false--12-31Q220190000737468Washington Trust Bancorp Inc280000022700000300000000600000006480000006789000000.06250.0625600000006000000017302037173358691730203717335869220000000.0450.012324000000000000608000000000000020000000000.281.000.120.000.200.021.000.000.000.000.160.000.100.130.000.130.100.130.120.000.000.000.120.00P5Y8600000 0000737468 2019-01-01 2019-06-30 0000737468 2019-07-30 0000737468 2019-06-30 0000737468 2018-12-31 0000737468 2018-01-01 2018-06-30 0000737468 2018-04-01 2018-06-30 0000737468 2019-04-01 2019-06-30 0000737468 us-gaap:RetainedEarningsMember 2019-06-30 0000737468 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-06-30 0000737468 us-gaap:RetainedEarningsMember 2019-01-01 0000737468 us-gaap:RetainedEarningsMember 2019-01-01 2019-06-30 0000737468 us-gaap:CommonStockMember 2019-06-30 0000737468 us-gaap:CommonStockMember 2019-01-01 2019-06-30 0000737468 us-gaap:AdditionalPaidInCapitalMember 2019-06-30 0000737468 2019-01-01 0000737468 us-gaap:CommonStockMember 2018-12-31 0000737468 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-06-30 0000737468 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 0000737468 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-06-30 0000737468 us-gaap:RetainedEarningsMember 2018-12-31 0000737468 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0000737468 us-gaap:AdditionalPaidInCapitalMember 2018-01-01 2018-06-30 0000737468 2017-12-31 0000737468 us-gaap:AdditionalPaidInCapitalMember 2017-12-31 0000737468 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-12-31 0000737468 us-gaap:RetainedEarningsMember 2018-01-01 2018-06-30 0000737468 us-gaap:CommonStockMember 2018-01-01 2018-06-30 0000737468 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-06-30 0000737468 2018-06-30 0000737468 us-gaap:CommonStockMember 2018-06-30 0000737468 us-gaap:RetainedEarningsMember 2018-06-30 0000737468 us-gaap:CommonStockMember 2017-12-31 0000737468 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-01-01 2018-06-30 0000737468 us-gaap:AdditionalPaidInCapitalMember 2018-06-30 0000737468 us-gaap:RetainedEarningsMember 2017-12-31 0000737468 us-gaap:CommonStockMember 2019-04-01 2019-06-30 0000737468 us-gaap:CommonStockMember 2019-03-31 0000737468 us-gaap:AdditionalPaidInCapitalMember 2019-04-01 2019-06-30 0000737468 2019-03-31 0000737468 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-04-01 2019-06-30 0000737468 us-gaap:RetainedEarningsMember 2019-04-01 2019-06-30 0000737468 us-gaap:AdditionalPaidInCapitalMember 2019-03-31 0000737468 us-gaap:RetainedEarningsMember 2019-03-31 0000737468 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-03-31 0000737468 us-gaap:CommonStockMember 2018-03-31 0000737468 us-gaap:RetainedEarningsMember 2018-04-01 2018-06-30 0000737468 us-gaap:AdditionalPaidInCapitalMember 2018-04-01 2018-06-30 0000737468 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-04-01 2018-06-30 0000737468 2018-03-31 0000737468 us-gaap:CommonStockMember 2018-04-01 2018-06-30 0000737468 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-03-31 0000737468 us-gaap:RetainedEarningsMember 2018-03-31 0000737468 us-gaap:AdditionalPaidInCapitalMember 2018-03-31 0000737468 2019-01-01 2019-01-01 0000737468 us-gaap:ChangeInAccountingPrincipleMember 2019-01-01 0000737468 us-gaap:USStatesAndPoliticalSubdivisionsMember 2018-12-31 0000737468 us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 2018-12-31 0000737468 us-gaap:CorporateBondSecuritiesMember 2018-12-31 0000737468 us-gaap:USGovernmentSponsoredEnterprisesDebtSecuritiesMember 2018-12-31 0000737468 wash:TrustPreferredSecuritiesIndividualNameIssuersMember 2018-12-31 0000737468 srt:MaximumMember 2019-01-01 2019-06-30 0000737468 wash:TrustPreferredSecuritiesIndividualNameIssuersMember 2019-06-30 0000737468 us-gaap:CorporateBondSecuritiesMember 2019-06-30 0000737468 srt:MinimumMember 2019-01-01 2019-06-30 0000737468 us-gaap:USGovernmentSponsoredEnterprisesDebtSecuritiesMember 2019-06-30 0000737468 us-gaap:USStatesAndPoliticalSubdivisionsMember 2019-06-30 0000737468 us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 2019-06-30 0000737468 wash:OtherconsumerDomain 2019-01-01 2019-06-30 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-01-01 2019-06-30 0000737468 wash:CommercialOtherMember 2018-01-01 2018-06-30 0000737468 us-gaap:ResidentialPortfolioSegmentMember 2018-01-01 2018-06-30 0000737468 us-gaap:ResidentialPortfolioSegmentMember 2019-01-01 2019-06-30 0000737468 wash:HomeequityDomain 2018-01-01 2018-06-30 0000737468 us-gaap:CommercialPortfolioSegmentMember 2019-01-01 2019-06-30 0000737468 us-gaap:ConsumerPortfolioSegmentMember 2018-01-01 2018-06-30 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember 2018-01-01 2018-06-30 0000737468 wash:OtherconsumerDomain 2018-01-01 2018-06-30 0000737468 wash:CommercialOtherMember 2019-01-01 2019-06-30 0000737468 us-gaap:CommercialPortfolioSegmentMember 2018-01-01 2018-06-30 0000737468 wash:HomeequityDomain 2019-01-01 2019-06-30 0000737468 us-gaap:ConsumerPortfolioSegmentMember 2019-01-01 2019-06-30 0000737468 wash:OtherconsumerDomain 2018-12-31 0000737468 us-gaap:ResidentialPortfolioSegmentMember 2019-06-30 0000737468 us-gaap:CommercialPortfolioSegmentMember 2019-06-30 0000737468 us-gaap:ResidentialPortfolioSegmentMember 2018-12-31 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-06-30 0000737468 us-gaap:CommercialPortfolioSegmentMember 2018-12-31 0000737468 wash:HomeequityDomain 2019-06-30 0000737468 us-gaap:ConsumerPortfolioSegmentMember 2018-12-31 0000737468 us-gaap:ConsumerPortfolioSegmentMember 2019-06-30 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember 2018-12-31 0000737468 wash:CommercialOtherMember 2019-06-30 0000737468 wash:OtherconsumerDomain 2019-06-30 0000737468 wash:HomeequityDomain 2018-12-31 0000737468 wash:CommercialOtherMember 2018-12-31 0000737468 us-gaap:CommercialPortfolioSegmentMember 2018-04-01 2018-06-30 0000737468 wash:CommercialOtherMember 2018-04-01 2018-06-30 0000737468 wash:CommercialOtherMember 2019-04-01 2019-06-30 0000737468 us-gaap:ResidentialPortfolioSegmentMember 2019-04-01 2019-06-30 0000737468 us-gaap:ResidentialPortfolioSegmentMember 2018-04-01 2018-06-30 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-04-01 2019-06-30 0000737468 wash:OtherconsumerDomain 2018-04-01 2018-06-30 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember 2018-04-01 2018-06-30 0000737468 wash:HomeequityDomain 2018-04-01 2018-06-30 0000737468 us-gaap:ConsumerPortfolioSegmentMember 2019-04-01 2019-06-30 0000737468 wash:OtherconsumerDomain 2019-04-01 2019-06-30 0000737468 us-gaap:ConsumerPortfolioSegmentMember 2018-04-01 2018-06-30 0000737468 us-gaap:CommercialPortfolioSegmentMember 2019-04-01 2019-06-30 0000737468 wash:HomeequityDomain 2019-04-01 2019-06-30 0000737468 wash:CurrentPaymentStatusMember 2018-12-31 0000737468 wash:PaymentDefaultMember 2018-04-01 2018-06-30 0000737468 wash:CurrentPaymentStatusMember 2019-06-30 0000737468 us-gaap:ConsumerPortfolioSegmentMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2019-06-30 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2019-06-30 0000737468 us-gaap:CommercialPortfolioSegmentMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2019-06-30 0000737468 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2019-06-30 0000737468 us-gaap:ResidentialPortfolioSegmentMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2019-06-30 0000737468 wash:CommercialOtherMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2019-06-30 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2019-06-30 0000737468 us-gaap:FinancingReceivables30To59DaysPastDueMember 2019-06-30 0000737468 wash:OtherconsumerDomain us-gaap:FinancingReceivables30To59DaysPastDueMember 2019-06-30 0000737468 us-gaap:CommercialPortfolioSegmentMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2019-06-30 0000737468 wash:CommercialOtherMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2019-06-30 0000737468 us-gaap:ResidentialPortfolioSegmentMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2019-06-30 0000737468 us-gaap:ConsumerPortfolioSegmentMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2019-06-30 0000737468 wash:HomeequityDomain us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2019-06-30 0000737468 wash:HomeequityDomain us-gaap:FinancingReceivables30To59DaysPastDueMember 2019-06-30 0000737468 us-gaap:CommercialPortfolioSegmentMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2019-06-30 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2019-06-30 0000737468 us-gaap:ResidentialPortfolioSegmentMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2019-06-30 0000737468 wash:OtherconsumerDomain us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2019-06-30 0000737468 wash:HomeequityDomain us-gaap:FinancingReceivables60To89DaysPastDueMember 2019-06-30 0000737468 us-gaap:ConsumerPortfolioSegmentMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2019-06-30 0000737468 wash:OtherconsumerDomain us-gaap:FinancingReceivables60To89DaysPastDueMember 2019-06-30 0000737468 us-gaap:FinancingReceivables60To89DaysPastDueMember 2019-06-30 0000737468 wash:CommercialOtherMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2019-06-30 0000737468 wash:CommercialOtherMember us-gaap:PassMember 2019-06-30 0000737468 us-gaap:CommercialPortfolioSegmentMember wash:ClassifiedMember 2019-06-30 0000737468 us-gaap:CommercialPortfolioSegmentMember us-gaap:PassMember 2019-06-30 0000737468 wash:CommercialOtherMember us-gaap:PassMember 2018-12-31 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember us-gaap:SpecialMentionMember 2019-06-30 0000737468 wash:CommercialOtherMember us-gaap:SpecialMentionMember 2018-12-31 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember us-gaap:SpecialMentionMember 2018-12-31 0000737468 us-gaap:CommercialPortfolioSegmentMember us-gaap:SpecialMentionMember 2018-12-31 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember wash:ClassifiedMember 2019-06-30 0000737468 us-gaap:CommercialPortfolioSegmentMember wash:ClassifiedMember 2018-12-31 0000737468 wash:CommercialOtherMember wash:ClassifiedMember 2019-06-30 0000737468 wash:CommercialOtherMember us-gaap:SpecialMentionMember 2019-06-30 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember us-gaap:PassMember 2019-06-30 0000737468 us-gaap:CommercialPortfolioSegmentMember us-gaap:SpecialMentionMember 2019-06-30 0000737468 us-gaap:CommercialPortfolioSegmentMember us-gaap:PassMember 2018-12-31 0000737468 wash:CommercialOtherMember wash:ClassifiedMember 2018-12-31 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember wash:ClassifiedMember 2018-12-31 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember us-gaap:PassMember 2018-12-31 0000737468 wash:CommercialOtherMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2018-12-31 0000737468 us-gaap:ConsumerPortfolioSegmentMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2018-12-31 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2018-12-31 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2018-12-31 0000737468 us-gaap:ResidentialPortfolioSegmentMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2018-12-31 0000737468 wash:HomeequityDomain us-gaap:FinancingReceivables30To59DaysPastDueMember 2018-12-31 0000737468 wash:HomeequityDomain us-gaap:FinancingReceivables60To89DaysPastDueMember 2018-12-31 0000737468 wash:CommercialOtherMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2018-12-31 0000737468 us-gaap:CommercialPortfolioSegmentMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2018-12-31 0000737468 us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2018-12-31 0000737468 us-gaap:CommercialPortfolioSegmentMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2018-12-31 0000737468 wash:OtherconsumerDomain us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2018-12-31 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2018-12-31 0000737468 wash:CommercialOtherMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2018-12-31 0000737468 wash:OtherconsumerDomain us-gaap:FinancingReceivables60To89DaysPastDueMember 2018-12-31 0000737468 us-gaap:FinancingReceivables60To89DaysPastDueMember 2018-12-31 0000737468 us-gaap:ResidentialPortfolioSegmentMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2018-12-31 0000737468 us-gaap:ResidentialPortfolioSegmentMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2018-12-31 0000737468 us-gaap:ConsumerPortfolioSegmentMember us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2018-12-31 0000737468 wash:HomeequityDomain us-gaap:FinancingReceivablesEqualToGreaterThan90DaysPastDueMember 2018-12-31 0000737468 us-gaap:FinancingReceivables30To59DaysPastDueMember 2018-12-31 0000737468 wash:OtherconsumerDomain us-gaap:FinancingReceivables30To59DaysPastDueMember 2018-12-31 0000737468 us-gaap:ConsumerPortfolioSegmentMember us-gaap:FinancingReceivables60To89DaysPastDueMember 2018-12-31 0000737468 us-gaap:CommercialPortfolioSegmentMember us-gaap:FinancingReceivables30To59DaysPastDueMember 2018-12-31 0000737468 wash:OtherConsumerMember 2019-06-30 0000737468 wash:OtherConsumerMember 2018-12-31 0000737468 wash:PurchasedMortgagesMember 2019-06-30 0000737468 wash:SelforiginatedMortgagesMember 2019-06-30 0000737468 wash:PurchasedMortgagesMember 2018-12-31 0000737468 wash:SelforiginatedMortgagesMember 2018-12-31 0000737468 wash:PaymentDefaultMember 2019-04-01 2019-06-30 0000737468 wash:PaymentDefaultMember 2019-01-01 2019-06-30 0000737468 wash:PaymentDefaultMember 2018-01-01 2018-06-30 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember 2018-06-30 0000737468 wash:CommercialOtherMember 2017-12-31 0000737468 wash:OtherconsumerDomain 2018-06-30 0000737468 us-gaap:ConsumerPortfolioSegmentMember 2017-12-31 0000737468 wash:CommercialOtherMember 2018-06-30 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember 2017-12-31 0000737468 us-gaap:CommercialPortfolioSegmentMember 2017-12-31 0000737468 wash:HomeequityDomain 2018-06-30 0000737468 us-gaap:ConsumerPortfolioSegmentMember 2018-06-30 0000737468 wash:HomeequityDomain 2017-12-31 0000737468 us-gaap:ResidentialPortfolioSegmentMember 2018-06-30 0000737468 us-gaap:ResidentialPortfolioSegmentMember 2017-12-31 0000737468 wash:OtherconsumerDomain 2017-12-31 0000737468 us-gaap:CommercialPortfolioSegmentMember 2018-06-30 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember 2019-03-31 0000737468 us-gaap:ConsumerPortfolioSegmentMember 2019-03-31 0000737468 us-gaap:ResidentialPortfolioSegmentMember 2019-03-31 0000737468 wash:CommercialOtherMember 2019-03-31 0000737468 us-gaap:CommercialPortfolioSegmentMember 2019-03-31 0000737468 wash:OtherconsumerDomain 2019-03-31 0000737468 wash:HomeequityDomain 2019-03-31 0000737468 wash:HomeequityDomain 2018-03-31 0000737468 wash:OtherconsumerDomain 2018-03-31 0000737468 us-gaap:CommercialRealEstatePortfolioSegmentMember 2018-03-31 0000737468 wash:CommercialOtherMember 2018-03-31 0000737468 us-gaap:ConsumerPortfolioSegmentMember 2018-03-31 0000737468 us-gaap:CommercialPortfolioSegmentMember 2018-03-31 0000737468 us-gaap:ResidentialPortfolioSegmentMember 2018-03-31 0000737468 srt:FederalHomeLoanBankOfBostonMember 2019-06-30 0000737468 srt:FederalHomeLoanBankOfBostonMember 2018-12-31 0000737468 srt:ParentCompanyMember 2019-06-30 0000737468 srt:SubsidiariesMember 2019-06-30 0000737468 srt:SubsidiariesMember 2018-12-31 0000737468 srt:ParentCompanyMember 2018-12-31 0000737468 us-gaap:InterestRateCapMember us-gaap:CashFlowHedgingMember us-gaap:OtherComprehensiveIncomeMember 2019-04-01 2019-06-30 0000737468 us-gaap:InterestRateSwapMember us-gaap:CashFlowHedgingMember us-gaap:OtherComprehensiveIncomeMember 2018-04-01 2018-06-30 0000737468 us-gaap:InterestRateFloorMember us-gaap:CashFlowHedgingMember us-gaap:OtherComprehensiveIncomeMember 2019-01-01 2019-06-30 0000737468 us-gaap:InterestRateCapMember us-gaap:CashFlowHedgingMember us-gaap:OtherComprehensiveIncomeMember 2018-04-01 2018-06-30 0000737468 us-gaap:InterestRateCapMember us-gaap:CashFlowHedgingMember us-gaap:OtherComprehensiveIncomeMember 2018-01-01 2018-06-30 0000737468 us-gaap:InterestRateSwapMember us-gaap:CashFlowHedgingMember us-gaap:OtherComprehensiveIncomeMember 2018-01-01 2018-06-30 0000737468 us-gaap:InterestRateSwapMember us-gaap:CashFlowHedgingMember us-gaap:OtherComprehensiveIncomeMember 2019-04-01 2019-06-30 0000737468 us-gaap:InterestRateCapMember us-gaap:CashFlowHedgingMember us-gaap:OtherComprehensiveIncomeMember 2019-01-01 2019-06-30 0000737468 us-gaap:InterestRateFloorMember us-gaap:CashFlowHedgingMember us-gaap:OtherComprehensiveIncomeMember 2019-04-01 2019-06-30 0000737468 us-gaap:InterestRateFloorMember us-gaap:CashFlowHedgingMember us-gaap:OtherComprehensiveIncomeMember 2018-04-01 2018-06-30 0000737468 us-gaap:InterestRateSwapMember us-gaap:CashFlowHedgingMember us-gaap:OtherComprehensiveIncomeMember 2019-01-01 2019-06-30 0000737468 us-gaap:InterestRateFloorMember us-gaap:CashFlowHedgingMember us-gaap:OtherComprehensiveIncomeMember 2018-01-01 2018-06-30 0000737468 wash:InterestRateSwapwithcustomersMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2018-01-01 2018-06-30 0000737468 us-gaap:ForwardContractsMember us-gaap:NondesignatedMember wash:NetGainsOnLoanSalesAndCommissionsOnLoansOriginatedForOthersMember 2018-01-01 2018-06-30 0000737468 us-gaap:NondesignatedMember 2019-04-01 2019-06-30 0000737468 us-gaap:ForeignExchangeContractMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2018-01-01 2018-06-30 0000737468 us-gaap:NondesignatedMember 2019-01-01 2019-06-30 0000737468 us-gaap:ForwardContractsMember us-gaap:NondesignatedMember wash:NetGainsOnLoanSalesAndCommissionsOnLoansOriginatedForOthersMember 2019-01-01 2019-06-30 0000737468 wash:InterestRateSwapwithcustomersMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2018-04-01 2018-06-30 0000737468 wash:InterestRateSwapwithcustomersMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2019-04-01 2019-06-30 0000737468 us-gaap:NondesignatedMember 2018-04-01 2018-06-30 0000737468 wash:InterestRateMirrorSwapsWithCounterpartiesMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2019-04-01 2019-06-30 0000737468 us-gaap:ForeignExchangeContractMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2019-04-01 2019-06-30 0000737468 us-gaap:InterestRateLockCommitmentsMember us-gaap:NondesignatedMember wash:NetGainsOnLoanSalesAndCommissionsOnLoansOriginatedForOthersMember 2018-01-01 2018-06-30 0000737468 us-gaap:ForeignExchangeContractMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2018-04-01 2018-06-30 0000737468 wash:InterestRateMirrorSwapsWithCounterpartiesMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2018-01-01 2018-06-30 0000737468 us-gaap:InterestRateLockCommitmentsMember us-gaap:NondesignatedMember wash:NetGainsOnLoanSalesAndCommissionsOnLoansOriginatedForOthersMember 2019-01-01 2019-06-30 0000737468 wash:RiskparticipationagreementsMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2018-04-01 2018-06-30 0000737468 us-gaap:ForwardContractsMember us-gaap:NondesignatedMember wash:NetGainsOnLoanSalesAndCommissionsOnLoansOriginatedForOthersMember 2019-04-01 2019-06-30 0000737468 us-gaap:ForwardContractsMember us-gaap:NondesignatedMember wash:NetGainsOnLoanSalesAndCommissionsOnLoansOriginatedForOthersMember 2018-04-01 2018-06-30 0000737468 wash:InterestRateSwapwithcustomersMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2019-01-01 2019-06-30 0000737468 us-gaap:NondesignatedMember 2018-01-01 2018-06-30 0000737468 wash:InterestRateMirrorSwapsWithCounterpartiesMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2019-01-01 2019-06-30 0000737468 wash:RiskparticipationagreementsMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2019-01-01 2019-06-30 0000737468 wash:RiskparticipationagreementsMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2018-01-01 2018-06-30 0000737468 us-gaap:InterestRateLockCommitmentsMember us-gaap:NondesignatedMember wash:NetGainsOnLoanSalesAndCommissionsOnLoansOriginatedForOthersMember 2018-04-01 2018-06-30 0000737468 us-gaap:InterestRateLockCommitmentsMember us-gaap:NondesignatedMember wash:NetGainsOnLoanSalesAndCommissionsOnLoansOriginatedForOthersMember 2019-04-01 2019-06-30 0000737468 us-gaap:ForeignExchangeContractMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2019-01-01 2019-06-30 0000737468 wash:RiskparticipationagreementsMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2019-04-01 2019-06-30 0000737468 wash:InterestRateMirrorSwapsWithCounterpartiesMember us-gaap:NondesignatedMember