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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.

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.

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, 2019.

Risks and Uncertainties

The COVID-19 pandemic has caused an unprecedented disruption to the economy and the communities we serve. In response, we are committed to working with and supporting our customers experiencing financial difficulty due to the COVID-19 pandemic, including loan payment deferrals and participation in the Small Business Administration's (“SBA’s”) Paycheck Protection Program (“PPP”).

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

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

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

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

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

Accounting Standards Adopted in 2020

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

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

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

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

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The Corporation has elected the five-year phase-in option, provided by regulatory guidance issued by the Federal Deposit Insurance Corporation (“FDIC”) in March 2020, which delays the estimated impact of Topic 326 on regulatory capital for the first two years and then phases it in over a three-year period beginning in 2022. See Note 8 for additional disclosure on regulatory capital.

Fair Value Measurement - Topic 820

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

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

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

Accounting Standards Pending Adoption

Compensation - Retirement Benefits - Topic 715

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

Income Taxes - Topic 745

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

Reference Rate Reform - Topic 848

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

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

ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Corporation is currently evaluating the effect that this ASU will have on the Corporation’s consolidated financial statements.

The Bank maintains certain average reserve balances to meet the requirements of the FRB.  Some or all of these reserve requirements may be satisfied with vault cash. Effective March 26, 2020, the FRB reduced the reserve requirement ratios to zero percent to eliminate the need for depository institutions, such as the Bank, to maintain balances in accounts at the FRB to satisfy reserve requirements. At December 31, 2019, the reserve balance was $27.9 million and was included in cash and due from banks in the Unaudited Consolidated Balance Sheets.

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

Adoption of Topic 326

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

Accounting Policy Updates

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

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

A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a debt security placed on nonaccrual is reversed against interest income. There were no debt securities on nonaccrual status and therefore there was no accrued interest related to debt securities reversed against interest income for the three and six months ended June 30, 2020 and 2019.

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

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

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

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

Available for Sale Debt Securities

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

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

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

(Dollars in thousands)
December 31, 2019	Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value
Available for Sale Debt Securities:
Obligations of U.S. government-sponsored enterprises		$157,255				$626				($233	)			$157,648
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	713,553				8,491				(2,964		)		719,080
Individual name issuer trust preferred debt securities	13,324				—				(745		)		12,579
Corporate bonds	11,141				—				(958		)		10,183
Total available for sale debt securities		$895,273				$9,117				($4,900	)			$899,490

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

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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, 2020	Amortized Cost				Fair Value
Due in one year or less		$108,361				$111,419
Due after one year to five years	320,989				329,271
Due after five years to ten years	315,206				319,219
Due after ten years	175,297				178,537
Total debt securities		$919,853				$938,446

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

The following table summarizes amounts relating to sales of securities:

(Dollars in thousands)	Three Months								Six Months
For the periods ended June 30,	2020				2019				2020				2019
Proceeds from sales		$—				$9,920				$—				$9,920
Gross realized gains		$—				$—				$—				$—
Gross realized losses	—				(80		)		—				(80		)
Net realized losses on securities		$—				($80	)			$—				($80	)

Assessment of Available for Sale Debt Securities for Impairment

Management assesses the decline in fair value of investment securities on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer.  Management evaluates both qualitative and quantitative factors to assess whether an impairment exists. For the accounting policy on the assessment of available for sale debt securities for impairment that was in effect prior to the adoption of Topic 326 on January 1, 2020, see Note 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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

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

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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
December 31, 2019	#			Fair Value			Unrealized Losses				#			Fair Value			Unrealized Losses				#			Fair Value			Unrealized Losses
Obligations of U.S. government-sponsored enterprises	3				$20,364			($136	)		3				$49,902			($97	)		6				$70,266			($233	)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	4			41,150			(56		)		23			216,804			(2,908		)		27			257,954			(2,964		)
Individual name issuer trust preferred debt securities	—			—			—				5			12,579			(745		)		5			12,579			(745		)
Corporate bonds	—			—			—				3			10,183			(958		)		3			10,183			(958		)
Total	7				$61,514			($192	)		34				$289,468			($4,708	)		41				$350,982			($4,900	)

Further deterioration in credit quality of the underlying issuers of the securities, deterioration in the condition of the financial services industry, worsening of the current economic environment, or additional declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as credit losses, and the Corporation may incur write-downs.

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

The gross unrealized losses on U.S. government agency and U.S. government-sponsored debt securities, including mortgage-backed securities, were primarily attributable to relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at June 30, 2020. Management believes that the unrealized losses on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no allowance for credits losses on securities was recorded at June 30, 2020.

