$—
 
$—
Residential real estate9,429
 9,784
 9,618
 9,997
 101
 104
12,891
 9,711
 13,754
 10,085
 96
 100
Consumer1,657
 704
 1,657
 703
 11
 6
1,706
 1,467
 1,706
 1,467
 225
 27
Total impaired loans
$15,965
 
$20,619
 
$16,227
 
$25,903
 
$112
 
$1,129

$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.






- 16-19-





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 RecognizedAverage Recorded Investment Interest Income Recognized
Three months ended September 30,2018 2017 2018 20172019 2018 2019 2018
Commercial:              
Commercial real estate
$—
 
$8,041
 
$—
 
$21

$886
 
$—
 
$—
 
$—
Commercial & industrial5,324
 6,427
 62
 67

 5,324
 
 62
Total commercial5,324
 14,468
 62
 88
886
 5,324
 
 62
Residential Real Estate:

 

 

 



 

 

 

Residential real estate9,265
 15,107
 96
 102
12,017
 9,265
 109
 96
Consumer:

 

 

 



 

 

 

Home equity1,424
 543
 22
 5
1,414
 1,424
 16
 22
Other25
 142
 
 2
108
 25
 3
 
Total consumer1,449
 685
 22
 7
1,522
 1,449
 19
 22
Totals
$16,038
 
$30,260
 
$180
 
$197

$14,425
 
$16,038
 
$128
 
$180
              
(Dollars in thousands)Average Recorded Investment Interest Income RecognizedAverage Recorded Investment Interest Income Recognized
Nine months ended September 30,2018 2017 2018 20172019 2018 2019 2018
Commercial:              
Commercial real estate
$1,352
 
$9,117
 
$—
 
$73

$929
 
$1,352
 
$1
 
$—
Commercial & industrial5,599
 6,750
 201
 219
2,835
 5,599
 103
 201
Total commercial6,951
 15,867
 201
 292
3,764
 6,951
 104
 201
Residential Real Estate:              
Residential real estate9,709
 15,750
 293
 374
10,972
 9,709
 331
 293
Consumer:              
Home equity1,045
 734
 41
 25
1,409
 1,045
 43
 41
Other85
 142
 5
 8
55
 85
 2
 5
Total consumer1,130
 876
 46
 33
1,464
 1,130
 45
 46
Totals
$17,790
 
$32,493
 
$540
 
$699

$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 on such loans is reversed against current period income.  Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest generally for a period of six months,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.






- 17-20-





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
Commercial:   
Commercial real estate
$684
 
$925
Commercial & industrial
 
Total commercial684
 925
Residential Real Estate:   
Residential real estate12,531
 9,346
Consumer:   
Home equity1,599
 1,436
Other88
 
Total consumer1,687
 1,436
Total nonaccrual loans
$14,902
 
$11,707
Accruing loans 90 days or more past due
$—
 
$—

(Dollars in thousands)Sep 30,
2018
 Dec 31,
2017
Commercial:   
Commercial real estate
$—
 
$4,954
Commercial & industrial122
 283
Total commercial122
 5,237
Residential Real Estate:   
Residential real estate9,063
 9,414
Consumer:   
Home equity1,624
 544
Other
 16
Total consumer1,624
 560
Total nonaccrual loans
$10,809
 
$15,211
Accruing loans 90 days or more past due
$—
 
$—


As of September 30, 20182019 and December 31, 2017,2018, loans secured by one- to four-family residential property amounting to $816$5.9 million and $761 thousand, and $4.4 million, respectively, were in process of foreclosure.


Nonaccrual loans of $4.4$5.1 million and $3.4$3.1 million, respectively, were current as to the payment of principal and interest at September 30, 20182019 and December 31, 2017.2018.


There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2018.2019.



- 18-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


Troubled Debt Restructurings
Loans are considered restructured in ato be troubled debt restructuringrestructurings when the Corporation has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered, to a borrower experiencing financial difficulties.considered. 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 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.


Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectibilitycollectability of the loan.  Loans thatwhich are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately 6six 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.


Troubled debt restructurings are reported as such for at least one year from the date of the restructuring.  In years after the restructuring, troubled debt restructured loans 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 terms specified in the restructuring agreement.


The recorded investment in troubled debt restructurings 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, the recorded investment also includes accrued interest. The recorded investment in troubled debt restructurings was $5.7 million$876 thousand and $11.2$5.6 million, respectively, at September 30, 20182019 and December 31, 2017.2018. The allowance for loan losses included specific reserves for these troubled debt restructurings of $104$101 thousand and $1.1 million,$103 thousand, respectively, at September 30, 20182019 and December 31, 2017.2018.


As ofFor the three and nine months ended September 30, 2018,2019, there were no significant commitments to lend additional funds to borrowers whose0 loans had been restructured.

modified as a troubled debt restructuring. For the three months ended September 30, 2018, there were no0 loans modified as a troubled debt restructuring. For the nine months


- 21-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

ended September 30, 2018, there was one1 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. There were no loans modified as a troubled debt restructuring for

For the three and nine months ended September 30, 2017.

2019 there were no payment defaults on troubled debt restructured loans modified within the previous 12 months. For both the three and nine months ended September 30, 2018, payment defaults on troubled debt restructured loans modified within the previous 12 months occurred on one1 loan with a carrying value of $608 thousand at the time of default. For the three months ended

As of September 30, 2017,2019, there were no payment defaults on troubled debt restructuredsignificant commitments to lend additional funds to borrowers whose loans modified within the previous 12 months. For the nine months ended September 30, 2017, payment defaults on troubled debt restructured loans modified within the previous 12 months occurred on two loans with a total carrying value of $1.6 million at the time of default.had been restructured.
            
            

        

        


- 19-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


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. The weighted average risk rating of the Corporation’s commercial loan portfolio was 4.74 at September 30, 2018 and 4.70 at December 31, 2017. For non-impaired loans, the Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for loan losses. See Note 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 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.


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 collectibility.collectability. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined. “Loss” is not intended to imply that the loan has no recovery value, but rather, it is not practical or desirable to continue to carry the asset.


The Corporation’s procedures call for loan 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, which generally consists of commercial loans that are risk-rated special mention or worse, 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 & industrial529,219
 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

(Dollars in thousands)Pass Special Mention Classified
 Sep 30,
2018
 Dec 31,
2017
 Sep 30,
2018
 Dec 31,
2017
 Sep 30,
2018
 Dec 31,
2017
Commercial:           
Commercial real estate1,235,579
 1,205,381
 1,065
 
 3,706
 5,114
Commercial & industrial593,673
 592,749
 55,012
 9,804
 8,197
 9,781
Total commercial
$1,829,252
 
$1,798,130
 
$56,077
 
$9,804
 
$11,903
 
$14,895



- 20-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


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. See Note 6 for additional information.


Other techniques are utilized to monitor indicators 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 FICOFair 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 mortgagereal estate and home equity consumer credits. See Note 6 for additional information.


The following table presents the residential and consumer loan portfolios, segregated by loan type and credit quality indicator:
(Dollars in thousands)Current Past Due
 Sep 30,
2019
 Dec 31,
2018
 Sep 30,
2019
 Dec 31,
2018
Residential Real Estate:       
Self-originated mortgages
$1,261,364
 
$1,238,402
 
$10,503
 
$9,079
Purchased mortgages105,555
 111,465
 1,096
 1,441
Total residential real estate
$1,366,919
 
$1,349,867
 
$11,599
 
$10,520
Consumer:       
Home equity
$292,277
 
$278,637
 
$1,973
 
$1,989
Other21,493
 26,202
 99
 33
Total consumer
$313,770
 
$304,839
 
$2,072
 
$2,022

(Dollars in thousands)Current Past Due
 Sep 30,
2018
 Dec 31,
2017
 Sep 30,
2018
 Dec 31,
2017
Residential Real Estate:       
Self-originated mortgages
$1,224,575
 
$1,091,291
 
$8,172
 
$6,413
Purchased mortgages115,367
 128,102
 1,226
 1,442
Total residential real estate
$1,339,942
 
$1,219,393
 
$9,398
 
$7,855
Consumer:       
Home equity
$279,392
 
$289,326
 
$2,939
 
$3,141
Other27,191
 31,484
 109
 43
Total consumer
$306,583
 
$320,810
 
$3,048
 
$3,184


(6)Note 6 - Allowance for Loan Losses
The allowance for loan losses is management’s best estimate of incurred losses inherent in the loan portfolio as of the balance sheet date. The Corporation uses a methodology to systematically measure 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 loans deemed to be impaired and (2) the application of loss allocation factors for non-impaired loans 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.




- 23-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the activity in the allowance for loan losses for the three months ended September 30, 2019:
(Dollars in thousands)Commercial  Consumer  
 CRE (1)C&I (2)Total CommercialResidential Real EstateHome EquityOtherTotal ConsumerTotal
Beginning Balance
$16,882

$4,453

$21,335

$4,857

$913

$293

$1,206

$27,398
Charge-offs(947)(1)(948)

(18)(18)(966)
Recoveries
123
123

36
6
42
165
Provision866
(1,128)(262)554
64
44
108
400
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.

The following table presents the activity in the allowance for loan losses for the nine months ended September 30, 2019:
         
(Dollars in thousands)Commercial  Consumer  
 CRE (1)C&I (2)Total CommercialResidential Real EstateHome EquityOtherTotal ConsumerTotal
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
Provision2,367
(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.

The following table presents the activity in the allowance for loan losses for the three months ended September 30, 2018:
(Dollars in thousands)Commercial  Consumer  
 CRE (1)C&I (2)Total CommercialResidential Real EstateHome EquityOtherTotal ConsumerTotal
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
Provision1,052
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.



- 21-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


The following table presents the activity in the allowance for loan losses for the nine months ended September 30, 2018:
         
(Dollars in thousands)Commercial  Consumer  
 CRE (1)C&I (2)Total CommercialResidential Real EstateHome EquityOtherTotal ConsumerTotal
Beginning Balance
$12,729

$5,580

$18,309

$5,427

$2,412

$340

$2,752

$26,488
Charge-offs(627)(8)(635)(73)(111)(70)(181)(889)
Recoveries25
104
129

12
19
31
160
Provision1,368
1,571
2,939
(1,239)(924)(26)(950)750
Ending Balance
$13,495

$7,247

$20,742

$4,115

$1,389

$263

$1,652

$26,509
         
(Dollars in thousands)Commercial  Consumer  
 CRE (1)C&I (2)Total CommercialResidential Real EstateHome EquityOtherTotal ConsumerTotal
Beginning Balance
$12,729

$5,580

$18,309

$5,427

$2,412

$340

$2,752

$26,488
Charge-offs(627)(8)(635)(73)(111)(70)(181)(889)
Recoveries25
104
129

12
19
31
160
Provision1,368
1,571
2,939
(1,239)(924)(26)(950)750
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.


The following table presents the activity in the allowance for loan losses for the three months ended September 30, 2017:
(Dollars in thousands)Commercial  Consumer  
 CRE (1)C&I (2)Total CommercialResidential Real EstateHome EquityOtherTotal ConsumerTotal
Beginning Balance
$11,935

$7,067

$19,002

$5,369

$1,927

$364

$2,291

$26,662
Charge-offs(535)(122)(657)
(18)(19)(37)(694)
Recoveries
8
8
1
25
6
31
40
Provision1,387
(301)1,086
70
(27)171
144
1,300
Ending Balance
$12,787

$6,652

$19,439

$5,440

$1,907

$522

$2,429

$27,308
(1) Commercial real estate loans.
(2) Commercial & industrial loans.

The following table presents the activity in the allowance for loan losses for the nine months ended September 30, 2017:
         
(Dollars in thousands)Commercial  Consumer  
 CRE (1)C&I (2)Total CommercialResidential Real EstateHome EquityOtherTotal ConsumerTotal
Beginning Balance
$11,166

$6,992

$18,158

$5,252

$1,889

$705

$2,594

$26,004
Charge-offs(935)(286)(1,221)(32)(79)(83)(162)(1,415)
Recoveries82
162
244
29
31
15
46
319
Provision2,474
(216)2,258
191
66
(115)(49)2,400
Ending Balance
$12,787

$6,652

$19,439

$5,440

$1,907

$522

$2,429

$27,308
(1) Commercial real estate loans.
(2) Commercial & industrial loans.



- 22-24-





Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


The following table presents the Corporation’s loan portfolio and associated allowance for loan losslosses by portfolio segment and by impairment methodology:
(Dollars in thousands)September 30, 2019 December 31, 2018
 Loans Related Allowance Loans Related Allowance
Loans Individually Evaluated for Impairment       
Commercial:       
Commercial real estate
$684
 
$—
 
$925
 
$—
Commercial & industrial
 
 4,714
 
Total commercial684
 
 5,639
 
Residential Real Estate:       
Residential real estate12,890
 96
 9,710
 100
Consumer:       
Home equity1,599
 220
 1,445
 24
Other107
 5
 22
 3
Total consumer1,706
 225
 1,467
 27
Subtotal15,280
 321
 16,816
 127
Loans Collectively Evaluated for Impairment       
Commercial:       
Commercial real estate1,516,636
 16,801
 1,391,483
 15,381
Commercial & industrial566,426
 3,447
 615,990
 5,847
Total commercial2,083,062
 20,248
 2,007,473
 21,228
Residential Real Estate:       
Residential real estate1,365,628
 5,315
 1,350,677
 3,887
Consumer:       
Home equity292,651
 793
 279,182
 1,579
Other21,485
 320
 26,212
 251
Total consumer314,136
 1,113
 305,394
 1,830
Subtotal3,762,826
 26,676
 3,663,544
 26,945
Total
$3,778,106
 
$26,997
 
$3,680,360
 
$27,072

(Dollars in thousands)September 30, 2018 December 31, 2017
 Loans Related Allowance Loans Related Allowance
Loans Individually Evaluated for Impairment       
Commercial:       
Commercial real estate
$—
 
$—
 
$4,954
 
$1,018
Commercial & industrial4,860
 
 5,157
 1
Total commercial4,860
 
 10,111
 1,019
Residential Real Estate:       
Residential real estate9,428
 101
 9,783
 104
Consumer:       
Home equity1,635
 9
 557
 
Other22
 2
 147
 6
Total consumer1,657
 11
 704
 6
Subtotal15,945
 112
 20,598
 1,129
Loans Collectively Evaluated for Impairment       
Commercial:       
Commercial real estate1,240,350
 13,495
 1,205,541
 11,711
Commercial & industrial652,022
 7,247
 607,177
 5,579
Total commercial1,892,372
 20,742
 1,812,718
 17,290
Residential Real Estate:       
Residential real estate1,339,912
 4,014
 1,217,465
 5,323
Consumer:       
Home equity280,696
 1,380
 291,910
 2,412
Other27,278
 261
 31,380
 334
Total consumer307,974
 1,641
 323,290
 2,746
Subtotal3,540,258
 26,397
 3,353,473
 25,359
Total
$3,556,203
 
$26,509
 
$3,374,071
 
$26,488




- 23-25-





Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


(7) BorrowingsNote 7 - Federal Home Loan Bank Advances
FHLB Advances
Advances payable to the FHLB amounted to $828.4$956.8 million and $791.4950.7 million, respectively, at September 30, 20182019 and December 31, 20172018.


The following table presents maturities and weighted average interest rates on FHLB advances outstanding asAs of September 30, 2018:
(Dollars in thousands)Total Outstanding 
Weighted
Average Rate
October 1, 2018 to December 31, 2018
$297,670
 2.26%
2019347,258
 2.15
202067,033
 1.95
202146,222
 2.57
202255,447
 3.59
2023 and thereafter14,762
 2.29
Balance at September 30, 2018
$828,392
 2.35%

As of September 30, 20182019 and December 31, 2017,2018, the Bank had access to a $40.0 million unused line of credit with the FHLB and also had remaining available borrowing capacity of $601.0$601.5 million and $449.9$628.5 million, respectively. 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 30, 2019:

(Dollars in thousands)Scheduled
Maturity
 
Weighted
Average Rate
October 1, 2019 to December 31, 2019
$355,822
 2.56%
2020444,533
 2.34
202186,222
 2.73
202255,447
 3.65
20239,428
 4.01
2024 and thereafter5,334
 5.06
Balance at September 30, 2019
$956,786
 2.56%


In October 2019, FHLB advances totaling $78.8 million were modified 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 terms as of September 30, 2019, as well as the revised terms associated with these FHLB advances:
(Dollars in thousands)Original Terms Revised Terms
 Scheduled
Maturity
Weighted
Average Rate
 Scheduled
Maturity
Weighted
Average Rate
2021
$20,000
3.07% 
$—
%
202254,634
3.63
 

20234,190
4.27
 

2024

 40,000
2.45
2025

 

2026

 38,824
3.09
Total
$78,824
3.52% 
$78,824
2.76%




- 24-26-





Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


(8) Shareholders’Note 8 - Shareholders' Equity
Regulatory Capital Requirements
At bothCapital levels at September 30, 2018 and December 31, 2017,2019 exceeded the Corporation and the Bank wereregulatory 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 ProvisionsActual For Capital Adequacy Purposes To Be “Well Capitalized” Under Prompt Corrective Action Provisions
Amount Ratio Amount Ratio Amount RatioAmount Ratio Amount Ratio Amount Ratio
September 30, 2018           
September 30, 2019           
Total Capital (to Risk-Weighted Assets):                      
Corporation
$445,448
 12.77% 
$279,165
 8.00% N/A
 N/A

$486,454
 12.94% 
$300,835
 8.00% N/A
 N/A
Bank442,337
 12.68
 279,145
 8.00
 
$348,931
 10.00%483,783
 12.87
 300,790
 8.00
 
$375,988
 10.00%
Tier 1 Capital (to Risk-Weighted Assets):                      
Corporation418,649
 12.00
 209,374
 6.00
 N/A
 N/A
459,140
 12.21
 225,627
 6.00
 N/A
 N/A
Bank415,538
 11.91
 209,358
 6.00
 279,145
 8.00
456,469
 12.14
 225,593
 6.00
 300,790
 8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):                      
Corporation396,651
 11.37
 157,031
 4.50
 N/A
 N/A
437,142
 11.62
 169,220
 4.50
 N/A
 N/A
Bank415,538
 11.91
 157,019
 4.50
 226,805
 6.50
456,469
 12.14
 169,195
 4.50
 244,392
 6.50
Tier 1 Capital (to Average Assets): (1)                      
Corporation418,649
 8.91
 187,898
 4.00
 N/A
 N/A
459,140
 8.97
 204,810
 4.00
 N/A
 N/A
Bank415,538
 8.85
 187,858
 4.00
 234,822
 5.00
456,469
 8.92
 204,722
 4.00
 255,903
 5.00
                      
December 31, 2017           
December 31, 2018           
Total Capital (to Risk-Weighted Assets):                      
Corporation416,038
 12.45
 267,365
 8.00
 N/A
 N/A
455,699
 12.56
 290,146
 8.00
 N/A
 N/A
Bank413,593
 12.38
 267,338
 8.00
 334,172
 10.00
453,033
 12.49
 290,128
 8.00
 362,660
 10.00
Tier 1 Capital (to Risk-Weighted Assets):                      
Corporation389,289
 11.65
 200,524
 6.00
 N/A
 N/A
428,338
 11.81
 217,609
 6.00
 N/A
 N/A
Bank386,844
 11.58
 200,503
 6.00
 267,338
 8.00
425,672
 11.74
 217,596
 6.00
 290,128
 8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):                      
Corporation367,291
 10.99
 150,383
 4.50
 N/A
 N/A
406,340
 11.20
 163,207
 4.50
 N/A
 N/A
Bank386,844
 11.58
 150,378
 4.50
 217,212
 6.50
425,672
 11.74
 163,197
 4.50
 235,729
 6.50
Tier 1 Capital (to Average Assets): (1)                      
Corporation389,289
 8.79
 177,089
 4.00
 N/A
 N/A
428,338
 8.89
 192,690
 4.00
 N/A
 N/A
Bank386,844
 8.74
 177,048
 4.00
 221,310
 5.00
425,672
 8.84
 192,652
 4.00
 240,815
 5.00
(1)Leverage ratio.


In addition to the minimum regulatory capital required for capital adequacy purposes included in the table above, the Corporation is required to maintain a minimum capital conservation buffer, in the form of common equity, in order to avoid restrictions on capital distributions and discretionary bonuses. The required amount of the capital conservation buffer was 1.25% on January 1, 2017 and 1.875% on January 1, 2018. The capital conservation buffer will increaseincreased another 0.625% on January 1, 2019, to reachreaching the full requirement of 2.50%.



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 30, 2019 and December 31, 2018, $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.



- 25-27-





Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


(9)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 30, 20182019 and December 31, 2017,2018, the Bancorp had two2 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 obtained the right to receive the difference between 3-month LIBOR and a 4.5% strike. The caps mature in 2020.


As of September 30, 20182019 and December 31, 2017,2018, the Bank had two2 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 30, 20182019 and December 31, 2017,2018, the Bank had three3 interest rate floor contracts with a total notional amount of $300.0 million that were designated as cash flow hedges to hedge the interest rate risk associated with a pool of variable rate commercial loans. The Bank obtained the right to receive the difference between 1-month LIBOR and a 1.0% strike for each of the interest rate floors. The floors mature in 2020.