wash:NetGainsLossesOnInterestRateSwapsMember 2018-04-01 2018-06-30 0000737468 us-gaap:InterestRateSwapMember us-gaap:DesignatedAsHedgingInstrumentMember 2019-06-30 0000737468 wash:RiskparticipationinagreementMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:InterestRateLockCommitmentsMember 2018-12-31 0000737468 us-gaap:InterestRateCapMember us-gaap:DesignatedAsHedgingInstrumentMember 2019-06-30 0000737468 us-gaap:ForwardContractsMember 2018-12-31 0000737468 us-gaap:ForeignExchangeContractMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:InterestRateFloorMember us-gaap:DesignatedAsHedgingInstrumentMember 2019-06-30 0000737468 us-gaap:InterestRateLockCommitmentsMember 2019-06-30 0000737468 wash:InterestRateSwapwithcustomersMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:ForwardContractsMember 2019-06-30 0000737468 wash:RiskparticipationoutagreementMember us-gaap:NondesignatedMember 2018-12-31 0000737468 wash:RiskparticipationoutagreementMember us-gaap:NondesignatedMember 2019-06-30 0000737468 wash:RiskparticipationinagreementMember us-gaap:NondesignatedMember 2018-12-31 0000737468 wash:InterestRateSwapwithcustomersMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:DerivativeFinancialInstrumentsLiabilitiesMember 2019-06-30 0000737468 us-gaap:OtherAssetsMember wash:RiskparticipationagreementsMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:DerivativeFinancialInstrumentsLiabilitiesMember 2018-12-31 0000737468 us-gaap:OtherAssetsMember wash:InterestRateMirrorSwapsWithCounterpartiesMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:OtherAssetsMember us-gaap:ForwardContractsMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:OtherAssetsMember us-gaap:InterestRateSwapMember us-gaap:DesignatedAsHedgingInstrumentMember 2018-12-31 0000737468 us-gaap:OtherAssetsMember wash:InterestRateSwapwithcustomersMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:OtherLiabilitiesMember wash:RiskparticipationagreementsMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:OtherLiabilitiesMember us-gaap:InterestRateCapMember us-gaap:DesignatedAsHedgingInstrumentMember 2018-12-31 0000737468 us-gaap:OtherLiabilitiesMember us-gaap:InterestRateFloorMember us-gaap:DesignatedAsHedgingInstrumentMember 2018-12-31 0000737468 us-gaap:OtherLiabilitiesMember us-gaap:ForeignExchangeContractMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:OtherLiabilitiesMember us-gaap:ForwardContractsMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:OtherLiabilitiesMember us-gaap:InterestRateLockCommitmentsMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:OtherLiabilitiesMember us-gaap:InterestRateSwapMember us-gaap:DesignatedAsHedgingInstrumentMember 2019-06-30 0000737468 us-gaap:OtherLiabilitiesMember us-gaap:ForeignExchangeContractMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:OtherLiabilitiesMember us-gaap:InterestRateFloorMember us-gaap:DesignatedAsHedgingInstrumentMember 2019-06-30 0000737468 us-gaap:OtherAssetsMember us-gaap:InterestRateSwapMember us-gaap:DesignatedAsHedgingInstrumentMember 2019-06-30 0000737468 us-gaap:DerivativeFinancialInstrumentsAssetsMember 2018-12-31 0000737468 us-gaap:OtherLiabilitiesMember wash:InterestRateMirrorSwapsWithCounterpartiesMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:OtherAssetsMember us-gaap:InterestRateCapMember us-gaap:DesignatedAsHedgingInstrumentMember 2018-12-31 0000737468 us-gaap:OtherAssetsMember us-gaap:ForeignExchangeContractMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:DerivativeFinancialInstrumentsAssetsMember 2019-06-30 0000737468 us-gaap:OtherLiabilitiesMember wash:InterestRateSwapwithcustomersMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:OtherLiabilitiesMember wash:InterestRateSwapwithcustomersMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:OtherAssetsMember us-gaap:InterestRateCapMember us-gaap:DesignatedAsHedgingInstrumentMember 2019-06-30 0000737468 us-gaap:OtherAssetsMember us-gaap:InterestRateFloorMember us-gaap:DesignatedAsHedgingInstrumentMember 2018-12-31 0000737468 us-gaap:OtherAssetsMember us-gaap:InterestRateLockCommitmentsMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:OtherLiabilitiesMember us-gaap:InterestRateSwapMember us-gaap:DesignatedAsHedgingInstrumentMember 2018-12-31 0000737468 us-gaap:OtherLiabilitiesMember us-gaap:InterestRateLockCommitmentsMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:OtherAssetsMember us-gaap:ForwardContractsMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:OtherAssetsMember wash:InterestRateSwapwithcustomersMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:OtherAssetsMember us-gaap:InterestRateLockCommitmentsMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:OtherAssetsMember us-gaap:ForeignExchangeContractMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:OtherAssetsMember us-gaap:InterestRateFloorMember us-gaap:DesignatedAsHedgingInstrumentMember 2019-06-30 0000737468 us-gaap:OtherLiabilitiesMember wash:InterestRateMirrorSwapsWithCounterpartiesMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:OtherAssetsMember wash:InterestRateMirrorSwapsWithCounterpartiesMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:OtherAssetsMember wash:RiskparticipationagreementsMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:OtherLiabilitiesMember us-gaap:ForwardContractsMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:OtherLiabilitiesMember us-gaap:InterestRateCapMember us-gaap:DesignatedAsHedgingInstrumentMember 2019-06-30 0000737468 us-gaap:OtherLiabilitiesMember wash:RiskparticipationagreementsMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:InterestRateSwapMember us-gaap:DesignatedAsHedgingInstrumentMember 2018-12-31 0000737468 wash:InterestRateMirrorSwapsWithCounterpartiesMember us-gaap:NondesignatedMember 2019-06-30 0000737468 us-gaap:InterestRateFloorMember us-gaap:DesignatedAsHedgingInstrumentMember 2018-12-31 0000737468 wash:InterestRateMirrorSwapsWithCounterpartiesMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:InterestRateCapMember us-gaap:DesignatedAsHedgingInstrumentMember 2018-12-31 0000737468 us-gaap:ForeignExchangeContractMember us-gaap:NondesignatedMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2018-12-31 0000737468 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2018-12-31 0000737468 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsNonrecurringMember 2019-06-30 0000737468 us-gaap:FairValueMeasurementsNonrecurringMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsNonrecurringMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember wash:TrustPreferredSecuritiesIndividualNameIssuersMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember wash:TrustPreferredSecuritiesIndividualNameIssuersMember 2019-06-30 0000737468 us-gaap:FairValueMeasurementsRecurringMember us-gaap:USGovernmentSponsoredEnterprisesDebtSecuritiesMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USGovernmentSponsoredEnterprisesDebtSecuritiesMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USGovernmentSponsoredEnterprisesDebtSecuritiesMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 2019-06-30 0000737468 us-gaap:FairValueMeasurementsRecurringMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USStatesAndPoliticalSubdivisionsMember 2019-06-30 0000737468 us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateBondSecuritiesMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USStatesAndPoliticalSubdivisionsMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USStatesAndPoliticalSubdivisionsMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USGovernmentSponsoredEnterprisesDebtSecuritiesMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateBondSecuritiesMember 2019-06-30 0000737468 us-gaap:FairValueMeasurementsRecurringMember us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember wash:TrustPreferredSecuritiesIndividualNameIssuersMember 2019-06-30 0000737468 us-gaap:FairValueMeasurementsRecurringMember wash:TrustPreferredSecuritiesIndividualNameIssuersMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateBondSecuritiesMember 2019-06-30 0000737468 us-gaap:FairValueMeasurementsRecurringMember us-gaap:USStatesAndPoliticalSubdivisionsMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateBondSecuritiesMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USStatesAndPoliticalSubdivisionsMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USGovernmentSponsoredEnterprisesDebtSecuritiesMember 2018-12-31 0000737468 us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateBondSecuritiesMember 2018-12-31 0000737468 us-gaap:FairValueMeasurementsRecurringMember us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateBondSecuritiesMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember wash:TrustPreferredSecuritiesIndividualNameIssuersMember 2018-12-31 0000737468 us-gaap:FairValueMeasurementsRecurringMember 2018-12-31 0000737468 us-gaap:FairValueMeasurementsRecurringMember us-gaap:USGovernmentSponsoredEnterprisesDebtSecuritiesMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateBondSecuritiesMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USStatesAndPoliticalSubdivisionsMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USStatesAndPoliticalSubdivisionsMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember wash:TrustPreferredSecuritiesIndividualNameIssuersMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USGovernmentSponsoredEnterprisesDebtSecuritiesMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember wash:TrustPreferredSecuritiesIndividualNameIssuersMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:USGovernmentSponsoredEnterprisesDebtSecuritiesMember 2018-12-31 0000737468 us-gaap:FairValueMeasurementsRecurringMember us-gaap:USStatesAndPoliticalSubdivisionsMember 2018-12-31 0000737468 us-gaap:FairValueMeasurementsRecurringMember wash:TrustPreferredSecuritiesIndividualNameIssuersMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateBondSecuritiesMember 2018-12-31 0000737468 us-gaap:EstimateOfFairValueFairValueDisclosureMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2019-06-30 0000737468 us-gaap:CarryingReportedAmountFairValueDisclosureMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:EstimateOfFairValueFairValueDisclosureMember 2019-06-30 0000737468 us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsNonrecurringMember 2018-12-31 0000737468 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsNonrecurringMember 2018-12-31 0000737468 us-gaap:FairValueMeasurementsNonrecurringMember 2018-12-31 0000737468 wash:MortgageLoansHeldforSaleMember 2018-04-01 2018-06-30 0000737468 wash:MortgageLoansHeldforSaleMember 2019-04-01 2019-06-30 0000737468 wash:MortgageLoansHeldforSaleMember 2019-01-01 2019-06-30 0000737468 wash:MortgageLoansHeldforSaleMember 2018-01-01 2018-06-30 0000737468 wash:ContingentConsiderationMember 2015-08-01 2015-08-01 0000737468 srt:MaximumMember wash:PropertyAcquiredThroughForeclosureOrRepossessionMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2019-01-01 2019-06-30 0000737468 srt:MaximumMember wash:PropertyAcquiredThroughForeclosureOrRepossessionMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2018-01-01 2018-12-31 0000737468 srt:WeightedAverageMember wash:CollateralDependentImpairedLoansMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2019-01-01 2019-06-30 0000737468 srt:MinimumMember wash:PropertyAcquiredThroughForeclosureOrRepossessionMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2018-01-01 2018-12-31 0000737468 srt:MaximumMember wash:CollateralDependentImpairedLoansMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2019-01-01 2019-06-30 0000737468 srt:MaximumMember wash:CollateralDependentImpairedLoansMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2018-01-01 2018-12-31 0000737468 srt:MinimumMember wash:CollateralDependentImpairedLoansMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2018-01-01 2018-12-31 0000737468 srt:MinimumMember wash:CollateralDependentImpairedLoansMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2019-01-01 2019-06-30 0000737468 srt:WeightedAverageMember wash:PropertyAcquiredThroughForeclosureOrRepossessionMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2019-01-01 2019-06-30 0000737468 srt:WeightedAverageMember wash:PropertyAcquiredThroughForeclosureOrRepossessionMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2018-01-01 2018-12-31 0000737468 srt:MaximumMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2018-01-01 2018-12-31 0000737468 srt:MinimumMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2018-01-01 2018-12-31 0000737468 srt:MinimumMember wash:PropertyAcquiredThroughForeclosureOrRepossessionMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2019-01-01 2019-06-30 0000737468 srt:WeightedAverageMember wash:CollateralDependentImpairedLoansMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2018-01-01 2018-12-31 0000737468 srt:WeightedAverageMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsNonrecurringMember wash:AppraisalsOfCollateralMember 2018-01-01 2018-12-31 0000737468 us-gaap:RevenueFromContractWithCustomerMember 2019-01-01 2019-06-30 0000737468 us-gaap:RevenueFromContractWithCustomerMember 2018-01-01 2018-06-30 0000737468 us-gaap:RevenueFromContractWithCustomerMember us-gaap:TransferredOverTimeMember 2019-04-01 2019-06-30 0000737468 us-gaap:RevenueFromContractWithCustomerMember 2018-04-01 2018-06-30 0000737468 us-gaap:RevenueFromContractWithCustomerMember us-gaap:TransferredOverTimeMember 2018-04-01 2018-06-30 0000737468 us-gaap:RevenueFromContractWithCustomerMember us-gaap:TransferredAtPointInTimeMember 2018-04-01 2018-06-30 0000737468 us-gaap:RevenueFromContractWithCustomerMember 2019-04-01 2019-06-30 0000737468 us-gaap:RevenueFromContractWithCustomerMember us-gaap:TransferredAtPointInTimeMember 2019-01-01 2019-06-30 0000737468 us-gaap:RevenueFromContractWithCustomerMember us-gaap:TransferredAtPointInTimeMember 2019-04-01 2019-06-30 0000737468 us-gaap:RevenueFromContractWithCustomerMember us-gaap:TransferredOverTimeMember 2018-01-01 2018-06-30 0000737468 us-gaap:RevenueFromContractWithCustomerMember us-gaap:TransferredAtPointInTimeMember 2018-01-01 2018-06-30 0000737468 us-gaap:RevenueFromContractWithCustomerMember us-gaap:TransferredOverTimeMember 2019-01-01 2019-06-30 0000737468 us-gaap:SupplementalEmployeeRetirementPlanDefinedBenefitMember 2019-01-01 2019-06-30 0000737468 us-gaap:PensionPlansDefinedBenefitMember 2019-01-01 2019-06-30 0000737468 us-gaap:PensionPlansDefinedBenefitMember 2018-01-01 2018-06-30 0000737468 us-gaap:SupplementalEmployeeRetirementPlanDefinedBenefitMember 2018-01-01 2018-06-30 0000737468 us-gaap:SupplementalEmployeeRetirementPlanDefinedBenefitMember 2019-04-01 2019-06-30 0000737468 us-gaap:PensionPlansDefinedBenefitMember 2018-04-01 2018-06-30 0000737468 us-gaap:SupplementalEmployeeRetirementPlanDefinedBenefitMember 2018-04-01 2018-06-30 0000737468 us-gaap:PensionPlansDefinedBenefitMember 2019-04-01 2019-06-30 0000737468 us-gaap:ScenarioForecastMember 2013-12-30 2023-12-30 0000737468 wash:TimeBasedNonvestedSharesMember 2019-01-01 2019-06-30 0000737468 wash:PerformanceBasedNonvestedSharesMember 2019-01-01 2019-06-30 0000737468 wash:CommercialBankingMember 2018-01-01 2018-06-30 0000737468 wash:CommercialBankingMember 2019-01-01 2019-06-30 0000737468 wash:WealthManagementServicesMember 2019-01-01 2019-06-30 0000737468 us-gaap:CorporateMember 2018-01-01 2018-06-30 0000737468 us-gaap:CorporateMember 2019-01-01 2019-06-30 0000737468 wash:WealthManagementServicesMember 2018-01-01 2018-06-30 0000737468 wash:WealthManagementServicesMember 2018-06-30 0000737468 wash:WealthManagementServicesMember 2019-06-30 0000737468 us-gaap:CorporateMember 2018-06-30 0000737468 wash:CommercialBankingMember 2019-06-30 0000737468 wash:CommercialBankingMember 2018-06-30 0000737468 us-gaap:CorporateMember 2019-06-30 0000737468 wash:WealthManagementServicesMember 2018-04-01 2018-06-30 0000737468 us-gaap:CorporateMember 2019-04-01 2019-06-30 0000737468 wash:WealthManagementServicesMember 2019-04-01 2019-06-30 0000737468 wash:CommercialBankingMember 2018-04-01 2018-06-30 0000737468 us-gaap:CorporateMember 2018-04-01 2018-06-30 0000737468 wash:CommercialBankingMember 2019-04-01 2019-06-30 0000737468 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2019-04-01 2019-06-30 0000737468 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2019-03-31 0000737468 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-03-31 0000737468 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-06-30 0000737468 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2019-04-01 2019-06-30 0000737468 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2019-03-31 0000737468 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-04-01 2019-06-30 0000737468 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2019-06-30 0000737468 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2019-06-30 0000737468 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-03-31 0000737468 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-03-31 0000737468 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-04-01 2018-06-30 0000737468 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-06-30 0000737468 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-04-01 2018-06-30 0000737468 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-06-30 0000737468 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-06-30 0000737468 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-04-01 2018-06-30 0000737468 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-03-31 0000737468 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-01-01 2018-06-30 0000737468 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-01-01 2018-06-30 0000737468 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-01-01 2018-06-30 0000737468 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2017-12-31 0000737468 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2017-12-31 0000737468 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2017-12-31 0000737468 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2018-12-31 0000737468 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-12-31 0000737468 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2019-01-01 2019-06-30 0000737468 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-01-01 2019-06-30 0000737468 us-gaap:AccumulatedNetUnrealizedInvestmentGainLossMember 2019-01-01 2019-06-30 0000737468 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-12-31 0000737468 srt:MinimumMember 2018-01-01 2018-12-31 0000737468 srt:MaximumMember 2019-06-30 0000737468 srt:MaximumMember 2018-01-01 2018-12-31 0000737468 srt:MinimumMember 2019-06-30 0000737468 us-gaap:ForeignExchangeContractMember 2018-12-31 0000737468 wash:InterestRateSwapwithcustomersMember 2019-06-30 0000737468 us-gaap:InterestRateSwapMember 2018-12-31 0000737468 wash:InterestRateSwapwithcustomersMember 2018-12-31 0000737468 wash:InterestRateMirrorSwapsWithCounterpartiesMember 2019-06-30 0000737468 us-gaap:CommitmentsToExtendCreditMember wash:CommitmentsToExtendCreditOnCommericalLoansMember 2019-06-30 0000737468 wash:RiskparticipationinagreementMember 2018-12-31 0000737468 wash:RiskparticipationinagreementMember 2019-06-30 0000737468 us-gaap:ForeignExchangeContractMember 2019-06-30 0000737468 us-gaap:CommitmentsToExtendCreditMember wash:CommitmentsToExtendCreditOnHomeEquityLinesMember 2019-06-30 0000737468 us-gaap:CommitmentsToExtendCreditMember wash:CommitmentsToExtendCreditOnHomeEquityLinesMember 2018-12-31 0000737468 wash:InterestRateMirrorSwapsWithCounterpartiesMember 2018-12-31 0000737468 us-gaap:CommitmentsToExtendCreditMember wash:CommitmentsToExtendCreditOnOtherLoansMember 2018-12-31 0000737468 us-gaap:CommitmentsToExtendCreditMember wash:CommitmentsToExtendCreditOnStandbyLettersOfCreditMember 2018-12-31 0000737468 us-gaap:CommitmentsToExtendCreditMember wash:CommitmentsToExtendCreditOnCommericalLoansMember 2018-12-31 0000737468 us-gaap:InterestRateSwapMember 2019-06-30 0000737468 us-gaap:CommitmentsToExtendCreditMember wash:CommitmentsToExtendCreditOnStandbyLettersOfCreditMember 2019-06-30 0000737468 us-gaap:CommitmentsToExtendCreditMember wash:CommitmentsToExtendCreditOnOtherLoansMember 2019-06-30 wash:loan iso4217:USD xbrli:shares iso4217:USD wash:security xbrli:shares wash:derivative_instrument xbrli:pure
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
☒
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended
 