Individual Name Issuer Trust Preferred Debt Securities

Included in debt securities in an unrealized loss position at June 30, 2020 were five trust preferred securities issued by four individual companies in the banking sector.  Based on the information available through the filing date of this report, all individual name issuer trust preferred debt securities held in our portfolio continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. Management 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.  As of June 30, 2020, individual name issuer trust preferred debt securities with an amortized cost of $2.0 million and unrealized losses of $254 thousand were rated below investment grade by Standard & Poors, Inc. (“S&P”).  Another individual name issuer trust preferred security with an amortized cost of $2.0 million and an unrealized loss of $245 thousand as of June 30, 2020 was downgraded by S&P to a rating of BB+ (below investment grade) on July  22, 2020. We noted no additional downgrades to below investment grade between June 30, 2020 and the filing date of this report.  Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates and not material changes in the credit quality of the issuers of the debt securities.  Management expects to recover the entire amortized cost basis of these securities.  Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity.  Therefore, no allowance for credit losses on securities was recorded at June 30, 2020.

Corporate Bonds

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

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Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information. Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates and not changes in the credit quality of the issuers of the debt securities. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity.  Therefore, no allowance for credit losses was recorded at June 30, 2020.

The following is a summary of loans:

(Dollars in thousands)	June 30, 2020			December 31, 2019
Commercial:
Commercial real estate (1)		$1,630,998			$1,547,572
Commercial & industrial (2)	852,445			585,289
Total commercial	2,483,443			2,132,861
Residential Real Estate:
Residential real estate (3)	1,508,223			1,449,090
Consumer:
Home equity	277,632			290,874
Other (4)	18,343			20,174
Total consumer	295,975			311,048
Total loans (5)		$4,287,641			$3,892,999

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

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

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

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

(5)	Includes net unamortized loan origination fees of $453 thousand at June 30, 2020 and net unamortized loan origination costs of $5.3 million, at December 31, 2019 and net unamortized premiums on purchased loans of $1.1 million and $995 thousand, respectively, at June 30, 2020 and December 31, 2019.

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

Concentrations of Credit Risk

A significant portion of our loan portfolio is concentrated among borrowers in southern New England and a substantial portion of the portfolio is collateralized by real estate in this area. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in the Corporation’s market area.

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

(Dollars in thousands)	Days Past Due
December 31, 2019	30-59				60-89				Over 90				Total Past Due				Current				Total Loans
Commercial:
Commercial real estate		$830				$—				$603				$1,433				$1,546,139				$1,547,572
Commercial & industrial	1				—				—				1				585,288				585,289
Total commercial	831				—				603				1,434				2,131,427				2,132,861
Residential Real Estate:
Residential real estate	4,574				2,155				4,700				11,429				1,437,661				1,449,090
Consumer:
Home equity	971				729				996				2,696				288,178				290,874
Other	42				—				88				130				20,044				20,174
Total consumer	1,013				729				1,084				2,826				308,222				311,048
Total loans		$6,418				$2,884				$6,387				$15,689				$3,877,310				$3,892,999

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

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

Nonaccrual Loans

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

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

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

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

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

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

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

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

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

Troubled Debt Restructurings

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

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be bifurcated with separate terms for each tranche of the restructured debt. Restructuring of a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection.

The Corporation's ACL reflects the effects of a TDR when management reasonably expects at the reporting date that a TDR will be executed with an individual borrower. A TDR is considered reasonably expected no later than the point when management concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession to avoid a default. Reasonably expected TDRs and executed TDRs are evaluated individually to determine the required ACL. Troubled debt restructurings that did not involve a below-market rate concession and perform in accordance with their modified contractual terms for a reasonable period of time may be included in the Corporation’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectibility of the loan.  Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status.  Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term and full collection of principal and interest is in doubt.

TDRs are reported as such for at least one year from the date of the restructuring.  In years after the restructuring, TDRs are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is performing in accordance with their modified contractual terms for a reasonable period of time.

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

The recorded investment in TDRs was $6.5 million and $869 thousand, respectively, at June 30, 2020 and December 31, 2019. The ACL on loans included specific reserves for these TDRs of $137 thousand and $97 thousand, respectively, at June 30, 2020 and December 31, 2019.

As of June 30, 2020, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured in a TDR.

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

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The following tables present loans modified as a TDR:

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

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

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

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

The following table presents information on how loans were modified as a TDR:

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

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

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For the three and six months ended June 30, 2020, payment defaults on TDRs modified within the previous 12 months occurred on one loan with a carrying value of $47 thousand at the time of the default. For the three and six months ended June 30, 2019, there were no payment defaults on TDRs modified within the previous 12 months.

Individually Analyzed Loans

Effective January 1, 2020, individually analyzed loans include nonaccrual commercial loans, loans classified as TDRs, and certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans. As of June 30, 2020, the carrying value of individually analyzed loans amounted to $7.1 million, of which $4.3 million were considered collateral dependent.

For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. See Note 10 for additional disclosure regarding fair value of individually analyzed collateral dependent loans.

The following table presents the carrying value of collateral dependent individually analyzed loans:

(Dollars in thousands)
As of June 30, 2020	Carrying Value			Related Allowance
Commercial:
Commercial real estate (1)		$431			$—
Commercial & industrial (2)	414			—
Total commercial	845			—
Residential Real Estate:
Residential real estate (3)	2,664			—
Consumer:
Home equity (3)	754			233
Other	—			—
Total consumer	754			233
Total		$4,263			$233

(1)	Secured by income-producing property.