The effective portion of the changes in fair value of derivatives designated as cash flow hedges isare recorded in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized.  The ineffective portion of changes in fair value of the derivatives is recognized directly in earnings. For the three and nine months ended September 30, 2018 and 2017, there was no ineffectiveness recorded in earnings.


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 into an interest rate swap contract with a commercial loan borrower, we simultaneously enter 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 risk that is associated with the potential failure of counterparties and the risk inherent in originating loans.  As of September 30, 20182019 and December 31, 2017,2018, Washington Trust had interest rate swap contracts with commercial loan borrowers with notional amounts of $574.4$729.9 million and $545.0$648.0 million, respectively, and equal amounts of “mirror” swap contracts with third-party financial institutions.  These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings.


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




- 26-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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 30, 2018,2019, the notional amounts of risk participation-out agreements and risk participation-in agreements were $51.5$44.5 million and $36.6$73.0 million, respectively, compared to $52.4$57.3 million and $34.1$46.5 million, respectively, as of December 31, 2017.2018.


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, 20182019 and December 31, 2017,2018, the notional amount of foreign exchange contracts was $2.9$2.6 million and $3.0$2.8 million, respectively.


Loan Commitments
Interest rate lock commitments are extended to borrowers and relate to the origination of residential real estate mortgage loans held for sale.  To mitigate the interest rate risk and pricing risk associated with rate locks and residential real estate 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 as suchtherefore, the changes in fair value of these commitments are reflected in earnings.


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


- 29-



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
  Fair Value  Fair Value
 Balance Sheet LocationSep 30, 2019 Dec 31, 2018 Balance Sheet LocationSep 30, 2019 Dec 31, 2018
Derivatives Designated as Cash Flow Hedging Instruments:         
Interest rate risk management contracts:         
Interest rate capsOther assets
$—
 
$20
 Other liabilities
$—
 
$—
Interest rate swapsOther assets2
 903
 Other liabilities1,000
 
Interest rate floorsOther assets69
 37
 Other liabilities
 
Derivatives not Designated as Hedging Instruments:         
Loan related derivative contracts:         
Interest rate swaps with customersOther assets37,765
 5,340
 Other liabilities80
 7,719
Mirror swaps with counterpartiesOther assets80
 7,592
 Other liabilities37,913
 5,392
Risk participation agreementsOther assets1
 
 Other liabilities3
 
Foreign exchange contractsOther assets6
 
 Other liabilities
 7
Forward loan commitments:         
Interest rate lock commitmentsOther assets1,762
 806
 Other liabilities1
 
Forward sale commitmentsOther assets393
 
 Other liabilities977
 816
Gross amounts 40,078
 14,698
  39,974
 13,934
Less amounts offset in Consolidated Balance Sheets (1)
 157
 10,732
  157
 10,732
Net amounts presented in Consolidated Balance Sheets 39,921
 3,966
  39,817
 3,202
Less collateral pledged (2)
 
 
  37,695
 1,460
Net amounts 
$39,921
 
$3,966
  
$2,122
 
$1,742

(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.
(Dollars in thousands)Asset Derivatives Liability Derivatives
  Fair Value  Fair Value
 Balance Sheet LocationSep 30, 2018 Dec 31, 2017 Balance Sheet LocationSep 30, 2018 Dec 31, 2017
Derivatives Designated as Cash Flow Hedging Instruments:         
Interest rate risk management contracts:         
Interest rate capsOther assets
$83
 
$25
 Other liabilities
$—
 
$—
Interest rate swapsOther assets1,947
 213
 Other liabilities
 14
Interest rate floorsOther assets14
 110
 Other liabilities
 
Derivatives not Designated as Hedging Instruments:         
Loan related derivative contracts:         
Interest rate swaps with customersOther assets33
 268
 Other liabilities17,522
 1,295
Mirror swaps with counterpartiesOther assets17,342
 1,152
 Other liabilities33
 268
Risk participation agreementsOther assets
 
 Other liabilities
 
Foreign exchange contractsOther assets37
 
 Other liabilities
 26
Forward loan commitments:         
Interest rate lock commitmentsOther assets618
 965
 Other liabilities1
 20
Forward sale commitmentsOther assets168
 26
 Other liabilities266
 1,424
Total 
$20,242
 
$2,759
  
$17,822
 
$3,047



- 27-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


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
(Effective Portion)
Gain (Loss) Recognized in
Other Comprehensive Income, Net of Tax
Three Months Nine MonthsThree Months Nine Months
Periods ended September 30,2018 2017 2018 20172019 2018 2019 2018
Derivatives Designated as Cash Flow Hedging Instruments:              
Interest rate risk management contracts:              
Interest rate caps
$17
 
($7) 
$66
 
($64)
$18
 
$17
 
$32
 
$66
Interest rate swaps189
 74
 1,322
 (26)(211) 189
 (1,442) 1,322
Interest rate floors(51) (80) 21
 (274)22
 (51) 175
 21
Total
$155
 
($13) 
$1,409
 
($364)
($171) 
$155
 
($1,235) 
$1,409



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.


(Dollars in thousands) 
Amount of Gain (Loss)
Recognized in Income on Derivatives
  Three Months Nine Months
Periods ended September 30,Statement of Income Location2018 2017 2018 2017
Derivatives not Designated as Hedging Instruments:        
Loan related derivative contracts:        
Interest rate swaps with customersLoan related derivative income
($3,178) 
$1,917
 (15,374) 5,583
Mirror swaps with counterpartiesLoan related derivative income3,415
 (505) 16,384
 (2,578)
Risk participation agreementsLoan related derivative income25
 40
 25
 (261)
Foreign exchange contractsLoan related derivative income16
 
 52
 
Forward loan commitments:        
Interest rate lock commitmentsMortgage banking revenues(504) 32
 
($327) 
$639
Forward sale commitmentsMortgage banking revenues316
 59
 1,552
 (1,321)
Total 
$90
 
$1,543
 
$2,312
 
$2,062




- 28-30-





Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

(10) Balance Sheet Offsetting
For interest rate risk management contracts and loan-related derivative contracts, the Corporation records derivative assets and derivative liabilities on a net basis. The interest rate risk management contracts and loan related derivative contracts with counterparties are subject to master netting agreements. The following tables present the Corporation’s derivative asset and derivative liability positions and the effect of netting arrangements on the Unaudited Consolidated Balance Sheets:
(Dollars in thousands) 
Amount of Gain (Loss)
Recognized in Income on Derivatives
  Three Months Nine Months
Periods ended September 30,Statement of Income Location2019 2018 2019 2018
Derivatives not Designated as Hedging Instruments:        
Loan related derivative contracts:        
Interest rate swaps with customersLoan related derivative income
$12,284
 
($3,178) 39,568
 (15,374)
Mirror swaps with counterpartiesLoan related derivative income(11,108) 3,415
 (36,958) 16,384
Risk participation agreementsLoan related derivative income213
 25
 213
 25
Foreign exchange contractsLoan related derivative income18
 16
 54
 52
Forward loan commitments:        
Interest rate lock commitmentsMortgage banking revenues(340) (504) 
$955
 
($327)
Forward sale commitmentsMortgage banking revenues(101) 316
 (1,969) 1,552
Total 
$966
 
$90
 
$1,863
 
$2,312

(Dollars in thousands)Gross Derivative Positions Offsetting Derivative Positions Net Amounts Presented in Balance Sheet Cash Collateral Pledged Net Amount
September 30, 2018    
Derivative Assets:         
Interest rate risk management contracts:         
Interest rate caps
$83
 
$—
 
$83
 
$—
 
$83
Interest rate swaps1,947
 
 1,947
 
 1,947
Interest rate floors14
 
 14
 
 14
Loan-related derivative contracts:         
Interest rate swaps with customers463
 430
 33
 
 33
Mirror swaps with counterparties17,784
 442
 17,342
 
 17,342
Foreign exchange contracts37
 
 37
 
 37
Total
$20,328
 
$872
 
$19,456
 
$—
 
$19,456
          
Derivative Liabilities:         
Loan-related derivative contracts:         
Interest rate swaps with customers
$17,952
 
$430
 
$17,522
 
$—
 
$17,522
Mirror swaps with counterparties475
 442
 33
 
 33
Total
$18,427
 
$872
 
$17,555
 
$—
 
$17,555



- 29-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

(Dollars in thousands)Gross Derivative Positions Offsetting Derivative Positions Net Amounts Presented in Balance Sheet Cash Collateral Pledged Net Amount
December 31, 2017    
Derivative Assets:         
Interest rate risk management contracts:         
Interest rate caps
$25
 
$—
 
$25
 
$—
 
$25
Interest rate swaps213
 
 213
 
 213
Interest rate floors110
 
 110
 
 110
Loan-related derivative contracts:         
Interest rate swaps with customers2,857
 2,589
 268
 
 268
Mirror swaps with counterparties3,801
 2,649
 1,152
 
 1,152
Total
$7,006
 
$5,238
 
$1,768
 
$—
 
$1,768
          
Derivative Liabilities:         
Interest rate risk management contracts:         
Interest rate swaps
$14
 
$—
 
$14
 
$14
 
$—
Loan-related derivative contracts:         
Interest rate swaps with customers3,884
 2,589
 1,295
 1,025
 270
Mirror swaps with counterparties2,917
 2,649
 268
 
 268
Foreign exchange contracts26
 
 26
 
 26
Total
$6,841
 
$5,238
 
$1,603
 
$1,039
 
$564

As of September 30, 2018, there was no pledged collateral to derivative counterparties in the form of cash. As of December 31, 2017, Washington Trust pledged collateral to derivative counterparties in the form of cash totaling $1.0 million. Washington Trust may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions.


(11)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.  As of September 30, 2018 and December 31, 2017, securities available for sale, residential real estate mortgage loans held for sale, derivatives and the contingent consideration liability areItems recorded at fair value on a recurring basis.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 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.
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


- 30-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

financial assets and liabilities on a contract-by-contract basis. The Corporation has elected the fair value option for residential real estate 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 aggregate principal amountfollowing table presents a summary of the residential real estate mortgage loans held for sale recorded ataccounted for under the fair value was $22.3 million and $26.4 million, respectively, at September 30, 2018 and December 31, 2017. The aggregate fair value of these loans as of the same dates was $22.6 million and $26.9 million, respectively. As of September 30, 2018 and December 31, 2017, the aggregate fair value of residential real estate mortgage loans held for sale exceeded the aggregate principal amount by $303 thousand and $543 thousand, respectively.option:

(Dollars in thousands)September 30,
2019
December 31,
2018
Aggregate fair value
$44,657

$20,996
Aggregate principal balance43,696
20,498
Difference between fair value and principal balance
$961

$498

There were no residential real estate mortgage loans held for sale 90 days or more past due as of September 30, 2018 and December 31, 2017.


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


- 31-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

to decreases of $352 thousand and $240 thousand respectively, in the three and nine months ended September 30, 2018, compared to a decrease of $81 thousand and an increase of $693 thousand, respectively, in the three and nine months ended September 30, 2017.respectively. 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 30, 2019 and December 31, 2018.

Valuation Techniques
Debt Securities
Securities availableAvailable 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 30, 20182019 and December 31, 2017.2018.


Level 2 securities include debt securities with quoted prices, which 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.


SecuritiesDebt 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 30, 20182019 and December 31, 2017.2018.


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 Impaired Loans
The fair value of collateral dependent loans that are deemed to be impaired is determined based upon the 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 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 the operation of the collateral, such as accruing troubled debt restructured loans, 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. Internal valuations are utilized to determine the fair value of other business assets. Collateraldependent 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. 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.


- 31-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)



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, Washington Trust considers factors such as the likelihood of default by the Corporation and its counterparties, its net exposures and remaining contractual life among other factors,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.


- 32-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

However, as of September 30, 20182019 and December 31, 2017,2018, 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 iswas based upon unobservable inputs,inputs; therefore, the contingent liability iswas classified within Level 3 of the fair value hierarchy. The unobservable inputs includeincluded probability estimates regarding the likelihood of achieving revenue growth targets and the discount rates utilized the discounted cash flow calculations applied to the estimatesestimated earn-outs to be paid. The contingent consideration liability iswas 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 arewere included in noninterest expenses in the Unaudited 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 contingency representscontingent consideration liability was reduced to 0 in the estimated pricefourth quarter of 2018. There have been no changes to transfer the fair value of the contingent consideration liability between market participants atfor the measurement date under current market conditions.three and nine months ended September 30, 2019.






- 32-33-





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)
September 30, 2019
Assets:    
Available for sale debt securities:    
Obligations of U.S. government-sponsored enterprises
$197,324

$—

$197,324

$—
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises664,905

664,905

Individual name issuer trust preferred debt securities12,421

12,421

Corporate bonds12,370

12,370

Mortgage loans held for sale44,657

44,657

Derivative assets39,921

39,921

Total assets at fair value on a recurring basis
$971,598

$—

$971,598

$—
Liabilities:    
Derivative liabilities
$39,817

$—

$39,817

$—
Total liabilities at fair value on a recurring basis
$39,817

$—

$39,817

$—

(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)
September 30, 2018   
Assets:       
Securities available for sale:       
Obligations of U.S. government-sponsored enterprises
$193,473
 
$—
 
$193,473
 
$—
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises592,862
 
 592,862
 
Obligations of states and political subdivisions937
 
 937
 
Individual name issuer trust preferred debt securities12,464
 
 12,464
 
Corporate bonds12,911
 
 12,911
 
Mortgage loans held for sale22,571
 
 22,571
 
Derivative assets20,242
 
 20,242
 
Total assets at fair value on a recurring basis
$855,460
 
$—
 
$855,460
 
$—
Liabilities:       
Derivative liabilities
$17,822
 
$—
 
$17,822
 
$—
Contingent consideration liability187
 
 
 187
Total liabilities at fair value on a recurring basis
$18,009
 
$—
 
$17,822
 
$187




(Dollars in thousands)TotalQuoted 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 enterprises660,793

660,793

Obligations of states and political subdivisions937

937

Individual name issuer trust preferred debt securities11,772

11,772

Corporate bonds11,625

11,625

Mortgage loans held for sale20,996

20,996

Derivative assets3,966

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

$—

(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, 2017   
Assets:       
Securities available for sale:       
Obligations of U.S. government-sponsored enterprises
$157,604
 
$—
 
$157,604
 
$—
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises590,882
 
 590,882
 
Obligations of states and political subdivisions2,359
 
 2,359
 
Individual name issuer trust preferred debt securities16,984
 
 16,984
 
Corporate bonds13,125
 
 13,125
 
Mortgage loans held for sale26,943
 
 26,943
 
Derivative assets2,759
 
 2,759
 
Total assets at fair value on a recurring basis
$810,656
 
$—
 
$810,656
 
$—
Liabilities:       
Derivative liabilities
$3,047
 
$—
 
$3,047
 
$—
Contingent consideration liability1,404
 
 
 1,404
Total liabilities at fair value on a recurring basis
$4,451
 
$—
 
$3,047
 
$1,404


- 33-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)



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, 20182019 and 2017.2018.


The contingent consideration liability is a Level 3 liability remeasured

- 34-



Condensed Notes to fair value on a recurring basis. The following table presents the change in the contingent consideration liability, which is included in other liabilities in the Unaudited Consolidated Balance Sheets.
Financial Statements – (continued)
(Dollars in thousands)Three Months Nine Months
Periods ended September 30,2018 2017 2018 2017
Balance at beginning of period
$187
 
$1,737
 
$1,404
 
$2,047
Change in fair value
 
 
 (310)
Payments
 
 (1,217) 
Balance at end of period
$187
 
$1,737
 
$187
 
$1,737


Items Recorded at Fair Value on a Nonrecurring Basis
The following table presents the carrying value of assets held at September 30, 2018,2019, which were written down to fair value during the nine months ended September 30, 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)
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
$27
 
$—
 
$—
 
$27

$1,451
 
$—
 
$—
 
$1,451
Property acquired through foreclosure or repossession2,974
 
 
 2,974
2,000
 
 
 2,000
Total assets at fair value on a nonrecurring basis
$3,001
 
$—
 
$—
 
$3,001

$3,451
 
$—
 
$—
 
$3,451


The allowance for loan losses on collateral dependent impaired loans amounted to $8$221 thousand at September 30, 2018.2019.


The following table presents the carrying value of assets held at December 31, 2017,2018, which were written down to fair value during the year ended December 31, 2017:2018:
(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 repossession2,142
 
 
 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)
   
Assets:       
Collateral dependent impaired loans
$1,425
 
$—
 
$—
 
$1,425
Property acquired through foreclosure or repossession131
 
 
 131
Total assets at fair value on a nonrecurring basis
$1,556
 
$—
 
$—
 
$1,556


The allowance for loan losses on collateral dependent impaired loans amounted to $690$24 thousand at December 31, 2017.2018.



- 34-



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 ValueValuation TechniqueUnobservable Input
Range of Inputs Utilized
(Weighted Average)
Fair ValueValuation TechniqueUnobservable Input
Range of Inputs Utilized
(Weighted Average)
September 30, 2018
September 30, 2019Fair ValueValuation TechniqueUnobservable Input
Range of Inputs Utilized
(Weighted Average)
Collateral dependent impaired loans
td7
Appraisals of collateralDiscount for costs to sell0% - 10% (8%)
    Appraisal adjustments (1)0% - 100% (19%)
Property acquired through foreclosure or repossession
$2,974
Appraisals of collateralDiscount for costs to sell13%
$2,000
Appraisals of collateralDiscount for costs to sell20%
  Appraisal adjustments (1)12%  Appraisal adjustments (1)13%
(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 ValueValuation TechniqueUnobservable Input
Range of Inputs Utilized
(Weighted Average)
Fair ValueValuation TechniqueUnobservable Input
Range of Inputs Utilized
(Weighted Average)
December 31, 2017
December 31, 2018Fair ValueValuation TechniqueUnobservable Input
Range of Inputs Utilized
(Weighted Average)
Collateral dependent impaired loans
td,425
Appraisals of collateralDiscount for costs to sell0% - 15% (15%)
    Appraisal adjustments (1)0% - 100% (2%)
Property acquired through foreclosure or repossession
$131
Appraisals of collateralDiscount for costs to sell10%
$2,142
Appraisals of collateralDiscount for costs to sell13%
  Appraisal adjustments (1)12% - 17% (15%)  Appraisal adjustments (1)12% - 28% (20%)
(1)Management may adjust appraisal values to reflect market value declines or other discounts resulting from its knowledge of the property.



Valuation of Other Financial Instruments
The following tables present the carrying amount, estimated fair valuevalues and placement in therelated carrying amounts for financial instruments for which fair value hierarchyis only disclosed are presented below as of the Corporation’s financial instruments.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, 2019Carrying 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 advances956,786
962,160

962,160

Junior subordinated debentures22,681
19,265

19,265


(Dollars in thousands)         
September 30, 2018Carrying 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:         
Securities held to maturity
$10,863
 
$10,657
 
$—
 
$10,657
 
$—
Loans, net of allowance for loan losses3,529,694
 3,500,065
 
 
 3,500,065
          
Financial Liabilities:         
Time deposits
$1,159,218
 
$1,170,151
 
$—
 
$1,170,151
 
$—
FHLB advances828,392
 827,328
 
 827,328
 
Junior subordinated debentures22,681
 19,844
 
 19,844
 




(Dollars in thousands)     
December 31, 2018Carrying 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 losses3,653,288
3,598,025


3,598,025
      
Financial Liabilities:     
Time deposits
$1,255,108

$1,269,433

$—

$1,269,433

$—
FHLB advances950,722
950,691

950,691

Junior subordinated debentures22,681
19,226

19,226





- 35-36-





Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


(Dollars in thousands)         
December 31, 2017Carrying 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:         
Securities held to maturity
$12,541
 
$12,721
 
$—
 
$12,721
 
$—
Loans, net of allowance for loan losses3,347,583
 3,369,932
 
 
 3,369,932
          
Financial Liabilities:         
Time deposits
$1,015,095
 
$1,018,396
 
$—
 
$1,018,396
 
$—
FHLB advances791,356
 792,887
 
 792,887
 
Junior subordinated debentures22,681
 18,559
 
 18,559
 

(12)Note 11 - Revenue from Contracts with Customers
Overview
RevenueThe following tables summarize total revenues as presented in the Unaudited Consolidated Statements of Income and the related amounts which are from contracts with customers in the scope of Accounting Standards Codification (“ASC”) Topic 606 is measured based on the consideration specified in the contract with a customer. The Corporation recognizes revenue from contracts with customers when it satisfies its performance obligations.

The Corporation’s performance obligations are generally satisfied as services are rendered and can either be satisfied at a point in time or over time. Unsatisfied performance obligations at the report date are not material to our unaudited consolidated financial statements.

In certain cases, other parties are involved with providing services to our customers. If the Corporation is a principal in the transaction (providing services itself or through a third party on its behalf), revenues are reported based on the gross consideration received from the customer and any related expenses are reported gross in noninterest expense. If the Corporation is an agent in the transaction (referring customers to another party to provide services), the Corporation reports its net fee or commission retained as revenue.

Accounting Policy Updates
The Corporation adopted Topic 606 “Revenue from Contracts with Customers” effective January 1, 2018 and has applied the guidance to all contracts within the scope of Topic 606 as of that date.606. As shown below, a result, the Corporation has modified its accounting policy for revenue recognition as detailed herein.

