Edgar Filing: WASHINGTON TRUST BANCORP INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended SEPTEMBER 30, 2017 or



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

Commission file number: 001-32991

WASHINGTON TRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)



RHODE ISLAND		05-0404671
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



23 BROAD STREET
WESTERLY, RHODE ISLAND		02891
(Address of principal executive offices)		(Zip Code)

(401) 348-1200

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

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



Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)		Emerging growth company o

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

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

o Yes x No

The number of shares of common stock of the registrant outstanding as of October 31, 2017 was 17,220,879.



FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended September 30, 2017

TABLE OF CONTENTS
	Page Number
	Page Number
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016	3
Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016	4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016	5
Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2017 and 2016	6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016	7
Condensed Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	46
Item 3. Quantitative and Qualitative Disclosures About Market Risk	71
Item 4. Controls and Procedures	71
PART II. Other Information
Item 1. Legal Proceedings	72
Item 1A. Risk Factors	72
Item 6. Exhibits	72
Signatures	73

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PART I. Financial Information

Item 1. Financial Statements



Consolidated Balance Sheets (unaudited)	(Dollars in thousands, except par value)



	September 30, 2017			December 31, 2016
Assets:
Cash and due from banks		$128,580			$106,185
Short-term investments	2,600			1,612
Mortgage loans held for sale, at fair value	28,484			29,434
Securities:
Available for sale, at fair value	714,355			739,912
Held to maturity, at amortized cost (fair value $13,537 at September 30, 2017 and $15,920 at December 31, 2016)	13,241			15,633
Total securities	727,596			755,545
Federal Home Loan Bank stock, at cost	42,173			43,129
Loans:
Commercial	1,800,116			1,771,666
Residential real estate	1,195,537			1,122,748
Consumer	327,425			339,957
Total loans	3,323,078			3,234,371
Less allowance for loan losses	27,308			26,004
Net loans	3,295,770			3,208,367
Premises and equipment, net	28,591			29,020
Investment in bank-owned life insurance	72,729			71,105
Goodwill	63,909			64,059
Identifiable intangible assets, net	9,388			10,175
Other assets	69,410			62,484
Total assets		$4,469,230			$4,381,115
Liabilities:
Deposits:
Demand deposits		$621,273			$585,960
NOW accounts	448,128			427,707
Money market accounts	716,827			730,075
Savings accounts	367,912			358,397
Time deposits	1,002,941			961,613
Total deposits	3,157,081			3,063,752
Federal Home Loan Bank advances	814,045			848,930
Junior subordinated debentures	22,681			22,681
Other liabilities	61,195			54,948
Total liabilities	4,055,002			3,990,311
Commitments and contingencies
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 60,000,000 shares; issued and outstanding 17,214,160 shares at September 30, 2017 and 17,170,820 shares at December 31, 2016	1,076			1,073
Paid-in capital	117,189			115,123
Retained earnings	312,334			294,365
Accumulated other comprehensive loss	(16,371		)	(19,757		)
Total shareholders’ equity	414,228			390,804
Total liabilities and shareholders’ equity		$4,469,230			$4,381,115