June 30, 2019
or
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______.
Commission file number:  001-32991
WASHINGTON TRUST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Rhode Island
 
05-0404671
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
23 Broad Street
 
 
Westerly,
Rhode Island
 
02891
(Address of principal executive offices)
 
(Zip Code)

(401) 348-1200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Mark one)
 
Large accelerated filer
☒
 
Accelerated filer
☐
Non-accelerated filer
☐
 
Smaller reporting company
☐
(Do not check if a smaller reporting company)
Emerging growth company
☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
COMMON STOCK, $.0625 PAR VALUE PER SHARE
WASH
The NASDAQ Stock Market LLC
The number of shares of common stock of the registrant outstanding as of July 30, 2019 was 17,337,072.


FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended June 30, 2019
 
 
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)
 
June 30,
2019
 
December 31,
2018
Assets:
 
 
 
Cash and due from banks

$115,904

 

$89,923

Short-term investments
3,910

 
3,552

Mortgage loans held for sale, at fair value
39,996

 
20,996

Securities:
 
 
 
Available for sale debt securities, at fair value
969,168

 
927,810

Held to maturity debt securities, at amortized cost (fair value $10,316 at December 31, 2018)
—

 
10,415

Total securities
969,168

 
938,225

Federal Home Loan Bank stock, at cost
49,759

 
46,068

Loans:
 
 
 
Total loans
3,730,339

 
3,680,360

Less allowance for loan losses
27,398

 
27,072

Net loans
3,702,941

 
3,653,288

Premises and equipment, net
29,302

 
29,005

Operating lease right-of-use assets
28,174

 
—

Investment in bank-owned life insurance
81,351

 
80,463

Goodwill
63,909

 
63,909

Identifiable intangible assets, net
7,684

 
8,162

Other assets
97,574

 
77,175

Total assets

$5,189,672

 

$5,010,766

Liabilities:
 
 
 
Deposits:
 
 
 
Noninterest-bearing deposits

$587,326

 

$603,216

Interest-bearing deposits
2,917,296

 
2,920,832

Total deposits
3,504,622

 
3,524,048

Federal Home Loan Bank advances
1,060,960

 
950,722

Junior subordinated debentures
22,681

 
22,681

Operating lease liabilities
30,210

 
—

Other liabilities
86,994

 
65,131

Total liabilities
4,705,467

 
4,562,582

Commitments and contingencies (Note 18)


 


Shareholders’ Equity:
 
 
 
Common stock of $.0625 par value; authorized 60,000,000 shares; issued and outstanding 17,335,869 shares at June 30, 2019 and 17,302,037 at December 31, 2018
1,083

 
1,081

Paid-in capital
121,115

 
119,888

Retained earnings
373,873

 
355,524

Accumulated other comprehensive loss
(11,866
)
 
(28,309
)
Total shareholders’ equity
484,205

 
448,184

Total liabilities and shareholders’ equity

$5,189,672

 

$5,010,766


The accompanying notes are an integral part of these unaudited consolidated financial statements.
- 3-


Washington Trust Bancorp, Inc. and Subsidiaries


 
Consolidated Statements of Income (unaudited)
(Dollars and shares in thousands, except per share amounts)


 
 
Three Months
 
Six Months
Periods ended June 30,
2019
 
2018
 
2019
 
2018
Interest income:
 
 
 
 
 
 
 
Interest and fees on loans

$42,138

 

$36,788

 

$83,882

 

$71,140

Interest on mortgage loans held for sale
288

 
313

 
468

 
539

Taxable interest on debt securities
7,006

 
5,358

 
14,232

 
10,476

Nontaxable interest on debt securities
8

 
20

 
17

 
43

Dividends on Federal Home Loan Bank stock
720

 
550

 
1,415

 
1,066

Other interest income
399

 
257

 
739

 
462

Total interest and dividend income
50,559

 
43,286

 
100,753

 
83,726

Interest expense:
 

 
 

 
 
 
 
Deposits
9,469

 
5,254

 
18,165

 
9,676

Federal Home Loan Bank advances
6,980

 
4,707

 
13,641

 
8,690

Junior subordinated debentures
252

 
214

 
505

 
397

Total interest expense
16,701

 
10,175

 
32,311

 
18,763

Net interest income
33,858

 
33,111

 
68,442

 
64,963

Provision for loan losses
525

 
400

 
1,175

 
400

Net interest income after provision for loan losses
33,333

 
32,711

 
67,267

 
64,563

Noninterest income:
 
 
 
 
 
 
 
Wealth management revenues
9,549

 
9,602

 
18,801

 
19,875

Mortgage banking revenues
3,640

 
2,941

 
6,286

 
5,779

Card interchange fees
1,018

 
961

 
2,015

 
1,808

Service charges on deposit accounts
929

 
903

 
1,804

 
1,766

Loan related derivative income
746

 
668

 
1,470

 
809

Income from bank-owned life insurance
566

 
537

 
1,215

 
1,052

Net realized losses on securities
(80
)
 
—

 
(80
)
 
—

Other income
385

 
381

 
609

 
647

Total noninterest income
16,753

 
15,993

 
32,120

 
31,736

Noninterest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
18,436

 
17,304

 
36,055

 
35,076

Outsourced services
2,518

 
2,350

 
5,124

 
4,223

Net occupancy
1,904

 
1,930

 
3,902

 
3,932

Equipment
1,028

 
1,069

 
2,039

 
2,249

Legal, audit and professional fees
664

 
555

 
1,198

 
1,281

FDIC deposit insurance costs
540

 
422

 
969

 
826

Advertising and promotion
525

 
329

 
764

 
506

Amortization of intangibles
239

 
247

 
478

 
495

Other expenses
2,297

 
2,082

 
4,586

 
4,830

Total noninterest expense
28,151

 
26,288

 
55,115

 
53,418

Income before income taxes
21,935

 
22,416

 
44,272

 
42,881

Income tax expense
4,662

 
4,742

 
9,504

 
8,996

Net income

$17,273

 

$17,674

 

$34,768

 

$33,885

 
 
 
 
 
 
 
 
Net income available to common shareholders

$17,238

 

$17,636

 

$34,699

 

$33,809

Weighted average common shares outstanding - basic
17,330

 
17,272

 
17,317

 
17,253

Weighted average common shares outstanding - diluted
17,405

 
17,387

 
17,403

 
17,384

Per share information:
Basic earnings per common share

$0.99

 

$1.02

 

$2.00

 

$1.96

 
Diluted earnings per common share

$0.99

 

$1.01

 

$1.99

 

$1.94

 
Cash dividends declared per share

$0.51

 

$0.43

 

$0.98

 

$0.86


The accompanying notes are an integral part of these unaudited consolidated financial statements.
- 4-


Washington Trust Bancorp, Inc. and Subsidiaries


 
Consolidated Statements of Comprehensive Income (unaudited)
(Dollars in thousands)


 
Three Months
 
Six Months
Periods ended June 30,
2019
 
2018
 
2019
 
2018
Net income

$17,273

 

$17,674

 

$34,768

 

$33,885

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net change in fair value of available for sale debt securities
6,033

 
(3,112
)
 
17,054

 
(13,526
)
Net change in fair value of cash flow hedges
(622
)
 
365

 
(1,064
)
 
1,254

Net change in defined benefit plan obligations
226

 
360

 
453

 
720

Total other comprehensive income (loss), net of tax
5,637

 
(2,387
)
 
16,443

 
(11,552
)
Total comprehensive income

$22,910

 

$15,287

 

$51,211

 

$22,333




The accompanying notes are an integral part of these unaudited consolidated financial statements.
- 5-


Washington Trust Bancorp, Inc. and Subsidiaries


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


For the three months ended June 30, 2019
Common
Shares Outstanding
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Balance at April 1, 2019
17,305

 

$1,082

 

$120,743

 

$365,521

 

($17,503
)
 

$469,843

Net income
—

 
—

 
—

 
17,273

 
—

 
17,273

Total other comprehensive income, net of tax
—

 
—

 
—

 
—

 
5,637

 
5,637

Cash dividends declared ($0.51 per share)
—

 
—

 
—

 
(8,921
)
 
—

 
(8,921
)
Share-based compensation
—

 
—

 
764

 
—

 
—

 
764

Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered
31

 
1

 
(392
)
 
—

 
—

 
(391
)
Balance at June 30, 2019
17,336

 

$1,083

 

$121,115

 

$373,873

 

($11,866
)
 

$484,205


For the six months ended June 30, 2019
Common
Shares Outstanding
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Balance at January 1, 2019
17,302

 

$1,081

 

$119,888

 

$355,524

 

($28,309
)
 

$448,184

Net income
—

 
—

 
—

 
34,768

 
—

 
34,768

Total other comprehensive income, net of tax
—

 
—

 
—

 
—

 
16,443

 
16,443

Cash dividends declared ($0.98 per share)
—

 
—

 
—

 
(17,141
)
 
—

 
(17,141
)
Share-based compensation
—

 
—

 
1,503

 
—

 
—

 
1,503

Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered
34

 
2

 
(276
)
 
—

 
—

 
(274
)
Cumulative effect of change in accounting principle
—

 
—

 
—

 
722

 
—

 
722

Balance at June 30, 2019
17,336

 

$1,083

 

$121,115

 

$373,873

 

($11,866
)
 

$484,205


The accompanying notes are an integral part of these unaudited consolidated financial statements.
- 6-


Washington Trust Bancorp, Inc. and Subsidiaries


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



For the three months ended June 30, 2018
Common
Shares Outstanding
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance at April 1, 2018
17,262

 

$1,079

 

$118,172

 

$326,505

 

($32,675
)
 

$413,081

Net income
—

 
—

 
—

 
17,674

 
—

 
17,674

Total other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
(2,387
)
 
(2,387
)
Cash dividends declared ($0.43 per share)
—

 
—

 
—

 
(7,509
)
 
—

 
(7,509
)
Share-based compensation
—

 
—

 
649

 
—

 
—

 
649

Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered
16

 
1

 
62

 
—

 
—

 
63

Balance at June 30, 2018
17,278

 

$1,080

 

$118,883

 

$336,670

 

($35,062
)
 

$421,571


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

 

$1,077

 

$117,961

 

$317,756

 

($23,510
)
 

$413,284

Net income
—

 
—

 
—

 
33,885

 
—

 
33,885

Total other comprehensive loss, net of tax
—

 
—

 
—

 
—

 
(11,552
)
 
(11,552
)
Cash dividends declared ($0.86 per share)
—

 
—

 
—

 
(14,971
)
 
—

 
(14,971
)
Share-based compensation
—

 
—

 
1,319

 
—

 
—

 
1,319

Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered
51

 
3

 
(397
)
 
—

 
—

 
(394
)
Balance at June 30, 2018
17,278

 

$1,080

 

$118,883

 

$336,670

 

($35,062
)
 

$421,571



The accompanying notes are an integral part of these unaudited consolidated financial statements.
- 7-


Washington Trust Bancorp, Inc. and Subsidiaries


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


Six months ended June 30,
2019

 
2018

Cash flows from operating activities:
 
 
 
Net income

$34,768

 

$33,885

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
1,175

 
400

Depreciation of premises and equipment
1,672

 
1,630

Net amortization of premiums and discounts on securities and loans
1,894

 
1,386

Amortization of intangibles
478

 
495

Share-based compensation
1,503

 
1,319

Tax benefit from stock option exercises and other equity awards
172

 
352

Income from bank-owned life insurance
(1,215
)
 
(1,052
)
Net gains on loan sales and commissions on loans originated for others, including fair value adjustments
(5,998
)
 
(5,465
)
Net realized losses on securities
80

 
—

Proceeds from sales of loans
199,897

 
182,964

Loans originated for sale
(213,247
)
 
(188,185
)
Decrease in operating lease right-of-use assets
748

 
—

Decrease in operating lease liabilities
(643
)
 
—

Increase in other assets
(26,368
)
 
(16,777
)
Increase in other liabilities
23,781

 
11,815

Net cash provided by operating activities
18,697

 
22,767

Cash flows from investing activities:
 
 
 
Purchases of:
Available for sale debt securities: Mortgage-backed
(72,262
)
 
(61,619
)
 
Available for sale debt securities: Other
(10,507
)
 
(1,064
)
Proceeds from sale of:
Other investment securities available for sale
9,920

 
—

Maturities, calls and principal payments of:
Available for sale debt securities: Mortgage-backed
51,590

 
41,270

 
Available for sale debt securities: Other
11,045

 
6,795

 
Held to maturity debt securities: Mortgage-backed
—

 
1,077

Purchases of Federal Home Loan Bank stock
(3,691
)
 
(5,764
)
Net increase in loans
(50,729
)
 
(115,986
)
Purchases of loans
(161
)
 
(1,676
)
Purchases of premises and equipment
(1,971
)
 
(1,675
)
Purchases of bank-owned life insurance
—

 
(5,000
)
Proceeds from surrender of bank-owned life insurance
326

 
—

Net cash used in investing activities
(66,440
)
 
(143,642
)
Cash flows from financing activities:
 
 
 
Net (decrease) increase in deposits
(19,426
)
 
78,904

Proceeds from Federal Home Loan Bank advances
1,022,000

 
1,135,000

Repayment of Federal Home Loan Bank advances
(911,762
)
 
(1,025,303
)
Payment of contingent consideration liability
—

 
(1,217
)
Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered
(274
)
 
(394
)
Cash dividends paid
(16,456
)
 
(14,346
)
Net cash provided by financing activities
74,082

 
172,644

Net increase in cash and cash equivalents
26,339

 
51,769

Cash and cash equivalents at beginning of period
93,475

 
82,923

Cash and cash equivalents at end of period

$119,814

 

$134,692


The accompanying notes are an integral part of these unaudited consolidated financial statements.
- 8-


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


Six months ended June 30,
2019

 
2018

Noncash Activities:
 
 
 
Loans charged off

$922

 

$793

Loans transferred to property acquired through foreclosure or repossession
—

 
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 assets
28,923

 
—

Operating lease liabilities
30,853

 
—

In conjunction with the adoption of ASU 2017-12 as detailed in Note 2 to the Unaudited Consolidated Financial Statements, the following qualifying debt securities classified as held-to-maturity were transferred to available for sale:
 
 
 
Fair value of debt securities transferred from held-to-maturity to available for sale
10,316

 
—

Supplemental Disclosures:
 
 
 
Interest payments

$30,341

 

$17,576

Income tax payments
9,786

 
8,570


The accompanying notes are an integral part of these unaudited consolidated financial statements.
- 9-


Condensed Notes to Unaudited Consolidated Financial Statements


Note 1 - Basis of Presentation
Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company that has elected to be a financial holding company.  The Bancorp’s subsidiaries include The Washington Trust Company, of Westerly (the “Bank”), a Rhode Island chartered commercial bank founded in 1800, and Weston Securities Corporation (“WSC”).  Through its subsidiaries, the Bancorp offers a complete product line of financial services, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut; its automated teller machines (“ATMs”); telephone banking; mobile banking and its internet website (www.washtrust.com).

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

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

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

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

Note 2 - Recently Issued Accounting Pronouncements
Accounting Standards Adopted in 2019
Leases - Topic 842
Accounting Standards Update No. 2016-02, “Leases” (“ASU 2016-02”), was issued in February 2016 and provides revised guidance related to the accounting and reporting of leases. ASU 2016-02 requires lessees to recognize most leases on the balance sheet. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee depends on its classification as a finance or operating lease. ASU 2016-02 requires a modified retrospective transition, with a package of practical expedients that entities may elect to apply. In January 2018, Accounting Standards Update No. 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” was issued to address concerns about the costs and complexity of complying with the transition provisions of ASU 2016-02. In July 2018, Accounting Standards Update No. 2018-10, “Codification Improvements to Topic 842, Leases” was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02. Also in July 2018, Accounting Standards Update No. 2018-11, “Targeted Improvements” (“ASU 2018-11”) was issued and allows for an optional transition method in which the provisions of Topic 842 would be applied upon the adoption date and would not have to be retroactively applied to the earliest reporting period presented in the consolidated financial statements. The Corporation used this optional transition method for the adoption of Topic 842. In December 2018, Accounting Standards Update No. 2018-20, “Leases (Topic 842) Narrow-Scope Improvement for Lessors” was issued to address lessors’ concerns about sales taxes and other similar taxes collected from lessees, certain lessor costs, and recognition of variable payments for contracts with lease and non-lease components. These ASUs were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.



- 10-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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

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

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

Derivatives and Hedging - Topic 815
Accounting Standards Update No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), was issued in August 2017 to better align financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 was effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. In addition, ASU 2017-12 also permitted the reclassification of eligible securities from the held-to-maturity classification to the available for sale classification. The Corporation adopted the provisions of ASU 2017-12 on January 1, 2019 using a modified retrospective transition method. As permitted by ASU 2017-12, qualifying debt securities classified as held to maturity with an amortized cost of $10.4 million and a fair value of $10.3 million were reclassified to available for sale upon the adoption date. An unrealized loss of $75 thousand (net of taxes) was recognized in the accumulated other comprehensive income component of shareholders’ equity at the date of adoption. The adoption of ASU 2017-12 did not have a material impact on the Corporation’s consolidated financial statements.

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

Accounting Standards Pending Adoption
Financial Instruments - Credit Losses - Topic 326
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 held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. 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. The Corporation will adopt ASU 2016-03 on


- 11-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

January 1, 2020 and is currently evaluating the effect that this ASU will have on the consolidated financial statements and disclosures.

In April 2019, Accounting Standards Update No. 2019-04, “Codification Improvements to Topic 326 Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU 2019-04”) was issued to provide additional clarification on the scope and disclosure requirements of Topic 326. ASU 2019-04 includes provisions related to accounting policy elections that can be made by the entity related to accrued interest receivable and expected prepayments on financial assets, the inclusion of recoveries in estimating the allowance for credit losses and consideration of contract extension and renewals when determining the contractual term. This ASU also provides clarification on the tabular vintage disclosures related to line-of-credit arrangements that convert term loans. In May 2019, Accounting Standards Update No. 2019-05, “Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief” (“ASU 2019-05”) was issued to allow an entity to make an irrevocable fair value option election on instruments within the 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 2019-04 and ASU 2019-05 are the same as the effective date of ASU 2016-13.

To prepare for the adoption of ASU 2016-13 and related updates, the Corporation has 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 allowance for credit losses. This has included assessing the adequacy of existing loan and loss data, as well as validating models for default and loss estimates. The new models will include additional assumptions used to calculate credit losses over the estimated life of the financial assets and will include the impact of forecasted economic conditions. The Corporation will continue the validation of models, the development of accounting policies and internal controls and the execution of “trial” runs of its Topic 326 compliant methodology throughout 2019.

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 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 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.

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”).  Some or all of these reserve requirements may be satisfied with vault cash. Reserve balances amounted to $25.5 million at June 30, 2019 and $21.6 million at December 31, 2018 and were included in cash and due from banks in the Unaudited Consolidated Balance Sheets.



- 12-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

As of June 30, 2019 and December 31, 2018, cash and due from banks included interest-bearing deposits in other banks of $61.7 million and $33.7 million, respectively.

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)
 
June 30, 2019
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Available for Sale Debt Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$236,726

 

$1,005

 

($304
)
 

$237,427

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
704,940

 
6,722

 
(4,482
)
 
707,180

Obligations of states and political subdivisions
90

 
—

 
—

 
90

Individual name issuer trust preferred debt securities
13,315

 
—

 
(1,014
)
 
12,301

Corporate bonds
13,713

 
25

 
(1,568
)
 
12,170

Total available for sale debt securities

$968,784

 

$7,752

 

($7,368
)
 

$969,168

Total securities

$968,784

 

$7,752

 

($7,368
)
 

$969,168



(Dollars in thousands)
 
December 31, 2018
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
Available for Sale Debt Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$246,708

 

$442

 

($4,467
)
 

$242,683

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
675,368

 
1,943

 
(16,518
)
 
660,793

Obligations of states and political subdivisions
935

 
2

 
—

 
937

Individual name issuer trust preferred debt securities
13,307

 
—

 
(1,535
)
 
11,772

Corporate bonds
13,402

 
—

 
(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



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 June 30, 2019 and December 31, 2018, debt securities with a fair value of $451.5 million and $439.7 million, respectively, were pledged as collateral for FHLB borrowings, potential borrowings with the FRB, certain public deposits and for other purposes. See Note 7 for additional disclosure on FHLB borrowings.



- 13-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The schedule of maturities of available for sale debt securities is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments.  All other debt securities are included based on contractual maturities.  Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.
(Dollars in thousands)
Available for Sale
June 30, 2019
Amortized Cost
 
Fair Value
Due in one year or less

$106,685

 

$106,963

Due after one year to five years
361,981

 
362,982

Due after five years to ten years
334,575

 
334,065

Due after ten years
165,543

 
165,158

Total debt securities

$968,784

 

$969,168


Included in the above table are debt securities with an amortized cost balance of $262.5 million and a fair value of $260.6 million at June 30, 2019 that are callable at the discretion of the issuers.  Final maturities of the callable securities range from 3 months to 18 years, with call features ranging from 1 month to 4 years.

Other-Than-Temporary Impairment Assessment
Management assesses whether the decline in fair value of investment securities is other-than-temporary on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility 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.

The following tables summarize temporarily impaired securities, segregated by length of time the securities have been in a continuous unrealized loss position:
(Dollars in thousands)
Less than 12 Months
 
12 Months or Longer
 
Total
June 30, 2019
#
 
Fair
Value
Unrealized
Losses
 
#

 
Fair
Value
Unrealized
Losses
 
#

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

 

$—


$—

 
5

 

$60,697


($304
)
 
5

 

$60,697


($304
)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
—

 
—

—

 
35

 
295,954

(4,482
)
 
35

 
295,954

(4,482
)
Individual name issuer trust preferred debt securities
—

 
—

—

 
5

 
12,301

(1,014
)
 
5

 
12,301

(1,014
)
Corporate bonds
—

 
—

—

 
4

 
10,432

(1,568
)
 
4

 
10,432

(1,568
)
Total temporarily impaired securities
—

 

$—


$—

 
49

 

$379,384


($7,368
)
 
49

 

$379,384


($7,368
)


(Dollars in thousands)
Less than 12 Months
 
12 Months or Longer
 
Total
December 31, 2018
#

 
Fair
Value
Unrealized
Losses
 
#

 
Fair
Value
Unrealized
Losses
 
#

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

 

$—


$—

 
16

 

$157,032


($4,467
)
 
16

 

$157,032


($4,467
)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
10

 
47,060

(439
)
 
51

 
438,701

(16,178
)
 
61

 
485,761

(16,617
)
Individual name issuer trust preferred debt securities
—

 
—

—

 
5

 
11,772

(1,535
)
 
5

 
11,772

(1,535
)
Corporate bonds
3

 
1,198

(9
)
 
5

 
10,427

(1,768
)
 
8

 
11,625

(1,777
)
Total temporarily impaired securities
13

 

$48,258


($448
)
 
77

 

$617,932


($23,948
)
 
90

 

$666,190


($24,396
)


- 14-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


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.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, the Corporation does not intend to sell these securities and it is not more-likely-than-not that the 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 June 30, 2019.

Individual Name Issuer Trust Preferred Debt Securities
Included in debt securities in an unrealized loss position at June 30, 2019 were five trust preferred securities issued by four individual companies in the banking sector.  Management believes the unrealized losses on these holdings were attributable to the general widening of spreads for this category of debt securities issued by financial services companies since the time these securities were purchased.  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 June 30, 2019, individual name issuer trust preferred debt securities with an amortized cost of $6.1 million and unrealized losses of $518 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 financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information.  We noted no additional downgrades to below investment grade between June 30, 2019 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, the Corporation does not intend to sell these securities and it is not more-likely-than-not that the 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 June 30, 2019.

Corporate Bonds
At June 30, 2019, the Corporation had four corporate bond holdings with unrealized losses totaling $1.6 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 primarily attributable to changes in the investment spreads and interest rates and not changes in the credit quality of the issuers of the debt securities. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is not more-likely-than-not that the 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 June 30, 2019.

The following table summarizes amounts relating to sales of securities:
(Dollars in thousands)
Three Months
 
Six Months
For the periods ended June 30,
2019
 
2018
 
2019
 
2018
Proceeds from sales

$9,920

 

$—

 

$9,920

 

$—

 
 
 
 
 
 
 
 
Gross realized gains

$—

 

$—

 

$—

 

$—

Gross realized losses
(80
)
 
—

 
(80
)
 
—

Net realized losses on securities

($80
)
 

$—

 

($80
)
 

$—






- 15-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 5 - Loans
The following is a summary of loans:
(Dollars in thousands)
June 30,
2019
December 31, 2018
Commercial:
 
 
Commercial real estate (1)

$1,482,836


$1,392,408

Commercial & industrial (2)
583,873

620,704

Total commercial
2,066,709

2,013,112

Residential Real Estate:
 
 
Residential real estate (3)
1,352,113

1,360,387

Consumer:
 
 
Home equity
288,078

280,626

Other (4)
23,439

26,235

Total consumer
311,517

306,861

Total loans (5)

$3,730,339


$3,680,360

(1)
Consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.
(2)
Consists of loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.
(3)
Consists of mortgage and homeowner construction loans secured by one- to four-family residential properties.
(4)
Consists of loans to individuals secured by general aviation aircraft and other personal installment loans.
(5)
Includes net unamortized loan origination costs of $5.3 million and $4.7 million, respectively, at June 30, 2019 and December 31, 2018 and net unamortized premiums on purchased loans of $609 thousand and $703 thousand, respectively, at June 30, 2019 and December 31, 2018.