As discussed in Note 2, the Corporation applied Topic 606 using the modified retrospective method, therefore, the prior period comparative information has not been adjusted and continues to be reported under Topic 605. There was no cumulative effect adjustment as of January 1, 2018, and there were no material changes to our unaudited consolidated financial statements at or for the nine months ended September 30, 2018, as a result of adopting Topic 606.

The Corporation applied the practical expedient pertaining to contracts with original expected duration of one year or less and does not disclose information about remaining performance obligations on such contracts.

The Corporation also applied the practical expedient pertaining to contracts for which, at contract inception, the period between when the entity transfers the services and when the customer pays for those services will be one year or less. As such, the Corporation does not adjust the consideration from customers for the effects of a significant financing component.

A substantial portion of the Corporation’s revenue isour revenues are specifically excluded from the scope of Topic 606. For the revenue that is within scope of Topic 606, the following is a description of principal activities from which the Corporation generates its revenue from contracts with customers, separated by the timing of revenue recognition.



For the three months ended September 30,2019 2018
(Dollars in thousands)As reported in Consolidated Statements of IncomeRevenue from contracts in scope of Topic 606 As reported in Consolidated Statements of IncomeRevenue from contracts in scope of Topic 606
Net interest income
$32,978

$—
 
$33,449

$—
Noninterest income:     
Asset-based wealth management revenues9,013
9,013
 9,322
9,322
Transaction-based wealth management revenues140
140
 132
132
Total wealth management revenues9,153
9,153
 9,454
9,454
Mortgage banking revenues4,840

 2,624

Card interchange fees1,099
1,099
 983
983
Service charges on deposit accounts939
939
 885
885
Loan related derivative income1,407

 278

Income from bank-owned life insurance569

 572

Net realized losses on securities

 

Other income335
323
 419
419
Total noninterest income18,342
11,514
 15,215
11,741
Total revenues
$51,320

$11,514
 
$48,664

$11,741


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

$—
 
$98,412

$—
Noninterest income:     
Asset-based wealth management revenues27,075
27,075
 28,413
28,413
Transaction-based wealth management revenues879
879
 916
916
Total wealth management revenues27,954
27,954
 29,329
29,329
Mortgage banking revenues11,126

 8,403

Card interchange fees3,114
3,114
 2,791
2,791
Service charges on deposit accounts2,743
2,743
 2,651
2,651
Loan related derivative income2,877

 1,087

Income from bank-owned life insurance1,784

 1,624

Net realized losses on securities(80)
 

Other income944
917
 1,066
1,051
Total noninterest income50,462
34,728
 46,951
35,822
Total revenues
$151,882

$34,728
 
$145,363

$35,822


- 36-37-





Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


Revenue Recognized at a Point in Time
The following table presents revenue from contracts with customers based on the timing of revenue recognition:
(Dollars in thousands)Three Months Nine Months
Periods ended September 30,20192018 20192018
Revenue recognized at a point in time:     
Card interchange fees
$1,099

$983
 
$3,114

$2,791
Service charges on deposit accounts728
670
 2,109
2,045
Other income268
258
 771
732
Revenue recognized over time:     
Wealth management revenues9,153
9,454
 27,954
29,329
Service charges on deposit accounts211
215
 634
606
Other income55
161
 146
319
Total revenues from contracts in scope of Topic 606
$11,514

$11,741
 
$34,728

$35,822


Receivables 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 million at both September 30, 2019 and December 31, 2018 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 recognizes revenue that is transactional in nature and such revenue is earned athas a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income relatedremaining performance obligation 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 isfulfill. Contract liabilities are recognized as revenue immediatelyover the life of the contract as the transactions occur or upon providing the service to complete the customer’s transaction.

Revenue Recognized Over Time
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 revenuesThe balances of contract liabilities were insignificant at both September 30, 2019 and service charges on deposit accounts. Wealth management revenues are categorized as either asset-based revenues or transaction-based revenues. Asset-based revenues include trustDecember 31, 2018 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 andwere included in other service fees. Fee revenue from service charges on deposit accounts representliabilities in the service charges assessed to customer who hold deposit accounts at the Bank.Unaudited Consolidated Balance Sheets.


Costs of Obtaining Revenue from Contracts with Customers
The Corporation pays commissions and incentives to its employees in accordance with certain employment arrangements and incentive plans. For commissions and incentives that are excluded from the scope of Topic 606, such as those paid to mortgage originator employees, the Corporation expenses these costs when incurred or applies the guidance in ASC Topic 310. 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 amortizationcarrying value of the contract cost asset is recorded within salaries and employee benefits expense.

Disaggregation of Revenue
The following table summarizes total revenues as presented in the Unaudited Consolidated Statements of Income and the related amounts which 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 month ended September 30,2018 2017
(Dollars in thousands)As reported in Consolidated Statements of IncomeRevenue from contracts in scope of Topic 606 As reported in Consolidated Statements of IncomeRevenue from contracts in scope of Topic 606
Net interest income
$33,449

$—
 
$30,059

$—
Noninterest income:     
Asset-based wealth management revenues9,322
9,322
 9,791
9,791
Transaction-based wealth management revenues132
132
 222
222
Total wealth management revenues9,454
9,454
 10,013
10,013
Mortgage banking revenues2,624

 3,036

Service charges on deposit accounts885
885
 942
942
Card interchange fees983
983
 894
894
Income from bank-owned life insurance572

 546

Loan related derivative income278

 1,452

Other income419
419
 400
400
Total noninterest income15,215
11,741
 17,283
12,249
Total revenues
$48,664

$11,741
 
$47,342

$12,249



- 37-



Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

For the nine months ended September 30,2018 2017
(Dollars in thousands)As reported in Consolidated Statements of IncomeRevenue from contracts in scope of Topic 606 As reported in Consolidated Statements of IncomeRevenue from contracts in scope of Topic 606
Net interest income
$98,412

$—
 
$88,642

$—
Noninterest income:     
Asset-based wealth management revenues28,413
28,413
 28,439
28,439
Transaction-based wealth management revenues916
916
 993
993
Total wealth management revenues29,329
29,329
 29,432
29,432
Mortgage banking revenues8,403

 8,295

Service charges on deposit accounts2,651
2,651
 2,726
2,726
Card interchange fees2,791
2,791
 2,598
2,598
Income from bank-owned life insurance1,624

 1,624

Loan related derivative income1,087

 2,744

Other income1,066
1,051
 1,180
1,139
Total noninterest income46,951
35,822
 48,599
35,895
Total revenues
$145,363

$35,822
 
$137,241

$35,895

The following table presents revenue from contracts with customers based on the timing of revenue recognition:
(Dollars in thousands)Three Months Nine Months
Periods ended September 30,20182017 20182017
Revenue recognized at a point in time:     
Card interchange fees
$983

$894
 
$2,791

$2,598
Service charges on deposit accounts670
741
 2,045
2,140
Other income258
283
 732
872
Revenue recognized over time:     
Wealth management revenues9,454
10,013
 29,329
29,432
Service charges on deposit accounts215
201
 606
586
Other income161
117
 319
267
Total revenues from contracts in scope of Topic 606
$11,741

$12,249
 
$35,822

$35,895

Receivables primarily consist of amounts due from customers for wealth management services performed for which the Corporation’s performance obligations have been fully satisfied. Receivablesassets amounted to $5.2 million$683 thousand at September 30, 2018,2019, compared to $5.7 million$458 thousand at December 31, 20172018 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 30, 2018 and December 31, 2017 and were included in other liabilities in the Unaudited Consolidated Balance Sheets.

Contract cost assets (capitalized commission and incentive costs, net of amortization) at September 30, 2018 were insignificant and were included in other assets in the Unaudited Consolidated Balance Sheets.





- 38-





Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


(13)Note 12 - Defined Benefit Pension Plans
The CorporationWashington Trust maintains a tax-qualified defined benefitqualified pension plan for the benefit of certain eligible employees who were hired prior to October 1, 2007. The CorporationWashington 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 defined benefitqualified pension plan is funded on a current basis, in compliance with the requirements of ERISA.


The non-qualified retirement plans provide for the designation of assets in rabbi trusts. Securities available for sale and other short-term investments designated for this purpose, with the carrying value of $12.5 million and $13.3 million are included in the Consolidated Balance Sheets at September 30, 2018 and December 31, 2017, respectively.

The compositionfollowing table presents components of net periodic benefit cost was as follows:and other amounts recognized in other comprehensive income (loss), on a pre-tax basis:
(Dollars in thousands)Qualified Pension Plan Non-Qualified Retirement Plans
 Three Months Nine Months Three Months Nine Months
Periods ended September 30,20192018 20192018 20192018 20192018
Net Periodic Benefit Cost:           
Service cost (1)
$510

$561
 
$1,528

$1,683
 
$31

$27
 
$94

$81
Interest cost (2)741
679
 2,225
2,036
 140
119
 422
356
Expected return on plan assets (2)(1,124)(1,318) (3,371)(3,954) 

 

Amortization of prior service credit (2)(4)(6) (12)(17) 

 

Recognized net actuarial loss (2)198
374
 594
1,122
 104
103
 307
308
Net periodic benefit cost
$321

$290
 
$964

$870
 
$275

$249
 
$823

$745
(Dollars in thousands)Qualified Pension Plan Non-Qualified Retirement Plans
 Three Months Nine Months Three Months Nine Months
Periods ended September 30,20182017 20182017 20182017 20182017
Net Periodic Benefit Cost:           
Service cost (1)
$561

$537
 
$1,683

$1,611
 
$27

$32
 
$81

$97
Interest cost (2)679
669
 2,036
2,005
 119
107
 356
321
Expected return on plan assets (2)(1,318)(1,236) (3,954)(3,707) 

 

Amortization of prior service (credit) cost (2)(6)(6) (17)(17) 

 

Recognized net actuarial loss (2)374
279
 1,122
836
 103
76
 308
269
Net periodic benefit cost
$290

$243
 
$870

$728
 
$249

$215
 
$745

$687

(1)Included in salaries and employee benefits expense in the Unaudited Consolidated Statements of Income.
(2)Included in other expenses in the Unaudited Consolidated Statements of Income.


The following table presents the measurement date and weighted-average assumptions used to determine net periodic benefit cost:
 Qualified Pension Plan Non-Qualified Retirement Plans
For the nine months ended September 30,2019 2018 2019 2018
Measurement dateDec 31, 2018 Dec 31, 2017 Dec 31, 2018 Dec 31, 2017
Equivalent single discount rate for benefit obligations4.38% 3.69% 4.28% 3.58%
Equivalent single discount rate for service cost4.44 3.76��4.48 3.79
Equivalent single discount rate for interest cost4.12 3.42 3.98 3.22
Expected long-term return on plan assets5.75 6.75 N/A N/A
Rate of compensation increase3.75 3.75 3.75 3.75

 Qualified Pension Plan Non-Qualified Retirement Plans
For the nine months ended September 30,2018 2017 2018 2017
Measurement dateDec 31, 2017 Dec 31, 2016 Dec 31, 2017 Dec 31, 2016
Equivalent single discount rate for benefit obligations3.69% 4.18% 3.58% 3.96%
Equivalent single discount rate for service cost3.76 4.29 3.79 4.25
Equivalent single discount rate for interest cost3.42 3.73 3.22 3.36
Expected long-term return on plan assets6.75 6.75 N/A N/A
Rate of compensation increase3.75 3.75 3.75 3.75






- 39-





Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


(14)Note 13 - Share-Based Compensation Arrangements
During the nine months ended September 30, 2018,2019, the Corporation granted equity awards, which included performance share unit awards and nonvested share unit awards.


The performancePerformance share awards were granted to certain executive and non-executive officers 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 January 18, 2018 (thethe Corporation’s common stock on the award date), or $54.25, and will be earned over 3- to 5-yeardate. The weighted average fair value of the performance periods.share awards was $52.83. The number of shares earnedto be vested will range from zero to 200% of the target number of shares dependentbe contingent upon the Corporation’s core return on equityattainment of certain performance measures as detailed in the performance share award agreements. The performance share awards will earned over a 3-year performance period and core earnings per share growth ranking compared to an industry peer group. Thethe current performance assumption based on the most recent peer group information available results in 43,360 shares earned at 140% of the target, or 41,454 shares.being earned.


The Corporation granted to non-employeenon-executive officers and directors and a non-executive officer 6,83010,870 nonvested share units, with 3- to 5-year3-year cliff vesting. The weighted average grant date fair value of the nonvested share units was $56.65.$51.43.


(15)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.  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 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, 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-





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
Three months ended September 30,20192018 20192018 20192018 20192018
Net interest income (expense)
$28,515

$27,036
 
($114)
($90) 
$4,577

$6,503
 
$32,978

$33,449
Provision for loan losses400
350
 

 

 400
350
Net interest income (expense) after provision for loan losses28,115
26,686
 (114)(90) 4,577
6,503
 32,578
33,099
Noninterest income8,607
5,174
 9,153
9,454
 582
587
 18,342
15,215
Noninterest expenses:           
Depreciation and amortization expense642
654
 360
371
 40
44
 1,042
1,069
Other noninterest expenses16,255
15,599
 6,217
6,194
 3,356
3,200
 25,828
24,993
Total noninterest expenses16,897
16,253
 6,577
6,565
 3,396
3,244
 26,870
26,062
Income before income taxes19,825
15,607
 2,462
2,799
 1,763
3,846
 24,050
22,252
Income tax expense4,347
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
            
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
Expenditures for long-lived assets662
612
 87
14
 48
19
 797
645
            
(Dollars in thousands)Commercial Banking Wealth Management Services Corporate Consolidated Total
Three months ended September 30,20182017 20182017 20182017 20182017
Net interest income (expense)
$27,036

$24,795
 
($90)
($48) 
$6,503

$5,312
 
$33,449

$30,059
Provision for loan losses350
1,300
 

 

 350
1,300
Net interest income (expense) after provision for loan losses26,686
23,495
 (90)(48) 6,503
5,312
 33,099
28,759
Noninterest income5,174
6,711
 9,454
10,013
 587
559
 15,215
17,283
Noninterest expenses:           
Depreciation and amortization expense654
646
 371
411
 44
50
 1,069
1,107
Other noninterest expenses15,599
15,834
 6,194
6,810
 3,200
3,003
 24,993
25,647
Total noninterest expenses16,253
16,480
 6,565
7,221
 3,244
3,053
 26,062
26,754
Income before income taxes15,607
13,726
 2,799
2,744
 3,846
2,818
 22,252
19,288
Income tax expense3,344
4,463
 710
1,092
 687
771
 4,741
6,326
Net income
$12,263

$9,263
 
$2,089

$1,652
 
$3,159

$2,047
 
$17,511

$12,962
            
Total assets at period end
$3,694,991

$3,486,783
 
$69,494

$63,600
 
$1,006,187

$918,847
 
$4,770,672

$4,469,230
Expenditures for long-lived assets612
890
 14
25
 19
22
 645
937

            
(Dollars in thousands)Commercial Banking Wealth Management Services Corporate Consolidated Total
Nine months ended September 30,20192018 20192018 20192018 20192018
Net interest income (expense)
$83,684

$79,656
 
($361)
($225) 
$18,097

$18,981
 
$101,420

$98,412
Provision for loan losses1,575
750
 

 

 1,575
750
Net interest income (expense) after provision for loan losses82,109
78,906
 (361)(225) 18,097
18,981
 99,845
97,662
Noninterest income20,753
15,947
 27,961
29,329
 1,748
1,675
 50,462
46,951
Noninterest expenses:           
Depreciation and amortization expense1,985
1,928
 1,089
1,137
 118
129
 3,192
3,194
Other noninterest expenses48,676
46,574
 19,631
19,986
 10,486
9,726
 78,793
76,286
Total noninterest expenses50,661
48,502
 20,720
21,123
 10,604
9,855
 81,985
79,480
Income before income taxes52,201
46,351
 6,880
7,981
 9,241
10,801
 68,322
65,133
Income tax expense11,371
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
            
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
Expenditures for long-lived assets2,259
1,864
 379
327
 130
129
 2,768
2,320

            
(Dollars in thousands)Commercial Banking Wealth Management Services Corporate Consolidated Total
Nine months ended September 30,20182017 20182017 20182017 20182017
Net interest income (expense)
$79,656

$72,985
 
($225)
($120) 
$18,981

$15,777
 
$98,412

$88,642
Provision for loan losses750
2,400
 

 

 750
2,400
Net interest income (expense) after provision for loan losses78,906
70,585
 (225)(120) 18,981
15,777
 97,662
86,242
Noninterest income15,947
17,500
 29,329
29,432
 1,675
1,667
 46,951
48,599
Noninterest expenses:           
Depreciation and amortization expense1,928
1,960
 1,137
1,288
 129
152
 3,194
3,400
Other noninterest expenses46,574
45,764
 19,986
20,106
 9,726
9,076
 76,286
74,946
Total noninterest expenses48,502
47,724
 21,123
21,394
 9,855
9,228
 79,480
78,346
Income before income taxes46,351
40,361
 7,981
7,918
 10,801
8,216
 65,133
56,495
Income tax expense9,834
13,142
 2,008
3,172
 1,895
2,238
 13,737
18,552
Net income
$36,517

$27,219
 
$5,973

$4,746
 
$8,906

$5,978
 
$51,396

$37,943
            
Total assets at period end
$3,694,991

$3,486,783
 
$69,494

$63,600
 
$1,006,187

$918,847
 
$4,770,672

$4,469,230
Expenditures for long-lived assets1,864
1,640
 327
368
 129
176
 2,320
2,184





- 41-





Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


(16)Note 15 - Other Comprehensive Income (Loss)
The following tables present the activity in other comprehensive income (loss):
      
Three months ended September 30,2018 20172019 2018
(Dollars in thousands)Pre-tax AmountsIncome TaxesNet of Tax Pre-tax AmountsIncome TaxesNet of TaxPre-tax AmountsIncome TaxesNet of Tax Pre-tax AmountsIncome TaxesNet of Tax
Securities available for sale:      
Changes in fair value of securities available for sale
($5,924)
($1,393)
($4,531) 
$1,736

$642

$1,094
Net gains on securities reclassified into earnings


 


Net change in fair value of securities available for sale(5,924)(1,393)(4,531) 1,736
642
1,094
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 securities3,772
886
2,886
 (5,924)(1,393)(4,531)
Cash flow hedges:      
Change in fair value of cash flow hedges(626)(148)(478) (237)(83)(154)(283)(66)(217) (626)(148)(478)
Net cash flow hedge losses reclassified into earnings (1)(2)
830
197
633
 224
83
141
60
14
46
 830
197
633
Net change in fair value of cash flow hedges204
49
155
 (13)
(13)(223)(52)(171) 204
49
155
Defined benefit plan obligations:      
Defined benefit plan obligation adjustment


 


Amortization of net actuarial losses (2)
477
112
365
 355
134
221
Amortization of net prior service credits (2)
(6)(2)(4) (6)(2)(4)
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 obligations471
110
361
 349
132
217
296
69
227
 471
110
361
Total other comprehensive (loss) income
($5,249)
($1,234)
($4,015) 
$2,072

$774

$1,298
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.
(2)(3)The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income.
        