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



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



		Three months						Nine months
Periods ended September 30,		2017			2016			2017			2016
Interest income:
Interest and fees on loans			$32,509			$29,633			$94,503			$88,753
Interest on securities:	Taxable	4,655			3,024			14,208			7,881
	Nontaxable	41			218			225			825
Dividends on Federal Home Loan Bank stock		467			288			1,293			729
Other interest income		197			93			457			227
Total interest and dividend income		37,869			33,256			110,686			98,415
Interest expense:
Deposits		3,835			3,110			10,928			9,059
Federal Home Loan Bank advances		3,816			2,641			10,669			7,106
Junior subordinated debentures		159			125			446			356
Other interest expense		—			1			1			4
Total interest expense		7,810			5,877			22,044			16,525
Net interest income		30,059			27,379			88,642			81,890
Provision for loan losses		1,300			1,800			2,400			2,750
Net interest income after provision for loan losses		28,759			25,579			86,242			79,140
Noninterest income:
Wealth management revenues		10,013			9,623			29,432			28,278
Mortgage banking revenues		3,036			3,734			8,295			8,642
Service charges on deposit accounts		942			915			2,726			2,757
Card interchange fees		894			870			2,598			2,527
Income from bank-owned life insurance		546			521			1,624			2,110
Loan related derivative income		1,452			1,178			2,744			2,331
Equity in earnings (losses) of unconsolidated subsidiaries		(89		)	(88		)	(266		)	(265		)
Other income		489			508			1,446			1,429
Total noninterest income		17,283			17,261			48,599			47,809
Noninterest expense:
Salaries and employee benefits		17,251			16,908			51,404			50,693
Net occupancy		1,928			1,766			5,662			5,376
Equipment		1,380			1,648			4,160			4,652
Outsourced services		1,793			1,254			4,960			3,911
Legal, audit and professional fees		534			691			1,732			1,982
FDIC deposit insurance costs		308			504			1,258			1,488
Advertising and promotion		416			370			1,015			1,055
Amortization of intangibles		253			321			787			966
Debt prepayment penalties		—			—			—			431
Change in fair value of contingent consideration		—			(939		)	(310		)	(898		)
Other expenses		2,891			2,127			7,678			6,474
Total noninterest expense		26,754			24,650			78,346			76,130
Income before income taxes		19,288			18,190			56,495			50,819
Income tax expense		6,326			5,863			18,552			16,500
Net income			$12,962			$12,327			$37,943			$34,319

Weighted average common shares outstanding - basic		17,212			17,090			17,201			17,060
Weighted average common shares outstanding - diluted		17,318			17,203			17,320			17,198
Per share information:	Basic earnings per common share		$0.75			$0.72			$2.20			$2.01
	Diluted earnings per common share		$0.75			$0.72			$2.19			$1.99
	Cash dividends declared per share		$0.39			$0.37			$1.15			$1.09

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



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



	Three Months						Nine Months
Periods ended September 30,	2017			2016			2017			2016
Net income		$12,962			$12,327			$37,943			$34,319
Other comprehensive income, net of tax:
Net change in fair value of securities available for sale	1,094			(91		)	3,323			1,651
Net change in fair value of cash flow hedges	(13		)	(4		)	(364		)	(94		)
Net change in defined benefit plan obligations	217			166			427			497
Total other comprehensive income, net of tax	1,298			71			3,386			2,054
Total comprehensive income		$14,260			$12,398			$41,329			$36,373

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



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



	Common Shares Outstanding	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total
Balance at January 1, 2017	17,171		$1,073		$115,123		$294,365			($19,757	)		$390,804
Net income	—	—		—		37,943			—			37,943
Total other comprehensive income, net of tax	—	—		—					3,386			3,386
Cash dividends declared	—	—		—		(19,974		)	—			(19,974		)
Share-based compensation	—	—		1,872		—			—			1,872
Exercise of stock options, issuance of other compensation-related equity awards	43	3		194		—			—			197
Balance at September 30, 2017	17,214		$1,076		$117,189		$312,334			($16,371	)		$414,228



	Common Shares Outstanding	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total
Balance at January 1, 2016	17,020		$1,064		$110,949		$273,074			($9,699	)		$375,388
Net income	—	—		—		34,319			—			34,319
Total other comprehensive income, net of tax	—	—		—		—			2,054			2,054
Cash dividends declared	—	—		—		(18,780		)	—			(18,780		)
Share-based compensation	—	—		1,634		—			—			1,634
Exercise of stock options, issuance of other compensation-related equity awards and related tax benefit	87	5		707		—			—			712
Balance at September 30, 2016	17,107		$1,069		$113,290		$288,613			($7,645	)		$395,327