(2)	Secured by business assets.

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

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

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

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

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

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

Credit Quality Indicators

Commercial

The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. The Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for credit losses on loans. See Note 6 for additional information.

A description of the commercial loan categories is as follows:

Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality, but may exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, performance or may be in an industry or of a loan type known to have a higher degree of risk. These weaknesses may be mitigated by secondary sources of repayment, including SBA guarantees.

Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies.

Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectibility. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined. “Loss” is not intended to imply that the loan has no recovery value, but rather, it is not practical or desirable to continue to carry the asset.

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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 watched asset list, which generally consists of commercial loans that are risk-rated 6 or worse, highly leveraged transaction loans, high-volatility commercial real estate and other selected loans. Management’s review focuses on the current status of the loans 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.

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.

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

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

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

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

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

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

(Dollars in thousands)
As of December 31, 2019	Current				Past Due
Residential Real Estate:
Residential real estate		$1,437,661				$11,429
Consumer:
Home equity		$288,178				$2,696
Other	20,044				130
Total consumer		$308,222				$2,826

Adoption of Topic 326

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

Accounting Policy Updates

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

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

The ACL on loans is management’s estimate of expected credit losses over the expected life of the loans at the reporting date.  The ACL on loans is increased through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income and by recoveries of amounts previously charged-off. The ACL on loans is reduced by charge-offs on loans.  Loan charge-offs are recognized when management believes the collectibility of the principal balance outstanding is unlikely.  Full or partial charge-offs on collateral dependent individually analyzed loans are generally recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.

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

Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components. The first component involves

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

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

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

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

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

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

(Dollars in thousands)	Commercial												Consumer
	CRE			C&I			Total Commercial			Residential Real Estate			Home Equity			Other			Total Consumer			Total
Beginning Balance		$19,736			$10,331			$30,067			$7,729			$1,435			$434			$1,869			$39,665
Charge-offs	(19		)	(289		)	(308		)	—			(1		)	(17		)	(18		)	(326		)
Recoveries	—			5			5			—			6			7			13			18
Provision	566			1,231			1,797			324			(46		)	9			(37		)	2,084
Ending Balance		$20,283			$11,278			$31,561			$8,053			$1,394			$433			$1,827			$41,441

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

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

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

For the accounting policy on the allowance for loan losses that was in effect prior to the adoption of Topic 326, see Note 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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

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

(Dollars in thousands)	Commercial												Consumer
	CRE			C&I			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

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

(Dollars in thousands)	Loans				Related Allowance
Loans Individually Analyzed for Credit Losses
Commercial:
Commercial real estate		$603				$—
Commercial & industrial	657				580
Total commercial	1,260				580
Residential Real Estate:
Residential real estate	14,654				95
Consumer:
Home equity	1,763				291
Other	106				2
Total consumer	1,869				293
Subtotal	17,783				968
Loans Collectively Evaluated for Credit Losses
Commercial:
Commercial real estate	1,546,969				14,741
Commercial & industrial	584,632				3,341
Total commercial	2,131,601				18,082
Residential Real Estate:
Residential real estate	1,434,436				6,520
Consumer:
Home equity	289,111				1,099
Other	20,068				345
Total consumer	309,179				1,444
Subtotal	3,875,216				26,046
Total		$3,892,999				$27,014

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Advances payable to the FHLB amounted to $1.0 billion and $1.1 billion, respectively, at June 30, 2020 and December 31, 2019.

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

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

(Dollars in thousands)	Scheduled Maturity				Weighted Average Rate
July 1, 2020 to December 31, 2020		$759,621			1.17	%
2021	155,222				1.48
2022	813				5.12
2023	5,238				3.80
2024	40,900				2.51
2025 and thereafter	43,257				3.29
Balance at June 30, 2020		$1,005,051			1.38	%

In June 2020, Washington Trust began participating in the FRB’s Paycheck Protection Program Liquidity Facility ("PPPLF"). PPPLF extends credit to depository institutions at a fixed interest rate of 0.35%. Only PPP loans can be pledged as collateral to access the facility. The maturity date of the PPPLF borrowings matches the maturity date of the pledged PPP loans. As of June 30, 2020, PPPLF borrowings amounted to $38.9 million and have a scheduled maturity in April 2022. PPP loans totaling $38.9 million were pledged as collateral to the FRB as of June 30, 2020.

2019 Stock Repurchase Program

The Corporation’s 2019 Stock Repurchase Program authorizes the repurchase of up to 850,000 shares, or approximately 5%, of the Corporation’s outstanding common stock. This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The 2019 Stock Repurchase Program expires on October 31, 2020 and may be modified, suspended, or discontinued at any time.  As of June 30, 2020, 124,863 shares have been repurchased under the 2019 Stock Repurchase Program, totaling $4.3 million, at an average price of $34.61. Due to the economic uncertainty resulting from the COVID-19 pandemic, Washington Trust suspended its 2019 Stock Repurchase Program effective March 25, 2020.

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Regulatory Capital Requirements

Capital levels at June 30, 2020 exceeded the regulatory minimum levels to be considered “well capitalized.”