Nine months ended September 30,2019 2018
(Dollars in thousands)Pre-tax AmountsIncome TaxesNet of Tax Pre-tax AmountsIncome TaxesNet 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)
Net losses on debt securities reclassified into earnings (1)
80
19
61
 


Net change in fair value of available for sale debt securities26,065
6,125
19,940
 (23,605)(5,548)(18,057)
Cash flow hedges:       
Change in fair value of cash flow hedges(1,653)(388)(1,265) 632
50
582
Net cash flow hedge losses reclassified into earnings (2)
39
9
30
 1,082
255
827
Net change in fair value of cash flow hedges(1,614)(379)(1,235) 1,714
305
1,409
Defined benefit plan obligations:       
Amortization of net actuarial losses (3)
900
211
689
 1,430
337
1,093
Amortization of net prior service credits (3)
(12)(3)(9) (17)(5)(12)
Net change in defined benefit plan obligations888
208
680
 1,413
332
1,081
Total other comprehensive (loss) income
$25,339

$5,954

$19,385
 
($20,478)
($4,911)
($15,567)
        
Nine months ended September 30,2018 2017
(Dollars in thousands)Pre-tax AmountsIncome TaxesNet of Tax Pre-tax AmountsIncome TaxesNet of Tax
Securities available for sale:       
Changes in fair value of securities available for sale
($23,605)
($5,548)
($18,057) 
$5,274

$1,951

$3,323
Net gains on securities reclassified into earnings


 


Net change in fair value of securities available for sale(23,605)(5,548)(18,057) 5,274
1,951
3,323
Cash flow hedges:       
Change in fair value of cash flow hedges632
50
582
 (1,064)(361)(703)
Net cash flow hedge losses reclassified into earnings (1)
1,082
255
827
 539
200
339
Net change in fair value of cash flow hedges1,714
305
1,409
 (525)(161)(364)
Defined benefit plan obligations:       
Defined benefit plan obligation adjustment


 (407)(150)(257)
Amortization of net actuarial losses (2)
1,430
337
1,093
 1,105
411
694
Amortization of net prior service credits (2)
(17)(5)(12) (17)(7)(10)
Net change in defined benefit plan obligations1,413
332
1,081
 681
254
427
Total other comprehensive (loss) income
($20,478)
($4,911)
($15,567) 
$5,430

$2,044

$3,386

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







- 42-





Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax:
(Dollars in thousands)Net Unrealized Losses on Available For Sale Securities Net Unrealized (Losses) Gains on Cash Flow Hedges Pension Benefit Adjustment Total
Balance at December 31, 2017
($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 September 30, 2019   
Balance at July 1, 2019
$292
 
($873) 
($11,285) 
($11,866)
Other comprehensive income (loss) before reclassifications2,886
 (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 reclassifications19,879
 (1,265) 
 18,614
Amounts reclassified from accumulated other comprehensive income61
 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 (Losses) Gains on Available For Sale Securities Net Unrealized Losses on Cash Flow Hedges Pension Benefit Adjustment Total
Balance at December 31, 2016
($6,825) 
($300) 
($12,632) 
($19,757)
Other comprehensive income (loss) before reclassifications3,323
 (703) 
 2,620
Amounts reclassified from accumulated other comprehensive income
 339
 427
 766
Net other comprehensive income (loss)3,323
 (364) 427
 3,386
Balance at September 30, 2017
($3,502) 
($664) 
($12,205) 
($16,371)
(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 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)





- 43-





Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


(17)Note 16 - Earnings Perper 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
Periods ended September 30,2019 2018 2019 2018
Earnings per common share - basic:       
Net income
$18,814
 
$17,511
 
$53,582
 
$51,396
Less dividends and undistributed earnings allocated to participating securities(36) (36) (105) (112)
Net income available to common shareholders
$18,778
 
$17,475
 
$53,477
 
$51,284
Weighted average common shares17,338
 17,283
 17,324
 17,263
Earnings per common share - basic
$1.08
 
$1.01
 
$3.09
 
$2.97
Earnings per common share - diluted:       
Net income
$18,814
 
$17,511
 
$53,582
 
$51,396
Less dividends and undistributed earnings allocated to participating securities(36) (36) (105) (112)
Net income available to common shareholders
$18,778
 
$17,475
 
$53,477
 
$51,284
Weighted average common shares17,338
 17,283
 17,324
 17,263
Dilutive effect of common stock equivalents76
 99
 82
 129
Weighted average diluted common shares17,414
 17,382
 17,406
 17,392
Earnings per common share - diluted
$1.08
 
$1.01
 
$3.07
 
$2.95

(Dollars and shares in thousands, except per share amounts)       

Three Months Nine Months
Periods ended September 30,2018 2017 2018 2017
Earnings per common share - basic:       
Net income
$17,511
 
$12,962
 
$51,396
 
$37,943
Less dividends and undistributed earnings allocated to participating securities(36) (28) (112) (84)
Net income applicable to common shareholders
$17,475
 
$12,934
 
$51,284
 
$37,859
Weighted average common shares17,283
 17,212
 17,263
 17,201
Earnings per common share - basic
$1.01
 
$0.75
 
$2.97
 
$2.20
Earnings per common share - diluted:       
Net income
$17,511
 
$12,962
 
$51,396
 
$37,943
Less dividends and undistributed earnings allocated to participating securities(36) (28) (112) (84)
Net income applicable to common shareholders
$17,475
 
$12,934
 
$51,284
 
$37,859
Weighted average common shares17,283
 17,212
 17,263
 17,201
Dilutive effect of common stock equivalents99
 106
 129
 119
Weighted average diluted common shares17,382
 17,318
 17,392
 17,320
Earnings per common share - diluted
$1.01
 
$0.75
 
$2.95
 
$2.19


Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 93,075 and 87,775, respectively for the three and nine months ended September 30, 2019, compared to 41,525 and 46,692, respectively, for the three and nine months ended September 30,same periods in 2018. There were no anti-dilutive weighted average common stock equivalents outstanding for the three and nine months ended September 30, 2017.





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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


(18)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 thousand and $2.8 million, respectively, for the three and nine months ended September 30, 2019, compared to $942 thousand and $2.8 million, respectively, for the same periods in 2018. 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 the undiscounted annual lease payments under the terms of the Corporation’s operating leases at September 30, 2019, 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
20203,515
20213,312
20223,165
20233,090
2024 and thereafter24,716
Total operating lease payments (1)
38,728
Less interest9,187
Present value of operating lease liabilities (2)

$29,541

(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.



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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the components of total lease expense and operating cash flows:
(Dollars in thousands)  
Periods ended September 30, 2019Three MonthsNine Months
Lease Expense:  
Operating lease expense
$931

$2,787
Variable lease expense13
36
Total lease expense (1)

$944

$2,823
Cash Paid:  
Cash paid reducing operating lease liabilities
$926

$2,677
(1) Included in net occupancy expenses in the Unaudited Consolidated Income Statement.

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
 20202,980
 20212,677
 20222,293
 20232,059
 2024 and thereafter22,648
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
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:


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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)
(Dollars in thousands)Sep 30,
2018
 Dec 31,
2017
Financial instruments whose contract amounts represent credit risk:   
Commitments to extend credit:   
Commercial loans
$519,887
 
$537,310
Home equity lines266,886
 254,855
Other loans44,665
 48,819
Standby letters of credit7,993
 6,666
Financial instruments whose notional amounts exceed the amount of credit risk:   
Forward loan commitments:   
Interest rate lock commitments38,612
 45,139
Forward sale commitments65,686
 71,539
Loan related derivative contracts:   
Interest rate swaps with customers574,364
 545,049
Mirror swaps with counterparties574,364
 545,049
Risk participation-in agreements36,610
 34,052
Foreign exchange contracts2,907
 3,005
Interest rate risk management contracts:   
Interest rate swaps60,000
 60,000


(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 lines290,442
 270,462
Other loans74,931
 46,698
Standby letters of credit9,343
 7,706
Financial instruments whose notional amounts exceed the amount of credit risk:   
Forward loan commitments:   
Interest rate lock commitments84,820
 30,766
Forward sale commitments156,594
 61,993
Loan related derivative contracts:   
Interest rate swaps with customers729,913
 648,050
Mirror swaps with counterparties729,913
 648,050
Risk participation-in agreements73,040
 46,510
Foreign exchange contracts2,648
 2,784
Interest rate risk management contracts:   
Interest rate swaps60,000
 60,000


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


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 $8.0$9.3 million and $6.7$7.7 million, respectively, as of September 30, 20182019 and December 31, 2017, respectfully.2018. At September 30, 20182019 and December 31, 2017,2018, 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 months ended September 30, 20182019 and 2017.2018.


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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)



Forward Loan Commitments
Interest rate lock commitments are extended to borrowers and relate to the origination of residential real estate mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with these rate locks and residential real estate mortgage loans held for sale, the Corporation enters into forward sale commitments.  Both interest rate lock commitments and forward sale commitments are derivative financial instruments.

Leases
At September 30, 2018, the Corporation was committed to rent premises used in business operations under non-cancelable operating leases. Rental expense under the operating leases amounted to $1.1 million and $3.2 million, respectively, for the three and nine months ended September 30, 2018, compared to $1.1 million and $3.3 million, respectively, for the same periods in 2017. The following table presents the minimum annual lease payments under the terms of these leases, exclusive of renewal provisions:
  
(Dollars in thousands) 
October 1, 2018 to December 31, 2018
$933
20193,579
20202,860
20212,526
20222,133
2023 and thereafter24,595
Total minimum lease payments
$36,626

Lease expiration dates range from 8 months to 22 years, with additional renewal options on certain leases ranging from 1 to 5 years.



- 46-47-





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, 20172018, 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 months endedSeptember 30, 20182019 are not necessarily indicative of the results for the full-year ended December 31, 20182019 or any future period. Certain previously reported amounts have been reclassified to conform to the 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 in national, regional or international economic conditions or conditions affecting the banking or financial services industries or financial capital markets; 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 in the value of securities and other assets; reductions in loan demand; changes in loan collectibility,collectability, default 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, such as cyberattacks;including, but not limited to cybersecurity breaches, fraud and natural disasters; 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, 20172018, 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 considers the following to be its critical accounting policies: the determination of allowance for loan losses, the valuation of goodwill and identifiable intangible assets, the assessment of investment securities for impairment and accounting for defined benefit pension plans.There have been no significant changes in the Corporation’s critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018.


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
Washington TrustThe 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; and its internet website at 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 benefits,benefit costs, outsourced services provided by third-party vendors, occupancy and facility-related costs technology and other administrative expenses.





- 47-48-





Management's Discussion and Analysis


Our financial results are affected by interest rate fluctuations, changes in economic and market conditions, competitive conditions within our market area and changes in legislation, regulation and/or accounting principles.  Adverse changes in economic growth, consumer confidence, credit availability and corporate earnings could negatively impact our financial results.


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

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 the Corporation’s risk profile is consistent with its risk strategy.

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

Credit risk represents the possibility that borrowers or other counterparties may not repay loans or other contractual obligations according to their terms due to changes in the financial capacity, ability and willingness of such borrowers or counterparties to meet their obligations. In early 2019, we plansome cases, the collateral securing payment of the loans may be sufficient to openassure repayment, but in other cases the Corporation may experience significant credit losses which could have an adverse effect on its operating results. The Corporation makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of the real estate and other assets serving as collateral for the repayment of loans. Credit risk also exists with respect to investment securities. For further discussion regarding the credit risk and the credit quality of the Corporation’s loan portfolio, see Note 5 and Note 6 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 assets and 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/Liability Management and Interest Rate 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 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 new full-service branchthird line of defense. They provide independent assurance to the Board of Directors of the effectiveness of the first and second lines in North Providence, Rhode Island.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.

Results of Operations
The following table presents a summarized consolidated statement of operations:
(Dollars in thousands)Three Months Nine MonthsThree Months Nine Months
  Change   Change  Change   Change
For the periods ended September 30,20182017 $% 20182017 $%20192018 $% 20192018 $%
Net interest income
$33,449

$30,059
 
$3,390
11% 
$98,412

$88,642
 
$9,770
11%
$32,978

$33,449
 
($471)(1%) 
$101,420

$98,412
 
$3,008
3%
Noninterest income15,215
17,283
 (2,068)(12) 46,951
48,599
 (1,648)(3)18,342
15,215
 3,127
21
 50,462
46,951
 3,511
7
Total revenues48,664
47,342
 1,322
3
 145,363
137,241
 8,122
6
51,320
48,664
 2,656
5
 151,882
145,363
 6,519
4
Provision for loan losses350
1,300
 (950)(73) 750
2,400
 (1,650)(69)400
350
 50
14
 1,575
750
 825
110
Noninterest expense26,062
26,754
 (692)(3) 79,480
78,346
 1,134
1
26,870
26,062
 808
3
 81,985
79,480
 2,505
3
Income before income taxes22,252
19,288
 2,964
15
 65,133
56,495
 8,638
15
24,050
22,252
 1,798
8
 68,322
65,133
 3,189
5
Income tax expense4,741
6,326
 (1,585)(25) 13,737
18,552
 (4,815)(26)5,236
4,741
 495
10
 14,740
13,737
 1,003
7
Net income
$17,511

$12,962
 
$4,549
35% 
$51,396

$37,943
 
$13,453
35%
$18,814

$17,511
 
$1,303
7% 
$53,582

$51,396
 
$2,186
4%


The following table presents a summary of performance metrics and ratios:
Three Months Nine MonthsThree Months Nine Months
For the periods ended September 30,20182017 2018201720192018 20192018
Diluted earnings per common share
$1.01

$0.75
 
$2.95

$2.19

$1.08

$1.01
 
$3.07

$2.95
Return on average assets (net income divided by average assets)1.47%1.17% 1.48%1.16%1.44%1.47% 1.39%1.48%
Return on average equity (net income available for common shareholders divided by average equity)16.26%12.43% 16.41%12.50%15.20%16.26% 15.09%16.41%
Net interest income as a percentage of total revenues69%63% 68%65%64%69% 67%68%
Noninterest income as a percentage of total revenues31%37% 32%35%36%31% 33%32%


Net income totaled $17.5$18.8 million, and $51.4 million, respectively, for the three months ended September 30, 2019, up by $1.3 million, or 7%, over the same period in 2018. This increase was mainly driven by increased mortgage banking activities and loan related derivative transactions.

Net income totaled $53.6 million for the nine months ended September 30, 2018, compared to $13.02019, up by $2.2 million, and $37.9 million, respectively, foror 4%, over the same periodsperiod in 2017. Income before income taxes for the three and nine months ended September 30, 2018 increased by $3.0 million and $8.6 million, respectively, compared to the same periods a year ago,2018. This largely due toreflected growth in net interest income. Income tax expense for the threeincome, increased mortgage banking activities and nine months ended September 30, 2018 decreasedloan related derivative transactions, partially offset by $1.6 millionlower wealth management revenues and $4.8 million, respectively, compared to the same periods in 2017, due to the December 2017 enactment of the Tax Cutsincreased salaries and Jobs Act (the “Tax Act”), which included the reduction of the federal corporate income tax rate from 35% to 21%, effective January 1, 2018.employee benefits expense.






- 48-50-





Management's Discussion and Analysis


Average Balances / Net Interest Margin - Fully Taxable Equivalent (FTE) Basis
The following tables presenttable 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 30,2018 2017 Change2019 2018 Change
(Dollars in thousands)Average BalanceInterestYield/ Rate Average BalanceInterestYield/ Rate Average BalanceInterestYield/ RateAverage BalanceInterestYield/ Rate Average BalanceInterestYield/ Rate Average BalanceInterestYield/ Rate
Assets:            
Cash, federal funds sold and short-term investments
$52,218

$261
1.98 
$61,390

$197
1.27 
($9,172)
$64
0.71

$96,231

$493
2.03 
$52,218

$261
1.98 
$44,013

$232
0.05
Mortgage loans held for sale34,571
384
4.41 28,820
289
3.98 5,751
95
0.43
39,771
410
4.09 34,571
384
4.41 5,200
26
(0.32)
Taxable debt securities825,302
5,383
2.59 751,735
4,655
2.46 73,567
728
0.13
920,910
6,318
2.72 825,302
5,383
2.59 95,608
935
0.13
Nontaxable debt securities935
11
4.67 4,287
65
6.02 (3,352)(54)(1.35)75
3
15.87 935
11
4.67 (860)(8)11.20
Total securities826,237
5,394
2.59 756,022
4,720
2.48 70,215
674
0.11
920,985
6,321
2.72 826,237
5,394
2.59 94,748
927
0.13
FHLB stock45,181
634
5.57 44,057
467
4.21 1,124
167
1.36
47,982
747
6.18 45,181
634
5.57 2,801
113
0.61
Commercial real estate1,233,230
13,931
4.48 1,157,613
11,235
3.85 75,617
2,696
0.63
1,490,878
17,314
4.61 1,233,230
13,931
4.48 257,648
3,383
0.13
Commercial & industrial642,005
7,720
4.77 594,009
6,684
4.46 47,996
1,036
0.31
584,601
6,946
4.71 642,005
7,720
4.77 (57,404)(774)(0.06)
Total commercial1,875,235
21,651
4.58 1,751,622
17,919
4.06 123,613
3,732
0.52
2,075,479
24,260
4.64 1,875,235
21,651
4.58 200,244
2,609
0.06
Residential real estate1,331,304
13,362
3.98 1,181,866
11,252
3.78 149,438
2,110
0.20
1,367,017
13,728
3.98 1,331,304
13,362
3.98 35,713
366

Home equity284,080
3,469
4.84 296,288
3,196
4.28 (12,208)273
0.56
291,058
3,615
4.93 284,080
3,469
4.84 6,978
146
0.09
Other27,635
344
4.94 33,401
408
4.85 (5,766)(64)0.09
22,270
278
4.95 27,635
344
4.94 (5,365)(66)0.01
Total consumer311,715
3,813
4.85 329,689
3,604
4.34 (17,974)209
0.51
313,328
3,893
4.93 311,715
3,813
4.85 1,613
80
0.08
Total loans3,518,254
38,826
4.38 3,263,177
32,775
3.98 255,077
6,051
0.40
3,755,824
41,881
4.42 3,518,254
38,826
4.38 237,570
3,055
0.04
Total interest-earning assets4,476,461
45,499
4.03 4,153,466
38,448
3.67 322,995
7,051
0.36
4,860,793
49,852
4.07 4,476,461
45,499
4.03 384,332
4,353
0.04
Noninterest-earning assets248,437
  248,070
  367




320,223
  248,437
  71,786




Total assets
$4,724,898
  
$4,401,536
  
$323,362
  
$5,181,016
  
$4,724,898
  
$456,118
  
Liabilities and Shareholders’ Equity:            
Interest-bearing demand deposits
$134,632

$465
1.37 
$46,352

$30
0.26 
$88,280

$435
1.11

$137,980

$649
1.87 
$134,632

$465
1.37 
$3,348

$184
0.50
NOW accounts458,143
104
0.09 442,166
68
0.06 15,977
36
0.03
471,302
69
0.06 458,143
104
0.09 13,159
(35)(0.03)
Money market accounts631,570
1,104
0.69 680,755
642
0.37 (49,185)462
0.32
699,138
2,094
1.19 631,570
1,104
0.69 67,568
990
0.50
Savings accounts375,528
60
0.06 366,177
56
0.06 9,351
4

362,142
72
0.08 375,528
60
0.06 (13,386)12
0.02
Time deposits (in-market)706,726
2,806
1.58 565,402
1,566
1.10 141,324
1,240
0.48
800,571
4,181
2.07 706,726
2,806
1.58 93,845
1,375
0.49
Total interest-bearing in-market deposits2,306,599
4,539
0.78 2,100,852
2,362
0.45 205,747
2,177
0.33
2,471,133
7,065
1.13 2,306,599
4,539
0.78 164,534
2,526
0.35
Wholesale brokered time deposits438,604
2,007
1.82 404,953
1,473
1.44 33,651
534
0.38
475,026
2,727
2.28 438,604
2,007
1.82 36,422
720
0.46
Total interest-bearing deposits2,745,203
6,546
0.95 2,505,805
3,835
0.61 239,398
2,711
0.34
2,946,159
9,792
1.32 2,745,203
6,546
0.95 200,956
3,246
0.37
FHLB advances852,904
4,937
2.30 837,300
3,816
1.81 15,604
1,121
0.49
980,091
6,512
2.64 852,904
4,937
2.30 127,187
1,575
0.34
Junior subordinated debentures22,681
232
4.06 22,681
159
2.78 
73
1.28
22,681
245
4.29 22,681
232
4.06 
13
0.23
Other

 1

 (1)

Total interest-bearing liabilities3,620,788
11,715
1.28 3,365,787
7,810
0.92 255,001
3,905
0.36
3,948,931
16,549
1.66 3,620,788
11,715
1.28 328,143
4,834
0.38
Noninterest-bearing demand deposits612,597
  567,737
  44,860
  626,408
  612,597
  13,811
  
Other liabilities65,207
  55,150
  10,057
  115,480
  65,207
  50,273
  
Shareholders’ equity426,306
  412,862
  13,444
  490,197
  426,306
  63,891
  
Total liabilities and shareholders’ equity
$4,724,898
  
$4,401,536
  
$323,362
  
$5,181,016
  
$4,724,898
  
$456,118
  
Net interest income (FTE) 
$33,784
  
$30,638
  
$3,146
  
$33,303
  
$33,784
  
($481) 
Interest rate spread 2.75  2.75  
 2.41  2.75  (0.34)
Net interest margin 2.99  2.93  0.06
 2.72  2.99  (0.27)






- 49-51-





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 30,20192018Change
Commercial loans
$323

$333

($10)
Nontaxable debt securities2
2

Total
$325

$335

($10)
            
Nine months ended September 30,2019 2018 Change
(Dollars in thousands)Average BalanceInterestYield/ Rate Average BalanceInterestYield/ Rate Average BalanceInterestYield/ 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
Mortgage loans held for sale28,379
878
4.14 29,770
923
4.15 (1,391)(45)(0.01)
Taxable debt securities972,511
20,550
2.83 817,274
15,859
2.59 155,237
4,691
0.24
Nontaxable debt securities602
24
5.33 1,743
65
4.99 (1,141)(41)0.34
Total debt securities973,113
20,574
2.83 819,017
15,924
2.60 154,096
4,650
0.23
FHLB stock48,185
2,162
6.00 43,149
1,700
5.27 5,036
462
0.73
Commercial real estate1,461,736
51,702
4.73 1,225,875
39,740
4.33 235,861
11,962
0.40
Commercial & industrial603,143
21,972
4.87 624,563
22,113
4.73 (21,420)(141)0.14
Total commercial2,064,879
73,674
4.77 1,850,438
61,853
4.47 214,441
11,821
0.30
Residential real estate1,358,606
41,099
4.04 1,278,662
37,717
3.94 79,944
3,382
0.10
Home equity284,657
10,757
5.05 285,143
9,908
4.65 (486)849
0.40
Other24,017
887
4.94 29,328
1,073
4.89 (5,311)(186)0.05
Total consumer308,674
11,644
5.04 314,471
10,981
4.67 (5,797)663
0.37
Total loans3,732,159
126,417
4.53 3,443,571
110,551
4.29 288,588
15,866
0.24
Total interest-earning assets4,857,169
151,263
4.16 4,389,335
129,821
3.95 467,834
21,442
0.21
Noninterest-earning assets292,702
   239,187
   53,515
  