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



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



Nine months ended September 30,		2017			2016
Cash flows from operating activities:
Net income			$37,943			$34,319
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,400			2,750
Depreciation of premises and equipment		2,613			2,737
Net amortization of premium and discount		2,560			1,802
Amortization of intangibles		787			966
Goodwill impairment		150			—
Share-based compensation		1,872			1,634
Tax benefit from stock option exercises and other equity awards		414			430
Income from bank-owned life insurance		(1,624		)	(2,110		)
Net gains on loan sales and commissions on loans originated for others, including fair value adjustments		(8,004		)	(8,682		)
Net gain on sale of portfolio loans		—			(135		)
Equity in (earnings) losses of unconsolidated subsidiaries		266			265
Proceeds from sales of loans		345,539			370,526
Loans originated for sale		(337,772		)	(369,746		)
Change in fair value of contingent consideration liability		(310		)	(898		)
Increase in other assets		(9,814		)	(22,719		)
Increase in other liabilities		6,537			17,635
Net cash provided by operating activities		43,557			28,774
Cash flows from investing activities:
Purchases of:	Mortgage-backed securities available for sale	(35,213		)	(248,221		)
	Other investment securities available for sale	(19,963		)	(70,495		)
Maturities and principal payments of:	Mortgage-backed securities available for sale	62,745			41,446
	Other investment securities available for sale	21,269			89,441
	Mortgage-backed securities held to maturity	2,283			3,029
Remittance (purchases) of Federal Home Loan Bank stock		956			(12,933		)
Net increase in loans		(88,914		)	(95,759		)
Net proceeds from sale of portfolio loans		—			510
Purchases of loans		(737		)	(77,180		)
Proceeds from the sale of property acquired through foreclosure or repossession		513			731
Purchases of premises and equipment		(2,184		)	(2,608		)
Purchases of bank-owned life insurance		—			(5,000		)
Proceeds from bank-owned life insurance		—			2,054
Net cash used in investing activities		(59,245		)	(374,985		)
Cash flows from financing activities:
Net increase in deposits		93,329			103,119
Proceeds from Federal Home Loan Bank advances		1,000,000			981,250
Repayment of Federal Home Loan Bank advances		(1,034,885		)	(688,608		)
Net proceeds from stock option exercises and issuance of other equity awards		194			282
Cash dividends paid		(19,567		)	(18,291		)
Net cash provided by financing activities		39,071			377,752
Net increase in cash and cash equivalents		23,383			31,541
Cash and cash equivalents at beginning of period		107,797			97,631
Cash and cash equivalents at end of period			$131,180			$129,172



Noncash Investing and Financing Activities:
Loans charged off		$1,415		$4,390
Loans transferred to property acquired through foreclosure or repossession	576		1,045
Supplemental Disclosures:
Interest payments		$21,512		$16,093
Income tax payments	19,272		14,860

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

Condensed Notes to Unaudited Consolidated Financial Statements

(1) General Information

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 comprehensive product line of banking and financial services, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut; its automated teller machines (“ATMs”); telephone banking; mobile banking and its internet website (www.washtrust.com).

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

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 reflective 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, 2016.

(2) Recently Issued Accounting Pronouncements

Revenue from Contracts with Customers - Topic 606

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

Financial Instruments - Overall - Topic 825

Accounting Standards Update No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), was issued in January 2016 and provides revised guidance related to the accounting for and reporting of financial

- 8-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

instruments. Some of the main provisions include: requiring most equity securities to be reported at fair value with unrealized gains and losses reported in the income statement; requiring separate presentation of financial assets and liabilities by measurement category and form (i.e. securities or loans); clarifying that entities must assess valuation allowances on a deferred tax asset related to available for sale debt securities in combination with their other deferred tax assets; and eliminating the requirement to disclose the method and significant assumptions used to estimate fair value for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of ASU 2016-01 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Leases - Topic 842

Accounting Standards Update No. 2016-02, “Leases” (“ASU 2016-02”), was issued in February 2016 and provides revised guidance related to the accounting and reporting of leases. ASU 2016-02 requires lessees to recognize most leases on the balance sheet. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. ASU 2016-02 requires a modified retrospective transition, with a number of practical expedients that entities may elect to apply. ASU 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. Washington Trust expects to adopt the provisions of ASU 2016-02 effective January 1, 2019. Management has assembled a project team that meets regularly to evaluate the provisions of this ASU, identify additional data requirements necessary and determine an approach for implementation. The Corporation has not yet determined the impact ASU 2016-02 will have on its consolidated financial statements.