The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios, as well as the corresponding minimum and well capitalized regulatory amounts and ratios that were in effect during the respective periods:

(Dollars in thousands)	Actual							For Capital Adequacy Purposes							To Be “Well Capitalized” Under Prompt Corrective Action Provisions
	Amount				Ratio			Amount				Ratio			Amount				Ratio
June 30, 2020
Total Capital (to Risk-Weighted Assets):
Corporation		$515,264			12.78	%			$322,590			8.00	%		N/A				N/A
Bank	504,621				12.52			322,556				8.00				$403,195			10.00	%
Tier 1 Capital (to Risk-Weighted Assets):
Corporation	481,728				11.95			241,942				6.00			N/A				N/A
Bank	471,085				11.68			241,917				6.00			322,556				8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
Corporation	459,729				11.40			181,457				4.50			N/A				N/A
Bank	471,085				11.68			181,438				4.50			262,076				6.50
Tier 1 Capital (to Average Assets): (1)
Corporation	481,728				8.42			228,756				4.00			N/A				N/A
Bank	471,085				8.24			228,672				4.00			285,839				5.00
December 31, 2019
Total Capital (to Risk-Weighted Assets):
Corporation	494,603				12.94			305,728				8.00			N/A				N/A
Bank	490,993				12.85			305,693				8.00			382,116				10.00
Tier 1 Capital (to Risk-Weighted Assets):
Corporation	467,296				12.23			229,296				6.00			N/A				N/A
Bank	463,686				12.13			229,270				6.00			305,693				8.00
Common Equity Tier 1 Capital (to Risk-Weighted Assets):
Corporation	445,298				11.65			171,972				4.50			N/A				N/A
Bank	463,686				12.13			171,952				4.50			248,375				6.50
Tier 1 Capital (to Average Assets): (1)
Corporation	467,296				9.04			206,682				4.00			N/A				N/A
Bank	463,686				8.98			206,596				4.00			258,245				5.00

(1)	Leverage ratio.

In addition to the minimum regulatory capital required for capital adequacy purposes outlined in the table above, the Corporation is required to maintain a minimum capital conservation buffer, in the form of common equity, of 2.50% in order to avoid restrictions on capital distributions and discretionary bonuses. The Corporation’s capital levels exceeded the minimum regulatory capital requirements plus the capital conservation buffer at June 30, 2020 and December 31, 2019.

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

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

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

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, 2020 and December 31, 2019, the Corporation 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 Corporation obtained the right to receive the difference between 3-month LIBOR and a 4.5% strike. The caps mature in November and December of 2020.

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

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

Loan Related Derivative Contracts

Interest Rate Swap Contracts with Customers

The Corporation has entered into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk.  The interest rate swap contracts with commercial loan borrowers allow them to convert variable-rate loan payments to fixed-rate loan payments.  When the Corporation enters into an interest rate swap contract with a commercial loan borrower, it simultaneously enters into a “mirror” swap contract with a third party.  The third party exchanges the client’s fixed-rate loan payments for variable-rate loan payments.  The Corporation retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans.  As of June 30, 2020 and December 31, 2019, Washington Trust had interest rate swap contracts with commercial loan borrowers with notional amounts of $958.6 million and $813.5 million, respectively, and equal amounts of “mirror” swap contracts with third-party financial institutions.  These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings.

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Risk Participation Agreements

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

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

As of June 30, 2020, the notional amounts of risk participation-out agreements and risk participation-in agreements were $60.7 million and $93.1 million, respectively, compared to $61.2 million and $72.9 million, respectively, as of December 31, 2019.

Mortgage Loan Commitments

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

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

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

(Dollars in thousands)	Derivative Assets									Derivative Liabilities
		Fair Value									Fair Value
	Balance Sheet Location	Jun 30, 2020				Dec 31, 2019				Balance Sheet Location	Jun 30, 2020				Dec 31, 2019
Derivatives Designated as Cash Flow Hedging Instruments:
Interest rate risk management contracts:
Interest rate caps	Other assets		$—				$—			Other liabilities		$—				$—
Interest rate swaps	Other assets	—				—				Other liabilities	2,503				730
Interest rate floors	Other assets	212				3				Other liabilities	—				—
Derivatives not Designated as Hedging Instruments:
Loan related derivative contracts:
Interest rate swaps with customers	Other assets	90,122				27,736				Other liabilities	1				358
Mirror swaps with counterparties	Other assets	—				351				Other liabilities	90,534				27,819
Risk participation agreements	Other assets	27				1				Other liabilities	3				1
Mortgage loan commitments:
Interest rate lock commitments	Other assets	8,381				1,097				Other liabilities	—				—
Forward sale commitments	Other assets	9				30				Other liabilities	2,545				827
Gross amounts		98,751				29,218					95,586				29,735
Less amounts offset in Consolidated Balance Sheets (1)		212				354					212				354
Net amounts presented in Consolidated Balance Sheets		98,539				28,864					95,374				29,381
Less collateral pledged (2)		—				—					54,041				27,105
Net amounts			$98,539				$28,864					$41,333				$2,276