Total assets
$5,149,871
   
$4,628,522
   
$521,349
  
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
NOW accounts462,856
228
0.07 456,083
215
0.06 6,773
13
0.01
Money market accounts668,330
5,534
1.11 671,135
2,944
0.59 (2,805)2,590
0.52
Savings accounts365,911
204
0.07 373,105
173
0.06 (7,194)31
0.01
Time deposits (in-market)795,559
11,900
2.00 662,850
6,890
1.39 132,709
5,010
0.61
Total interest-bearing in-market deposits2,436,962
19,825
1.09 2,263,817
10,817
0.64 173,145
9,008
0.45
Wholesale brokered time deposits485,405
8,132
2.24 426,096
5,405
1.70 59,309
2,727
0.54
Total interest-bearing deposits2,922,367
27,957
1.28 2,689,913
16,222
0.81 232,454
11,735
0.47
FHLB advances1,019,172
20,153
2.64 846,359
13,627
2.15 172,813
6,526
0.49
Junior subordinated debentures22,681
750
4.42 22,681
629
3.71 
121
0.71
Total interest-bearing liabilities3,964,220
48,860
1.65 3,558,953
30,478
1.14 405,267
18,382
0.51
Noninterest-bearing demand deposits613,917
   590,573
   23,344
  
Other liabilities98,012
   61,042
   36,970
  
Shareholders’ equity473,722
   417,954
   55,768
  
Total liabilities and shareholders’ equity
$5,149,871
   
$4,628,522
   
$521,349
  
Net interest income (FTE) $102,403   
$99,343
   
$3,060
 
Interest rate spread  2.51   2.81  

(0.30)
Net interest margin  2.82   3.03  

(0.21)
(Dollars in thousands)   
Three months ended September 30,2018
2017
Change
Commercial loans
$333

$555

($222)
Nontaxable debt securities2
24
(22)
Total
$335

$579

($244)

            
Nine months ended September 30,2018 2017 Change
(Dollars in thousands)Average BalanceInterestYield/ Rate Average BalanceInterestYield/ Rate Average BalanceInterestYield/ Rate
Assets:           
Cash, federal funds sold and short-term investments
$53,828

$723
1.80 
$59,357

$457
1.03 
($5,529)
$266
0.77
Mortgage loans held for sale29,770
923
4.15 25,090
734
3.91 4,680
189
0.24
Taxable debt securities817,274
15,859
2.59 760,308
14,208
2.50 56,966
1,651
0.09
Nontaxable debt securities1,743
65
4.99 7,602
347
6.10 (5,859)(282)(1.11)
Total debt securities819,017
15,924
2.60 767,910
14,555
2.53 51,107
1,369
0.07
FHLB stock43,149
1,700
5.27 44,015
1,293
3.93 (866)407
1.34
Commercial real estate1,225,875
39,740
4.33 1,175,302
32,824
3.73 50,573
6,916
0.60
Commercial & industrial624,563
22,113
4.73 581,514
19,448
4.47 43,049
2,665
0.26
Total commercial1,850,438
61,853
4.47 1,756,816
52,272
3.98 93,622
9,581
0.49
Residential real estate1,278,662
37,717
3.94 1,150,473
32,763
3.81 128,189
4,954
0.13
Home equity285,143
9,908
4.65 297,079
9,120
4.10 (11,936)788
0.55
Other29,328
1,073
4.89 35,166
1,271
4.83 (5,838)(198)0.06
Total consumer314,471
10,981
4.67 332,245
10,391
4.18 (17,774)590
0.49
Total loans3,443,571
110,551
4.29 3,239,534
95,426
3.94 204,037
15,125
0.35
Total interest-earning assets4,389,335
129,821
3.95 4,135,906
112,465
3.64 253,429
17,356
0.31
Noninterest-earning assets239,187
   238,050
   1,137
  
Total assets
$4,628,522
   
$4,373,956
   
$254,566
  
Liabilities and Shareholders’ Equity:           
Interest-bearing demand deposits
$100,644

$595
0.79 
$52,564

$37
0.09 
$48,080

$558
0.70
NOW accounts456,083
215
0.06 433,435
176
0.05 22,648
39
0.01
Money market accounts671,135
2,944
0.59 715,386
1,881
0.35 (44,251)1,063
0.24
Savings accounts373,105
173
0.06 361,904
158
0.06 11,201
15

Time deposits (in-market)662,850
6,890
1.39 559,938
4,443
1.06 102,912
2,447
0.33
Total interest-bearing in-market deposits2,263,817
10,817
0.64 2,123,227
6,695
0.42 140,590
4,122
0.22
Wholesale brokered time deposits426,096
5,405
1.70 398,349
4,233
1.42 27,747
1,172
0.28
Total interest-bearing deposits2,689,913
16,222
0.81 2,521,576
10,928
0.58 168,337
5,294
0.23
FHLB advances846,359
13,627
2.15 828,775
10,669
1.72 17,584
2,958
0.43
Junior subordinated debentures22,681
629
3.71 22,681
446
2.63 
183
1.08
Other

 13
1
10.28 (13)(1)(10.28)
Total interest-bearing liabilities3,558,953
30,478
1.14 3,373,045
22,044
0.87 185,908
8,434
0.27
Noninterest-bearing demand deposits590,573
   546,393
   44,180
  
Other liabilities61,042
   49,721
   11,321
  
Shareholders’ equity417,954
   404,797
   13,157
  
Total liabilities and shareholders’ equity
$4,628,522
   
$4,373,956
   
$254,566
  
Net interest income (FTE) 
$99,343
   
$90,421
   
$8,922
 
Interest rate spread  2.81   2.77  

0.04
Net interest margin  3.03   2.92  

0.11



- 50-52-





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 30,2018
2017
Change
20192018Change
Commercial loans
$918

$1,657

($739)
$977

$918

$59
Nontaxable debt securities13
122
(109)6
13
(7)
Total
$931

$1,779

($848)
$983

$931

$52


Net Interest Income
Net interest income continues to be the primary source of our operating income.  Net interest income for the three and nine months ended September 30, 20182019 totaled $33.0 million and $101.4 million, respectively, compared to $33.4 million and $98.4 million, respectively, compared to $30.1 million and $88.6 million, respectively, for the same periods in 2017.2018. 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.  IncomePrepayment penalty income associated with loan payoffs and prepayment penalties 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 ismay be impacted by the levelamount of prepayment penalty income associated with loan payoffs and prepayment penalties recognized in each period. For the three and nine months ended September 30, 2018,2019, prepayment penalty income associated with loan payoffs amounted to $130 thousand and prepayment penalties amounted$215 thousand, respectively, compared to $173 thousand and $703 thousand, respectively, compared to $131 thousand and $815 thousand, respectively, for the same periods in 2017.2018.


FTE net interest income for the three and nine months ended September 30, 20182019 amounted to $33.8$33.3 million and $99.3$102.4 million, respectively, down by $481 thousand and up by $3.1 million and $8.9 million, respectively, from the same periods in 2017. The net interest margin was 2.99% and 3.03%, respectively, for the three and nine months ended September 30, 2018, compared to 2.93% and 2.92%, respectively, for the same periods a year ago.2018. Excluding the impact of prepayment penalty income associated with loan payoffs and prepayment penalties from each period, net interest income for the three and nine months ended September 30, 20182019 decreased by $438 thousand and increased by $3.1 million and $9.0$3.5 million, respectively, from the same periods in 2017. Excluding2018. The decline in third quarter 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 impactincrease in net interest income reflected growth in average loans and securities and relatively higher market interest rates on variable rate loans, partially offset by higher cost of income associated with loan payoffsfunds and prepayment penalties from each period, thegrowth in higher cost time deposits.

The net interest margin was 2.98%2.72% and 3.00%2.82%, respectively, for the three and nine months ended September 30, 2018,2019, compared to 2.91%2.99% and 2.90%3.03%, respectively, for the same periods in 2017. Whilea year ago. Excluding the impact of prepayment penalty income associated with loan payoffs from each period, the net interest margin benefited from the rise in market interest rates on variable rate loanswas 2.71% and growth in lower-cost in-market deposit balances, it was also impacted by a higher cost of funds.

Total average loans2.81%, respectively, for the three and nine months ended September 30, 2018 increased by $255.1 million2019, compared to 2.98% and $204.0 million,3.00%, respectively, from the average balances for the comparable 2017same periods with growth in 2018. The decrease in the net interest margin was driven by higher cost of funds, partially offset by relatively higher market interest rates on variable rate loans.

Total average residential real estate and commercial loan balances. The yield on total loanssecurities for the three and nine months ended September 30, 2018 was 4.38% and 4.29%, respectively, compared to 3.98% and 3.94%, respectively, for the same periods in 2017. Excluding the impact of income associated with loan payoffs and prepayment penalties from each period, the yield on total loans for the three and nine months ended September 30, 2018 was 4.36% and 4.26%, respectively, compared to 3.97% and 3.90%, respectively, for the same periods in 2017. Yields on LIBOR-based and prime-based loans reflected the increases in market rates of interest.

Total average securities for the three and nine months ended September 30, 20182019 increased by $70.2$94.7 million and $51.1$154.1 million, respectively, from the average balances for the same periods a year earlier. The FTE rate of return on the securities portfolio for the three and nine months ended September 30, 20182019 was 2.59%2.72% and 2.60%2.83%, respectively, compared to 2.48%2.59% and 2.53%2.60%, respectively, for the same periods in 2017.2018, reflecting purchases of relatively higher yielding debt securities in the fourth quarter of 2018 and first half of 2019.


In futureTotal average loan balances for the three and nine months ended September 30, 2019 increased by $237.6 million and $288.6 million, respectively, from the average loan balances for the comparable 2018 periods, yieldsprimarily due to growth in average commercial real estate and residential real estate loan balances. The yield on total loans for the three and securities will be affected bynine months ended September 30, 2019 was 4.42% and 4.53%, compared to 4.38% and 4.29%, respectively, for the amountsame periods in 2018. Yields on LIBOR-based and composition of loan growth and additions to the securities portfolio, the runoff of existing portfolio balances and the level ofprime-based loans reflected relatively higher market interest rates.


The average balance of FHLB advances for the three and nine months ended September 30, 20182019 increased by $15.6$127.2 million and $17.6$172.8 million, respectively, compared to the average balances for the same periods in 2017.2018 to fund loan growth and purchases of securities. The average rate paid on such


- 51-



Management's Discussion and Analysis

advances for both the three and nine months ended September 30, 20182019 was 2.64%, compared to 2.30% and 2.15%, respectively, compared to 1.81% and 1.72%, respectively, for the same periods in 2017,2018, due to relatively higher rates on short-term advances.


Total average interest-bearing deposits for the three

- 53-



Management's Discussion and nine months ended September 30, 2018 increased by $239.4 million and $168.3 million, respectively, from the average balances for the same periods in 2017. Analysis


Included in total average interest-bearing deposits were of out-of-market wholesale brokered time deposits, which increased by $33.7$36.4 million and $27.7$59.3 million, respectively, from the same periods in 2017. Excluding2018. The average rate paid on wholesale brokered time deposits average in-market interest-bearing deposits for the three and nine months ended September 30, 2019 was 2.28% and 2.24%, respectively, compared to 1.82% and 1.70%, respectively, for the same periods in 2018, as maturities were replaced with wholesale brokered time deposits with higher rates.

Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, for the three and nine months ended September 30, 2019 increased by $205.7$164.5 million and $140.6$173.1 million, respectively, from the average balances for the same periods in 2017, with2018. The year-over-year increase in average in-market interest bearing deposits was largely due to growth in time deposits and demand deposits, partially offset by a decline in money market accounts.deposits. The average rate paid on in-market interest-bearing deposits for the three and nine months ended September 30, 20182019 increased by 3335 basis points and 2245 basis points, respectively, compared to the same periods in 2017,2018, largely due to higher rates paid on promotional time deposits, as well as competitive pricing on money market accounts and demand deposits. See additional disclosure under the caption “Sources of Funds” regarding a program implemented in June 2018 that transitioned wealth management client assets, previously held in outside accounts, into insured interest-bearing demand deposits on Washington Trust's balance sheet.deposits.


The average balance of noninterest-bearing demand deposits for the three and nine months ended September 30, 20182019 increased by $44.9$13.8 million and $44.2$23.3 million, respectively, from the average balances for the same periods in 2017.2018.






- 52-54-





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, 2018 vs. 2017 Nine Months Ended September 30, 2018 vs. 2017Three Months Ended September 30, 2019 vs. 2018 Nine Months Ended September 30, 2019 vs. 2018
Change Due to Change Due toChange Due to Change Due to
VolumeRateNet Change VolumeRateNet ChangeVolumeRateNet Change VolumeRateNet Change
Interest on Interest-Earning Assets:      
Cash, federal funds sold and other short-term investments
($33)
$97

$64
 
($46)
$312

$266

$225

$7

$232
 
$330

$179

$509
Mortgage loans held for sale62
33
95
 142
47
189
55
(29)26
 (43)(2)(45)
Taxable debt securities473
255
728
 1,115
536
1,651
652
283
935
 3,153
1,538
4,691
Nontaxable debt securities(42)(12)(54) (230)(52)(282)(17)9
(8) (45)4
(41)
Total securities431
243
674
 885
484
1,369
635
292
927
 3,108
1,542
4,650
FHLB stock12
155
167
 (26)433
407
41
72
113
 211
251
462
Commercial real estate769
1,927
2,696
 1,460
5,456
6,916
2,970
413
3,383
 8,082
3,880
11,962
Commercial & industrial557
479
1,036
 1,493
1,172
2,665
(679)(95)(774) (778)637
(141)
Total commercial1,326
2,406
3,732
 2,953
6,628
9,581
2,291
318
2,609
 7,304
4,517
11,821
Residential real estate1,488
622
2,110
 3,793
1,161
4,954
366

366
 2,405
977
3,382
Home equity(135)408
273
 (382)1,170
788
83
63
146
 (17)866
849
Other(71)7
(64) (214)16
(198)(67)1
(66) (197)11
(186)
Total consumer(206)415
209
 (596)1,186
590
16
64
80
 (214)877
663
Total loans2,608
3,443
6,051
 6,150
8,975
15,125
2,673
382
3,055
 9,495
6,371
15,866
Total interest income3,080
3,971
7,051
 7,105
10,251
17,356
3,629
724
4,353
 13,101
8,341
21,442
Interest on Interest-Bearing Liabilities:      
Interest-bearing demand deposits134
301
435
 59
499
558
12
172
184
 341
1,023
1,364
NOW accounts2
34
36
 8
31
39
3
(38)(35) 1
12
13
Money market accounts(49)511
462
 (125)1,188
1,063
127
863
990
 (12)2,602
2,590
Savings accounts4

4
 15

15
(2)14
12
 (3)34
31
Time deposits (in-market)452
788
1,240
 908
1,539
2,447
412
963
1,375
 1,570
3,440
5,010
Total interest-bearing in-market deposits543
1,634
2,177
 865
3,257
4,122
552
1,974
2,526
 1,897
7,111
9,008
Wholesale brokered time deposits128
406
534
 306
866
1,172
178
542
720
 831
1,896
2,727
Total interest-bearing deposits671
2,040
2,711
 1,171
4,123
5,294
730
2,516
3,246
 2,728
9,007
11,735
FHLB advances72
1,049
1,121
 231
2,727
2,958
791
784
1,575
 3,084
3,442
6,526
Junior subordinated debentures
73
73
 
183
183

13
13
 
121
121
Other


 (1)
(1)
Total interest expense743
3,162
3,905
 1,401
7,033
8,434
1,521
3,313
4,834
 5,812
12,570
18,382
Net interest income (FTE)
$2,337

$809

$3,146
 
$5,704

$3,218

$8,922

$2,108

($2,589)
($481) 
$7,289

($4,229)
$3,060


Provision and Allowance for Loan Losses
The provision for loan losses is based on management’s periodic assessment of the adequacy of the allowance for loan losses which, in turn, is based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics; the levellevels of nonperforming loans, past due loans and net charge-offs, both current and historic; local economic and credit conditions; the direction of real estate values; and regulatory guidelines.  The provision for loan losses is charged against earnings in order to maintain an allowance for loan losses that reflects management’s best estimate of probable losses inherent in the loan portfolio at the balance sheet date.


Loan loss provisions of $400 thousand and $1.6 million, respectively, were charged to earnings totaledfor 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, compared to $1.3 million and $2.4 million, respectively, for the three and nine months ended


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Management's Discussion and Analysis

September 30, 2017.2018. 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, changes inmetrics.



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Management's Discussion and Analysis

Net charge-offs totaled $801 thousand and $1.7 million, respectively, for the loan portfolio and loss exposure allocations.

For the three and nine months ended September 30, 2018,2019. This compared to net charge-offs totaledof $15 thousand and $729 thousand, respectively, compared to net charge-offs of $654 thousand and $1.1 million, respectively, for the three and nine months ended September 30, 2017.same periods in 2018.


The allowance for loan losses was $26.5$27.0 million, or 0.75%0.71% of total loans, at September 30, 2018,2019, compared to $26.5$27.1 million, or 0.79%0.74% of total loans, at December 31, 2017.2018. See additional discussion under the caption “Asset Quality” for further information on the allowance for loan losses.


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 MonthsThree Months Nine Months
    Change     Change    Change     Change
Periods ended September 30,2018 2017 $ % 2018 2017 $ %2019 2018 $ % 2019 2018 $ %
Noninterest income:                              
Wealth management revenues
$9,454
 
$10,013
 
($559) (6%) 
$29,329
 
$29,432
 
($103)  %
$9,153
 
$9,454
 
($301) (3%) 
$27,954
 
$29,329
 
($1,375) (5)%
Mortgage banking revenues2,624
 3,036
 (412) (14) 8,403
 8,295
 108
 1
4,840
 2,624
 2,216
 84
 11,126
 8,403
 2,723
 32
Card interchange fees1,099
 983
 116
 12
 3,114
 2,791
 323
 12
Service charges on deposit accounts885
 942
 (57) (6) 2,651
 2,726
 (75) (3)939
 885
 54
 6
 2,743
 2,651
 92
 3
Card interchange fees983
 894
 89
 10
 2,791
 2,598
 193
 7
Loan related derivative income1,407
 278
 1,129
 406
 2,877
 1,087
 1,790
 165
Income from bank-owned life insurance572
 546
 26
 5
 1,624
 1,624
 
 
569
 572
 (3) (1) 1,784
 1,624
 160
 10
Loan related derivative income278
 1,452
 (1,174) (81) 1,087
 2,744
 (1,657) (60)
Net realized gains on securities
 
 
 100
 (80) 
 (80) 100
Other income419
 400
 19
 5
 1,066
 1,180
 (114) (10)335
 419
 (84) (20) 944
 1,066
 (122) (11)
Total noninterest income
$15,215
 
$17,283
 
($2,068) (12)% 
$46,951
 
$48,599
 
($1,648) (3)%
$18,342
 
$15,215
 
$3,127
 21 % 
$50,462
 
$46,951
 
$3,511
 7 %


Noninterest Income Analysis
Revenue from wealth management services is our largest source of noninterest income.income, representing 55% of total noninterest income for the nine months ended September 30, 2019, compared to 62% for the same period in 2018. A substantial portion of wealth management revenues is largely 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 primarily 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.


The categories of wealth management revenues are shown in the following table:
(Dollars in thousands)Three Months Nine MonthsThree Months Nine Months
    Change     Change    Change     Change
Periods ended September 30,2018 2017 $ % 2018 2017 $ %2019 2018 $ % 2019 2018 $ %
Wealth management revenues:                              
Trust and investment management fees
$9,322
 
$9,101
 
$221
 2 % 
$28,413
 
$26,400
 
$2,013
 8 %
Mutual fund fees
 690
 (690) (100) 
 2,039
 (2,039) (100)
Asset-based revenues9,322
 9,791
 (469) (5) 28,413
 28,439
 (26) 

$9,013
 
$9,322
 
($309) (3)% 27,075
 28,413
 (1,338) (5)
Transaction-based revenues132
 222
 (90) (41) 916
 993
 (77) (8)140
 132
 8
 6
 879
 916
 (37) (4)
Total wealth management revenues
$9,454
 
$10,013
 
($559) (6)% 
$29,329
 
$29,432
 
($103)  %
$9,153
 
$9,454
 
($301) (3)% 
$27,954
 
$29,329
 
($1,375) (5)%


Wealth management revenues for the three and nine months ended September 30, 20182019 decreased by $559$301 thousand and $103 thousand,$1.4 million, respectively, from the comparable periods in 2017, reflecting a higher level of trust and investment management fees and2018, due to a decline in mutual fund fees.asset-based revenues.






- 54-56-





Management's Discussion and Analysis

Trust and investment management fee income benefited from financial market appreciation, as the average balance of assets under administration for the nine months ended September 30, 2018 amounted to $6.5 billion, up by 2% from the comparable 2017 period. Trust and investment management fee income was also positively impacted by a fee increase on a portion of our wealth management business that went effective at the beginning of 2018. However, this revenue source was adversely impacted by net client asset outflows of $586.0 million in the first nine months of 2018. Approximately 90% of these outflows were associated with the loss of certain client-facing personnel in the latter portion of the first quarter of 2018.