Compensation - Stock Compensation - Topic 718

Accounting Standards Update No. 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), was issued in March 2016. ASU 2016-09 includes multiple provisions intended to simplify several aspects of the accounting for share-based payment transactions, including income tax consequences and the classification of certain tax-related transactions on the statement of cash flows. ASU 2016-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Management adopted the provisions of this ASU on January 1, 2017 using the appropriate transition method as required by ASU 2016-09. For Washington Trust, the most significant provision of this ASU pertained to the accounting for excess tax benefits or tax deficiencies on share based award exercises and vestings. ASU 2016-09 requires that excess tax benefits or tax deficiencies be recognized as income tax benefit or expense in the Consolidated Statements of Income in the period that they occur. Management adopted this specific provision of the ASU on a prospective basis. The ASU also requires that the excess tax benefits or tax deficiencies be reported as an operating activity in the Consolidated Statement of Cash Flows and, in accordance with the ASU, management elected the retrospective transition method in adopting this specific provision. The adoption of ASU 2016-09 did not have a material impact on the consolidated financial statements.

Financial Instruments - Credit Losses - Topic 326

Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses” (“ASU 2016-13”), was issued in June 2016. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 provides for a modified retrospective transition, resulting in a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective, except for debt securities for which an other-than-temporary impairment has previously been recognized. For these debt securities, a prospective transition approach will be adopted in order to maintain the same amortized cost prior to and subsequent to the effective date of ASU 2016-13. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted, for annual periods and interim periods within those annual periods, beginning after December 15, 2018. Washington Trust is evaluating the effect that this ASU will have on consolidated financial statements and disclosures. Management has assembled a project team that meets regularly to evaluate the provisions of this ASU, identify additional data requirements necessary and determine an approach for implementation. The Corporation has not yet determined if it will early adopt ASU 2016-13 or the impact it will have on its consolidated financial statements.

Statement of Cash Flows - Topic 230

Accounting Standards Update No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), was issued in August 2016. ASU 2016-15 provides classification guidance on certain cash receipts and cash payments, including, but not limited to, debt prepayment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance policies and distributions received

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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

from equity method investees. The adoption of ASU 2016-15 requires a retrospective transition method applied to each period presented. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The adoption of ASU 2016-15 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Accounting Standards Update No. 2016-18, “Restricted Cash” (“ASU 2016-18”), was issued in November 2016. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash. Restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of ASU 2016-18 requires a retrospective transition method applied to each period presented. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The adoption of ASU 2016-18 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Intangibles - Goodwill and Other - Topic 350

Accounting Standards Update No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), was issued in January 2017 and eliminates Step 2 of the annual goodwill impairment test. Step 2 is a more detailed analysis, which involves measuring the excess of the fair value of the reporting unit, as determined in Step 1, over the aggregate fair value of the individual assets, liabilities, and identifiable intangibles as if the reporting unit was being acquired in a business combination. Under ASU 2017-04, an impairment charge would be recognized for the amount by which the carrying amount exceeded the reporting unit’s fair value under Step 1. ASU 2017-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 and the provisions should be applied on a prospective basis. Effective April 1, 2017, management early adopted the provisions of this ASU, as permitted. The adoption of ASU 2017-04 did not have a material impact on the Corporation’s consolidated financial statements.

Compensation - Retirement Benefits - Topic 715

Accounting Standards Update No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”), was issued in March 2017. ASU 2017-07 requires that employers include the service cost component of net periodic benefit cost in the same line item as other employee compensation costs and all other components of net periodic benefit cost in a separate line item(s) in the statement of income. In addition, the line item in which the components of net periodic benefit cost other than the service cost are included shall be identified as such on the statement of income or in the notes to the financial statements. ASU 2017-07 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of ASU 2017-07 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Receivables - Nonrefundable Fees and Other Costs - Subtopic 310-20

Accounting Standards Update No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”), was issued in March 2017. ASU 2017-08 shortens the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. Effective January 1, 2017, management early adopted the provisions of this ASU, as permitted. The adoption of ASU 2017-08 did not have a material impact on the Corporation’s consolidated financial statements.

Compensation - Stock Compensation - Topic 718

Accounting Standards Update No. 2017-09, “Scope of Modification Accounting” (“ASU 2017-09”), was issued in May 2017 to provide clarity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and the provisions should be applied on a prospective basis. Early adoption is permitted. The adoption of ASU 2017-09 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Derivatives and Hedging - Topic 815

Accounting Standards Update No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), was issued in August 2017 to better align financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The provisions of ASU 2017-12 should be applied on a modified retrospective transition method in which the Corporation will recognize the cumulative effect of the change in the opening balance of retained earnings as of the adoption date. The Corporation has not yet determined the impact ASU 2017-12 will have on its consolidated financial statements.