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

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

The following tables present the effect of derivative instruments in the 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,	2020				2019				2020				2019
Derivatives Designated as Cash Flow Hedging Instruments:
Interest rate risk management contracts:
Interest rate caps		$24				$14				$46				$14
Interest rate swaps	1				(765		)		(1,323		)		(1,231		)
Interest rate floors	(17		)		129				235				153
Total		$8				($622	)			($1,042	)			($1,064	)

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

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(Dollars in thousands)		Amount of Gain (Loss) Recognized in Income on Derivatives
		Three Months								Six Months
Periods ended June 30,	Statement of Income Location	2020				2019				2020				2019
Derivatives not Designated as Hedging Instruments:
Loan related derivative contracts:
Interest rate swaps with customers	Loan related derivative income		$7,960				$16,974				$66,491				$27,284
Mirror swaps with counterparties	Loan related derivative income	(7,964		)		(16,246		)		(64,154		)		(25,850		)
Risk participation agreements	Loan related derivative income	103				—				217				—
Foreign exchange contracts	Loan related derivative income	—				18				—				36
Mortgage loan commitments:
Interest rate lock commitments	Mortgage banking revenues	3,548				610				7,284				1,295
Forward sale commitments	Mortgage banking revenues	(2,356		)		(1,439		)		(5,990		)		(1,868		)
Total			$1,291				($83	)			$3,848				$897

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

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

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

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

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

Fair Value Option Election

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

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

(Dollars in thousands)	June 30, 2020			December 31, 2019
Aggregate fair value		$43,997			$27,833
Aggregate principal balance	42,296			27,168
Difference between fair value and principal balance		$1,701			$665

Changes in fair value of mortgage loans held for sale accounted for under the fair value option election amounted to increases of $149 thousand and $1.0 million, respectively, in the three and six months ended June 30, 2020, compared to increases of

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

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

Valuation Techniques

Debt Securities

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

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

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

Mortgage Loans Held for Sale

The fair value of mortgage loans held for sale is estimated based on current market prices for similar loans in the secondary market and therefore are classified as Level 2 assets.

Collateral Dependent Individually Analyzed / Impaired Loans

The fair value of collateral dependent loans that are individually analyzed or were previously deemed impaired is determined based upon the appraised fair value of the underlying collateral. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For collateral dependent loans for which repayment is to be provided substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral dependent loans for which repayment is to be provided substantially through the operation of the collateral, such as accruing TDRs, estimated costs to sell are not incorporated into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the collateral. Internal valuations may be utilized to determine the fair value of other business assets. Collateral dependent individually analyzed / 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 credit losses on loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Such subsequent valuation charges are charged through earnings. Fair value is generally based upon appraised values of the collateral. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.

Derivatives

Interest rate cap, swap and floor contracts are traded in over-the-counter markets where quoted market prices are not readily available.  Fair value measurements are determined using independent pricing models that utilize primarily market observable inputs, such as swap rates of different maturities and LIBOR rates. The Corporation also evaluates the credit risk of its counterparties, as well as that of the Corporation.  Accordingly, factors such as the likelihood of default by the Corporation and its counterparties, its net exposures and remaining contractual life are considered in determining if any fair value adjustments related to credit risk are required.  Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position, if any. Although the Corporation has determined that the majority of the inputs used to value its interest rate swap, cap and floor contracts fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with interest rate contracts and risk participation agreements utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Corporation and its counterparties. However, as of June 30, 2020 and December 31, 2019, the Corporation has assessed the significance of the impact of the credit

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valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation has classified its derivative valuations in their entirety as Level 2.

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

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, 2020
Assets:
Available for sale debt securities:
Obligations of U.S. government-sponsored enterprises		$156,638			$—			$156,638			$—
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	761,056			—			761,056			—
Individual name issuer trust preferred debt securities	11,729			—			11,729			—
Corporate bonds	9,023			—			9,023			—
Mortgage loans held for sale	43,997			—			43,997			—
Derivative assets	98,539			—			98,539			—
Total assets at fair value on a recurring basis		$1,080,982			$—			$1,080,982			$—
Liabilities:
Derivative liabilities		$95,374			$—			$95,374			$—
Total liabilities at fair value on a recurring basis		$95,374			$—			$95,374			$—

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(Dollars in thousands)	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
December 31, 2019
Assets:
Available for sale debt securities:
Obligations of U.S. government-sponsored enterprises		$157,648			$—			$157,648			$—
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	719,080			—			719,080			—
Individual name issuer trust preferred debt securities	12,579			—			12,579			—
Corporate bonds	10,183			—			10,183			—
Mortgage loans held for sale	27,833			—			27,833			—
Derivative assets	28,864			—			28,864			—
Total assets at fair value on a recurring basis		$956,187			$—			$956,187			$—
Liabilities:
Derivative liabilities		$29,381			$—			$29,381			$—
Total liabilities at fair value on a recurring basis		$29,381			$—			$29,381			$—

Items Recorded at Fair Value on a Nonrecurring Basis

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

(Dollars in thousands)	Total				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
Collateral dependent individually analyzed CRE loan		$431				$—				$—				$431
Total assets at fair value on a nonrecurring basis		$431				$—				$—				$431

The ACL on all collateral dependent individually analyzed loans amounted to $233 thousand at June 30, 2020.