As of both June 30, 2019 and December 31, 2018, loans amounting to $2.0 billion were 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.

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
 
 
 
 
 
 
June 30, 2019
30-59
 
60-89
 
Over 90
 
Total Past Due
 
Current
 
Total Loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate

$2,744

 

$—

 

$926

 

$3,670

 

$1,479,166

 

$1,482,836

Commercial & industrial
1

 
—

 
—

 
1

 
583,872

 
583,873

Total commercial
2,745

 
—

 
926

 
3,671

 
2,063,038

 
2,066,709

Residential Real Estate:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
4,006

 
2,758

 
4,473

 
11,237

 
1,340,876

 
1,352,113

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
1,763

 
351

 
790

 
2,904

 
285,174

 
288,078

Other
13

 
1

 
88

 
102

 
23,337

 
23,439

Total consumer
1,776

 
352

 
878

 
3,006

 
308,511

 
311,517

Total loans

$8,527

 

$3,110

 

$6,277

 

$17,914

 

$3,712,425

 

$3,730,339




- 16-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

(Dollars in thousands)
Days Past Due
 
 
 
 
 
 
December 31, 2018
30-59
 
60-89
 
Over 90
 
Total Past Due
 
Current
 
Total Loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate

$155

 

$925

 

$—

 

$1,080

 

$1,391,328

 

$1,392,408

Commercial & industrial
—

 
—

 
—

 
—

 
620,704

 
620,704

Total commercial
155

 
925

 
—

 
1,080

 
2,012,032

 
2,013,112

Residential Real Estate:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
6,318

 
2,693

 
1,509

 
10,520

 
1,349,867

 
1,360,387

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
1,281

 
156

 
552

 
1,989

 
278,637

 
280,626

Other
33

 
—

 
—

 
33

 
26,202

 
26,235

Total consumer
1,314

 
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 at both June 30, 2019 and December 31, 2018 were nonaccrual loans of $8.6 million.

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



- 17-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Impaired Loans
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
 
Jun 30,
2019
 
Dec 31,
2018
 
Jun 30,
2019
 
Dec 31,
2018
 
Jun 30,
2019
 
Dec 31,
2018
No Related Allowance Recorded
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate

$926

 

$925

 

$926

 

$926

 

$—

 

$—

Commercial & industrial
—

 
4,681

 
—

 
4,732

 
—

 
—

Total commercial
926

 
5,606

 
926

 
5,658

 
—

 
—

Residential Real Estate:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
9,825

 
9,347

 
10,662

 
9,695

 
—

 
—

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
1,224

 
1,360

 
1,224

 
1,360

 
—

 
—

Other
88

 
—

 
88

 
—

 
—

 
—

Total consumer
1,312

 
1,360

 
1,312

 
1,360

 
—

 
—

Subtotal
12,063

 
16,313

 
12,900

 
16,713

 
—

 
—

With Related Allowance Recorded
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate

$—

 

$—

 

$—

 

$—

 

$—

 

$—

Commercial & industrial
—

 
52

 
—

 
73

 
—

 
—

Total commercial
—

 
52

 
—

 
73

 
—

 
—

Residential Real Estate:
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
1,145

 
364

 
1,171

 
390

 
97

 
100

Consumer:
 
 
 
 
 
 
 
 
 
 
 
Home equity
21

 
85

 
21

 
85

 
20

 
24

Other
19

 
22

 
19

 
22

 
2

 
3

Total consumer
40

 
107

 
40

 
107

 
22

 
27

Subtotal
1,185

 
523

 
1,211

 
570

 
119

 
127

Total impaired loans

$13,248

 

$16,836

 

$14,111

 

$17,283

 

$119

 

$127

Total:
 
 
 
 
 
 
 
 
 
 
 
Commercial

$926

 

$5,658

 

$926

 

$5,731

 

$—

 

$—

Residential real estate
10,970

 
9,711

 
11,833

 
10,085

 
97

 
100

Consumer
1,352

 
1,467

 
1,352

 
1,467

 
22

 
27

Total impaired loans

$13,248

 

$16,836

 

$14,111

 

$17,283

 

$119

 

$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.



- 18-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following tables present the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class.
 
 
 
 
 
 
 
 
(Dollars in thousands)
Average Recorded Investment
 
Interest Income Recognized
Three months ended June 30,
2019
 
2018
 
2019
 
2018
Commercial:
 
 
 
 
 
 
 
Commercial real estate

$926

 

$—

 

$—

 

$—

Commercial & industrial
3,868

 
5,983

 
49

 
73

Total commercial
4,794

 
5,983

 
49

 
73

Residential Real Estate:


 


 


 


Residential real estate
10,728

 
10,017

 
107

 
85

Consumer:


 


 


 


Home equity
1,332

 
1,036

 
13

 
10

Other
35

 
88

 
—

 
2

Total consumer
1,367

 
1,124

 
13

 
12

Totals

$16,889

 

$17,124

 

$169

 

$170

 
 
 
 
 
 
 
 
(Dollars in thousands)
Average Recorded Investment
 
Interest Income Recognized
Six months ended June 30,
2019
 
2018
 
2019
 
2018
Commercial:
 
 
 
 
 
 
 
Commercial real estate

$951

 

$2,039

 

$1

 

$—

Commercial & industrial
4,276

 
5,738

 
103

 
139

Total commercial
5,227

 
7,777

 
104

 
139

Residential Real Estate:
 
 
 
 
 
 
 
Residential real estate
10,441

 
9,934

 
222

 
197

Consumer:
 
 
 
 
 
 
 
Home equity
1,406

 
853

 
27

 
19

Other
28

 
116

 
—

 
5

Total consumer
1,434

 
969

 
27

 
24

Totals

$17,102

 

$18,680

 

$353

 

$360



Nonaccrual Loans
Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. When loans are placed on nonaccrual status, interest previously accrued but not collected is reversed against current period income.  Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.



- 19-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following is a summary of nonaccrual loans, segregated by class of loans:
(Dollars in thousands)
Jun 30,
2019
 
Dec 31,
2018
Commercial:
 
 
 
Commercial real estate

$926

 

$925

Commercial & industrial
—

 
—

Total commercial
926

 
925

Residential Real Estate:
 
 
 
Residential real estate
10,610

 
9,346

Consumer:
 
 
 
Home equity
1,243

 
1,436

Other
88

 
—

Total consumer
1,331

 
1,436

Total nonaccrual loans

$12,867

 

$11,707

Accruing loans 90 days or more past due

$—

 

$—



As of June 30, 2019 and December 31, 2018, loans secured by one- to four-family residential property amounting to $3.5 million and $761 thousand, respectively, were in process of foreclosure.

Nonaccrual loans of $4.3 million and $3.1 million, respectively, were current as to the payment of principal and interest at June 30, 2019 and December 31, 2018.

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

Troubled Debt Restructurings
Loans are considered to be troubled debt restructurings when the Corporation has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have 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 collectability of the loan.  Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status.  Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.

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 $882 thousand and $5.6 million, respectively, at June 30, 2019 and December 31, 2018. The allowance for loan losses included specific reserves for these troubled debt restructurings of $100 thousand and $103 thousand, respectively, at June 30, 2019 and December 31, 2018.

For the three and six months ended June 30, 2019, there were no loans modified as a troubled debt restructuring. For the three months ended June 30, 2018, there were no loans modified as a troubled debt restructuring. For the six months ended June 30,


- 20-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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

For the three and six months ended June 30, 2019 and 2018, there were no payment defaults on troubled debt restructured loans modified within the previous 12 months.

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

 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 

Credit Quality Indicators
Commercial
The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. For non-impaired loans, the 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 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 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.


- 21-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


The following table presents the commercial loan portfolio, segregated by category of credit quality indicator:
(Dollars in thousands)
Pass
 
Special Mention
 
Classified
 
Jun 30,
2019
 
Dec 31,
2018
 
Jun 30,
2019
 
Dec 31,
2018
 
Jun 30,
2019
 
Dec 31,
2018
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate

$1,460,537

 

$1,387,666

 

$17,587

 

$205

 

$4,712

 

$4,537

Commercial & industrial
546,188

 
559,019

 
22,234

 
50,426

 
15,451

 
11,259

Total commercial

$2,006,725

 

$1,946,685

 

$39,821

 

$50,631

 

$20,163

 

$15,796



Residential and Consumer
Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type. For non-impaired residential real estate and consumer loans, the Corporation assigns loss allocation factors to each respective loan type.

Other techniques 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 Fair Isaac Corporation (“FICO”) score and an estimated loan to value (“LTV”) ratio. LTV ratio is determined via statistical modeling analyses. The indicated LTV levels are estimated based on such factors as the location, the original LTV ratio, and the date of origination of the loan and do not reflect actual appraisal amounts. The results of these analyses and other loan review procedures are taken into consideration in the determination of loss allocation factors for residential mortgage and home equity consumer credits.

The following table presents the residential and consumer loan portfolios, segregated by loan type and credit quality indicator:
(Dollars in thousands)
Current
 
Past Due
 
Jun 30,
2019
 
Dec 31,
2018
 
Jun 30,
2019
 
Dec 31,
2018
Residential Real Estate:
 
 
 
 
 
 
 
Self-originated mortgages

$1,239,272

 

$1,238,402

 

$10,141

 

$9,079

Purchased mortgages
101,604

 
111,465

 
1,096

 
1,441

Total residential real estate

$1,340,876

 

$1,349,867

 

$11,237

 

$10,520

Consumer:
 
 
 
 
 
 
 
Home equity

$285,174

 

$278,637

 

$2,904

 

$1,989

Other
23,337

 
26,202

 
102

 
33

Total consumer

$308,511

 

$304,839

 

$3,006

 

$2,022



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.



- 22-


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 June 30, 2019:
(Dollars in thousands)
Commercial
 
 
Consumer
 
 
 
CRE (1)
C&I (2)
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance

$17,191


$4,498


$21,689


$4,009


$1,589


$357


$1,946


$27,644

Charge-offs
—

(4
)
(4
)
(486
)
(311
)
(18
)
(329
)
(819
)
Recoveries
—

20

20

—

22

6

28

48

Provision
(309
)
(61
)
(370
)
1,334

(387
)
(52
)
(439
)
525

Ending Balance

$16,882


$4,453


$21,335


$4,857


$913


$293


$1,206


$27,398


(1) Commercial real estate loans.
(2) Commercial & industrial loans.

The following table presents the activity in the allowance for loan losses for the six months ended June 30, 2019:
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Commercial
 
 
Consumer
 
 
 
CRE (1)
C&I (2)
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance

$15,381


$5,847


$21,228


$3,987


$1,603


$254


$1,857


$27,072

Charge-offs
—

(18
)
(18
)
(486
)
(372
)
(46
)
(418
)
(922
)
Recoveries
—

28

28

—

35

10

45

73

Provision
1,501

(1,404
)
97

1,356

(353
)
75

(278
)
1,175

Ending Balance

$16,882


$4,453


$21,335


$4,857


$913


$293


$1,206


$27,398

(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 June 30, 2018:
(Dollars in thousands)
Commercial
 
 
Consumer
 
 
 
CRE (1)
C&I (2)
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance

$11,819


$5,871


$17,690


$5,494


$2,192


$488


$2,680


$25,864

Charge-offs
—

(1
)
(1
)
(5
)
(76
)
(21
)
(97
)
(103
)
Recoveries
—

4

4

—

3

6

9

13

Provision
624

768

1,392

(175
)
(744
)
(73
)
(817
)
400

Ending Balance

$12,443


$6,642


$19,085


$5,314


$1,375


$400


$1,775


$26,174

(1) Commercial real estate loans.
(2) Commercial & industrial loans.

The following table presents the activity in the allowance for loan losses for the six months ended June 30, 2018:
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Commercial
 
 
Consumer
 
 
 
CRE (1)
C&I (2)
Total Commercial
Residential Real Estate
Home Equity
Other
Total Consumer
Total
Beginning Balance

$12,729


$5,580


$18,309


$5,427


$2,412


$340


$2,752


$26,488

Charge-offs
(627
)
(7
)
(634
)
(5
)
(111
)
(43
)
(154
)
(793
)
Recoveries
25

33

58

—

10

11

21

79

Provision
316

1,036

1,352

(108
)
(936
)
92

(844
)
400

Ending Balance

$12,443


$6,642


$19,085


$5,314


$1,375


$400


$1,775


$26,174


(1) Commercial real estate loans.
(2) Commercial & industrial loans.



- 23-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the Corporation’s loan portfolio and associated allowance for loan losses by portfolio segment and by impairment methodology:
(Dollars in thousands)
June 30, 2019
 
December 31, 2018
 
Loans
 
Related Allowance
 
Loans
 
Related Allowance
Loans Individually Evaluated for Impairment
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Commercial real estate

$926

 

$—

 

$925

 

$—

Commercial & industrial
—

 
—

 
4,714

 
—

Total commercial
926

 
—

 
5,639

 
—

Residential Real Estate:
 
 
 
 
 
 
 
Residential real estate
10,969

 
97

 
9,710

 
100

Consumer:
 
 
 
 
 
 
 
Home equity
1,245

 
20

 
1,445

 
24

Other
107

 
2

 
22

 
3

Total consumer
1,352

 
22

 
1,467

 
27

Subtotal
13,247

 
119

 
16,816

 
127

Loans Collectively Evaluated for Impairment
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Commercial real estate
1,481,910

 
16,882

 
1,391,483

 
15,381

Commercial & industrial
583,873

 
4,453

 
615,990

 
5,847

Total commercial
2,065,783

 
21,335

 
2,007,473

 
21,228

Residential Real Estate:
 
 
 
 
 
 
 
Residential real estate
1,341,144

 
4,760

 
1,350,677

 
3,887

Consumer:
 
 
 
 
 
 
 
Home equity
286,833

 
893

 
279,182

 
1,579

Other
23,332

 
291

 
26,212

 
251

Total consumer
310,165

 
1,184

 
305,394

 
1,830

Subtotal
3,717,092

 
27,279

 
3,663,544

 
26,945

Total

$3,730,339

 

$27,398

 

$3,680,360

 

$27,072




- 24-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 7 - Federal Home Loan Bank Advances
Advances payable to the FHLB amounted to $1.1 billion and $950.7 million, respectively, at June 30, 2019 and December 31, 2018.

The following table presents maturities and weighted average interest rates on FHLB advances outstanding as of June 30, 2019:
(Dollars in thousands)
Scheduled
Maturity
 
Weighted
Average Rate
July 1, 2019 to December 31, 2019

$534,996

 
2.58
%
2020
369,533

 
2.39

2021
86,222

 
2.73

2022
55,447

 
3.65

2023
9,428

 
4.01

2024 and thereafter
5,334

 
5.06

Balance at June 30, 2019

$1,060,960

 
2.60
%


As of June 30, 2019 and December 31, 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 $535.3 million and $628.5 million, respectively. The Bank pledges certain qualified investment securities and loans as collateral to the FHLB.



- 25-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 8 - Shareholders' Equity
Regulatory Capital Requirements
Capital levels at June 30, 2019 exceeded the regulatory minimum levels to be considered “well capitalized.”

The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios, as well as the corresponding minimum and well capitalized regulatory amounts and ratios that were in effect during the respective periods:
(Dollars in thousands)
Actual
 
For Capital Adequacy Purposes
 
To Be “Well Capitalized” Under Prompt Corrective Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Total Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation

$475,982

 
12.80
%
 

$297,470

 
8.00
%
 
N/A

 
N/A

Bank
473,515

 
12.74

 
297,426

 
8.00

 

$371,783

 
10.00
%
Tier 1 Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
448,282

 
12.06

 
223,102

 
6.00

 
N/A

 
N/A

Bank
445,815

 
11.99

 
223,070

 
6.00

 
297,426

 
8.00

Common Equity Tier 1 Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
426,284

 
11.46

 
167,327

 
4.50

 
N/A

 
N/A

Bank
445,815

 
11.99

 
167,302

 
4.50

 
241,659

 
6.50

Tier 1 Capital (to Average Assets): (1)
 
 
 
 
 
 
 
 
 
 
 
Corporation
448,282

 
8.76

 
204,811

 
4.00

 
N/A

 
N/A

Bank
445,815

 
8.71

 
204,724

 
4.00

 
255,906

 
5.00

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Total Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
455,699

 
12.56

 
290,146

 
8.00

 
N/A

 
N/A

Bank
453,033

 
12.49

 
290,128

 
8.00

 
362,660

 
10.00

Tier 1 Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
428,338

 
11.81

 
217,609

 
6.00

 
N/A

 
N/A

Bank
425,672

 
11.74

 
217,596

 
6.00

 
290,128

 
8.00

Common Equity Tier 1 Capital (to Risk-Weighted Assets):
 
 
 
 
 
 
 
 
 
 
 
Corporation
406,340

 
11.20

 
163,207

 
4.50

 
N/A

 
N/A

Bank
425,672

 
11.74

 
163,197

 
4.50

 
235,729

 
6.50

Tier 1 Capital (to Average Assets): (1)
 
 
 
 
 
 
 
 
 
 
 
Corporation
428,338

 
8.89

 
192,690

 
4.00

 
N/A

 
N/A

Bank
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 1.875% on January 1, 2018. The capital conservation buffer increased another 0.625% on January 1, 2019, reaching 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 June 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 Federal Reserve’s capital adequacy guidelines.


- 26-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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 June 30, 2019 and December 31, 2018, the Bancorp had two 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 June 30, 2019 and December 31, 2018, the Bank had two 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 June 30, 2019 and December 31, 2018, the Bank had three 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 changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized.

Loan Related Derivative Contracts
Interest Rate Swap Contracts with Customers
The Corporation has entered into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk.  The interest rate swap contracts with commercial loan borrowers allow them to convert variable-rate loan payments to fixed-rate loan payments.  When we enter 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 June 30, 2019 and December 31, 2018, Washington Trust had interest rate swap contracts with commercial loan borrowers with notional amounts of $678.9 million and $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.

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


- 27-


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 June 30, 2019, the notional amounts of risk participation-out agreements and risk participation-in agreements were $44.7 million and $46.2 million, respectively, compared to $57.3 million and $46.5 million, respectively, as of December 31, 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.

The notional amount of foreign exchange contracts was $2.8 million as of both June 30, 2019 and December 31, 2018.

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

As of June 30, 2019, the notional amounts of interest rate lock commitments and forward sale commitments were $89.7 million and $149.4 million, respectively, compared to $30.8 million and $62.0 million, respectively, as of December 31, 2018.


- 28-


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 Location
Jun 30, 2019
 
Dec 31, 2018
 
Balance Sheet Location
Jun 30, 2019
 
Dec 31, 2018
Derivatives Designated as Cash Flow Hedging Instruments:
 
 
 
 
 
 
 
 
 
Interest rate risk management contracts:
 
 
 
 
 
 
 
 
 
Interest rate caps
Other assets

$—

 

$20

 
Other liabilities

$—

 

$—

Interest rate swaps
Other assets
7

 
903

 
Other liabilities
724

 
—

Interest rate floors
Other assets
120

 
37

 
Other liabilities
—

 
—

Derivatives not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
Loan related derivative contracts:
 
 
 
 
 
 
 
 
 
Interest rate swaps with customers
Other assets
25,857

 
5,340

 
Other liabilities
429

 
7,719

Mirror swaps with counterparties
Other assets
420

 
7,592

 
Other liabilities
25,955

 
5,392

Risk participation agreements
Other assets
1

 
—

 
Other liabilities
1

 
—

Foreign exchange contracts
Other assets
4

 
—

 
Other liabilities
—

 
7

Forward loan commitments:
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
Other assets
2,102

 
806

 
Other liabilities
—

 
—

Forward sale commitments
Other assets
23

 
—

 
Other liabilities
1,560

 
816

Gross amounts
 
28,534

 
14,698

 
 
28,669

 
13,934

Less amounts offset in Consolidated Balance Sheets (1)
 
551

 
10,732

 
 
551

 
10,732

Net amounts presented in Consolidated Balance Sheets
 
27,983

 
3,966

 
 
28,118

 
3,202

Less collateral pledged (2)
 
—

 
—

 
 
25,303

 
1,460

Net amounts
 

$27,983

 

$3,966

 
 

$2,815

 

$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.

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
 
Three Months
 
Six Months
Periods ended June 30,
2019
 
2018
 
2019
 
2018
Derivatives Designated as Cash Flow Hedging Instruments:
 
 
 
 
 
 
 
Interest rate risk management contracts:
 
 
 
 
 
 
 
Interest rate caps

$14

 

$11

 

$14

 

$49

Interest rate swaps
(765
)
 
294

 
(1,231
)
 
1,133

Interest rate floors
129

 
60

 
153

 
72

Total

($622
)
 

$365

 

($1,064
)
 

$1,254


See Note 15 for additional disclosure pertaining to the amounts reclassified from accumulated other comprehensive income into earnings for derivatives designated as cash flow hedging instruments.



- 29-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

(Dollars in thousands)
 
Amount of Gain (Loss)
Recognized in Income on Derivatives
 
 
Three Months
 
Six Months
Periods ended June 30,
Statement of Income Location
2019
 
2018
 
2019
 
2018
Derivatives not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
Loan related derivative contracts:
 
 
 
 
 
 
 
 
Interest rate swaps with customers
Loan related derivative income

$16,974

 

($3,001
)
 
27,284

 
(12,196
)
Mirror swaps with counterparties
Loan related derivative income
(16,246
)
 
3,645

 
(25,850
)
 
12,969

Risk participation agreements
Loan related derivative income
—

 
—

 
—

 
—

Foreign exchange contracts
Loan related derivative income
18

 
24

 
36

 
36

Forward loan commitments:
 
 
 
 
 
 
 
 
Interest rate lock commitments
Mortgage banking revenues
610

 
191

 

$1,295

 

$177

Forward sale commitments
Mortgage banking revenues
(1,439
)
 
(82
)
 
(1,868
)
 
1,236

Total
 

($83
)
 

$777

 

$897

 

$2,222



Note 10 - Fair Value Measurements
The Corporation uses fair value measurements to record fair value adjustments on certain assets and liabilities and to determine fair value disclosures.  Items recorded at fair value on a recurring basis include securities available for sale, mortgage loans held for sale and derivatives.  Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights.  These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets.