The decline in mutual fund fees noted in the above table was attributable to a change in 2017 in the business activities of our Weston Financial Group, Inc. (“Weston Financial”) and WSC subsidiaries. Prior to September 30, 2017, Weston Financial, a registered investment adviser subsidiary of the Bank, served as the investment adviser to a group of mutual funds. WSC, a broker-dealer subsidiary of the Bancorp, acted as the underwriter and principal distributor to these mutual funds. In 2017, Weston Financial concluded that the continued operation of the mutual funds was not in the best interest of its shareholders and recommended the dissolution of the mutual funds to its board of trustees. In the third quarter of 2017, the mutual funds were dissolved and liquidated pursuant to an Agreement and Plan of Dissolution and Liquidation approved by the shareholders of the mutual funds in August 2017. The dissolution of the mutual funds did not significantly impact the amount of Weston Financial’s assets under management.


The following table presents the changes in wealth management assets under administration:
(Dollars in thousands)Three Months Nine MonthsThree Months Nine Months
Periods ended September 30,2018 2017 2018 20172019 2018 2019 2018
Wealth management assets under administration:              
Balance at the beginning of period
$6,220,155
 
$6,403,501
 
$6,714,637
 
$6,063,293

$6,478,890
 
$6,220,155
 
$5,910,814
 
$6,714,637
Net investment (depreciation) appreciation & income232,245
 270,549
 333,671
 653,896
Net investment appreciation & income66,514
 232,245
 809,060
 333,671
Net client asset flows9,940
 (86,151) (585,968) (129,290)(419,077) 9,940
 (593,547) (585,968)
Balance at the end of period
$6,462,340
 
$6,587,899
 
$6,462,340
 
$6,587,899

$6,126,327
 
$6,462,340
 
$6,126,327
 
$6,462,340


AssetsWealth management assets under administration stood at $6.5were $6.1 billion at September 30, 2018,2019, down by $125.6$336.0 million, or 2%5%, from a year ago,ago. Wealth management assets and downrelated asset-based revenues were adversely impacted by $252.3 million, or 4%, from December 31, 2017. The declinenet client outflows largely associated with the departures of certain client-facing personnel in the first quarter of 2018 and two senior counselors at the end of period balancethe second quarter of wealth management assets from December 31, 2017 was largely due to net client asset outflows as further described above.2019.


Mortgage banking revenues represented 22% of total noninterest income for the nine months ended September 30, 2019, compared to 18% for the same period in 2018. 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 MonthsThree Months Nine Months
  Change   Change  Change   Change
Periods ended September 30,20182017 $% 20182017 $%20192018 $% 20192018 $%
Mortgage banking revenues:                  
Gains and commissions on loan sales (1)
$2,485

$2,952
 
($467)(16)% 
$7,950

$8,004
 
($54)(1)%
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)139
84
 55
65
 453
291
 162
56
88
139
 (51)(37) 377
453
 (76)(17)
Total mortgage banking revenues
$2,624

$3,036
 
($412)(14)% 
$8,403

$8,295
 
$108
1 %
$4,840

$2,624
 
$2,216
84 % 
$11,126

$8,403
 
$2,723
32 %
                  
Loans sold to the secondary market(3)
$132,146

$147,331
 
($15,185)(10)% 
$334,677

$391,687
 
($57,010)(15)%
$184,976

$132,116
 
$52,860
40 % 
$414,469

$334,677
 
$79,792
24 %
(1)Includes gains on loan sales, commissionscommission income on loans originated for others, servicing right gains, fair value adjustments on mortgage loans held for sale, and fair value adjustments and gains on forward loan commitments.
adjustments and gains on forward loan commitments.
(2)Represents loan servicing fee income, net of servicing right amortization and valuation adjustments.
(3)Includes brokered loans (loans originated for others).


For the three and nine months ended September 30, 2018,2019, mortgage banking revenues were down by $412 thousand and up by $108 thousand,$2.2 million and $2.7 million, respectively, fromcompared to the same periods in 2017.2018. The changeincrease in mortgage banking revenues reflected a lowerhigher sales volume ofand an increase in the sales yield on loans sold in 2018. Mortgage banking revenuesthe secondary market. Also included was also impacted by the changean increase in fair value adjustments on mortgage loan


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Management's Discussion and Analysis

commitments and loans held for sale, reflecting growth in the mortgage pipeline and a higher sales yield on loans sold to the secondary market. The change in fair value adjustments and the increase in sales yield were associated with the commencement of a portfolio-based economic hedging program that began at the beginning of 2018. Prior to 2018, Washington Trust economically hedged mortgagecorresponding loan commitments only on a loan by loan basis. The change in mortgage banking revenues from the 2017 periods also reflected an increase in loan servicing fee income largely due to a higher balance of residential real estate loans serviced for others in 2018.commitment balances.


Loan related derivative income for the three and nine months ended September 30, 2018 decreased2019 increased by $1.2$1.1 million and $1.7$1.8 million, respectively, from the comparable periods in 2017. The decline was largely2018, due to relatively lessa higher volume reflecting a lower level of commercial loan borrower demand for interest rate swap transactions.




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Management's Discussion and Analysis

Noninterest Expense
The following table presents noninterest expense comparisons:
(Dollars in thousands)Three Months Nine MonthsThree Months Nine Months
    Change     Change    Change     Change
Periods ended September 30,2018 2017 $ % 2018 2017 $ %2019 2018 $ % 2019 2018 $ %
Noninterest expenses:               
Noninterest expense:               
Salaries and employee benefits
$17,283
 
$17,362
 
($79)  % 
$52,359
 
$51,697
 
$662
 1 %
$18,332
 
$17,283
 
$1,049
 6 % 
$54,387
 
$52,359
 
$2,028
 4 %
Outsourced services1,951
 1,793
 158
 9
 6,174
 4,960
 1,214
 24
2,722
 1,951
 771
 40
 7,846
 6,174
 1,672
 27
Net occupancy2,013
 1,928
 85
 4
 5,945
 5,662
 283
 5
1,933
 2,013
 (80) (4) 5,835
 5,945
 (110) (2)
Equipment1,080
 1,380
 (300) (22) 3,329
 4,160
 (831) (20)1,046
 1,080
 (34) (3) 3,085
 3,329
 (244) (7)
Legal, audit and professional fees559
 534
 25
 5
 1,840
 1,732
 108
 6
645
 559
 86
 15
 1,843
 1,840
 3
 
FDIC deposit insurance costs410
 308
 102
 33
 1,236
 1,258
 (22) (2)(460) 410
 (870) (212) 509
 1,236
 (727) (59)
Advertising and promotion440
 416
 24
 6
 946
 1,015
 (69) (7)368
 440
 (72) (16) 1,132
 946
 186
 20
Amortization of intangibles245
 253
 (8) (3) 740
 787
 (47) (6)236
 245
 (9) (4) 714
 740
 (26) (4)
Change in fair value of contingent consideration
 
 
 
 
 (310) 310
 100
Other2,081
 2,780
 (699) (25) 6,911
 7,385
 (474) (6)2,048
 2,081
 (33) (2) 6,634
 6,911
 (277) (4)
Total noninterest expense
$26,062
 
$26,754
 
($692) (3)% 
$79,480
 
$78,346
 
$1,134
 1 %
$26,870
 
$26,062
 
$808
 3 % 
$81,985
 
$79,480
 
$2,505
 3 %


Noninterest Expense Analysis
Salaries and employee benefits expense for the three and nine months ended September 30, 2018 decreased by $79 thousand and2019 increased by $662 thousand,$1.0 million and $2.0 million, respectively, compared to the same periods in 2017. The year-to-date increase reflected2018, largely reflecting annual merit increases and special employeevolume-related increases in mortgage banking commission expense, partially offset by lower wealth management compensation enhancements made in 2018. As previously announced, the reduction of the federal corporate income tax rate by the Tax Act provided Washington Trustcosts associated with the opportunity to further recognizedeparture of personnel. Year-to-date salaries and invest in our employees with special compensation enhancements. In the first quarter of 2018,employee benefits expense was also impacted by one-time cash incentive bonuses of approximately $450 thousand that were expensed and paid to employees below a certain compensation threshold. In additionrecognized in the first quarter of 2018, we implemented a $1.00 per hour salary increase for employees below a certain compensation level. The change2018. There were no such one-time bonuses recognized in salaries and benefits expense also included a lower level of commission expense in the mortgage banking and wealth management business lines in 2018.2019.


Outsourced services expense for the three and nine months ended September 30, 20182019 increased by $158$771 thousand and $1.2$1.7 million, respectively, compared to the same periods in 2017.2018. Equipment expense for the three and nine months endedSeptember 30, 20182019 decreased by $300$34 thousand and $831$244 thousand, respectively, from the same periods a year ago. Both the increase in outsourced services and the decline in equipment expense reflects thereflected changes to and expansion of services provided by third party vendors, including software application processing and operational services, provided byas well as volume-related increases in third party vendors. Also, in the third quarter of 2018, a one-time third party vendor credit of $300 thousand was recognized as a reduction to outsourced services expense.processing costs.


During the nine months ended September 30, 2017, the Corporation recorded a net reduction to noninterest expenses of $310 thousand reflecting the change in fair value of a contingent consideration liability. As part of the consideration to acquire Halsey Associates, Inc. (“Halsey”), a contingent consideration liability was initially recorded at fair value in August 2015 representing the estimated present value of future earn-outs to be paid based on the future revenue growth of Halsey during the 5-year period following the acquisition. One of the two earn-out periods associated with this contingent consideration liability ended December 31, 2017.


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Management's Discussion and Analysis


Other expensesFDIC deposit insurance costs for the three and nine months endedSeptember 30, 2018 decreased by $699 thousand and $474 thousand, respectively, from the same periods in 2017. The year-over-year comparisons of other expenses were impacted by the following:
In the second quarter of 2017, a goodwill impairment charge of $150 thousand was recognized on WSC, a small broker-dealer subsidiary.
In the third quarter of 2017, a charge of approximately $570 thousand was recognized in connection with a claim against another bank related to a matter involving one of the Bank’s customers. In the fourth quarter of 2017, Washington Trust received a settlement totaling $325 thousand from the other bank associated with this incident. The receipt of the settlement was recognized in the fourth quarter of 2017, as a reduction in other expenses.
For the nine months endedSeptember 30, 2018, software system implementation costs of $796 thousand were recognized. There were no such costs recognized for the three months ended September 30, 2018. For the three and nine months ended September 30, 2017, software system implementation costs of $2422019 decreased by $870 thousand and $458$727 thousand, respectively, were recognized. The 2018 amounts were primarily associated with our new wealth management and trust accounting system, which was completed in April 2018. The 2017 amounts were also associated with the new wealth management and trust accounting system, as well as the migration of our loan and deposit accounting system from an in-house environmentcompared to an externally hosted environment that was completed in October 2017.
Excluding the impact of the items mentioned above, other expenses for the three and nine months endedSeptember 30, 2018 increased by $113 thousand and decreased by $92 thousand, respectively, from the same periods a year ago.in 2018, largely due to approximately $900 thousand of FDIC assessment credits recognized in the third quarter of 2019.


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 MonthsThree Months Nine Months
Periods ended September 30,20182017 2018201720192018 20192018
Income tax expense
$4,741

$6,326
 
$13,737

$18,552

$5,236

$4,741
 
$14,740

$13,737
Effective income tax rate21.3%32.8% 21.1%32.8%21.8%21.3% 21.6%21.1%


The decline in income tax expense and in the effective tax rates from the prior year was due to the December 2017 enactment of the Tax Act, which included the reduction of the federal corporate tax rate from 35% to 21% effective January 1, 2018.

The effective income tax rates for the three and nine months endedSeptember 30, 20182019 and 20172018 differed from the federal ratesrate of 21% in 2018 and 35% in 2017, primarily due to state income tax expense, offset by the benefits of tax-exempt loan and investment security income, income from BOLI, state income taxes, federal tax credits and the recognition of excess tax benefits associated with the settlement of share-based awards.




- 58-



Management's Discussion and Analysis

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

Segment Reporting
Washington TrustThe 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 1514 to the Unaudited Consolidated Financial Statements for additional disclosure related to business segments.



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Management's Discussion and Analysis


Commercial Banking
The following table presents a summarized statement of operations for the Commercial Banking business segment:
(Dollars in thousands)Three Months Nine MonthsThree Months Nine Months
  Change   Change  Change   Change
Periods ended September 30,20182017 $% 20182017 $%20192018 $% 20192018 $%
Net interest income
$27,036

$24,795
 
$2,241
9% 
$79,656

$72,985
 
$6,671
9%
$28,515

$27,036
 
$1,479
5% 
$83,684

$79,656
 
$4,028
5%
Provision for loan losses350
1,300
 (950)(73) 750
2,400
 (1,650)(69)400
350
 50
14
 1,575
750
 825
110
Net interest income after provision for loan losses26,686
23,495
 3,191
14
 78,906
70,585
 8,321
12
28,115
26,686
 1,429
5
 82,109
78,906
 3,203
4
Noninterest income5,174
6,711
 (1,537)(23) 15,947
17,500
 (1,553)(9)8,607
5,174
 3,433
66
 20,753
15,947
 4,806
30
Noninterest expense16,253
16,480
 (227)(1) 48,502
47,724
 778
2
16,897
16,253
 644
4
 50,661
48,502
 2,159
4
Income before income taxes15,607
13,726
 1,881
14
 46,351
40,361
 5,990
15
19,825
15,607
 4,218
27
 52,201
46,351
 5,850
13
Income tax expense3,344
4,463
 (1,119)(25) 9,834
13,142
 (3,308)(25)4,347
3,344
 1,003
30
 11,371
9,834
 1,537
16
Net income
$12,263

$9,263
 
$3,000
32% 
$36,517

$27,219
 
$9,298
34%
$15,478

$12,263
 
$3,215
26% 
$40,830

$36,517
 
$4,313
12%


Net interest income for the Commercial Banking segment for the three and nine months ended September 30, 2018,2019, increased by $2.2$1.5 million and $6.7$4.0 million, respectively, from the same periods in 2017,2018, largely reflecting growth in loans, which was partially offset by a shift in the mix of deposits to higher cost categories and increases in rates paid on in-market deposits.


Loan loss provisions of $400 thousand and $1.6 million, respectively, were charged to earnings totaledfor 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, compared to $1.3 million and $2.4 million, respectively, for the three and nine months ended September 30, 2017.2018. 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, changes in the loan portfolio and loss exposure allocations.metrics.


Noninterest income derived from the Commercial Banking segment for the three and nine months ended September 30, 20182019 was downup by $1.5$3.4 million and $1.6$4.8 million, respectively, from the comparable periods in 2017.2018. The decreasesincrease largely reflected a lower volume ofhigher mortgage banking revenues and loan related derivative transactions and related income in 2018.income. See additional discussion regarding the changes in mortgage banking revenues under the caption “Noninterest Income.”Income” above.


Commercial Banking noninterest expenses for thethree and nine months ended September 30, 2018 were down by $227 thousand and up by $778 thousand, respectively, from the same periods in 2017. The three and nine months ended September 30, 2017 included a charge of approximately $5702019 were up by $644 thousand classified as otherand $2.2 million, respectively, from the same periods in 2018, reflecting increases in salaries and employee benefits and outsourced services expenses, and discussedpartially offset by lower FDIC deposit insurance costs. See further discussion under the caption “Noninterest Expense” above. Excluding this charge, noninterest expenses for the three



- 59-



Management's Discussion and nine months ended September 30, 2018 for the Commercial Banking segment increased by $343 thousand and $1.3 million, respectively. The year-to-date increase largely reflected increases in salaries and employee benefits costs and outsourced services, partially offset by declines in equipment expense and software system implementation costs.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 MonthsThree Months Nine Months
  Change   Change  Change   Change
Periods ended September 30,2018
2017
 $% 20182017 $%20192018 $% 20192018 $%
Net interest expense
($90)
($48) 
($42)88% 
($225)
($120) 
($105)88%
($114)
($90) 
($24)27% 
($361)
($225) 
($136)60%
Noninterest income9,454
10,013
 (559)(6) 29,329
29,432
 (103)
9,153
9,454
 (301)(3) 27,961
29,329
 (1,368)(5)
Noninterest expense6,565
7,221
 (656)(9) 21,123
21,394
 (271)(1)6,577
6,565
 12

 20,720
21,123
 (403)(2)
Income before income taxes2,799
2,744
 55
2
 7,981
7,918
 63
1
2,462
2,799
 (337)(12) 6,880
7,981
 (1,101)(14)
Income tax expense710
1,092
 (382)(35) 2,008
3,172
 (1,164)(37)646
710
 (64)(9) 1,845
2,008
 (163)(8)
Net income
$2,089

$1,652
 
$437
26% 
$5,973

$4,746
 
$1,227
26%
$1,816

$2,089
 
($273)(13%) 
$5,035

$5,973
 
($938)(16%)




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Management's Discussion and Analysis

For the three and nine months ended September 30, 2018,2019, noninterest income derived from the Wealth Management Services segment decreased by $559$301 thousand and $103 thousand,$1.4 million, respectively, compared to the same periods in 2017.2018. See further discussion of wealth management revenues under the caption “Noninterest Income” above.


For the three and nine months ended September 30, 2018, noninterest expenses for the Wealth Management Services segment decreased by $656 thousand and $271 thousand, respectively, from the same periods in 2017. The noninterest expense comparison for this segment was impacted by the following items:
In the first quarter of 2017, a non-taxable fair value adjustment on a contingent consideration liability of $310 thousand was recognized, which decreased noninterest expenses.
In the second quarter of 2017, a non-taxable goodwill impairment charge of $150 thousand was recognized.
For the nine months ended September 30, 2018, software system implementation costs of $724 thousand were recognized, predominantly in connection with a system that was implemented in April 2018. For the three and nine months ended September 30, 2017 software system implementation costs of $203 thousand and $288 thousand, respectively, were recognized.
In the third quarter of 2018, a one-time third party vendor credit of $300 thousand was recognized as a reduction to outsourced services expense.
Excluding the impact of the items mentioned above, total2019, noninterest expenses for the Wealth Management Services segment for the threeincreased by $12 thousand and nine months ended September 30, 2018 decreased by $153$403 thousand, respectively. The modest increase in third quarter noninterest expenses reflected higher outsourced services and $567 thousand, respectively, fromlegal expenses, offset by lower compensation costs. See further discussion under the same periodscaption “Noninterest Expense” above. The decrease in 2017, largely reflecting lower salaries and benefits costs.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 MonthsThree Months Nine Months
  Change   Change  Change   Change
Periods ended September 30,20182017 $% 20182017 $%20192018 $% 20192018 $%
Net interest income
$6,503

$5,312
 
$1,191
22% 
$18,981

$15,777
 
$3,204
20%
$4,577

$6,503
 
($1,926)(30%) 
$18,097

$18,981
 
($884)(5%)
Noninterest income587
559
 28
5
 1,675
1,667
 8

582
587
 (5)(1) 1,748
1,675
 73
4
Noninterest expense3,244
3,053
 191
6
 9,855
9,228
 627
7
3,396
3,244
 152
5
 10,604
9,855
 749
8
Income before income taxes3,846
2,818
 1,028
36
 10,801
8,216
 2,585
31
1,763
3,846
 (2,083)(54) 9,241
10,801
 (1,560)(14)
Income tax expense687
771
 (84)(11) 1,895
2,238
 (343)(15)243
687
 (444)(65) 1,524
1,895
 (371)(20)
Net income
$3,159

$2,047
 
$1,112
54% 
$8,906

$5,978
 
$2,928
49%
$1,520

$3,159
 
($1,639)(52%) 
$7,717

$8,906
 
($1,189)(13%)


Net interest income for the Corporate unit for the three and nine months ended September 30, 20182019 was updown by $1.2$1.9 million and $3.2 million,$884 thousand, respectively, compared to the same periods in 2017, reflecting2018. Higher wholesale funding costs were partially offset by increased investment income due toon debt securities resulting from growth in the investment securities portfolio and higher dividend income on FHLB stock, partially offset by increased FHLB borrowing costs.stock.


Noninterest expensesexpense for the Corporate unit for the three and nine months endedSeptember 30, 2018 were2019 was up by $191$152 thousand and $627$749 thousand, respectively, from the same periods in 2017, 2018,reflecting increased staffing.increases in staffing levels.