The following table presents the carrying value of assets held at December 31, 2019, which were written down to fair value during the year ended December 31, 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		$1,448				$—				$—				$1,448
Property acquired through foreclosure or repossession	1,109				—				—				1,109
Total assets at fair value on a nonrecurring basis		$2,557				$—				$—				$2,557

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

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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, 2020
Collateral dependent individually analyzed CRE loan		$431		Appraisals of collateral	Discount for costs to sell	0% - 20% (12%)
					Appraisal adjustments (1)	0% - 100% (43%)

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

(Dollars in thousands)	Fair Value			Valuation Technique	Unobservable Input	Range of Inputs Utilized (Weighted Average)
December 31, 2019
Collateral dependent impaired loans		$1,448		Appraisals of collateral	Discount for costs to sell	0% - 20% (5%)
					Appraisal adjustments (1)	0% - 100% (67%)
Property acquired through foreclosure or repossession		$1,109		Appraisals of collateral	Discount for costs to sell	12%
					Appraisal adjustments (1)	22%

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

Valuation of Financial Instruments

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

(Dollars in thousands)
June 30, 2020	Carrying Amount			Total Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Financial Assets:
Loans, net of allowance for credit losses on loans		$4,246,200			$4,249,310			$—			$—			$4,249,310
Financial Liabilities:
Time deposits		$1,257,382			$1,267,644			$—			$1,267,644			$—
FHLB advances	1,005,051			1,017,218			—			1,017,218			—
Junior subordinated debentures	22,681			18,077			—			18,077			—

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(Dollars in thousands)
December 31, 2019	Carrying Amount			Total Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Financial Assets:
Loans, net of allowance for loan losses		$3,865,985			$3,869,192			$—			$—			$3,869,192
Financial Liabilities:
Time deposits		$1,069,323			$1,082,830			$—			$1,082,830			$—
FHLB advances	1,141,464			1,145,242			—			1,145,242			—
Junior subordinated debentures	22,681			19,628			—			19,628			—

The following tables summarize total revenues as presented in the Unaudited Consolidated Statements of Income and the related amounts that are from contracts with customers within the scope of 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,	2020							2019
(Dollars in thousands)	Revenue (1)			ASC 606 Revenue (2)				Revenue (1)			ASC 606 Revenue (2)
Net interest income		$30,945			$—				$33,858			$—
Noninterest income:
Asset-based wealth management revenues	8,156			8,156				9,141			9,141
Transaction-based wealth management revenues	449			449				408			408
Total wealth management revenues	8,605			8,605				9,549			9,549
Mortgage banking revenues	14,851			—				3,640			—
Card interchange fees	1,031			1,031				1,018			1,018
Service charges on deposit accounts	517			517				929			929
Loan related derivative income	99			—				746			—
Income from bank-owned life insurance	791			—				566			—
Net realized losses on securities	—			—				(80		)	—
Other income	426			288				385			371
Total noninterest income	26,320			10,441				16,753			11,867
Total revenues		$57,265			$10,441				$50,611			$11,867

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

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

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

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

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

The Corporation recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), ATM fees, wire transfer fees, overdraft charge fees, and stop-payment and returned check fees. Such revenue is derived from transactional information and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction.

The Corporation recognizes revenue over a period of time, generally monthly, as services are performed and performance obligations are satisfied. Such revenue includes wealth management revenues and service charges on deposit accounts. Wealth management revenues are categorized as either asset-based revenues or transaction-based revenues. Asset-based revenues include trust and investment management fees that are earned based upon a percentage of asset values under administration. Transaction-based revenues include financial planning fees, tax preparation fees, commissions and other service fees. Fee revenue from service charges on deposit accounts represent service charges assessed to customers who hold deposit accounts at the Bank.

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

(Dollars in thousands)	Three Months							Six Months
Periods ended June 30,	2020			2019				2020			2019
Revenue recognized at a point in time:
Card interchange fees		$1,031			$1,018				$1,978			$2,015
Service charges on deposit accounts	374			719				1,041			1,381
Other income	254			324				454			503
Revenue recognized over time:
Wealth management revenues	8,605			9,549				17,294			18,801
Service charges on deposit accounts	143			210				336			423
Other income	34			47				81			92
Total revenues from contracts in scope of Topic 606		$10,441			$11,867				$21,184			$23,215

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

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

For commissions and incentives that are in-scope of Topic 606, such as those paid to employees in our wealth management services and commercial banking segments in order to obtain customer contracts, contract cost assets are established. The contract cost assets are capitalized and amortized over the estimated useful life that the asset is expected to generate benefits. The carrying value of contract cost assets amounted to $1.0 million at June 30, 2020, compared to $905 thousand at December 31, 2019 and were included in other assets in the Unaudited Consolidated Balance Sheets.