- 10-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

(3) Cash and Due from Banks

The Bank maintains certain average reserve balances to meet the requirements of the Board of Governors of the Federal Reserve System (“FRB”). Some or all of these reserve requirements may be satisfied with vault cash. Reserve balances amounted to $11.9 million at September 30, 2017 and $11.5 million at December 31, 2016 and were included in cash and due from banks in the Unaudited Consolidated Balance Sheets.

As of September 30, 2017 and December 31, 2016, cash and due from banks included interest-bearing deposits in other banks of $42.0 million and $60.3 million, respectively.

(4) Securities

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



(Dollars in thousands)
September 30, 2017	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$121,499		$—		($2,374	)		$119,125
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	563,240		4,915		(6,485		)	561,670
Obligations of states and political subdivisions	3,156		7		—			3,163
Individual name issuer trust preferred debt securities	27,897		—		(1,509		)	26,388
Corporate bonds	4,122		24		(137		)	4,009
Total securities available for sale		$719,914		$4,946		($10,505	)		$714,355
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$13,241		$296		$—			$13,537
Total securities held to maturity		$13,241		$296		$—			$13,537
Total securities		$733,155		$5,242		($10,505	)		$727,892



(Dollars in thousands)
December 31, 2016	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$111,483		$7		($3,050	)		$108,440
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	592,833		4,923		(9,671		)	588,085
Obligations of states and political subdivisions	14,423		62		—			14,485
Individual name issuer trust preferred debt securities	29,851		—		(3,115		)	26,736
Corporate bonds	2,155		16		(5		)	2,166
Total securities available for sale		$750,745		$5,008		($15,841	)		$739,912
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$15,633		$287		$—			$15,920
Total securities held to maturity		$15,633		$287		$—			$15,920
Total securities		$766,378		$5,295		($15,841	)		$755,832

- 11-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

As of September 30, 2017 and December 31, 2016, securities with a fair value of $364.3 million and $736.2 million, respectively, were pledged as collateral for Federal Home Loan Bank of Boston (“FHLBB”) borrowings, potential borrowings with the FRB, certain public deposits and for other purposes. See Note 8 for additional disclosure on FHLBB borrowings.

The schedule of maturities of debt securities available for sale and held to maturity is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments. All other debt securities are included based on contractual maturities. Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties.



(Dollars in thousands)	Available for Sale				Held to Maturity
September 30, 2017	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less		$59,796		$59,636		$1,792		$1,832
Due after one year to five years	226,076		224,715		5,603		5,728
Due after five years to ten years	246,549		243,740		4,239		4,334
Due after ten years	187,493		186,264		1,607		1,643
Total securities		$719,914		$714,355		$13,241		$13,537

Included in the above table are debt securities with an amortized cost balance of $155.5 million and a fair value of $151.5 million at September 30, 2017 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 8 months to 19 years, with call features ranging from 1 month to 4 years.

Other-Than-Temporary Impairment Assessment

Washington Trust assesses whether the decline in fair value of investment securities is other-than-temporary on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates impairments in value both qualitatively and quantitatively to assess whether they are other-than-temporary.

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



(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
September 30, 2017	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored enterprises	9		$79,988		($1,511	)	2		$29,137		($863	)	11		$109,125		($2,374	)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	20	153,078		(2,200		)	14	179,166		(4,285		)	34	332,244		(6,485		)
Individual name issuer trust preferred debt securities	—	—		—			9	26,388		(1,509		)	9	26,388		(1,509		)
Corporate bonds	2	402		(1		)	1	1,845		(136		)	3	2,247		(137		)
Total temporarily impaired securities	31		$233,468		($3,712	)	26		$236,536		($6,793	)	57		$470,004		($10,505	)

- 12-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)



(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
December 31, 2016	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored enterprises	10		$98,433		($3,050	)	—		$—		$—		10		$98,433		($3,050	)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	35	407,073		(9,671		)	—	—		—			35	407,073		(9,671		)
Individual name issuer trust preferred debt securities	—	—		—			10	26,736		(3,115		)	10	26,736		(3,115		)
Corporate bonds	2	400		(5		)	—	—		—			2	400		(5		)
Total temporarily impaired securities	47		$505,906		($12,726	)	10		$26,736		($3,115	)	57		$532,642		($15,841	)

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

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. Based on the assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more-likely-than-not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2017.