- 59-60-





Management's Discussion and Analysis


Financial Condition
Summary
The following table presents selected financial condition data:
(Dollars in thousands)    Change    Change
September 30,
2018
 December 31,
2017
 $%September 30,
2019
 December 31,
2018
 $%
Cash and due from banks
$141,768
 
$89,923
 
$51,845
58%
Total securities823,510
 793,495
 30,015
4%887,020
 938,225
 (51,205)(5)
Total loans3,556,203
 3,374,071
 182,132
5
3,778,106
 3,680,360
 97,746
3
Allowance for loan losses26,509
 26,488
 21

26,997
 27,072
 (75)
Total assets4,770,672
 4,529,850
 240,822
5
5,198,878
 5,010,766
 188,112
4
Total deposits3,414,348
 3,242,707
 171,641
5
3,586,153
 3,524,048
 62,105
2
FHLB advances828,392
 791,356
 37,036
5
956,786
 950,722
 6,064
1
Total shareholders’ equity427,909
 413,284
 14,625
4
497,825
 448,184
 49,641
11


Total assets stood at $4.8amounted to $5.2 billion at September 30, 2018,2019, up by $240.8$188.1 million, or 4%, from the end of 2017,2018. 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 increase in total assets reflected increases in total loans and the balance of cash and due from banks, partially offset by a decrease in total securities. The increase in cash and due from banks was largely reflecting loan growth and purchasesdue to increased levels of securities. Incash collateral pledged to derivative counterparties. See Note 9 to the nine months ended September 30, 2018, totalUnaudited Consolidated Financial Statements for additional disclosure regarding derivative financial instruments. Total deposits increased by $171.6$62.1 million, or 2%, and FHLB advances increased by $37.0 million.$6.1 million, or 1%, from September 30, 2018. Shareholders’ equity amounted to $427.9$497.8 million at September 30, 2018,2019, up by $14.6$49.6 million from the balance at the end of 2017.December 31, 2018. As of September 30, 2018,2019, 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
Washington Trust’sInvestment 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.  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 doeshas not currently maintainmaintained 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 inactive is based upon the level of trading activity for a particular security class. The Corporation reviews the independent pricing service’s documentation to gain an understanding of the appropriateness of the pricing methodologies. The Corporation 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 periodically performs independent price tests of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of September 30, 20182019 and December 31, 2017,2018, the Corporation did not make any adjustments to the prices provided by the pricing service.



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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 1110 to the Unaudited Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities.



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Management's Discussion and Analysis


Securities Portfolio
The carrying amounts of securities held are as follows:
(Dollars in thousands)September 30, 2018 December 31, 2017September 30, 2019 December 31, 2018
Amount
 %
 Amount
 %
Amount
 %
 Amount
 %
Securities Available for Sale:       
Available for Sale Debt Securities:       
Obligations of U.S. government-sponsored enterprises
$193,473
 24% 
$157,604
 20%
$197,324
 22% 
$242,683
 26%
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises592,862
 72
 590,882
 76
664,905
 76
 660,793
 72
Obligations of states and political subdivisions937
 
 2,359
 

 
 937
 
Individual name issuer trust preferred debt securities12,464
 2
 16,984
 2
12,421
 1
 11,772
 1
Corporate bonds12,911
 2
 13,125
 2
12,370
 1
 11,625
 1
Total securities available for sale
$812,647
 100% 
$780,954
 100%
Total available for sale debt securities
$887,020
 100% 
$927,810
 100%


(Dollars in thousands)September 30, 2018 December 31, 2017September 30, 2019 December 31, 2018
Amount
 %
 Amount
 %
Amount
 %
 Amount
 %
Securities Held to Maturity:       
Held to Maturity Debt Securities:       
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
$10,863
 100% 
$12,541
 100%
$—
 % 
$10,415
 100%
Total securities held to maturity
$10,863
 100% 
$12,541
 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.

The securities portfolio stood at $823.5$887.0 million as of September 30, 2018,2019, or 17% of total assets, compared to $793.5$938.2 million as of December 31, 2017,2018, or 18%19% 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.

Obligations of and mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, totaling $127.8 million with a weighted average yield of 3.34% were purchased during the nine months ended September 30, 2018. These purchases were offset by routine principal pay-downs on mortgage-backed securities, calls and maturities of debt securities and a temporary decline in the fair value of available for sale securities.


As of September 30, 2018 and December 31, 2017,2019, the net unrealized gain position on securities available for sale amounted to $4.2 million compared to a net unrealized loss position of $22.0 million on securities available for sale and held to maturity amounted to $33.7 million and $9.7 million, respectively, andas of December 31, 2018. These net positions included gross unrealized losses of $34.8$5.4 million and $13.5$24.4 million, respectively.  Asrespectively, of as September 30, 2018, the2019 and December 31, 2018. The decrease in gross unrealized losses werein 2019 was primarily concentrated in obligations of and mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises, including mortgage-backed securities, and were primarilylargely attributable to relative changes in interest rates since the time of purchase. Management evaluated the impairment status of these debt securities and does not consider these investments to be other-than-temporarily impaired at September 30, 2018. See Note 4 to the Unaudited Consolidated Financial Statements for additional information.





- 61-62-





Management's Discussion and Analysis


Washington Trust owns trust preferred debt securities of individual name issuers in the financial services industry. The following table presents information concerning these holdings, including credit ratings.  The Corporation’s Investment Policy contains rating standards that specifically reference ratings issued by Moody’s and S&P.

Loans
Individual Name Issuer Trust Preferred Debt Securities
(Dollars in thousands)September 30, 2018 Credit Ratings
         September 30, 2018 Form 10-Q Filing Date
Named Issuer
(parent holding company)
(i) Amortized Cost 
Fair
Value
 Unrealized Losses Moody’s S&P Moody’s S&P
Wells Fargo & Company2 5,176
 4,868
 (308)  A1/Baa1  BBB/BBB-  A1/Baa1  BBB/BBB-
SunTrust Banks, Inc.1 4,182
 3,917
 (265)  Baa2  BB+ (ii)  Baa2  BB+ (ii)
Northern Trust Corporation1 1,990
 1,870
 (120)  A3  BBB+  A3  BBB+
Huntington Bancshares Incorporated1 1,955
 1,809
 (146)  Baa2  BB+ (ii)  Baa2  BB+ (ii)
Totals5 
$13,303
 
$12,464
 
($839)        
(i)Number of separate issuances, including issuances of acquired institutions.
(ii)Rating is below investment grade.

The Corporation’s evaluation of the impairment status of individual name trust preferred securities includes various considerations in additionTotal loans amounted to the degree of impairment and the duration of impairment.  We review the reported regulatory capital ratios of the issuer and, in all cases, the regulatory capital ratios were deemed to be in excess of the regulatory minimums.  Credit ratings were also taken into consideration, 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.  We noted no additional downgrades to below investment grade between September 30, 2018 and the filing date of this report.  Where available, credit ratings from multiple rating agencies are obtained and rating downgrades are specifically analyzed.  Our review process for these credit-sensitive holdings also includes a periodic review of relevant financial information for each issuer, such as quarterly financial reports, press releases and analyst reports.  This information is used to evaluate the current and prospective financial condition of the issuer in order to assess the issuer’s ability to meet its debt obligations.  Through the filing date of this report, each of the individual name issuer securities was current with respect to interest payments.  Based on our evaluation of the facts and circumstances relating to each issuer, management concluded that all principal and interest payments for these individual name issuer trust preferred debt securities would be collected according to their contractual terms and it expects to recover the entire amortized cost basis of these securities.  Furthermore, Washington Trust does not intend to sell these securities and it is not more-likely-than-not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be at maturity.  Therefore, management does not consider these investments to be other-than-temporarily impaired$3.8 billion at September 30, 2018.

Further deterioration2019, up by $97.7 million, or 3%, from the end of 2018, largely due to growth 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 incommercial real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses may be designated as other-than-temporary in future periods, and the Corporation may incur write-downs.loans.



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Management's Discussion and Analysis

Loans
The following is a summary of loans:
(Dollars in thousands)September 30, 2018 December 31, 2017September 30, 2019 December 31, 2018
Amount
 %
 Amount
 %
Amount
 %
 Amount
 %
Commercial:              
Commercial real estate (1)
$1,240,350
 35% 
$1,210,495
 36%
$1,517,320
 40% 
$1,392,408
 38 %
Commercial & industrial (2)656,882
 18
 612,334
 18
566,426
 15
 620,704
 17
Total commercial1,897,232
 53
 1,822,829
 54
2,083,746
 55
 2,013,112
 55
Residential Real Estate:              
Residential real estate (3)1,349,340
 38
 1,227,248
 36
1,378,518
 36
 1,360,387
 37
Consumer:              
Home equity282,331
 8
 292,467
 9
294,250
 8
 280,626
 8
Other (4)27,300
 1
 31,527
 1
21,592
 1
 26,235
 
Total consumer309,631
 9
 323,994
 10
315,842
 9
 306,861
 8
Total loans
$3,556,203
 100% 
$3,374,071
 100%
$3,778,106
 100% 
$3,680,360
 100 %
(1)Commercial real estate loans consistConsists of commercial mortgages primarily secured by income producingincome-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.
(2)Commercial & industrial consistConsists of loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.
(3)Residential real estate loans consistConsists of mortgage and homeowner construction loans secured by one- to four- familyfour-family residential properties.
(4)Other consumer loans consistsConsists of loans to individuals secured by general aviation aircraft and other personal installment loans.

Total loans amounted to $3.6 billion at September 30, 2018, up by $182.1 million from the end of 2017, reflecting increases of $122.1 million and $74.4 million, respectively, in the residential real estate and commercial loan portfolios, partially offset by a decrease of $14.4 million in the consumer loan portfolio.


Commercial Loans
The commercial loan portfolio represented 53%55% of total loans at September 30, 2018.2019.


In making commercial loans, we may occasionally solicit the participation of other banks. Washington TrustThe 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 $390.6$394.4 million and $364.0$406.4 million, respectively, at September 30, 20182019 and December 31, 2017.2018. Our participation in commercial loans originated by other banks also includes shared national credits. Effective January 1, 2018, sharedShared 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 exempttax-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.



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Management's Discussion and Analysis


Commercial Real Estate Loans
Commercial real estate loans totaled $1.2$1.5 billion at September 30, 2018,2019, up by $29.9$124.9 million, or 2%9%, from the balance at December 31, 2017.2018. Included in commercial real estate loans were construction and development loans of $148.2$192.1 million and $138.0


- 63-



Management's Discussion and Analysis

$190.9 million, respectively, atas of September 30, 20182019 and December 31, 2017. In 2018,2018. For the nine months ended September 30, 2019, commercial real estate loan originations and advances amounted to $192.4were approximately $265 million, which were partially offset by payoffs and transfers of completed commercial construction loans to the commercial and industrial portfolio.payoffs.


Commercial real estate loans are secured by a variety of property types, with approximately 90% of the total at September 30, 20182019 composed of multi-family dwellings, retail facilities, office buildings, lodging, healthcare facilities, industrial and warehouse properties and commercial mixed use properties, industrial and warehouse, and healthcare facilities.properties. The average commercial real estate loan balance outstanding in the portfoliosize was $2.5$3.0 million and the largest individual commercial real estate loan outstanding was $26.0 million as of September 30, 2018.2019.


The following table presents a geographic summary of commercial real estate loans, including commercial construction, by property location:
(Dollars in thousands)September 30, 2018 December 31, 2017September 30, 2019 December 31, 2018
Amount% of Total Amount% of TotalAmount% of Total Amount% of Total
Rhode Island
$352,297
29% 
$360,834
30%
$378,337
25% 
$377,249
27%
Connecticut499,996
40
 461,230
38
618,262
41
 570,116
41
Massachusetts299,082
24
 309,013
26
432,424
28
 356,615
26
Subtotal1,151,375
93
 1,131,077
94
1,429,023
94
 1,303,980
94
All other states88,975
7
 79,418
6
88,297
6
 88,428
6
Total
$1,240,350
100% 
$1,210,495
100%
$1,517,320
100% 
$1,392,408
100%


Commercial and Industrial Loans
Commercial and industrial loans amounted to $656.9$566.4 million at September 30, 2018, up2019, down by $44.5$54.3 million, or 7%9%, from the balance at December 31, 2017. This increase included a transfer of $27.62018. For the nine months ended September 30, 2019, originations were approximately $43 million of completed commercial construction loans into the commercial and industrial portfolio. In 2018, originations and increasedwere offset by lower line utilization, amounted to $93.7 million, which were partially offset by payoffs and paydowns.


Shared national credit balances outstanding included in the commercial and industrial loan portfolio totaled $88.9$65.6 million at September 30, 2018. Of this balance, $69.9 million was2019. All of these loans were included in the pass-rated category of commercial loan credit quality and $19.0 million was included in the special mention category. All of these loans were current with respect to contractual payment terms at September 30, 2018.2019.


The commercial and industrial loan portfolio includes loans to a variety of business types.  Approximatelytypes, with 90% of the total isat September 30, 2019 composed of health care/social assistance, educational services, manufacturing, owner occupied and other real estate, educational services, professional, scientific and technical, retail trade, transportation and warehousing, entertainment and recreation, other services, finance and insurance services, other services, public administration and construction businesses. The average commercial and industrial loan balance outstanding in the portfoliosize was $637$618 thousand and the largest individual commercial and industrial loan outstanding was $19.3$19.1 million as of September 30, 2018.2019.


Residential Real Estate Loans
The residential real estate loan portfolio represented 38%36% of total loans at September 30, 2018.2019.


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.






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Management's Discussion and Analysis


The table below presents residential real estate loan origination activity:
(Dollars in thousands)Three Months Nine MonthsThree Months Nine Months
Periods ended September 30,2018 2017 2018 20172019 2018 2019 2018
Amount% of Total Amount% of Total Amount% of Total Amount% of TotalAmount% of Total Amount% of Total Amount% of Total Amount% of Total
Originations for retention in portfolio
$94,866
44% 
$90,378
39% 
$291,185
47% 
$243,079
38%
$105,075
36% 
$80,751
40% 
$226,508
34% 
$277,070
46%
Originations for sale to the secondary market (1)119,832
56
 143,112
61
 330,245
53
 390,044
62
189,979
64
 119,832
60
 437,928
66
 330,245
54
Total
$214,698
100% 
$233,490
100% 
$621,430
100% 
$633,123
100%
$295,054
100% 
$200,583
100% 
$664,436
100% 
$607,315
100%
(1)Includes brokered loans (loans originated in a broker capacity.for others).


The table below presents residential real estate loan sales activity:
(Dollars in thousands)Three Months Nine MonthsThree Months Nine Months
Periods ended September 30,2018 2017 2018 20172019 2018 2019 2018
Amount% of Total Amount% of Total Amount% of Total Amount% of TotalAmount% of Total Amount% of Total Amount% of Total Amount% of Total
Loans sold with servicing rights retained
$24,422
18% 
$37,823
26% 
$82,634
25% 
$89,589
23%
$25,766
14% 
$24,422
18% 
$53,548
13% 
$82,634
25%
Loans sold with servicing rights released (1)107,724
82
 109,508
74
 252,043
75
 302,098
77
159,210
86
 107,694
82
 360,921
87
 252,043
75
Total
$132,146
100% 
$147,331
100% 
$334,677
100% 
$391,687
100%
$184,976
100% 
$132,116
100% 
$414,469
100% 
$334,677
100%
(1)Includes brokered loans (loans originated in a broker capacity.for others).


Loans are sold with servicing retained or released. Loans sold with the retention of 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 $3.7$3.4 million and $3.6$3.7 million, respectively, as of September 30, 20182019 and December 31, 2017.2018. The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $590.5$573.6 million and $568.3$588.5 million, respectively, as of September 30, 20182019 and December 31, 2017.2018.


Residential real estate loans held in portfolio amounted to $1.3$1.4 billion at September 30, 2018,2019, up by $122.1$18.1 million or 10%, from the balance at December 31, 2017. A2018. While year-over-year residential real estate mortgage loan origination volumes were higher, a lower percentage of residential real estate mortgage loans were originated for retention in portfolio during the three and nine months ended September 30, 2018,2019, compared to the same periods in 2017.2018.


The following is a geographic summary of residential real estate mortgages by property location:
(Dollars in thousands)September 30, 2018 December 31, 2017September 30, 2019 December 31, 2018
Amount% of Total Amount% of TotalAmount% of Total Amount% of Total
Rhode Island
$347,657
26% 
$343,340
28%
$347,847
25% 
$352,141
26%
Connecticut145,962
11
 140,843
12
142,744
11
 141,775
10
Massachusetts838,628
62
 726,712
59
871,309
63
 849,435
63
Subtotal1,332,247
99
 1,210,895
99
1,361,900
99
 1,343,351
99
All other states17,093
1
 16,353
1
16,618
1
 17,036
1
Total (1)
$1,349,340
100% 
$1,227,248
100%
$1,378,518
100% 
$1,360,387
100%
(1)Includes residential real estate loans purchased from other financial institutions totaling $116.6$106.7 million and $129.5$112.9 million, respectively, as of September 30, 20182019 and December 31, 2017.2018.


Consumer Loans
Consumer loans include home equity loans and lines of credit and personal installment loans. Washington Trust also purchases loans to individuals secured by general aviation aircraft.






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Management's Discussion and Analysis


The consumer loan portfolio totaled $309.6$315.8 million at September 30, 2018, down2019, up by $14.4$9.0 million, or 4%3%, from December 31, 2017, largely due to lower home equity line utilization.2018. Home equity lines of credit and home equity loans represented 91%93% of the total consumer portfolio at September 30, 2018.2019. The Bank estimates that approximately 65% of the combined home equity linelines 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 $18.6$14.1 million and $21.7$17.6 million, respectively, at September 30, 20182019 and December 31, 2017.2018.


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,
2018
 Dec 31,
2017
Sep 30,
2019
 Dec 31,
2018
Commercial:      
Commercial real estate
$—
 
$4,954

$684
 
$925
Commercial & industrial122
 283

 
Total commercial122
 5,237
684
 925
Residential Real Estate:      
Residential real estate9,063
 9,414
12,531
 9,346
Consumer:      
Home equity1,624
 544
1,599
 1,436
Other
 16
88
 
Total consumer1,624
 560
1,687
 1,436
Total nonaccrual loans10,809
 15,211
14,902
 11,707
Property acquired through foreclosure or repossession, net2,974
 131
4,142
 2,142
Total nonperforming assets
$13,783
 
$15,342

$19,044
 
$13,849
      
Nonperforming assets to total assets0.29% 0.34%0.37% 0.28%
Nonperforming loans to total loans0.30% 0.45%0.39% 0.32%
Total past due loans to total loans0.38% 0.59%0.38% 0.37%
Accruing loans 90 days or more past due
$—
 
$—

$—
 
$—


Total nonperforming assets declinedincreased by $1.6$5.2 million from the endDecember 31, 2018. This included a net increase of 2017, with a $4.4$3.2 million decline in nonaccrual residential real estate loans and a $2.8an increase of $2.0 million increase in property acquired through foreclosure. At September 30, 2019, property acquired through foreclosure consisted of two commercial properties.


Nonaccrual Loans
During the nine months ended September 30, 2018,2019, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status. In addition, there were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2018.






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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 status5,672
 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, 2018 December 31, 2017September 30, 2019 December 31, 2018
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
$—
 
$—
 
$—
% 
$4,954
 
$—
 
$4,954
0.41%
$684
 
$—
 
$684
0.05% 
$—
 
$925
 
$925
0.07%
Commercial & industrial122
 
 122
0.02
 281
 2
 283
0.05

 
 

 
 
 

Total commercial122
 
 122
0.01
 5,235
 2
 5,237
0.29
684
 
 684
0.03
 
 925
 925
0.05
Residential Real Estate:                          
Residential real estate1,140
 7,923
 9,063
0.67
 3,903
 5,511
 9,414
0.77
4,760
 7,771
 12,531
0.91
 1,509
 7,837
 9,346
0.69
Consumer:                          
Home equity551
 1,073
 1,624
0.58
 268
 276
 544
0.19
812
 787
 1,599
0.54
 552
 884
 1,436
0.51
Other
 
 

 14
 2
 16
0.05
88
 
 88
0.41
 
 
 

Total consumer551
 1,073
 1,624
0.52
 282
 278
 560
0.17
900
 787
 1,687
0.53
 552
 884
 1,436
0.47
Total nonaccrual loans
$1,813
 
$8,996
 
$10,809
0.30% 
$9,420
 
$5,791
 
$15,211
0.45%
$6,344
 
$8,558
 
$14,902
0.39% 
$2,061
 
$9,646
 
$11,707
0.32%
(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 30, 2019.

As of September 30, 2018,2019, the composition of nonaccrual loans was 1% commercial and 99%95% residential and consumer and 5% commercial, compared to 34%92% and 66%8%, respectively, at December 31, 2017.2018.

Total nonaccrual loans declined by $4.4 million from the end of 2017 due to the resolution of two nonaccrual commercial real estate relationships, both of which were previously modified in a troubled debt restructuring. In March 2018, a nonaccrual commercial real estate loan with a carrying value of $3.1 million was transferred to property acquired through foreclosure. Also in March 2018, a second nonaccrual commercial real estate loan with a carrying value of $1.8 million was reclassified to loans held for sale as the loan was sold in April at carrying value.


Nonaccrual residential real estate mortgage loans amounted to $9.1$12.5 million at September 30, 2018, down2019, up by $351 thousand$3.2 million from the end of 2017.2018. As of September 30, 2018,2019, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Rhode Island Connecticut and Massachusetts.Connecticut.  Included in total nonaccrual residential real estate loans at September 30, 20182019 were fourfive loans purchased for portfolio and serviced by others amounting to $1.2$1.5 million.  Management monitors the collection efforts of its third party servicers as part of its assessment of the collectibility of nonperforming loans.