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

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

The following table presents components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss), on a pre-tax basis:

(Dollars in thousands)	Qualified Pension Plan														Non-Qualified Retirement Plans
	Three Months							Six Months							Three Months							Six Months
Periods ended June 30,	2020			2019				2020			2019				2020			2019				2020			2019
Net Periodic Benefit Cost:
Service cost (1)		$541			$509				$1,082			$1,018				$42			$32				$85			$63
Interest cost (2)	627			742				1,253			1,484				117			141				233			282
Expected return on plan assets (2)	(1,134		)	(1,123		)		(2,269		)	(2,247		)		—			—				—			—
Amortization of prior service credit (2)	—			(4		)		—			(8		)		—			—				—			—
Recognized net actuarial loss (2)	395			198				791			396				140			101				280			203
Net periodic benefit cost		$429			$322				$857			$643				$299			$274				$598			$548

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

(2)	Included in other expenses in the Unaudited Consolidated Statements of Income.

The following table presents the measurement date and weighted-average assumptions used to determine net periodic benefit cost:

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

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

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

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

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

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

Commercial Banking

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

Wealth Management Services

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

Corporate

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

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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,	2020			2019				2020			2019				2020			2019				2020			2019
Net interest income (expense)		$32,580			$27,867				($26	)		($120	)			($1,609	)		$6,111				$30,945			$33,858
Provision for credit losses	2,200			525				—			—				—			—				2,200			525
Net interest income (expense) after provision for credit losses	30,380			27,342				(26		)	(120		)		(1,609		)	6,111				28,745			33,333
Noninterest income	16,910			6,690				8,605			9,557				805			506				26,320			16,753
Noninterest expenses:
Depreciation and amortization expense	611			672				354			363				39			39				1,004			1,074
Other noninterest expenses	17,615			16,660				6,225			6,937				3,634			3,480				27,474			27,077
Total noninterest expenses	18,226			17,332				6,579			7,300				3,673			3,519				28,478			28,151
Income (loss) before income taxes	29,064			16,700				2,000			2,137				(4,477		)	3,098				26,587			21,935
Income tax expense (benefit)	6,177			3,603				457			582				(1,087		)	477				5,547			4,662
Net income (loss)		$22,887			$13,097				$1,543			$1,555				($3,390	)		$2,621				$21,040			$17,273
Total assets at period end		$4,579,720			$3,916,915				$74,803			$77,757				$1,222,437			$1,195,000				$5,876,960			$5,189,672
Expenditures for long-lived assets	261			297				13			—				23			19				297			316

(Dollars in thousands)	Commercial Banking							Wealth Management Services							Corporate							Consolidated Total
Six months ended June 30,	2020			2019				2020			2019				2020			2019				2020			2019
Net interest income (expense)		$61,590			$55,169				($93	)		($247	)			$2,050			$13,520				$63,547			$68,442
Provision for credit losses	9,236			1,175				—			—				—			—				9,236			1,175
Net interest income (expense) after provision for loan losses	52,354			53,994				(93		)	(247		)		2,050			13,520				54,311			67,267
Noninterest income	27,575			12,146				17,294			18,808				1,378			1,166				46,247			32,120
Noninterest expenses:
Depreciation and amortization expense	1,231			1,342				708			729				78			79				2,017			2,150
Other noninterest expenses	36,298			32,421				13,230			13,414				7,386			7,130				56,914			52,965
Total noninterest expenses	37,529			33,763				13,938			14,143				7,464			7,209				58,931			55,115
Income (loss) before income taxes	42,400			32,377				3,263			4,418				(4,036		)	7,477				41,627			44,272
Income tax expense (benefit)	8,941			7,024				813			1,199				(1,068		)	1,281				8,686			9,504
Net income (loss)		$33,459			$25,353				$2,450			$3,219				($2,968	)		$6,196				$32,941			$34,768
Total assets at period end		$4,579,720			$3,916,915				$74,803			$77,757				$1,222,437			$1,195,000				$5,876,960			$5,189,672
Expenditures for long-lived assets	787			1,597				66			292				72			82				925			1,971

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

Three months ended June 30,	2020										2019
(Dollars in thousands)	Pre-tax Amounts			Income Taxes			Net of Tax				Pre-tax Amounts			Income Taxes			Net of Tax
Securities available for sale:
Changes in fair value of available for sale debt securities		($2,364	)		($556	)		($1,808	)			$7,807			$1,835			$5,972
Net losses on debt securities reclassified into earnings (1)	—			—			—				80			19			61
Net change in fair value of available for sale debt securities	(2,364		)	(556		)	(1,808		)		7,887			1,854			6,033
Cash flow hedges:
Change in fair value of cash flow hedges	(293		)	(69		)	(224		)		(824		)	(194		)	(630		)
Net cash flow hedge gains reclassified into earnings (2)	305			73			232				10			2			8
Net change in fair value of cash flow hedges	12			4			8				(814		)	(192		)	(622		)
Defined benefit plan obligations:
Amortization of net actuarial losses (3)	535			126			409				300			71			229
Amortization of net prior service credits (3)	—			—			—				(4		)	(1		)	(3		)
Net change in defined benefit plan obligations	535			126			409				296			70			226
Total other comprehensive (loss) income		($1,817	)		($426	)		($1,391	)			$7,369			$1,732			$5,637