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

•
Level 1 – Quoted prices for identical assets or liabilities in active markets.
•
Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
•
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in the markets and which reflect the Corporation’s market assumptions.

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

The following table presents a summary of mortgage loans held for sale accounted for under the fair value option:
(Dollars in thousands)
June 30,
2019
December 31,
2018
Aggregate fair value

$39,996


$20,996

Aggregate principal balance
38,953

20,498

Difference between fair value and principal balance

$1,043


$498



Changes in fair value of mortgage loans held for sale accounted for under the fair value option election amounted to an increase of $679 thousand and $544 thousand in the three and six months ended June 30, 2019, respectively, compared to an increase of


- 30-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

$441 thousand and $112 thousand in the three and six months ended June 30, 2018, 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 June 30, 2019 and December 31, 2018.

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

Level 2 debt securities are traded less frequently than exchange-traded instruments. The fair value of these securities is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.  This category includes obligations of U.S. government-sponsored enterprises, including mortgage-backed securities, obligations of states and political subdivisions, individual name issuer trust preferred debt securities and corporate bonds.

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

Derivatives
Interest rate cap, swap and floor contracts are traded in over-the-counter markets where quoted market prices are not readily available.  Fair value measurements are determined using independent pricing models that utilize primarily market observable inputs, such as swap rates of different maturities and LIBOR rates. The Corporation also evaluates the credit risk of its counterparties as well as that of the Corporation.  Accordingly, factors such as the likelihood of default by the Corporation and its counterparties, its net exposures and remaining contractual life are considered in determining if any fair value adjustments related to credit risk are required.  Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position, if any. Although the Corporation has determined that the majority of the inputs used to value its interest rate swap, cap and floor contracts fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with interest rate contracts and risk participation agreements utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Corporation and its counterparties. However, as of June 30, 2019 and December 31, 2018, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments


- 31-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

are not significant to the overall valuation of its derivatives. As a result, the Corporation has classified its derivative valuations in their entirety as Level 2.

Fair value measurements of forward loan commitments (interest rate lock commitments and forward sale commitments) are primarily based on current market prices for similar assets in the secondary market for mortgage loans and therefore are classified as Level 2 assets. The fair value of interest rate lock commitments is also dependent on the ultimate closing of the loans. Pull-through rates are based on the Corporation’s historical data and reflect the Corporation’s best estimate of the likelihood that a commitment will result in a closed loan. Although the pull-through rates are Level 3 inputs, the Corporation has assessed the significance of the impact of pull-through rates on the overall valuation of its interest rate lock commitments and has determined that they are not significant to the overall valuation. As a result, the Corporation has classified its interest rate lock commitments as Level 2.

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

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

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

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

$237,427


$—


$237,427


$—

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
707,180

—

707,180

—

Obligations of states and political subdivisions
90

—

90

—

Individual name issuer trust preferred debt securities
12,301

—

12,301

—

Corporate bonds
12,170

—

12,170

—

Mortgage loans held for sale
39,996

—

39,996

—

Derivative assets
27,983

—

27,983

—

Total assets at fair value on a recurring basis

$1,037,147


$—


$1,037,147


$—

Liabilities:
 
 
 
 
Derivative liabilities

$28,118


$—


$28,118


$—

Total liabilities at fair value on a recurring basis

$28,118


$—


$28,118


$—





- 32-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


(Dollars in thousands)
Total
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
December 31, 2018
Assets:
 
 
 
 
Available for sale debt securities:
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$242,683


$—


$242,683


$—

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
660,793

—

660,793

—

Obligations of states and political subdivisions
937

—

937

—

Individual name issuer trust preferred debt securities
11,772

—

11,772

—

Corporate bonds
11,625

—

11,625

—

Mortgage loans held for sale
20,996

—

20,996

—

Derivative assets
3,966

—

3,966

—

Total assets at fair value on a recurring basis

$952,772


$—


$952,772


$—

Liabilities:
 
 
 
 
Derivative liabilities

$3,202


$—


$3,202


$—

Total liabilities at fair value on a recurring basis

$3,202


$—


$3,202


$—



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 six months ended June 30, 2019 and 2018.
 
 
 
 

Items Recorded at Fair Value on a Nonrecurring Basis
The following table presents the carrying value of assets held at June 30, 2019, which were written down to fair value during the six months ended June 30, 2019:
(Dollars in thousands)
Total
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
 
 
Assets:
 
 
 
 
 
 
 
Collateral dependent impaired loans

$768

 

$—

 

$—

 

$768

Total assets at fair value on a nonrecurring basis

$768

 

$—

 

$—

 

$768


The allowance for loan losses on collateral dependent impaired loans amounted to $20 thousand at June 30, 2019.



- 33-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the carrying value of assets held at December 31, 2018, which were written down to fair value during the year ended December 31, 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 repossession
2,142

 
—

 
—

 
2,142

Total assets at fair value on a nonrecurring basis

$3,025

 

$—

 

$—

 

$3,025



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

The following tables present valuation techniques and unobservable inputs for assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value:
(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Input
Range of Inputs Utilized
(Weighted Average)
June 30, 2019
Collateral dependent impaired loans

$768

Appraisals of collateral
Discount for costs to sell
0% - 12% (12%)
 
 
 
Appraisal adjustments (1)
0% - 100% (16%)
(1)
Management may adjust appraisal values to reflect market value declines or other discounts resulting from its knowledge of the property.

(Dollars in thousands)
Fair Value
Valuation Technique
Unobservable Input
Range of Inputs Utilized
(Weighted Average)
December 31, 2018
Collateral dependent impaired loans

$883

Appraisals of collateral
Discount for costs to sell
0% - 10% (10%)
 
 
 
Appraisal adjustments (1)
0% - 100% (2%)
Property acquired through foreclosure or repossession

$2,142

Appraisals of collateral
Discount for costs to sell
13%
 
 
 
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.



- 34-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Valuation of Financial Instruments
The estimated fair values and related carrying amounts for financial instruments for which fair value is only disclosed are presented below as of the periods indicated. The tables exclude financial instruments for which the carrying value approximates fair value such as cash and cash equivalents, FHLB stock, accrued interest receivable, bank-owned life insurance, non-maturity deposits and accrued interest payable.
(Dollars in thousands)
 
 
 
 
 
June 30, 2019
Carrying Amount
Total
Fair Value
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Financial Assets:
 
 
 
 
 
Loans, net of allowance for loan losses

$3,702,941


$3,693,614


$—


$—


$3,693,614

 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
Time deposits

$1,284,538


$1,302,002


$—


$1,302,002


$—

FHLB advances
1,060,960

1,066,411

—

1,066,411

—

Junior subordinated debentures
22,681

19,457

—

19,457

—



(Dollars in thousands)
 
 
 
 
 
December 31, 2018
Carrying Amount
Total
Fair Value
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Financial Assets:
 
 
 
 
 
Held to maturity debt securities

$10,415


$10,316


$—


$10,316


$—

Loans, net of allowance for loan losses
3,653,288

3,598,025

—

—

3,598,025

 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
Time deposits

$1,255,108


$1,269,433


$—


$1,269,433


$—

FHLB advances
950,722

950,691

—

950,691

—

Junior subordinated debentures
22,681

19,226

—

19,226

—





- 35-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 11 - Revenue from Contracts with Customers
The following tables summarize total revenues as presented in the Unaudited Consolidated Statements of Income and the related amounts 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 months ended June 30,
2019
 
2018
(Dollars in thousands)
As reported in Consolidated Statements of Income
Revenue from contracts in scope of Topic 606
 
As reported in Consolidated Statements of Income
Revenue from contracts in scope of Topic 606
Net interest income

$33,858


$—

 

$33,111


$—

Noninterest income:
 
 
 
 
 
Asset-based wealth management revenues
9,141

9,141

 
9,136

9,136

Transaction-based wealth management revenues
408

408

 
466

466

Total wealth management revenues
9,549

9,549

 
9,602

9,602

Mortgage banking revenues
3,640

—

 
2,941

—

Card interchange fees
1,018

1,018

 
961

961

Service charges on deposit accounts
929

929

 
903

903

Loan related derivative income
746

—

 
668

—

Income from bank-owned life insurance
566

—

 
537

—

Net realized losses on securities
(80
)
—

 
—

—

Other income
385

371

 
381

366

Total noninterest income
16,753

11,867

 
15,993

11,832

Total revenues

$50,611


$11,867

 

$49,104


$11,832



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

$68,442


$—

 

$64,963


$—

Noninterest income:
 
 
 
 
 
Asset-based wealth management revenues
18,062

18,062

 
19,091

19,091

Transaction-based wealth management revenues
739

739

 
784

784

Total wealth management revenues
18,801

18,801

 
19,875

19,875

Mortgage banking revenues
6,286

—

 
5,779

—

Card interchange fees
2,015

2,015

 
1,808

1,808

Service charges on deposit accounts
1,804

1,804

 
1,766

1,766

Loan related derivative income
1,470

—

 
809

—

Income from bank-owned life insurance
1,215

—

 
1,052

—

Net realized losses on securities
(80
)
—

 
—

—

Other income
609

595

 
647

632

Total noninterest income
32,120

23,215

 
31,736

24,081

Total revenues

$100,562


$23,215

 

$96,699


$24,081



- 36-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


The following table presents revenue from contracts with customers based on the timing of revenue recognition:
(Dollars in thousands)
Three Months
 
Six Months
Periods ended June 30,
2019
2018
 
2019
2018
Revenue recognized at a point in time:
 
 
 
 
 
Card interchange fees

$1,018


$961

 

$2,015


$1,808

Service charges on deposit accounts
719

703

 
1,381

1,375

Other income
324

248

 
503

474

Revenue recognized over time:
 
 
 
 
 
Wealth management revenues
9,549

9,602

 
18,801

19,875

Service charges on deposit accounts
210

200

 
423

391

Other income
47

118

 
92

158

Total revenues from contracts in scope of Topic 606

$11,867


$11,832

 

$23,215


$24,081



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 $5.0 million at June 30, 2019, compared to $4.8 million at 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 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 June 30, 2019 and December 31, 2018 and were included in other liabilities in the Unaudited Consolidated Balance Sheets.

For commissions and incentives that are in-scope of Topic 606, such as those paid to employees in our wealth management services and commercial banking segments in order to obtain customer contracts, contract cost assets are established. The contract cost assets are capitalized and amortized over the estimated useful life that the asset is expected to generate benefits. The carrying value of contract cost assets amounted to $580 thousand at June 30, 2019, compared to $458 thousand at December 31, 2018 and were included in other assets in the Unaudited Consolidated Balance Sheets.

Note 12 - Defined Benefit Pension Plans
Washington Trust maintains a qualified pension plan for the benefit of certain eligible employees who were hired prior to October 1, 2007. Washington Trust also has non-qualified retirement plans to provide supplemental retirement benefits to certain employees, as defined in the plans. The defined benefit pension plans were previously amended to freeze benefit accruals after a 10-year transition period ending in December 2023.

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



- 37-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss), on a pre-tax basis:
(Dollars in thousands)
Qualified Pension Plan
 
Non-Qualified Retirement Plans
 
Three Months
 
Six Months
 
Three Months
 
Six Months
Periods ended June 30,
2019
2018
 
2019
2018
 
2019
2018
 
2019
2018
Net Periodic Benefit Cost:
 
 
 
 
 
 
 
 
 
 
 
Service cost (1)

$509


$561

 

$1,018


$1,122

 

$32


$27

 

$63


$54

Interest cost (2)
742

678

 
1,484

1,357

 
141

118

 
282

237

Expected return on plan assets (2)
(1,123
)
(1,318
)
 
(2,247
)
(2,636
)
 
—

—

 
—

—

Amortization of prior service credit (2)
(4
)
(5
)
 
(8
)
(11
)
 
—

—

 
—

—

Recognized net actuarial loss (2)
198

374

 
396

748

 
101

103

 
203

205

Net periodic benefit cost

$322


$290

 

$643


$580

 

$274


$248

 

$548


$496


(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 six months ended June 30,
2019
 
2018
 
2019
 
2018
Measurement date
Dec 31, 2018
 
Dec 31, 2017
 
Dec 31, 2018
 
Dec 31, 2017
Equivalent single discount rate for benefit obligations
4.38%
 
3.69%
 
4.28%
 
3.58%
Equivalent single discount rate for service cost
4.44
 
3.76
 
4.48
 
3.79
Equivalent single discount rate for interest cost
4.12
 
3.42
 
3.98
 
3.22
Expected long-term return on plan assets
5.75
 
6.75
 
N/A
 
N/A
Rate of compensation increase
3.75
 
3.75
 
3.75
 
3.75




- 38-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 13 - Share-Based Compensation Arrangements
During the six months ended June 30, 2019, the Corporation granted performance share unit awards and nonvested share unit awards.

Performance 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 the Corporation’s common stock on the award date. The weighted average fair value of the performance share awards was $52.83. The number of shares to be vested will be contingent upon the Corporation’s attainment of certain performance measures as detailed in the performance share award agreements. The performance share awards will earned over a 3-year performance period and the current performance assumption results in 43,360 shares being earned.

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

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.



- 39-


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 June 30,
2019
2018
 
2019
2018
 
2019
2018
 
2019
2018
Net interest income (expense)

$27,867


$26,644

 

($120
)

($77
)
 

$6,111


$6,544

 

$33,858


$33,111

Provision for loan losses
525

400

 
—

—

 
—

—

 
525

400

Net interest income (expense) after provision for loan losses
27,342

26,244

 
(120
)
(77
)
 
6,111

6,544

 
33,333

32,711

Noninterest income
6,690

5,837

 
9,557

9,602

 
506

554

 
16,753

15,993

Noninterest expenses:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization expense
672

637

 
363

370

 
39

43

 
1,074

1,050

Other noninterest expenses
16,660

15,509

 
6,937

6,593

 
3,480

3,136

 
27,077

25,238

Total noninterest expenses
17,332

16,146

 
7,300

6,963

 
3,519

3,179

 
28,151

26,288

Income before income taxes
16,700

15,935

 
2,137

2,562

 
3,098

3,919

 
21,935

22,416

Income tax expense
3,603

3,387

 
582

655

 
477

700

 
4,662

4,742

Net income

$13,097


$12,548

 

$1,555


$1,907

 

$2,621


$3,219

 

$17,273


$17,674

 
 
 
 
 
 
 
 
 
 
 
 
Total assets at period end

$3,916,915


$3,647,649

 

$77,757


$68,009

 

$1,195,000


$1,021,584

 

$5,189,672


$4,737,242

Expenditures for long-lived assets
297

801

 
—

11

 
19

52

 
316

864


 
 
 
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
Commercial Banking
 
Wealth Management Services
 
Corporate
 
Consolidated Total
Six months ended June 30,
2019
2018
 
2019
2018
 
2019
2018
 
2019
2018
Net interest income (expense)

$55,169


$52,620

 

($247
)

($135
)
 

$13,520


$12,478

 

$68,442


$64,963

Provision for loan losses
1,175

400

 
—

—

 
—

—

 
1,175

400

Net interest income (expense) after provision for loan losses
53,994

52,220

 
(247
)
(135
)
 
13,520

12,478

 
67,267

64,563

Noninterest income
12,146

10,773

 
18,808

19,875

 
1,166

1,088

 
32,120

31,736

Noninterest expenses:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization expense
1,342

1,274

 
729

766

 
79

85

 
2,150

2,125

Other noninterest expenses
32,421

30,975

 
13,414

13,792

 
7,130

6,526

 
52,965

51,293

Total noninterest expenses
33,763

32,249

 
14,143

14,558

 
7,209

6,611

 
55,115

53,418

Income before income taxes
32,377

30,744

 
4,418

5,182

 
7,477

6,955

 
44,272

42,881

Income tax expense
7,024

6,490

 
1,199

1,298

 
1,281

1,208

 
9,504

8,996

Net income

$25,353


$24,254

 

$3,219


$3,884

 

$6,196


$5,747

 

$34,768


$33,885

 
 
 
 
 
 
 
 
 
 
 
 
Total assets at period end

$3,916,915


$3,647,649

 

$77,757


$68,009

 

$1,195,000


$1,021,584

 

$5,189,672


$4,737,242

Expenditures for long-lived assets
1,597

1,252

 
292

313

 
82

110

 
1,971

1,675




- 40-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 15 - Other Comprehensive Income (Loss)
The following tables present the activity in other comprehensive income (loss):
 
 
 
 
 
 
 
 
Three months ended June 30,
2019
 
2018
(Dollars in thousands)
Pre-tax Amounts
Income Taxes
Net of Tax
 
Pre-tax Amounts
Income Taxes
Net of Tax
Securities available for sale:
 
 
 
 
 
 
 
Changes in fair value of available for sale debt securities

$7,807


$1,835


$5,972

 

($4,068
)

($956
)

($3,112
)
Net losses on debt securities reclassified into earnings (1)
80

19

61

 
—

—

—

Net change in fair value of available for sale debt securities
7,887

1,854

6,033

 
(4,068
)
(956
)
(3,112
)
Cash flow hedges:
 
 
 
 
 
 
 
Change in fair value of cash flow hedges
(824
)
(194
)
(630
)
 
455

107

348

Net cash flow hedge losses reclassified into earnings (2)
10

2

8

 
21

4

17

Net change in fair value of cash flow hedges
(814
)
(192
)
(622
)
 
476

111

365

Defined benefit plan obligations:
 
 
 
 
 
 
 
Amortization of net actuarial losses (3)
300

71

229

 
477

113

364

Amortization of net prior service credits (3)
(4
)
(1
)
(3
)
 
(5
)
(1
)
(4
)
Net change in defined benefit plan obligations
296

70

226

 
472

112

360

Total other comprehensive income (loss)

$7,369


$1,732


$5,637

 

($3,120
)

($733
)

($2,387
)
(1)
The pre-tax amount is reported as net realized losses on securities in the Unaudited Consolidated Statements of Income.
(2)
The pre-tax amounts are included in interest expense on FHLB advances, interest expense on junior subordinated debentures and interest and fees on loans in the Unaudited Consolidated Statements of Income.
(3)
The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income.
 
 
 
 
 
 
 
 
Six months ended June 30,
2019
 
2018
(Dollars in thousands)
Pre-tax Amounts
Income Taxes
Net of Tax
 
Pre-tax Amounts
Income Taxes
Net of Tax
Securities available for sale:
 
 
 
 
 
 
 
Changes in fair value of available for sale debt securities

$22,213


$5,220


$16,993

 

($17,681
)

($4,155
)

($13,526
)
Net losses on debt securities reclassified into earnings (1)
80

19

61

 
—

—

—

Net change in fair value of available for sale debt securities
22,293

5,239

17,054

 
(17,681
)
(4,155
)
(13,526
)
Cash flow hedges:
 
 
 
 
 
 
 
Change in fair value of cash flow hedges
(1,370
)
(322
)
(1,048
)
 
1,258

198

1,060

Net cash flow hedge losses reclassified into earnings (2)
(21
)
(5
)
(16
)
 
252

58

194

Net change in fair value of cash flow hedges
(1,391
)
(327
)
(1,064
)
 
1,510

256

1,254

Defined benefit plan obligations:
 
 
 
 
 
 
 
Amortization of net actuarial losses (3)
600

141

459

 
953

225

728

Amortization of net prior service credits (3)
(8
)
(2
)
(6
)
 
(11
)
(3
)
(8
)
Net change in defined benefit plan obligations
592

139

453

 
942

222

720

Total other comprehensive (loss) income

$21,494


$5,051


$16,443

 

($15,229
)

($3,677
)

($11,552
)

(1)
The pre-tax amount is reported as net realized losses on securities in the Unaudited Consolidated Statements of Income.
(2)
The pre-tax amounts are included in interest expense on FHLB advances, interest expense on junior subordinated debentures and interest and fees on loans in the Unaudited Consolidated Statements of Income.
(3)
The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income.