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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 estate359
 363
Consumer:   
Home equity
 10
Other19
 21
Total consumer19
 31
Total accruing troubled debt restructured loans378
 5,108
    
Nonaccrual troubled debt restructured loans   
Residential Real Estate:   
Residential real estate
$497
 
$510
Total nonaccrual troubled debt restructured loans497
 510
Total troubled debt restructured loans
$875
 
$5,618

Troubled Debt Restructurings
Loans are considered restructured in a troubled debt restructuring when the Corporation has granted concessions, that it otherwise would not have considered, to a borrower experiencing financial difficulties.  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 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.


Troubled debt restructurings are reported as such for at least one year from the date of the restructuring.  In years after the restructuring, troubled debt restructured loans 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 terms specified in the restructuring agreement.


As of September 30, 2018,2019, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.



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Management's Discussion and Analysis


The following table sets forth information on troubledTroubled debt restructured loans asdecreased by $4.7 million from the end of December 31, 2018 due to the dates indicated. The amounts below consistpayoff of unpaid principal balance, net of charge-offsone accruing commercial and unamortized deferredindustrial loan origination fees and costs. Accrued interest is not includedthat occurred in the carrying amounts set forth below. See Note 5 to the Unaudited Consolidated Financial Statements for additional information.second quarter of 2019.
(Dollars in thousands)Sep 30,
2018
 Dec 31,
2017
Accruing troubled debt restructured loans   
Commercial:   
Commercial real estate
$—
 
$—
Commercial & industrial4,738
 4,875
Total commercial4,738
 4,875
Residential Real Estate:   
Residential real estate365
 369
Consumer:   
Home equity10
 13
Other23
 130
Total consumer33
 143
Total accruing troubled debt restructured loans5,136
 5,387
    
Nonaccrual troubled debt restructured loans   
Commercial:   
Commercial real estate
 4,954
Commercial & industrial
 281
Total commercial
 5,235
Residential Real Estate:   
Residential real estate517
 529
Consumer:   
Home equity
 
Other
 
Total consumer
 
Total nonaccrual troubled debt restructured loans517
 5,764
Total troubled debt restructured loans
$5,653
 
$11,151


The allowance for loans losses included specific reserves for troubled debt restructurings of $104$101 thousand and $1.1 million,$103 thousand, respectively, at September 30, 20182019 and December 31, 2017.2018.


Troubled debt restructured loans declined by $5.5 million from the end of 2017, reflecting the resolution of two nonaccrual commercial real estate relationships discussed under the caption “Nonaccrual Loans.”





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Management's Discussion and Analysis


Past Due Loans
The following table presents past due loans by category:
(Dollars in thousands)September 30, 2018 December 31, 2017September 30, 2019 December 31, 2018
Amount 
% (1)

 Amount 
% (1)

Amount 
% (1)

 Amount 
% (1)

Commercial:              
Commercial real estate
$931
 0.08% 
$4,960
 0.41%
$684
 0.05% 
$1,080
 0.08%
Commercial & industrial142
 0.02
 4,076
 0.67
1
 
 
 
Total commercial1,073
 0.06
 9,036
 0.50
685
 0.03
 1,080
 0.05
Residential Real Estate:              
Residential real estate9,398
 0.70
 7,855
 0.64
11,599
 0.84
 10,520
 0.77
Consumer:              
Home equity2,939
 1.04
 3,141
 1.07
1,973
 0.67
 1,989
 0.71
Other109
 0.40
 43
 0.14
99
 0.46
 33
 0.13
Consumer loans3,048
 0.98
 3,184
 0.98
Total consumer2,072
 0.66
 2,022
 0.66
Total past due loans
$13,519
 0.38% 
$20,075
 0.59%
$14,356
 0.38% 
$13,622
 0.37%
(1)Percentage of past due loans to the total loans outstanding within the respective category.


As of September 30, 2018,2019, the composition of past due loans loans(loans past due 30 days or more,more) was 8% commercial and 92%95% residential and consumer and 5% commercial, compared to 45%92% and 55%8%, respectively, at December 31, 2017.

2018. Total past due loans declinedincreased by $6.6 million$734 thousand from the end of 2017, with a decrease of $8.0 million in commercial loans, partially offset by2018, as an increase of $1.5 million in residential real estate loans. The decline in past due commercial loans reflected the resolution of two nonaccrual commercial real estate relationships discussed under the caption “Nonaccrual Loans.” The increase in past due residential real estate loans was concentratedpartially offset by a decline in self-originated mortgage loans secured by properties in Rhode Island, Massachusetts and Connecticut.past due commercial real estate loans.


Total past due loans included $9.8 million of nonaccrual loans as of September 30, 2018 and2019, compared to $8.6 million as of December 31, 2017 included nonaccrual loans of $6.4 million and $11.8 million, respectively.2018. All loans 90 days or more past due at September 30, 20182019 and December 31, 20172018 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 30, 20182019 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.  The Corporation

Management has identified approximately $11.8$11.7 million in potential problem loans at September 30, 2018,2019, compared to $9.7$14.9 million at December 31, 2017.2018. 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 30, 2019, 98% of the balance of potential problem loans consisted of three commercial relationships and 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 of allowance for loan losses necessarily involves a high degree of judgment.  The Corporation uses a methodology to systematically measure 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 7 under the caption “Critical Accounting Policies and Estimates” of Washington Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 20172018 and in Note 6 to the Unaudited Consolidated Financial Statements.






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Management's Discussion and Analysis


The allowance for loan losses is management’s best estimate of incurred losses inherent 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,charged-off, and is reduced by charge-offs on loans. The status of nonaccrual loans, delinquentpast 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. See Note 5 to the Unaudited Consolidated Financial Statements under the caption “Credit Quality Indicators” for additional information. Management believes that the level of allowance for loan losses at September 30, 20182019 is adequate and consistent with asset quality and credit quality indicators. Management will continue to assess the adequacy of the allowance for loan losses in accordance with its established policies.


The Bank’sCorporation’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. The Bank recognizes fullFull or partial charge-offs on collateral dependent impaired loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan. The BankCorporation does not recognize a recovery when an updated appraisal indicates a subsequent increase in value.


Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status.  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 mortgagesreal 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 of loan loss exposure inherent in the loan portfolio includes, among other procedures, the identification of loss allocations for individual loans deemed to be impaired; and the application of loss allocation factors for non-impaired loans 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 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 (nonaccrual loans and loans restructured in a troubled debt restructuring) by measurement type:
(Dollars in thousands)Sep 30,
2018
 Dec 31,
2017
Sep 30,
2019
 Dec 31,
2018
Collateral dependent impaired loans (1)

$8,599
 
$13,880

$13,264
 
$10,466
Impaired loans measured on discounted cash flow method (2)
7,346
 6,718
2,016
 6,350
Total impaired loans
$15,945
 
$20,598

$15,280
 
$16,816
(1)Net of partial charge-offs of $111$840 thousand and $5.1 million,$289 thousand, respectively, at September 30, 20182019 and December 31, 2017.2018.
(2)
Net of partial charge-offs of $85$262 thousand and $84$85 thousand, respectively, at September 30, 20182019 and December 31, 2017.
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, 2018 December 31, 2017September 30, 2019 December 31, 2018
LoansRelated AllowanceAllowance / Loans LoansRelated AllowanceAllowance / LoansLoansRelated AllowanceAllowance / Loans LoansRelated AllowanceAllowance / Loans
Impaired loans individually evaluated for impairment
$15,945

$112
0.70% 
$20,598

$1,129
5.48%
$15,280

$321
2.10% 
$16,816

$127
0.76%
Loans collectively evaluated for impairment3,540,258
26,397
0.75
 3,353,473
25,359
0.76
3,762,826
26,676
0.71
 3,663,544
26,945
0.74
Total
$3,556,203

$26,509
0.75% 
$3,374,071

$26,488
0.79%
$3,778,106

$26,997
0.71% 
$3,680,360

$27,072
0.74%

The decline in collateral dependent impaired loans individually evaluated for impairment reflected the resolution of two




- 70-





Management's Discussion and Analysis


nonaccrual commercial real estate relationships disclosed under the caption “Nonaccrual Loans.”

Loan loss provisions of $400 thousand and $1.6 million, respectively, were charged to earnings totaledfor 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, compared to $1.3 million and $2.4 million, respectively, for the three and nine months ended September 30, 2017.2018. 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, changes in the loan portfolio and loss exposure allocations.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 three and nine months ended September 30, 2018, compared to $654 thousand and $1.1 million, respectively for the same periods in 2017.2018. The increase in year-to-date net charge-offs was concentrated in residential real estate and consumer home equity.


As of September 30, 2018,2019, the allowance for loan losses was $26.5$27.0 million, or 0.75%0.71% of total loans, compared to $26.5$27.1 million, or 0.79%0.74% of total loans, at December 31, 2017, largely reflecting a decrease in specific reserves on impaired loans.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 losses from any segment of the loan portfolio.
(Dollars in thousands)September 30, 2018 December 31, 2017September 30, 2019 December 31, 2018
Amount
 
% (1)
 Amount 
% (1)
Amount
 
% (1)
 Amount 
% (1)
Allocation of Allowance for Loan Losses       
Commercial:              
Commercial real estate
$13,495
 35% 
$12,729
 36%
$16,801
 40% 
$15,381
 38%
Commercial & industrial7,247
 18
 5,580
 18
3,447
 15
 5,847
 17
Total commercial20,742
 53
 18,309
 54
20,248
 55
 21,228
 55
Residential Real Estate:              
Residential real estate4,115
 38
 5,427
 36
5,411
 36
 3,987
 37
Consumer:              
Home equity1,389
 8
 2,412
 9
1,013
 8
 1,603
 8
Other263
 1
 340
 1
325
 1
 254
 
Total consumer1,652
 9
 2,752
 10
1,338
 9
 1,857
 8
Balance at end of period
$26,509
 100% 
$26,488
 100%
Total allowance for loan losses at end of period
$26,997
 100% 
$27,072
 100%
(1)Percentage of loans within theoutstanding 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.  Washington TrustThe Corporation uses funds to originate and purchase loans, purchase investment securities, conduct operations, expand the branch network and pay dividends to shareholders.


Deposits
Washington TrustThe 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.


Washington TrustThe 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. Washington TrustThe 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. DDM, ICS and CDARS deposits are considered to be brokered deposits for bank regulatory purposes. We consider these reciprocal deposit balances to be in-market deposits as distinguished from traditional out-of-market wholesale brokered deposits.






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Management's Discussion and Analysis


The following table presents a summary of deposits:
(Dollars in thousands)    Change    Change
September 30,
2018
 December 31, 2017 $%September 30,
2019
 December 31, 2018 $%
Noninterest-bearing demand deposits
$611,829
 
$578,410
 
$33,419
6%
$619,839
 
$603,216
 
$16,623
3%
Interest-bearing demand deposits151,322
 82,728
 68,594
83
152,200
 178,733
 (26,533)(15)
NOW accounts468,578
 466,605
 1,973

478,462
 466,568
 11,894
3
Money market accounts650,976
 731,345
 (80,369)(11)749,122
 646,878
 102,244
16
Savings accounts372,425
 368,524
 3,901
1
362,868
 373,545
 (10,677)(3)
Time deposits (in-market)715,635
 617,368
 98,267
16
792,941
 778,105
 14,836
2
Total in-market deposits2,970,765
 2,844,980
 125,785
4
3,155,432
 3,047,045
 108,387
4
Wholesale brokered time deposits443,583
 397,727
 45,856
12
430,721
 477,003
 (46,282)(10)
Total deposits
$3,414,348
 
$3,242,707
 
$171,641
5 %
$3,586,153
 
$3,524,048
 
$62,105
2 %


Total deposits amounted to $3.4$3.6 billion at September 30, 2018,2019, up by $171.6$62.1 million, or 2%, from December 31, 2017.2018. This included an increasea decrease of $45.9$46.3 million of out-of-market brokered time deposits. Excluding out-of-market brokered time deposits, in-market deposits were up by $125.8$108.4 million, or 4%, from the balance at December 31, 2017. The growth in in-market deposits reflected2018, largely due to an increase in time deposits attributable to a promotional campaign, as well as an increase in interest-bearing demand deposits due to the implementation of a program in June of 2018 that transitioned wealth management client assets, previously held in outside accounts, into the insured reciprocal DDM program described above. These increases were partially offset by a decline$102.2 million in money market account balances.accounts.


FHLB Advances
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 $828.4$956.8 million at September 30, 2018,2019, up by $37.0$6.1 million, or 1%, from the balance at the end of 2017.2018.


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

Liquidity and Capital Resources
Liquidity Management
Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand.  Washington Trust’sThe Corporation’s primary source of liquidity is in-market deposits, which funded approximately 62%59% of total average assets in the nine months ended September 30, 2018.2019.  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.  For

The Corporation has a more detailed discussion on Washington Trust’s detailed liquidity funding policy and a contingency funding plan see additional information in Item 7 under the caption “Liquidity and Capital Resources” of Washington Trust’s Annual Report on Form 10-Kthat provide for the fiscal year ended December 31, 2017.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.




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Management's Discussion and Analysis

The Asset/Liability Committee (“ALCO”)table below presents unused funding capacity by source as of the dates indicated:
(Dollars in thousands)   
 September 30,
2019
 December 31,
2018
Additional Funding Capacity:   
Federal Home Loan Bank of Boston (1)

$601,520
 
$628,468
Federal Reserve Bank of Boston (2)
25,070
 27,608
Unencumbered investment securities445,994
 493,623
Total
$1,072,584
 
$1,149,699
(1)As of September 30, 2019 and December 31, 2018, loans with a carrying value of $2.0 billion and $2.0 billion, respectively, and securities available for sale with carrying values of $262.6 million and $236.7 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.
(2)As of September 30, 2019 and December 31, 2018, loans with a carrying value of $17.4 million and $22.9 million, respectively, and securities available for sale with a carrying value of $17.2 million and $16.4 million, respectively, were pledged to the FRB resulting in this additional unused borrowing capacity.

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

The ALCO establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained within target ranges established by the ALCO during the nine months ended September 30, 2018.2019.  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 $58.4$37.4 million for the nine months ended September 30, 2018,2019, which was generated by net income of $51.4$53.6 million and adjustments to reconcile net income to net cash provided by operating activities. Net cash used in investing activities totaled $250.4$27.3 million for the nine months ended September 30, 2018,2019, reflecting outflows to fund loan growth and purchase investment securities, FHLB stockpurchases of loans and bank-owned life insurance.purchases of debt securities. These outflows were partially offset by net inflows from maturities, calls, sales and principal paydowns, calls and maturitiespayments of debt securities. For the nine months ended September 30, 2018,2019, net cash provided by financing activities amounted to $184.9$42.6 million, largely due towith net increases in deposits and FHLB advances, partially offset by the payment of dividends to shareholders. See the Corporation’s Unaudited Consolidated Statements of Cash Flows for further information about sources and uses of cash.


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Management's Discussion and Analysis



Capital Resources
Total shareholders’ equity amounted to $427.9$497.8 million at September 30, 2018,2019, up by $14.6$49.6 million from December 31, 2017,2018, including net income of $51.4$53.6 million offset by $22.5and an increase of $19.4 million for dividend declarations and a $15.6 million reduction in the accumulated comprehensive income component of shareholders’ equity, primarily resulting from a temporary declinereflecting an increase in the fair value of available for sale debt securities. These increases were partially offset by $26.1 million for dividend declarations.


The Corporation declared a quarterly dividend of 4351 cents per share for the three months ended September 30, 2018,2019, compared to 3943 cents per share for the same period in 2017. Year-to-date dividends declared amounted to $1.29 per share, an increase of 14 cents per share, or 12%, from the same period a year ago.2018.


The ratio of total equity to total assets amounted to 8.97%9.58% at September 30, 20182019 compared to a ratio of 9.12%8.94% at December 31, 2017. 2018.  Book value per share at September 30, 20182019 and December 31, 20172018 amounted to $24.7528.71 and $23.99,$25.90, respectively.


The Bancorp and the Bank are subject to various regulatory capital requirements and are considered “well capitalized,” with a totalrequirements. Total risk-based capital ratio of 12.77%amounted to 12.94% at September 30, 2018,2019, compared to 12.45%12.56% at December 31, 2017.2018. Capital levels exceeded the regulatory minimum levels to be considered “well capitalized.” See Note 8 to the Unaudited Consolidated Financial Statements for additional discussion of regulatory capital requirements.


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


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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 primary market risk category associated with the Corporation’s operations.  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 Washington Trust’sthe Corporation’s liquidity, capital adequacy, growth, risk and profitability goals.


The Corporation utilizes the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, off-balance sheet interest rate contracts and the pricing and structure of loans and deposits, to manage interest rate risk. The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors.  These interest rate contracts involve, to varying degrees, credit risk and interest rate risk.  Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract.  The notional amount of the interest rate contracts is the amount upon which interest and other payments are based.  The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk.  See Notes 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 30, 20182019 and December 31, 2017,2018, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation.  The Corporation defines maximum unfavorable net interest income exposure to be a change of no more than 5% in net interest income over the first 12 months, no more than 10% over the second 12 months, and no more than 10% over the full 60-month simulation horizon. 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


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Management's Discussion and Analysis

to measuring the change in net interest income as compared to an unchanged interest 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 interest 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 30, 20182019 and December 31, 2017.2018.  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


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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, 2018 December 31, 2017September 30, 2019 December 31, 2018
Months 1 - 12 Months 13 - 24 Months 1 - 12 Months 13 - 24Months 1 - 12 Months 13 - 24 Months 1 - 12 Months 13 - 24
100 basis point rate decrease(3.69)% (6.15)% (3.88)% (7.94)%(3.67)% (5.57)% (3.60)% (5.30)%
100 basis point rate increase1.90 (0.02) 3.02 2.522.72 0.77 1.94 (0.46)
200 basis point rate increase5.90 4.04 7.31 7.646.53 3.52 5.85 2.62
300 basis point rate increase9.88 7.83 11.65 12.7710.35 5.99 9.75 5.49


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


The overall positive exposure of net interest income to rising rates as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term.  For simulation purposes, deposit rate changes are anticipated to lag behind other market interest rates in both timing and magnitude.  The ALCO’s estimate of interest rate risk exposure to rising rate environments, including those involving changes to the shape of the yield curve, incorporates certain assumptions regarding the shift in deposit balances from low-cost core savings categories to higher-cost deposit categories, which has characterized a shift in funding mix during the past rising interest rate cycles.


The relative changes from December 31, 2017 to September 30, 2018, as shown in the above table, were attributable to several factors, including a higher absolute level of market interest rates and a relative increase in the proportion of wholesale funding and promotional time deposit balances.  Interest rate risk modeling assumes that wholesale funding sources are more sensitive to changes in market interest rates than core deposits.  Furthermore, the amount of time deposits scheduled to mature during the 13-24 month time period has increased, as compared to the prior period, as a result of our ongoing deposit promotions. Our modeling assumption is that these time deposit maturities will reprice at higher rates during rising rate scenarios.

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.


Due to the low level of market interest rates, theThe banking industry has attracted and retained low-cost core savings deposits overduring the pastlow interest rate cycle that lasted several years. The ALCO recognizes that a portion of these increased levels of low-cost balances could continue to shift into higher


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Management's Discussion and Analysis

yielding alternatives in the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled increased amounts of 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 mortgageresidential 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.




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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 30, 20182019 and December 31, 20172018 resulting from immediate parallel rate shifts:
(Dollars in thousands)      
Security TypeDown 100 Basis Points Up 200 Basis PointsDown 100 Basis Points Up 200 Basis Points
U.S. government-sponsored enterprise securities (callable)
$6,316
 
($15,076)
$1,222
 
($8,472)
Obligations of states and political subdivisions1
 (4)
 
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises27,669
 (62,725)14,108
 (63,966)
Trust preferred debt and other corporate debt securities(82) 138
(107) 173
Total change in market value as of September 30, 2018
$33,904
 
($77,667)
Total change in market value as of December 31, 2017
$17,308
 
($69,453)
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)






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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.”


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 30, 20182019.  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 internal controls over financial reporting during the quarter ended September 30, 20182019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.








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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 the risk factors described in Item IA to Part I of Washington Trust’s Annual Report on Form 10-K for the year ended December 31, 2017.2018.


Item 6.  Exhibits
(a) Exhibits.  The following exhibits are included as part of this Form 10-Q:
Exhibit Number 
31.1
31.2
32.1
101The following materials from Washington Trust Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarterperiod ended September 30, 20182019 formatted in XBRL (eXtensible Business Reporting Language):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 notesNotes to these consolidated financial statements - Filed herewith.statements.
104The cover page from the Corporation’s Quarterly Report on Form 10-Q for the period ended September 30, 2019 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.





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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 5, 20184, 2019 By:/s/ Edward O. Handy III
    Edward O. Handy III
    Chairman and Chief Executive Officer
    (principal executive officer)
     
Date:November 5, 20184, 2019 By:/s/ Ronald S. Ohsberg
    Ronald S. Ohsberg
    Senior Executive Vice President, Chief Financial Officer and Treasurer
    (principal financial officer)
     
Date:November 5, 20184, 2019 By:/s/ Maria N. Janes
    Maria N. Janes
    Executive Vice President and Controller
    (principal accounting officer)



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Exhibit Index

Exhibit Number
31.1
31.2
32.1
101
The following materials from Washington Trust Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 formatted in XBRL (eXtensible Business Reporting Language): (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 financial statements - Filed herewith.
____________________
(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.



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