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

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

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

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

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

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

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

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The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax:

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

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

(Dollars in thousands)	Net Unrealized (Losses) 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 March 31, 2019		($5,741	)			($251	)			($11,511	)			($17,503	)
Other comprehensive income (loss) before reclassifications	5,972				(630		)		—				5,342
Amounts reclassified from accumulated other comprehensive income	61				8				226				295
Net other comprehensive income (loss)	6,033				(622		)		226				5,637
Balance at June 30, 2019		$292				($873	)			($11,285	)			($11,866	)

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

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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,	2020				2019				2020				2019
Earnings per common share - basic:
Net income		$21,040				$17,273				$32,941				$34,768
Less dividends and undistributed earnings allocated to participating securities	(40		)		(35		)		(72		)		(69		)
Net income available to common shareholders		$21,000				$17,238				$32,869				$34,699
Weighted average common shares	17,257				17,330				17,301				17,317
Earnings per common share - basic		$1.22				$0.99				$1.90				$2.00
Earnings per common share - diluted:
Net income		$21,040				$17,273				$32,941				$34,768
Less dividends and undistributed earnings allocated to participating securities	(40		)		(35		)		(72		)		(69		)
Net income available to common shareholders		$21,000				$17,238				$32,869				$34,699
Weighted average common shares	17,257				17,330				17,301				17,317
Dilutive effect of common stock equivalents	35				75				76				86
Weighted average diluted common shares	17,292				17,405				17,377				17,403
Earnings per common share - diluted		$1.21				$0.99				$1.89				$1.99

Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 256,721 and 220,305, respectively for the three and six months ended June 30, 2020, compared to 87,950 and 87,863, respectively, for the same periods in 2019.

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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.

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

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

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

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

(Dollars in thousands)
July 1, 2020 to December 31, 2020		$3,718
2021	3,499
2022	3,493
2023	3,356
2024	2,921
2025 and thereafter	20,567
Total operating lease payments (1)	37,554
Less interest	8,429
Present value of operating lease liabilities (2)		$29,125

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

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

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

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

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

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Adoption of Topic 326

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

Accounting Policy Updates

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

The ACL on unfunded commitments is management’s estimate of expected credit losses over the expected contractual term (or life) in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. Unfunded commitments for home equity lines of credit and commercial demand loans are considered unconditionally cancellable for regulatory capital purposes and, therefore, are excluded from the calculation to estimate the ACL on unfunded commitments. For each portfolio, estimated loss rates and funding factors are applied to the corresponding balance of unfunded commitments. For each portfolio, the estimated loss rates applied to unfunded commitments are the same quantitative and qualitative loss rates applied to the corresponding on-balance sheet amounts in determining the ACL on loans. The estimated funding factor applied to unfunded commitments represents the likelihood that the funding will occur and is based upon the Corporation’s average historical utilization rate for each portfolio.

The ACL on unfunded commitments is included in other liabilities in the Unaudited Consolidated Balance Sheets. The ACL on unfunded commitments is adjusted through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income.

Financial Instruments with Off-Balance Sheet Risk

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates.  These financial instruments include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts.  These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Unaudited Consolidated Balance Sheets.  The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

Financial Instruments Whose Contract Amounts Represent Credit Risk (Unfunded Commitments)

Commitments to Extend Credit

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

Standby Letters of Credit

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support the financing needs of the Bank’s commercial customers. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The collateral supporting those commitments is essentially the same as for other commitments. Most standby letters of credit extend for one year. The maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered totaled $10.1 million and $13.7 million, respectively, as of June 30, 2020 and December 31, 2019. At June 30, 2020 and December 31, 2019, there were no liabilities to beneficiaries resulting from standby letters of credit.  Fee income on standby letters of credit was insignificant for the three and six months ended June 30, 2020 and 2019.

A substantial portion of the standby letters of credit were supported by pledged collateral. The collateral obtained is determined based on management’s credit evaluation of the customer. Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required.

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Financial Instruments Whose Notional Amounts Exceed the Amount of Credit Risk

Mortgage Loan Commitments

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

Loan Related Derivative Contracts

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

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

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

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

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

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

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

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

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

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

Other Contingencies

Litigation

The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated balance sheets or statements of income of the Corporation.

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

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

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

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

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

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

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

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

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•

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

•

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

•

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

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

•

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

•

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

•

Entertainment and recreation consisted of 94 loans with balances totaling $35.6 million as of June 30, 2020, representing 4% of the total C&I portfolio. This industry segment consists largely of golf courses and marinas. As of June 30, 2020, we have executed 11 short-term deferments on loan balances totaling $13.0 million, which represented 37% of this industry segment’s balance at June 30, 2020. The deferments have been executed primarily for golf courses.

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

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

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

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

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

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

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

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

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

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

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