- 41-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax:
(Dollars in thousands)
Net Unrealized (Losses) Gains on Available For Sale Debt Securities
 
Net Unrealized (Losses) Gains on Cash Flow Hedges
 
Defined Benefit Pension Plan Adjustment
 
Total
For the three months ended June 30, 2019
 
 
 
Balance at April 1, 2019

($5,741
)
 

($251
)
 

($11,511
)
 

($17,503
)
Other comprehensive income (loss) before reclassifications
5,972

 
(630
)
 
—

 
5,342

Amounts reclassified from accumulated other comprehensive income
61

 
8

 
226

 
295

Net other comprehensive income (loss)
6,033

 
(622
)
 
226

 
5,637

Balance at June 30, 2019

$292

 

($873
)
 

($11,285
)
 

($11,866
)


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

($16,762
)
 

$191

 

($11,738
)
 

($28,309
)
Other comprehensive income (loss) before reclassifications
16,993

 
(1,048
)
 
—

 
15,945

Amounts reclassified from accumulated other comprehensive income
61

 
(16
)
 
453

 
498

Net other comprehensive income (loss)
17,054

 
(1,064
)
 
453

 
16,443

Balance at June 30, 2019

$292

 

($873
)
 

($11,285
)
 

($11,866
)



(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 June 30, 2018
 
 
 
Balance at April 1, 2018

($17,948
)
 

$461

 

($15,188
)
 

($32,675
)
Other comprehensive (loss) income before reclassifications
(3,112
)
 
348

 
—

 
(2,764
)
Amounts reclassified from accumulated other comprehensive income
—

 
17

 
360

 
377

Net other comprehensive (loss) income
(3,112
)
 
365

 
360

 
(2,387
)
Balance at June 30, 2018

($21,060
)
 

$826

 

($14,828
)
 

($35,062
)


(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 six months ended June 30, 2018
 
 
 
Balance at January 1, 2018

($7,534
)
 

($428
)
 

($15,548
)
 

($23,510
)
Other comprehensive (loss) income before reclassifications
(13,526
)
 
1,060

 
—

 
(12,466
)
Amounts reclassified from accumulated other comprehensive income
—

 
194

 
720

 
914

Net other comprehensive (loss) income
(13,526
)
 
1,254

 
720

 
(11,552
)
Balance at June 30, 2018

($21,060
)
 

$826

 

($14,828
)
 

($35,062
)





- 42-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 16 - Earnings per Common Share
The following table presents the calculation of earnings per common share:
(Dollars and shares in thousands, except per share amounts)
 
 
 
 
 
 
 

Three Months
 
Six Months
Periods ended June 30,
2019
 
2018
 
2019
 
2018
Earnings per common share - basic:
 
 
 
 
 
 
 
Net income

$17,273

 

$17,674

 

$34,768

 

$33,885

Less dividends and undistributed earnings allocated to participating securities
(35
)
 
(38
)
 
(69
)
 
(76
)
Net income available to common shareholders

$17,238

 

$17,636

 

$34,699

 

$33,809

Weighted average common shares
17,330

 
17,272

 
17,317

 
17,253

Earnings per common share - basic

$0.99

 

$1.02

 

$2.00

 

$1.96

Earnings per common share - diluted:
 
 
 
 
 
 
 
Net income

$17,273

 

$17,674

 

$34,768

 

$33,885

Less dividends and undistributed earnings allocated to participating securities
(35
)
 
(38
)
 
(69
)
 
(76
)
Net income available to common shareholders

$17,238

 

$17,636

 

$34,699

 

$33,809

Weighted average common shares
17,330

 
17,272

 
17,317

 
17,253

Dilutive effect of common stock equivalents
75

 
115

 
86

 
131

Weighted average diluted common shares
17,405

 
17,387

 
17,403

 
17,384

Earnings per common share - diluted

$0.99

 

$1.01

 

$1.99

 

$1.94



Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 87,950 and 87,863, respectively for the three and six months ended June 30, 2019, compared to 43,871 and 48,956, respectively, for the same periods in 2018.



- 43-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Note 17 - Leases
The Corporation has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception.

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

The Corporation’s leases do not provide an implicit interest rate, therefore the Corporation used its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine the present value of operating lease liabilities. The weighted average discount rate used to discount operating lease liabilities at June 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 June 30, 2019, the Corporation does not have any leases that have not yet commenced. At June 30, 2019, lease expiration dates ranged from 3 months to 22 years, with additional renewal options on certain leases ranging from 1 to 5 years. At June 30, 2019, the weighted average remaining lease term for the Corporation’s operating leases was 14.2 years.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $940 thousand and $1.9 million, respectively, for the three and six months ended June 30, 2019, compared to $938 thousand and $1.9 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 June 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)
 
July 1, 2019 to December 31, 2019

$1,856

2020
3,515

2021
3,312

2022
3,165

2023
3,090

2024 and thereafter
24,716

Total operating lease payments (1)
39,654

Less interest
9,444

Present value of operating lease liabilities (2)

$30,210


(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 $2.5 million.



- 44-


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 June 30, 2019
Three Months
Six Months
Lease Expense:
 
 
Operating lease expense

$928


$1,856

Variable lease expense
12

23

Total lease expense (1)

$940


$1,879

Cash Paid:
 
 
Cash paid reducing operating lease liabilities

$831


$1,751

(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

 
2020
2,980

 
2021
2,677

 
2022
2,293

 
2023
2,059

 
2024 and thereafter
22,648

Total minimum lease payments
 

$36,201



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

Note 18 - Commitments and Contingencies
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:


- 45-


Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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

$480,851

 

$533,884

Home equity lines
285,601

 
270,462

Other loans
87,343

 
46,698

Standby letters of credit
9,189

 
7,706

Financial instruments whose notional amounts exceed the amount of credit risk:
 
 
 
Forward loan commitments:
 
 
 
Interest rate lock commitments
89,682

 
30,766

Forward sale commitments
149,404

 
61,993

Loan related derivative contracts:
 
 
 
Interest rate swaps with customers
678,865

 
648,050

Mirror swaps with counterparties
678,865

 
648,050

Risk participation-in agreements
46,205

 
46,510

Foreign exchange contracts
2,763

 
2,784

Interest rate risk management contracts:
 
 
 
Interest rate swaps
60,000

 
60,000



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

Commitments to Extend Credit
Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since some of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements.  Each borrower’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained is based on management’s credit evaluation of the borrower.

Standby Letters of Credit
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support the financing needs of the Bank’s commercial customers. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The collateral supporting those commitments is essentially the same as for other commitments. Most standby letters of credit extend for one year. The maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered totaled $9.2 million and $7.7 million, respectively, as of June 30, 2019 and December 31, 2018. At June 30, 2019 and December 31, 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 six months ended June 30, 2019 and 2018.

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


- 46-


Management's Discussion and Analysis

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Corporation’s Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2018, 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 six months ended June 30, 2019 are not necessarily indicative of the results for the full-year ended December 31, 2019 or any future period. Certain previously reported amounts have been reclassified to conform to current year’s presentation.

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

Some of the factors that might cause these differences include the following: weakness 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 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, including cyberattacks, hacking and identity theft 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, 2018, 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, 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
The Corporation offers a comprehensive product line of banking and financial services to individuals and businesses, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut; its ATM networks; 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 benefit costs, outsourced services provided by third-party vendors, occupancy and facility-related costs and other administrative expenses.



- 47-


Management's Discussion and Analysis


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 some cases, the collateral securing payment of the loans may be sufficient to assure repayment, but in other cases the Corporation may experience significant credit losses which could have an adverse effect on its operating results. The Corporation makes various assumptions and judgments about the collectability 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 which may expose the Corporation to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, adherence to all applicable laws and regulations, and employment and tax matters.

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

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

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


- 48-


Management's Discussion and Analysis

collaborate closely with business units on planning and resource allocation with respect to risk management. Internal Audit is a third line of defense. They provide independent assurance to the Board of Directors of the effectiveness of the first and second lines in fulfilling their risk management responsibilities.

For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see the section labeled “Risk Factors” in Item 1A of 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
 
Six Months
 
 
 
 
Change
 
 
 
 
Change
For the periods ended June 30,
2019
2018
 
$
%
 
2019
2018
 
$
%
Net interest income

$33,858


$33,111

 

$747

2
%
 

$68,442


$64,963

 

$3,479

5
%
Noninterest income
16,753

15,993

 
760

5

 
32,120

31,736

 
384

1

Total revenues
50,611

49,104

 
1,507

3

 
100,562

96,699

 
3,863

4

Provision for loan losses
525

400

 
125

31

 
1,175

400

 
775

194

Noninterest expense
28,151

26,288

 
1,863

7

 
55,115

53,418

 
1,697

3

Income before income taxes
21,935

22,416

 
(481
)
(2
)
 
44,272

42,881

 
1,391

3

Income tax expense
4,662

4,742

 
(80
)
(2
)
 
9,504

8,996

 
508

6

Net income

$17,273


$17,674

 

($401
)
(2
%)
 

$34,768


$33,885

 

$883

3
%

The following table presents a summary of performance metrics and ratios:
 
Three Months
 
Six Months
For the periods ended June 30,
2019
2018
 
2019
2018
Diluted earnings per common share

$0.99


$1.01

 

$1.99


$1.94

Return on average assets (net income divided by average assets)
1.34
%
1.53
%
 
1.37
%
1.49
%
Return on average equity (net income available for common shareholders divided by average equity)
14.58
%
16.99
%
 
15.04
%
16.48
%
Net interest income as a percentage of total revenues
67
%
67
%
 
68
%
67
%
Noninterest income as a percentage of total revenues
33
%
33
%
 
32
%
33
%

Net income totaled $17.3 million and $34.8 million for the three and six months ended June 30, 2019, compared to $17.7 million and $33.9 million for the same periods in 2018. The increase in net interest income reflected loan growth, purchases of debt securities, the impact of market rate increases in 2018, which were partially offset by a higher cost of funds. Growth in noninterest income reflected increased mortgage loan sale activities. The year-to-date increase in noninterest income also reflected a lower level of wealth management revenues and a higher level of loan related derivative income. The comparison of noninterest expense was impacted by one-time incentive bonuses recognized in the first quarter of 2018. Excluding the one-time incentive bonuses, the increase in noninterest expense reflected increases in salaries and employee benefits, outsourced services and advertising and promotion.



- 49-


Management's Discussion and Analysis

Average Balances / Net Interest Margin - Fully Taxable Equivalent (FTE) Basis
The following table presents average balance and interest rate information.  Tax-exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. Unrealized gains (losses) on available for sale securities and fair value adjustments on mortgage loans held for sale are excluded from the average balance and yield calculations. Nonaccrual loans, as well as interest recognized on these loans, are included in amounts presented for loans.
Three months ended June 30,
2019
 
2018
 
Change
(Dollars in thousands)
Average Balance
Interest
Yield/ Rate
 
Average Balance
Interest
Yield/ Rate
 
Average Balance
Interest
Yield/ Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash, federal funds sold and short-term investments

$72,976


$399

2.19
 

$56,142


$257

1.84
 

$16,834


$142

0.35

Mortgage loans held for sale
28,532

288

4.05
 
30,203

313

4.16
 
(1,671
)
(25
)
(0.11
)
Taxable debt securities
996,590

7,006

2.82
 
821,772

5,358

2.62
 
174,818

1,648

0.20

Nontaxable debt securities
805

11

5.48
 
1,956

26

5.33
 
(1,151
)
(15
)
0.15

Total securities
997,395

7,017

2.82
 
823,728

5,384

2.62
 
173,667

1,633

0.20

FHLB stock
49,574

720

5.83
 
43,331

550

5.09
 
6,243

170

0.74

Commercial real estate
1,468,382

17,509

4.78
 
1,225,926

13,463

4.40
 
242,456

4,046

0.38

Commercial & industrial
606,835

7,482

4.95
 
622,141

7,569

4.88
 
(15,306
)
(87
)
0.07

Total commercial
2,075,217

24,991

4.83
 
1,848,067

21,032

4.56
 
227,150

3,959

0.27

Residential real estate
1,350,865

13,606

4.04
 
1,275,171

12,426

3.91
 
75,694

1,180

0.13

Home equity
284,195

3,579

5.05
 
284,188

3,278

4.63
 
7

301

0.42

Other
24,189

292

4.84
 
29,696

360

4.86
 
(5,507
)
(68
)
(0.02
)
Total consumer
308,384

3,871

5.03
 
313,884

3,638

4.65
 
(5,500
)
233

0.38

Total loans
3,734,466

42,468

4.56
 
3,437,122

37,096

4.33
 
297,344

5,372

0.23

Total interest-earning assets
4,882,943

50,892

4.18
 
4,390,526

43,600

3.98
 
492,417

7,292

0.20

Noninterest-earning assets
288,619

 
 
 
238,290

 
 
 
50,329





Total assets

$5,171,562

 
 
 

$4,628,816

 
 
 

$542,746

 
 
Liabilities and Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits

$129,334


$624

1.94
 

$86,204


$101

0.47
 

$43,130


$523

1.47

NOW accounts
462,217

75

0.07
 
460,712

57

0.05
 
1,505

18

0.02

Money market accounts
659,021

1,831

1.11
 
664,127

960

0.58
 
(5,106
)
871

0.53

Savings accounts
366,449

71

0.08
 
375,690

57

0.06
 
(9,241
)
14

0.02

Time deposits (in-market)
796,606

3,992

2.01
 
662,969

2,265

1.37
 
133,637

1,727

0.64

Total interest-bearing in-market deposits
2,413,627

6,593

1.10
 
2,249,702

3,440

0.61
 
163,925

3,153

0.49

Wholesale brokered time deposits
507,376

2,876

2.27
 
430,118

1,814

1.69
 
77,258

1,062

0.58

Total interest-bearing deposits
2,921,003

9,469

1.30
 
2,679,820

5,254

0.79
 
241,183

4,215

0.51

FHLB advances
1,050,660

6,980

2.66
 
874,746

4,707

2.16
 
175,914

2,273

0.50

Junior subordinated debentures
22,681

252

4.46
 
22,681

214

3.78
 
—

38

0.68

Total interest-bearing liabilities
3,994,344

16,701

1.68
 
3,577,247

10,175

1.14
 
417,097

6,526

0.54

Noninterest-bearing demand deposits
608,099

 
 
 
574,258

 
 
 
33,841

 
 
Other liabilities
94,766

 
 
 
60,878

 
 
 
33,888

 
 
Shareholders’ equity
474,353

 
 
 
416,433

 
 
 
57,920

 
 
Total liabilities and shareholders’ equity

$5,171,562

 
 
 

$4,628,816

 
 
 

$542,746

 
 
Net interest income (FTE)
 

$34,191

 
 
 

$33,425

 
 
 

$766

 
Interest rate spread
 
 
2.50
 
 
 
2.84
 
 
 
(0.34
)
Net interest margin
 
 
2.81
 
 
 
3.05
 
 
 
(0.24
)



- 50-


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 June 30,
2019
2018
Change
Commercial loans

$330


$308


$22

Nontaxable debt securities
3

6

(3
)
Total

$333


$314


$19

 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
2019
 
2018
 
Change
(Dollars in thousands)
Average Balance
Interest
Yield/ Rate
 
Average Balance
Interest
Yield/ Rate
 
Average Balance
Interest
Yield/ Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash, federal funds sold and short-term investments

$64,713


$739

2.30
 

$54,649


$462

1.70
 

$10,064


$277

0.60

Mortgage loans held for sale
22,588

468

4.18
 
27,329

539

3.98
 
(4,741
)
(71
)
0.20

Taxable debt securities
998,738

14,232

2.87
 
813,193

10,476

2.60
 
185,545

3,756

0.27

Nontaxable debt securities
870

21

4.87
 
2,154

55

5.15
 
(1,284
)
(34
)
(0.28
)
Total debt securities
999,608

14,253

2.88
 
815,347

10,531

2.60
 
184,261

3,722

0.28

FHLB stock
48,288

1,415

5.91
 
42,116

1,066

5.10
 
6,172

349

0.81

Commercial real estate
1,446,923

34,388

4.79
 
1,222,136

25,809

4.26
 
224,787

8,579

0.53

Commercial & industrial
612,568

15,026

4.95
 
615,698

14,392

4.71
 
(3,130
)
634

0.24

Total commercial
2,059,491

49,414

4.84
 
1,837,834

40,201

4.41
 
221,657

9,213

0.43

Residential real estate
1,354,330

27,371

4.08
 
1,251,904

24,355

3.92
 
102,426

3,016

0.16

Home equity
281,404

7,142

5.12
 
285,684

6,439

4.55
 
(4,280
)
703

0.57

Other
24,905

609

4.93
 
30,188

729

4.87
 
(5,283
)
(120
)
0.06

Total consumer
306,309

7,751

5.10
 
315,872

7,168

4.58
 
(9,563
)
583

0.52

Total loans
3,720,130

84,536

4.58
 
3,405,610

71,724

4.25
 
314,520

12,812

0.33

Total interest-earning assets
4,855,327

101,411

4.21
 
4,345,051

84,322

3.91
 
510,276

17,089

0.30

Noninterest-earning assets
278,714

 
 
 
234,485

 
 
 
44,229

 
 
Total assets

$5,134,041

 
 
 

$4,579,536

 
 
 

$554,505

 
 
Liabilities and Shareholders’ Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits

$147,522


$1,311

1.79
 

$83,368


$129

0.31
 

$64,154


$1,182

1.48

NOW accounts
458,563

159

0.07
 
455,036

111

0.05
 
3,527

48

0.02

Money market accounts
652,671

3,440

1.06
 
691,245

1,840

0.54
 
(38,574
)
1,600

0.52

Savings accounts
367,826

131

0.07
 
371,873

114

0.06
 
(4,047
)
17

0.01

Time deposits (in-market)
793,012

7,719

1.96
 
640,548

4,085

1.29
 
152,464

3,634

0.67

Total interest-bearing in-market deposits
2,419,594

12,760

1.06
 
2,242,070

6,279

0.56
 
177,524

6,481

0.50

Wholesale brokered time deposits
490,680

5,405

2.22
 
419,738

3,397

1.63
 
70,942

2,008

0.59

Total interest-bearing deposits
2,910,274

18,165

1.26
 
2,661,808

9,676

0.73
 
248,466

8,489

0.53

FHLB advances
1,039,037

13,641

2.65
 
843,033

8,690

2.08
 
196,004

4,951

0.57

Junior subordinated debentures
22,681

505

4.49
 
22,681

397

3.53
 
—

108

0.96

Total interest-bearing liabilities
3,971,992

32,311

1.64
 
3,527,522

18,763

1.07
 
444,470

13,548

0.57

Noninterest-bearing demand deposits
607,569

 
 
 
579,379

 
 
 
28,190

 
 
Other liabilities
89,133

 
 
 
58,926

 
 
 
30,207

 
 
Shareholders’ equity
465,347

 
 
 
413,709

 
 
 
51,638

 
 
Total liabilities and shareholders’ equity

$5,134,041

 
 
 

$4,579,536

 
 
 

$554,505

 
 
Net interest income (FTE)
 

$69,100

 
 
 

$65,559

 
 
 

$3,541

 
Interest rate spread
 
 
2.57
 
 
 
2.84
 
 


(0.27
)
Net interest margin
 
 
2.87
 
 
 
3.04
 
 


(0.17
)


- 51-


Management's Discussion and Analysis

 
 
 
 
(Dollars in thousands)
 
 
 
Six months ended June 30,
2019
2018
Change
Commercial loans

$654


$584


$70

Nontaxable debt securities
4

12

(8
)
Total

$658


$596


$62


Net Interest Income
Net interest income continues to be the primary source of our operating income.  Net interest income for the three and six months ended June 30, 2019 totaled $33.9 million and $68.4 million, respectively, compared to $33.1 million and $65.0 million, respectively, for the same periods in 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.  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 may be impacted by the level of income associated with loan payoffs and prepayment penalties recognized in each period. For the three and six months ended June 30, 2019, income associated with loan payoffs and prepayment penalties amounted to $37 thousand and $86 thousand, respectively, compared to $483 thousand and $530 thousand, respectively, for the same periods in 2018.

FTE net interest income for the three and six months ended June 30, 2019 amounted to $34.2 million and $69.1 million, respectively, up by $766 thousand and $3.5 million, respectively, from the same periods in 2018. The net interest margin was 2.81% and 2.87%, respectively, for the three and six months ended June 30, 2019, compared to 3.05% and 3.04%, respectively, for the same periods a year ago. Excluding the impact of income associated with loan payoffs and prepayment penalties from each period, net interest income for the three and six months ended June 30, 2019 increased by $1.2 million and $4.0 million, respectively, from the same periods in 2018. Excluding the impact of income associated with loan payoffs and prepayment penalties from each period, the net interest margin was 2.81% and 2.87%, respectively, for the three and six months ended June 30, 2019, compared to 3.01% and 3.02%, respectively, for the same periods in 2018. The comparison of net interest margin reflected relatively higher market interest rates on variable rate loans, offset by a higher cost of funds.

Total average securities for the three and six months ended June 30, 2019 increased by $173.7 million and $184.3 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 six months ended June 30, 2019 was 2.82% and 2.88%, respectively, compared to 2.62% and 2.60%, respectively, for the same periods in 2018, due primarily to purchases of relatively higher yielding debt securities in the latter portion of 2018.

Total average loan balances for the three and six months ended June 30, 2019 increased by $297.3 million and $314.5 million, respectively, from the average loan balances for the comparable 2018 periods, primarily due to growth in average commercial real estate and residential real estate loan balances. The yield on total loans for the three and six months ended June 30, 2019 was 4.56% and 4.58%, compared to 4.33% and 4.25%, respectively, for the same periods in 2018. In 2019, yields on LIBOR-based and prime-based loans reflected relatively higher market interest rates.

The average balance of FHLB advances for the three and six months ended June 30, 2019 increased by $175.9 million and $196.0 million, respectively, compared to the average balances for the same periods in 2018 to fund loan growth and purchases of securities. The average rate paid on such advances for the three and six months ended June 30, 2019 was 2.66% and 2.65%, respectively, compared to 2.16% and 2.08%, respectively, for the same periods in 2018, due to higher rates on short-term advances.

Included in total average interest-bearing deposits were of out-of-market wholesale brokered time deposits, which increased by $77.3 million and $70.9 million, respectively, from the same periods in 2018. The average rate paid on wholesale brokered time deposits for the three and six months ended June 30, 2019 was 2.27% and 2.22%, respectively, compared to 1.69% and 1.63%, 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 six months ended June 30, 2019 increased by $163.9 million and $177.5 million, respectively, from the average balances for the same


- 52-


Management's Discussion and Analysis

periods in 2018, largely due to growth in time deposits and demand deposits, offset, in part, by a decline in money market accounts. The average rate paid on in-market interest-bearing deposits for the three and six months ended June 30, 2019 increased by 49 basis points and 50 basis points, respectively, compared to the same periods in 2018, largely due to higher rates paid on promotional time deposits, as well as competitive pricing on money market accounts and interest-bearing demand deposits.

The average balance of noninterest-bearing demand deposits for the three and six months ended June 30, 2019 increased by $33.8 million and $28.2 million, respectively, from the average balances for the same periods in 2018.

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 June 30, 2019 vs. 2018
 
Six Months Ended June 30, 2019 vs. 2018
 
Change Due to
 
Change Due to
 
Volume
Rate
Net Change
 
Volume
Rate
Net Change
Interest on Interest-Earning Assets:
 
 
 
 
 
 
 
Cash, federal funds sold and other short-term investments

$87


$55


$142

 

$95


$182


$277

Mortgage loans held for sale
(17
)
(8
)
(25
)
 
(97
)
26

(71
)
Taxable debt securities
1,213

435

1,648

 
2,581

1,175

3,756

Nontaxable debt securities
(16
)
1

(15
)
 
(31
)
(3
)
(34
)
Total securities
1,197

436

1,633

 
2,550

1,172

3,722

FHLB stock
85

85

170

 
167

182

349

Commercial real estate
2,816

1,230

4,046

 
5,117

3,462

8,579

Commercial & industrial
(192
)
105

(87
)
 
(75
)
709

634

Total commercial
2,624

1,335

3,959

 
5,042

4,171

9,213

Residential real estate
756

424

1,180

 
2,012

1,004

3,016

Home equity
—

301

301

 
(97
)
800

703

Other
(67
)
(1
)
(68
)
 
(129
)
9

(120
)
Total consumer
(67
)
300

233

 
(226
)
809

583

Total loans
3,313

2,059

5,372

 
6,828

5,984

12,812

Total interest income
4,665

2,627

7,292

 
9,543

7,546

17,089

Interest on Interest-Bearing Liabilities:
 
 
 
 
 
 
 
Interest-bearing demand deposits
72

451

523

 
164

1,018

1,182

NOW accounts
—

18

18

 
1

47

48

Money market accounts
(7
)
878

871

 
(108
)
1,708

1,600

Savings accounts
(2
)
16

14

 
(1
)
18

17

Time deposits (in-market)
521

1,206

1,727

 
1,142

2,492

3,634

Total interest-bearing in-market deposits
584

2,569

3,153

 
1,198

5,283

6,481

Wholesale brokered time deposits
365

697

1,062

 
639

1,369

2,008

Total interest-bearing deposits
949

3,266

4,215

 
1,837

6,652

8,489

FHLB advances
1,057

1,216

2,273

 
2,272

2,679

4,951

Junior subordinated debentures
—

38

38

 
—

108

108

Total interest expense
2,006

4,520

6,526

 
4,109

9,439

13,548

Net interest income (FTE)

$2,659


($1,893
)

$766

 

$5,434


($1,893
)

$3,541


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 level of nonperforming 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


- 53-


Management's Discussion and Analysis

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 $525 thousand and $1.2 million, respectively, were charged to earnings for the three and six months ended June 30, 2019, compared to $400 thousand for both the three and six months ended June 30, 2018. These provisions were based on management’s assessment of asset quality and credit quality metrics, growth and changes in the loan portfolio, and loss exposure allocations.

Net charge-offs totaled $771 thousand and $849 thousand, respectively, for the three and six months ended June 30, 2019 and were largely attributable to one residential real estate relationship. Net charge-offs were $90 thousand and $714 thousand, respectively, for the same periods in 2018.

The allowance for loan losses was $27.4 million, or 0.73% of total loans, at June 30, 2019, compared to $27.1 million, or 0.74% of total loans, at December 31, 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
 
Six Months
 
 
 
 
 
Change
 
 
 
 
 
Change
Periods ended June 30,
2019
 
2018
 
$
 
%
 
2019
 
2018
 
$
 
%
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wealth management revenues

$9,549

 

$9,602

 

($53
)
 
(1
%)
 

$18,801

 

$19,875

 

($1,074
)
 
(5
)%
Mortgage banking revenues
3,640

 
2,941

 
699

 
24

 
6,286

 
5,779

 
507

 
9

Card interchange fees
1,018

 
961

 
57

 
6

 
2,015

 
1,808

 
207

 
11

Service charges on deposit accounts
929

 
903

 
26

 
3

 
1,804

 
1,766

 
38

 
2

Loan related derivative income
746

 
668

 
78

 
12

 
1,470

 
809

 
661

 
82

Income from bank-owned life insurance
566

 
537

 
29

 
5

 
1,215

 
1,052

 
163

 
15

Net realized gains on securities
(80
)
 
—

 
(80
)
 
100

 
(80
)
 
—

 
(80
)
 
100

Other income
385

 
381

 
4

 
1

 
609

 
647

 
(38
)
 
(6
)
Total noninterest income

$16,753

 

$15,993

 

$760

 
5
 %
 

$32,120

 

$31,736

 

$384

 
1
 %

Noninterest Income Analysis
Revenue from wealth management services is our largest source of noninterest income, representing 59% of total noninterest income for the six months ended June 30, 2019, compared to 63% 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 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
 
Six Months
 
 
 
 
 
Change
 
 
 
 
 
Change
Periods ended June 30,
2019
 
2018
 
$
 
%
 
2019
 
2018
 
$
 
%
Wealth management revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-based revenues

$9,141

 

$9,136

 

$5

 
—
 %
 
18,062

 
19,091

 
(1,029
)
 
(5
)
Transaction-based revenues
408

 
466

 
(58
)
 
(12
)
 
739

 
784

 
(45
)
 
(6
)
Total wealth management revenues

$9,549

 

$9,602

 

($53
)
 
(1
)%
 

$18,801

 

$19,875

 

($1,074
)
 
(5
)%

Wealth management revenues for the three and six months ended June 30, 2019 decreased by $53 thousand and $1.1 million,


- 54-


Management's Discussion and Analysis

respectively, from the comparable periods in 2018. The year-to-date decrease in 2019 was largely due to a decline in asset-based revenues.

The following table presents the changes in wealth management assets under administration:
(Dollars in thousands)
Three Months
 
Six Months
Periods ended June 30,
2019
 
2018
 
2019
 
2018
Wealth management assets under administration:
 
 
 
 
 
 
 
Balance at the beginning of period

$6,350,128

 

$6,343,720

 

$5,910,814

 

$6,714,637

Net investment appreciation & income
222,489

 
133,450

 
742,546

 
101,426

Net client asset flows
(93,727
)
 
(257,015
)
 
(174,470
)
 
(595,908
)
Balance at the end of period

$6,478,890

 

$6,220,155

 

$6,478,890

 

$6,220,155


While the June 30, 2019 end of period wealth management assets under administration balances were up by 4% from a year ago, the average balance of wealth management assets for the three and six months ended June 30, 2019 was up by $106.3 million, or 2%, and down by $227.4 million, or 3%, respectively, compared to the average balance of wealth management assets for the same periods in 2018. The year-over-year comparison in average wealth management assets was adversely impacted by net client outflows largely associated with the loss of certain client-facing personnel in the first quarter of 2018, and may be further adversely impacted by outflows associated with the loss of two additional senior counselors in the second quarter of 2019. These two senior counselors managed, or were associated with, approximately $1.0 billion of wealth management assets as of June 30, 2019.

Mortgage banking revenues represented 20% of total noninterest income for the six months ended June 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
 
Six Months
 
 
 
 
Change
 
 
 
 
Change
Periods ended June 30,
2019
2018
 
$
%
 
2019
2018
 
$
%
Mortgage banking revenues:
 
 
 
 
 
 
 
 
 
 
 
Gains and commissions on loan sales (1)

$3,523


$2,786

 

$737

26
 %
 

$5,997


$5,465

 

$532

10
 %
Loan servicing fee income, net (2)
117

155

 
(38
)
(25
)
 
289

314

 
(25
)
(8
)
Total mortgage banking revenues

$3,640


$2,941

 

$699

24
 %
 

$6,286


$5,779

 

$507

9
 %
 
 
 
 
 
 
 
 
 
 
 
 
Loans sold to the secondary market (3)

$137,414


$105,421

 

$31,993

30
 %
 

$229,493


$202,261

 

$27,232

13
 %
(1)
Includes gains on loan sales, commissions 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.
(2)
Represents loan servicing fee income, net of servicing right amortization and valuation adjustments.
(3)
Includes brokered loans.

For the three and six months ended June 30, 2019, mortgage banking revenues were up by $699 thousand and $507 thousand, respectively, compared to the same periods in 2018. The increase in mortgage banking revenues largely reflected higher sales volume of loans sold in the secondary market. For the six months ended June 30, 2019 and 2018, loans originated for sale represented 67% and 52%, respectively, of total residential real estate loan originations. In 2019, a higher proportion of total residential real estate loan originations were originated for sale.

Loan related derivative income for the three and six months ended June 30, 2019 increased by $78 thousand and $661 thousand, respectively, from the comparable periods in 2018. The year-to-date increase was largely due to a higher volume of commercial borrower interest rate swap transactions.



- 55-


Management's Discussion and Analysis

Income from bank-owned life insurance for the three and six months ended June 30, 2019 increased by $29 thousand and $163 thousand, respectively, from the same periods in 2018. The year-to-date increase was largely due to a $91 thousand gain that was recognized in the first quarter of 2019 resulting from the receipt of tax-exempt life insurance proceeds.

Noninterest Expense
The following table presents noninterest expense comparisons:
(Dollars in thousands)
Three Months
 
Six Months
 
 
 
 
 
Change
 
 
 
 
 
Change
Periods ended June 30,
2019
 
2018
 
$
 
%
 
2019
 
2018
 
$
 
%
Noninterest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits

$18,436

 

$17,304

 

$1,132

 
7
 %
 

$36,055

 

$35,076

 

$979

 
3
 %
Outsourced services
2,518

 
2,350

 
168

 
7

 
5,124

 
4,223

 
901

 
21

Net occupancy
1,904

 
1,930

 
(26
)
 
(1
)
 
3,902

 
3,932

 
(30
)
 
(1
)
Equipment
1,028

 
1,069

 
(41
)
 
(4
)
 
2,039

 
2,249

 
(210
)
 
(9
)
Legal, audit and professional fees
664

 
555

 
109

 
20

 
1,198

 
1,281

 
(83
)
 
(6
)
FDIC deposit insurance costs
540

 
422

 
118

 
28

 
969

 
826

 
143

 
17

Advertising and promotion
525

 
329

 
196

 
60

 
764

 
506

 
258

 
51

Amortization of intangibles
239

 
247

 
(8
)
 
(3
)
 
478

 
495

 
(17
)
 
(3
)
Other
2,297

 
2,082

 
215

 
10

 
4,586

 
4,830

 
(244
)
 
(5
)
Total noninterest expense

$28,151

 

$26,288

 

$1,863

 
7
 %
 

$55,115

 

$53,418

 

$1,697

 
3
 %

Noninterest Expense Analysis
Salaries and employee benefits expense for the three and six months ended June 30, 2019 increased by $1.1 million and $979 thousand, respectively, compared to the same periods in 2018, reflecting an increase in salaries and wages costs and lower deferred labor costs. The increase in salaries and wages included annual merit increases, while the decrease in deferred labor associated with portfolio loan originations was due to a lower proportion of residential real estate loans originated for retention for portfolio in 2019 compared to 2018. Year-to-date salaries and employee benefits expense was also impacted by one-time incentive bonuses of approximately $450 thousand that were recognized in the first quarter of 2018. There were no such one-time bonuses recognized in 2019.

Outsourced services expense for the three and six months ended June 30, 2019 increased by $168 thousand and $901 thousand, respectively, compared to the same periods in 2018. Equipment expense for the three and six months ended June 30, 2019 decreased by $41 thousand and $210 thousand, respectively, from the same periods a year ago. Both the increase in outsourced services and decline in equipment expense reflected changes to and expansion of services provided by third party vendors, including software application processing and operational services.

Advertising and promotion expense for the three and six months ended June 30, 2019 increased by $196 thousand and $258 thousand, respectively, compared to the same periods in 2018, reflecting timing of promotional activities.

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
 
Six Months
Periods ended June 30,
2019
2018
 
2019
2018
Income tax expense

$4,662


$4,742

 

$9,504


$8,996

Effective income tax rate
21.3
%
21.2
%
 
21.5
%
21.0
%

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


- 56-


Management's Discussion and Analysis


The increase in the effective tax rate for the six months ended June 30, 2019 compared to the same period in 2018 largely reflected a decrease in excess tax benefits recognized upon the settlement of share-based compensation awards.

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

Commercial Banking
The following table presents a summarized statement of operations for the Commercial Banking business segment:
(Dollars in thousands)
Three Months
 
Six Months
 
 
 
 
Change
 
 
 
 
Change
Periods ended June 30,
2019
2018
 
$
%
 
2019
2018
 
$
%
Net interest income

$27,867


$26,644

 

$1,223

5
%
 

$55,169


$52,620

 

$2,549

5
%
Provision for loan losses
525

400

 
125

31

 
1,175

400

 
775

194

Net interest income after provision for loan losses
27,342

26,244

 
1,098

4

 
53,994

52,220

 
1,774

3

Noninterest income
6,690

5,837

 
853

15

 
12,146

10,773

 
1,373

13

Noninterest expense
17,332

16,146

 
1,186

7

 
33,763

32,249

 
1,514

5

Income before income taxes
16,700

15,935

 
765

5

 
32,377

30,744

 
1,633

5

Income tax expense
3,603

3,387

 
216

6

 
7,024

6,490

 
534

8

Net income

$13,097


$12,548

 

$549

4
%
 

$25,353


$24,254

 

$1,099

5
%

Net interest income for the Commercial Banking segment for the three and six months ended June 30, 2019, increased by $1.2 million and $2.5 million, respectively, from the same periods in 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 $525 thousand and $1.2 million, respectively, were charged to earnings for the three and six months ended June 30, 2019, compared to $400 thousand for both the three and six months ended June 30, 2018. These provisions were based on management’s assessment of asset quality and credit quality metrics, growth and changes in the loan portfolio, and loss exposure allocations.

Noninterest income derived from the Commercial Banking segment for the three and six months ended June 30, 2019 was up by $853 thousand and $1.4 million, respectively, from the comparable periods in 2018. The increase largely reflected higher mortgage banking revenues and loan related derivative income. See additional discussion under the caption “Noninterest Income.”

Commercial Banking noninterest expenses for the three and six months ended June 30, 2019 were up by $1.2 million and $1.5 million, respectively, from the same periods in 2018, reflecting increased salaries and employee benefits expense and lower deferred labor. See further discussion of salaries and employee benefits expense under the caption “Noninterest Expense Analysis” above. The increase in Commercial Banking noninterest expenses also includes higher outsourced services expense associated with the expansion of services provided by third party vendors.



- 57-


Management's Discussion and Analysis

Wealth Management Services
The following table presents a summarized statement of operations for the Wealth Management Services business segment:
(Dollars in thousands)
Three Months
 
Six Months
 
 
 
 
Change
 
 
 
 
Change
Periods ended June 30,
2019
2018
 
$
%
 
2019
2018
 
$
%
Net interest expense

($120
)

($77
)
 

($43
)
56
%
 

($247
)

($135
)
 

($112
)
83
%
Noninterest income
9,557

9,602

 
(45
)
—

 
18,808

19,875

 
(1,067
)
(5
)
Noninterest expense
7,300

6,963

 
337

5

 
14,143

14,558

 
(415
)
(3
)
Income before income taxes
2,137

2,562

 
(425
)
(17
)
 
4,418

5,182

 
(764
)
(15
)
Income tax expense
582

655

 
(73
)
(11
)
 
1,199

1,298

 
(99
)
(8
)
Net income

$1,555


$1,907

 

($352
)
(18
%)
 

$3,219


$3,884

 

($665
)
(17
%)

For the three and six months ended June 30, 2019, noninterest income derived from the Wealth Management Services segment decreased by $45 thousand and $1.1 million, respectively, compared to the same periods in 2018. See further discussion of wealth management revenues under the caption “Noninterest Income” above.

For the three months ended June 30, 2019, noninterest expenses for the Wealth Management Services segment increased by $337 thousand, largely reflecting increased salaries and employee benefits expense attributable to business development efforts, as well as increased legal costs. For the six months ended June 30, 2019, noninterest expenses for the Wealth Management Services segment decreased by $415 thousand, primarily due to software system implementation costs incurred in 2018 associated with an April 2018 system implementation. This decrease was partially offset by increased salaries and employee benefits expense, higher outsourced services expense and increased legal costs.

Corporate
The following table presents a summarized statement of operations for the Corporate unit:
(Dollars in thousands)
Three Months
 
Six Months
 
 
 
 
Change
 
 
 
 
Change
Periods ended June 30,
2019
2018
 
$
%
 
2019
2018
 
$
%
Net interest income

$6,111


$6,544

 

($433
)
(7
%)
 

$13,520


$12,478

 

$1,042

8
%
Noninterest income
506

554

 
(48
)
(9
)
 
1,166

1,088

 
78

7

Noninterest expense
3,519

3,179

 
340

11

 
7,209

6,611

 
598

9

Income before income taxes
3,098

3,919

 
(821
)
(21
)
 
7,477

6,955

 
522

8

Income tax expense
477

700

 
(223
)
(32
)
 
1,281

1,208

 
73

6

Net income

$2,621


$3,219

 

($598
)
(19
%)
 

$6,196


$5,747

 

$449

8
%

Net interest income for the Corporate unit for the three and six months ended June 30, 2019 was down by $433 thousand and up by $1.0 million, respectively, compared to the same periods in 2018. While the changes reflected increased investment income due to growth in the investment securities portfolio and higher dividend income on FHLB stock, they were also impacted by a decline in the interest rate spread due to higher wholesale funding costs.

Noninterest expense for the Corporate unit for the three and six months ended June 30, 2019 was up by $340 thousand and $598 thousand, respectively, from the same periods in 2018, reflecting increases in staffing levels and advertising and promotional activities.



- 58-


Management's Discussion and Analysis

Financial Condition
Summary
The following table presents selected financial condition data:
(Dollars in thousands)
 
 
 
 
Change
 
June 30,
2019
 
December 31,
2018
 
$
%
Cash and due from banks

$115,904

 

$89,923

 

$25,981

29
%
Total securities
969,168

 
938,225

 
30,943

3

Total loans
3,730,339

 
3,680,360

 
49,979

1

Allowance for loan losses
27,398

 
27,072

 
326

1

Total assets
5,189,672

 
5,010,766

 
178,906

4

Total deposits
3,504,622

 
3,524,048

 
(19,426
)
(1
)
FHLB advances
1,060,960

 
950,722

 
110,238

12

Total shareholders’ equity
484,205

 
448,184

 
36,021

8


Total assets amounted to $5.2 billion at June 30, 2019, up by $178.9 million, or 4%, from the end of 2018. Included in the increase in total assets was the recognition of operating lease right-of-use assets totaling $28.9 million due to the adoption of ASU 2016-02 on January 1, 2019 as disclosed in Note 2 to the Unaudited Consolidated Financial Statements. The remaining increase in total assets reflected loan growth, purchases of securities and an increase in the balance of cash and due from banks. Total deposits decreased by $19.4 million, or 1%, and FHLB advances increased by $110.2 million, or 12%, from the end of 2018. Shareholders’ equity amounted to $484.2 million at June 30, 2019, up by $36.0 million from the balance at the end of 2018. As of June 30, 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
Investment security activity is monitored by an 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 has not maintained a portfolio of trading securities. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Debt securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized. Debt securities held to maturity are reported at amortized cost.

Determination of Fair Value
The Corporation uses an independent pricing service to obtain quoted prices. The prices provided by the independent pricing service are generally based on observable market data in active markets. The determination of whether markets are active or 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 June 30, 2019 and December 31, 2018, the Corporation did not make any adjustments to the prices provided by the pricing service.



- 59-


Management's Discussion and Analysis

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

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

Securities Portfolio
The carrying amounts of securities held are as follows:
(Dollars in thousands)
June 30, 2019
 
December 31, 2018
 
Amount

 
%

 
Amount

 
%

Available for Sale Debt Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises

$237,427

 
24
%
 

$242,683

 
26
%
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
707,180

 
74

 
660,793

 
72

Obligations of states and political subdivisions
90

 
—

 
937

 
—

Individual name issuer trust preferred debt securities
12,301

 
1

 
11,772

 
1

Corporate bonds
12,170

 
1

 
11,625

 
1

Total available for sale debt securities

$969,168

 
100
%
 

$927,810

 
100
%

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

 
%

 
Amount

 
%

Held to Maturity Debt Securities:
 
 
 
 
 
 
 
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises

$—

 
—
%
 

$10,415

 
100
%
Total held to maturity debt securities

$—

 
—
%
 

$10,415

 
100
%

As noted above, the securities portfolio is managed to generate interest income, for interest rate risk management purposes, and to provide an available source of liquidity for balance sheet management. Debt securities totaling $82.8 million and $62.7 million, respectively, were purchased during the six months ended June 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 3.21%. 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 $969.2 million as of June 30, 2019, or 19% of total assets, compared to $938.2 million as of December 31, 2018, or 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.

As of June 30, 2019 the net unrealized gain position on securities available for sale amounted to $384 thousand compared to a net unrealized loss position of $22.0 million on securities available for sale and held to maturity as of December 31, 2018. These net positions included gross unrealized losses of $7.4 million and $24.4 million, respectively, of as June 30, 2019 and December 31, 2018. The decrease in gross unrealized losses in 2019 was primarily concentrated in obligations of U.S. government agencies and U.S. government-sponsored enterprises, including mortgage-backed securities, and largely attributable to relative changes in interest rates since the time of purchase. See Note 4 to the Unaudited Consolidated Financial Statements for additional information.



- 60-


Management's Discussion and Analysis

Loans
Total loans amounted to $3.7 billion at June 30, 2019, up by $50.0 million, or 1%, from the end of 2018, due to growth in commercial loan portfolio.

The following is a summary of loans:
(Dollars in thousands)
June 30, 2019
 
December 31, 2018
 
Amount

 
%

 
Amount

 
%

Commercial:
 
 
 
 
 
 
 
Commercial real estate (1)

$1,482,836

 
40
%
 

$1,392,408

 
38
 %
Commercial & industrial (2)
583,873

 
15

 
620,704

 
17

Total commercial
2,066,709

 
55

 
2,013,112

 
55

Residential Real Estate:
 
 
 
 
 
 
 
Residential real estate (3)
1,352,113

 
36

 
1,360,387

 
37

Consumer:
 
 
 
 
 
 
 
Home equity
288,078

 
8

 
280,626

 
8

Other (4)
23,439

 
1

 
26,235

 
—

Total consumer
311,517

 
9

 
306,861

 
8

Total loans

$3,730,339

 
100
%
 

$3,680,360

 
100
 %
(1)
Consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.
(2)
Consists of loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.
(3)
Consists of mortgage and homeowner construction loans secured by one- to four-family residential properties.
(4)
Consists of loans to individuals secured by general aviation aircraft and other personal installment loans.

Commercial Loans
The commercial loan portfolio represented 55% of total loans at June 30, 2019.

In making commercial loans, we may occasionally solicit the participation of other banks. The Bank also participates in commercial loans originated by other banks. In such cases, these loans are individually underwritten by us using standards similar to those employed for our self-originated loans. Our participation in commercial loans originated by other banks amounted to $386.5 million and $406.4 million, respectively, at June 30, 2019 and December 31, 2018. Our participation in commercial loans originated by other banks also includes shared national credits. Shared national credits are defined as participations in loans or loan commitments of at least $100.0 million that are shared by three or more banks.

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

Commercial Real Estate Loans
Commercial real estate loans totaled $1.5 billion at June 30, 2019, up by $90.4 million, or 6%, from the balance at December 31, 2018. Included in commercial real estate loans were construction and development loans of $227.1 million and $190.9 million, respectively, as of June 30, 2019 and December 31, 2018. For the six months ended June 30, 2019, commercial real estate loan originations and advances amounted to $178.9 million, which were partially offset by payoffs.


- 61-


Management's Discussion and Analysis


Commercial real estate loans are secured by a variety of property types, with approximately 90% of the total at June 30, 2019 composed of multi-family dwellings, retail facilities, office buildings, lodging, healthcare facilities, industrial and warehouse properties and commercial mixed use properties. The average commercial real estate loan size was $2.9 million and the largest individual commercial real estate loan outstanding was $26.0 million as of June 30, 2019.

The following table presents a geographic summary of commercial real estate loans, including commercial construction, by property location:
(Dollars in thousands)
June 30, 2019
 
December 31, 2018
 
Amount
% of Total
 
Amount
% of Total
Rhode Island

$384,603

26
%
 

$377,249

27
%
Connecticut
603,036

41

 
570,116

41

Massachusetts
407,350

27

 
356,615

26

Subtotal
1,394,989

94

 
1,303,980

94

All other states
87,847

6

 
88,428

6

Total

$1,482,836

100
%
 

$1,392,408

100
%

Commercial and Industrial Loans
Commercial and industrial loans amounted to $583.9 million at June 30, 2019, down by $36.8 million, or 6%, from the balance at December 31, 2018. For the six months ended June 30, 2019, originations amounted to $37.4 million and were offset by lower line utilization, payoffs and paydowns.

Shared national credit balances outstanding included in the commercial and industrial loan portfolio totaled $73.7 million at June 30, 2019. All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at June 30, 2019.

The commercial and industrial loan portfolio includes loans to a variety of business types, with 90% of the total at June 30, 2019 composed of health care/social assistance, educational services, manufacturing, owner occupied and other real estate, professional, scientific and technical, retail trade, transportation and warehousing, entertainment and recreation, other services, finance and insurance services, public administration and construction businesses. The average commercial and industrial loan size was $608 thousand and the largest individual commercial and industrial loan outstanding was $19.3 million as of June 30, 2019.

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

The table below presents residential real estate loan origination activity:
(Dollars in thousands)
Three Months
 
Six Months
Periods ended June 30,
2019
 
2018
 
2019
 
2018
 
Amount
% of Total
 
Amount
% of Total
 
Amount
% of Total
 
Amount
% of Total
Originations for retention in portfolio

$69,736

30
%
 

$128,479

51
%
 

$121,433

33
%
 

$196,319

48
%
Originations for sale to the secondary market (1)
162,123

70

 
122,693

49

 
247,949

67

 
210,413

52

Total

$231,859

100
%
 

$251,172

100
%
 

$369,382

100
%
 

$406,732

100
%
(1)
Includes brokered loans.



- 62-


Management's Discussion and Analysis

The table below presents residential real estate loan sales activity:
(Dollars in thousands)
Three Months
 
Six Months
Periods ended June 30,
2019
 
2018
 
2019
 
2018
 
Amount
% of Total
 
Amount
% of Total
 
Amount
% of Total
 
Amount
% of Total
Loans sold with servicing rights retained

$18,292

13
%
 

$24,367

23
%
 

$27,782

12
%
 

$57,942

29
%
Loans sold with servicing rights released (1)
119,122

87

 
81,054

77

 
201,711

88

 
144,319

71

Total

$137,414

100
%
 

$105,421

100
%
 

$229,493

100
%
 

$202,261

100
%
(1)
Includes brokered loans.

Loans are sold with servicing retained or released. Loans sold with the retention of servicing result in the capitalization of servicing rights. Loan servicing rights are included in other assets and are subsequently amortized as an offset to mortgage banking revenues over the estimated period of servicing. The net balance of capitalized servicing rights amounted to $3.4 million and $3.7 million, respectively, as of June 30, 2019 and December 31, 2018. The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $577.5 million and $588.5 million, respectively, as of June 30, 2019 and December 31, 2018.

Residential real estate loans held in portfolio amounted to $1.4 billion at June 30, 2019, down by $8.3 million from the balance at December 31, 2018. A lower percentage of residential real estate mortgage loans were originated for retention in portfolio during the three and six months ended June 30, 2019, compared to the same periods in 2018.

The following is a geographic summary of residential real estate mortgages by property location:
(Dollars in thousands)
June 30, 2019
 
December 31, 2018
 
Amount
% of Total
 
Amount
% of Total
Rhode Island

$347,406

26
%
 

$352,141

26
%
Connecticut
144,664

11

 
141,775

10

Massachusetts
844,024

62

 
849,435

63

Subtotal
1,336,094

99

 
1,343,351

99

All other states
16,019

1

 
17,036

1

Total (1)

$1,352,113

100
%
 

$1,360,387

100
%
(1)
Includes residential real estate loans purchased from other financial institutions totaling $102.7 million and $112.9 million, respectively, as of June 30, 2019 and December 31, 2018.

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

The consumer loan portfolio totaled $311.5 million at June 30, 2019, up by $4.7 million, or 2%, from December 31, 2018. Home equity lines and home equity loans represented 92% of the total consumer portfolio at June 30, 2019. The Bank estimates that approximately 65% of the combined home equity line and home equity loan balances are first lien positions or subordinate to other Washington Trust mortgages. Purchased consumer loans amounted to $14.9 million and $17.6 million, respectively, at June 30, 2019 and December 31, 2018.

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



- 63-


Management's Discussion and Analysis

The following table presents nonperforming assets and additional asset quality data:
(Dollars in thousands)
Jun 30,
2019
 
Dec 31,
2018
Commercial:
 
 
 
Commercial real estate

$926

 

$925

Commercial & industrial
—

 
—

Total commercial
926

 
925

Residential Real Estate:
 
 
 
Residential real estate
10,610

 
9,346

Consumer:
 
 
 
Home equity
1,243

 
1,436

Other
88

 
—

Total consumer
1,331

 
1,436

Total nonaccrual loans
12,867

 
11,707

Property acquired through foreclosure or repossession, net
2,142

 
2,142

Total nonperforming assets

$15,009

 

$13,849

 
 
 
 
Nonperforming assets to total assets
0.29
%
 
0.28
%
Nonperforming loans to total loans
0.34
%
 
0.32
%
Total past due loans to total loans
0.48
%
 
0.37
%
Accruing loans 90 days or more past due

$—

 

$—


Total nonperforming assets increased by $1.2 million from the end of 2018, reflecting a net increase in nonaccrual residential real estate loans.

At June 30, 2019, property acquired through foreclosure consisted of one commercial property.

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

The following table presents the activity in nonaccrual loans:
(Dollars in thousands)
Three Months
 
Six Months
For the periods ended June 30,
2019
 
2018
 
2019
 
2018
Balance at beginning of period

$12,365

 

$10,521

 

$11,707

 

$15,211

Additions to nonaccrual status
1,620

 
2,457

 
3,544

 
3,667

Loans returned to accruing status
(118
)
 
(475
)
 
(973
)
 
(819
)
Loans charged-off
(819
)
 
(103
)
 
(922
)
 
(793
)
Loans transferred to other real estate owned
—

 
—

 
—

 
(3,074
)
Payments, payoffs and other changes
(181
)
 
(655
)
 
(489
)
 
(2,447
)
Balance at end of period

$12,867

 

$11,745

 

$12,867

 

$11,745




- 64-


Management's Discussion and Analysis

The following table presents additional detail on nonaccrual loans:
(Dollars in thousands)
June 30, 2019
 
December 31, 2018
 
Days Past Due
 
 
 
 
Days Past Due
 
 
 
 
Over 90
 
Under 90
 
Total
% (1)
 
Over 90
 
Under 90
 
Total
% (1)
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate

$926

 

$—

 

$926

0.06
%
 

$—

 

$925

 

$925

0.07
%
Commercial & industrial
—

 
—

 
—

—

 
—

 
—

 
—

—

Total commercial
926

 
—

 
926

0.04

 
—

 
925

 
925

0.05

Residential Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
4,473

 
6,137

 
10,610

0.78

 
1,509

 
7,837

 
9,346

0.69

Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity
790

 
453

 
1,243

0.43

 
552

 
884

 
1,436

0.51

Other
88

 
—

 
88

0.38

 
—

 
—

 
—

—

Total consumer
878

 
453

 
1,331

0.43

 
552

 
884

 
1,436

0.47

Total nonaccrual loans

$6,277

 

$6,590

 

$12,867

0.34
%
 

$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 June 30, 2019.

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

Nonaccrual residential real estate mortgage loans amounted to $10.6 million at June 30, 2019, up by $1.3 million from the end of 2018. As of June 30, 2019, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Rhode Island and Connecticut.  Included in total nonaccrual residential real estate loans at June 30, 2019 were five loans purchased for portfolio and serviced by others amounting to $1.5 million.  Management monitors the collection efforts of its third party servicers as part of its assessment of the collectibility of nonperforming loans.



- 65-


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)
Jun 30,
2019
 
Dec 31,
2018
Accruing troubled debt restructured loans
 
 
 
Commercial:
 
 
 
Commercial & industrial

$—

 

$4,714

Residential Real Estate:
 
 
 
Residential real estate
360

 
363

Consumer:
 
 
 
Home equity
—

 
10

Other
20

 
21

Total consumer
20

 
31

Total accruing troubled debt restructured loans
380

 
5,108

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

$501

 

$510

Total nonaccrual troubled debt restructured loans
501

 
510

Total troubled debt restructured loans

$881

 

$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 June 30, 2019, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

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

The allowance for loans losses included specific reserves for troubled debt restructurings of $100 thousand and $103 thousand, respectively, at June 30, 2019 and December 31, 2018.



- 66-


Management's Discussion and Analysis

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

 
Amount
 
% (1)

Commercial:
 
 
 
 
 
 
 
Commercial real estate

$3,670

 
0.25
%
 

$1,080

 
0.08
%
Commercial & industrial
1

 
—

 
—

 
—

Total commercial
3,671

 
0.18

 
1,080

 
0.05

Residential Real Estate:
 
 
 
 
 
 
 
Residential real estate
11,237

 
0.83

 
10,520

 
0.77

Consumer:
 
 
 
 
 
 
 
Home equity
2,904

 
1.01

 
1,989

 
0.71

Other
102

 
0.44

 
33

 
0.13

Total consumer
3,006

 
0.96

 
2,022

 
0.66

Total past due loans

$17,914

 
0.48
%
 

$13,622

 
0.37
%
(1)
Percentage of past due loans to the total loans outstanding within the respective category.

As of June 30, 2019, the composition of past due loans (loans past due 30 days or more) was 80% residential and consumer and 20% commercial, compared to 92% and 8%, respectively, at December 31, 2018.

Total past due loans increased by $4.3 million from the end of 2018, largely due to one commercial real estate loan with a carrying value of $2.7 million that went delinquent in the second quarter of 2019. This loan returned to current status in early July 2019.

Total past due loans included $8.6 million of nonaccrual loans as of both June 30, 2019 and December 31, 2018. All loans 90 days or more past due at June 30, 2019 and December 31, 2018 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 June 30, 2019 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future.  These loans are not included in the amounts of nonaccrual or restructured loans presented above.  Management cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans.  Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require increased allowance coverage and provision for loan losses.

Management has identified approximately $19.2 million in potential problem loans at June 30, 2019, compared to $14.9 million at December 31, 2018. As of June 30, 2019, 94% of the balance of potential problem loans consisted of five commercial relationships. As of the filing date of this report, 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, 2018 and in Note 6 to the Unaudited Consolidated Financial Statements.



- 67-


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, and is reduced by charge-offs on loans. The status of nonaccrual loans, past due loans and performing loans were all taken into consideration in the assessment of the adequacy of the allowance for loans losses. In addition, the balance and trends of credit quality indicators, including the commercial loan categories of Pass, Special Mention and Classified, are integrated into the process used to determine the allocation of loss exposure. 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 June 30, 2019 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 Corporation’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely. Full or partial charge-offs on collateral dependent impaired loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan. The Corporation does not recognize a recovery when an updated appraisal indicates a subsequent increase in value.

Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status.  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 mortgages 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 by measurement type:
(Dollars in thousands)
Jun 30,
2019
 
Dec 31,
2018
Collateral dependent impaired loans (1)

$11,603

 

$10,466

Impaired loans measured on discounted cash flow method (2)
1,644

 
6,350

Total impaired loans

$13,247

 

$16,816

(1)
Net of partial charge-offs of $775 thousand and $289 thousand, respectively, at June 30, 2019 and December 31, 2018.
(2)
Net of partial charge-offs of $85 thousand at both June 30, 2019 and December 31, 2018.

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

The following table presents additional detail on the Corporation’s loan portfolio and associated allowance for loan losses:
(Dollars in thousands)
June 30, 2019
 
December 31, 2018
 
Loans
Related Allowance
Allowance / Loans
 
Loans
Related Allowance
Allowance / Loans
Impaired loans individually evaluated for impairment

$13,247


$119

0.90
%
 

$16,816


$127

0.76
%
Loans collectively evaluated for impairment
3,717,092

27,279

0.73

 
3,663,544

26,945

0.74

Total

$3,730,339


$27,398

0.73
%
 

$3,680,360


$27,072

0.74
%


- 68-


Management's Discussion and Analysis


Loan loss provisions of $525 thousand and $1.2 million, respectively, were charged to earnings for the three and six months ended June 30, 2019, compared to $400 thousand for both the three and six months ended June 30, 2018. These provisions were based on management’s assessment of asset quality and credit quality metrics, growth and changes in the loan portfolio, and loss exposure allocations.

Net charge-offs totaled $771 thousand and $849 thousand, respectively, for the three and six months ended June 30, 2019 and were largely attributable to one residential real estate relationship. Net charge-offs were $90 thousand and $714 thousand, respectively, for the same periods in 2018.

As of June 30, 2019, the allowance for loan losses was $27.4 million, or 0.73% of total loans, compared to $27.1 million, or 0.74% of total loans, at December 31, 2018.

The following table presents the allocation of the allowance for loan losses. The allocation below is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of any future loss trends. The total allowance is available to absorb losses from any segment of the loan portfolio.
(Dollars in thousands)
June 30, 2019
 
December 31, 2018
 
Amount

 
% (1)
 
Amount
 
% (1)
Allocation of Allowance for Loan Losses
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
Commercial real estate

$16,882

 
40
%
 

$15,381

 
38
%
Commercial & industrial
4,453

 
15

 
5,847

 
17

Total commercial
21,335

 
55

 
21,228

 
55

Residential Real Estate:
 
 
 
 
 
 
 
Residential real estate
4,857

 
36

 
3,987

 
37

Consumer:
 
 
 
 
 
 
 
Home equity
913

 
8

 
1,603

 
8

Other
293

 
1

 
254

 
—

Total consumer
1,206

 
9

 
1,857

 
8

Total allowance for loan losses at end of period

$27,398

 
100
%
 

$27,072

 
100
%
(1)
Percentage of loans outstanding in respective category to total loans outstanding.

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

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

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



- 69-


Management's Discussion and Analysis

The following table presents a summary of deposits:
(Dollars in thousands)
 
 
 
 
Change
 
June 30,
2019
 
December 31, 2018
 
$
%
Noninterest-bearing demand deposits

$587,326

 

$603,216

 

($15,890
)
(3
%)
Interest-bearing demand deposits
128,355

 
178,733

 
(50,378
)
(28
)
NOW accounts
484,615

 
466,568

 
18,047

4

Money market accounts
654,719

 
646,878

 
7,841

1

Savings accounts
365,069

 
373,545

 
(8,476
)
(2
)
Time deposits (in-market)
801,501

 
778,105

 
23,396

3

Total in-market deposits
3,021,585

 
3,047,045

 
(25,460
)
(1
)
Wholesale brokered time deposits
483,037

 
477,003

 
6,034

1

Total deposits

$3,504,622

 

$3,524,048

 

($19,426
)
(1
)%

Total deposits amounted to $3.5 billion at June 30, 2019, down by $19.4 million, or 1%, from December 31, 2018. This included an increase of $6.0 million of out-of-market brokered time deposits. Excluding out-of-market brokered time deposits, in-market deposits were down by $25.5 million, or 1%, from the balance at December 31, 2018, reflecting a decline in demand account balances due to seasonal outflows of various institutional and governmental depositors based on their underlying business cycles. This decline was partially offset by growth in promotional certificates of deposit.

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 $1.1 billion at June 30, 2019, up by $110.2 million, or 12%, from the balance at the end of 2018.

Liquidity and Capital Resources
Liquidity Management
Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand.  The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 59% of total average assets in the six months ended June 30, 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 a more detailed discussion on the Corporation’s detailed liquidity funding policy and 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-K for the fiscal year ended December 31, 2018.

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



- 70-


Management's Discussion and Analysis

The table below presents unused funding capacity by source as of the dates indicated:
(Dollars in thousands)
 
 
 
 
June 30,
2019
 
December 31,
2018
Additional Funding Capacity:
 
 
 
Federal Home Loan Bank of Boston (1)

$535,258

 

$628,468

Federal Reserve Bank of Boston (2)
26,670

 
27,608

Unencumbered investment securities
512,087

 
493,623

Total

$1,074,015

 

$1,149,699

(1)
As of June 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 $283.9 million and $236.7 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.
(2)
As of June 30, 2019 and December 31, 2018, loans with a carrying value of $21.6 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 six months ended June 30, 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 $18.7 million for the six months ended June 30, 2019, which was generated by net income of $34.8 million and adjustments to reconcile net income to net cash provided by operating activities. Net cash used in investing activities totaled $66.4 million for the six months ended June 30, 2019, reflecting outflows to purchase debt securities and fund loan growth. These outflows were partially offset by net inflows from maturities, calls, sales and principal payments of securities. For the six months ended June 30, 2019, net cash provided by financing activities amounted to $74.1 million, largely due to net increases in FHLB advances, partially offset by a net decrease in deposits and 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.

Capital Resources
Total shareholders’ equity amounted to $484.2 million at June 30, 2019, up by $36.0 million from December 31, 2018, including net income of $34.8 million and an increase of $16.4 million in the accumulated comprehensive income component of shareholders’ equity, primarily resulting from an increase in the fair value of available for sale debt securities. These increases were partially offset by $17.1 million for dividend declarations.

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

The ratio of total equity to total assets amounted to 9.33% at June 30, 2019 compared to a ratio of 8.94% at December 31, 2018.  Book value per share at June 30, 2019 and December 31, 2018 amounted to $27.93 and $25.90, respectively.

The Bancorp and the Bank are subject to various regulatory capital requirements. Total risk-based capital ratio amounted to 12.80% at June 30, 2019, compared to 12.56% at December 31, 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 transactions include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative


- 71-


Management's Discussion and Analysis

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

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

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

The Corporation utilizes the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, off-balance sheet interest rate contracts and the pricing and structure of loans and deposits, to manage interest rate risk. The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors.  These interest rate contracts involve, to varying degrees, credit risk and interest rate risk.  Credit risk is the possibility that a loss may occur if a 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 June 30, 2019 and December 31, 2018, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation. All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where both interest rates and the composition of the Corporation’s balance sheet remain stable for a 60-month period.  In addition to measuring the change in net interest income as compared to an unchanged 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 June 30, 2019 and December 31, 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 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.


- 72-


Management's Discussion and Analysis

 
June 30, 2019
 
December 31, 2018
 
Months 1 - 12
 
Months 13 - 24
 
Months 1 - 12
 
Months 13 - 24
100 basis point rate decrease
(3.60)%
 
(5.47)%
 
(3.60)%
 
(5.30)%
100 basis point rate increase
2.09
 
0.28
 
1.94
 
(0.46)
200 basis point rate increase
5.86
 
3.13
 
5.85
 
2.62
300 basis point rate increase
9.64
 
5.56
 
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 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 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 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.

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

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

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

Mortgage-backed securities and residential mortgage 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.



- 73-


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 June 30, 2019 and December 31, 2018 resulting from immediate parallel rate shifts:
(Dollars in thousands)
 
 
 
Security Type
Down 100 Basis Points
 
Up 200 Basis Points
U.S. government-sponsored enterprise securities (callable)

$2,255

 

($11,245
)
Obligations of states and political subdivisions
—

 
—

Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises
16,972

 
(63,498
)
Trust preferred debt and other corporate debt securities
(34
)
 
53

Total change in market value as of June 30, 2019

$19,193

 

($74,690
)
Total change in market value as of December 31, 2018

$31,617

 

($85,191
)



- 74-




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 June 30, 2019.  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 June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




- 75-

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, 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
101
The following materials from Washington Trust Bancorp, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2019 formatted in iXBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related Notes to these consolidated financial statements.
____________________
(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.


- 76-

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:
August 1, 2019
 
By:
/s/ Edward O. Handy III
 
 
 
 
Edward O. Handy III
 
 
 
 
Chairman and Chief Executive Officer
 
 
 
 
(principal executive officer)
 
 
 
 
 
Date:
August 1, 2019
 
By:
/s/ Ronald S. Ohsberg
 
 
 
 
Ronald S. Ohsberg
 
 
 
 
Senior Executive Vice President, Chief Financial Officer and Treasurer
 
 
 
 
(principal financial officer)
 
 
 
 
 
Date:
August 1, 2019
 
By:
/s/ Maria N. Janes
 
 
 
 
Maria N. Janes
 
 
 
 
Executive Vice President and Controller
 
 
 
 
(principal accounting officer)


- 77-

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 period ended June 30, 2019 formatted in iXBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related Notes to these consolidated financial statements.
____________________
(1)
These certifications are not “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Securities Exchange Act.



- 78-