Trust Preferred Debt Securities of Individual Name Issuers

Included in debt securities in an unrealized loss position at September 30, 2017 were nine trust preferred security holdings issued by six individual companies in the banking sector. Management believes the unrealized loss position in these holdings was attributable to the general widening of spreads for this category of debt securities issued by financial services companies since the time these securities were purchased. Based on the information available through the filing date of this report, all individual name issuer trust preferred debt securities held in our portfolio continue to accrue and make payments as expected with no payment deferrals or defaults on the part of the issuers. As of September 30, 2017, individual name issuer trust preferred debt securities with an amortized cost of $10.9 million and unrealized losses of $621 thousand were rated below investment grade by Standard & Poors, Inc. (“S&P”). Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information. We noted no additional downgrades to below investment grade between September 30, 2017 and the filing date of this report. Based on this review, management concluded that it expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more-likely-than-not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2017.

- 13-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

(5) Loans

The following is a summary of loans:



(Dollars in thousands)	September 30, 2017				December 31, 2016
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$1,085,535	33	%		$1,074,186	33	%
Construction & development (2)	126,257		4		121,371		4
Commercial & industrial (3)	588,324		17		576,109		18
Total commercial	1,800,116		54		1,771,666		55
Residential Real Estate:
Mortgages	1,171,161		35		1,094,824		34
Homeowner construction	24,376		1		27,924		1
Total residential real estate	1,195,537		36		1,122,748		35
Consumer:
Home equity lines	259,880		8		264,200		8
Home equity loans	34,777		1		37,272		1
Other (4)	32,768		1		38,485		1
Total consumer	327,425		10		339,957		10
Total loans (5)		$3,323,078	100	%		$3,234,371	100	%


(1)	Loans primarily secured by income producing property.


(2)	Loans for construction of commercial properties, loans to developers for construction of residential properties and loans for land development.


(3)	Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.


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


(5)	Includes net unamortized loan origination costs of $3.9 million and $3.0 million, respectively, at September 30, 2017 and December 31, 2016 and net unamortized premiums on purchased loans of $781 thousand and $783 thousand, respectively, at September 30, 2017 and December 31, 2016.

As of September 30, 2017 and December 31, 2016, there were $1.6 billion and $1.4 billion, respectively, of loans pledged as collateral for FHLBB borrowings and potential borrowings with the FRB. See Note 8 for additional disclosure regarding borrowings.

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. Interest previously accrued but not collected on such loans is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest generally for a period of six months, 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.

- 14-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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



(Dollars in thousands)	Sep 30, 2017		Dec 31, 2016
Commercial:
Mortgages		$5,887		$7,811
Construction & development	—		—
Commercial & industrial	429		1,337
Residential Real Estate:
Mortgages	11,699		11,736
Homeowner construction	—		—
Consumer:
Home equity lines	27		—
Home equity loans	453		1,058
Other	16		116
Total nonaccrual loans		$18,511		$22,058
Accruing loans 90 days or more past due		$—		$—

As of September 30, 2017 and December 31, 2016, loans secured by one- to four-family residential property amounting to $3.9 million and $5.7 million, respectively, were in process of foreclosure.

Nonaccrual loans of $5.3 million and $3.5 million, respectively, were current as to the payment of principal and interest at September 30, 2017 and December 31, 2016.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2017.

Past Due Loans

Past due status is based on the contractual payment terms of the loan. The following tables present an age analysis of past due loans, segregated by class of loans:



(Dollars in thousands)	Days Past Due
September 30, 2017	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$—		$—		$5,887		$5,887		$1,079,648		$1,085,535
Construction & development	—		—		—		—		126,257		126,257
Commercial & industrial	8		21		426		455		587,869		588,324
Residential Real Estate:
Mortgages	1,530		1,748		4,524		7,802		1,163,359		1,171,161
Homeowner construction	—		—		—		—		24,376		24,376
Consumer:
Home equity lines	761		54		—		815		259,065		259,880
Home equity loans	847		549		57		1,453		33,324		34,777
Other	19		1		15		35		32,733		32,768
Total loans		$3,165		$2,373		$10,909		$16,447		$3,306,631		$3,323,078

- 15-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)



(Dollars in thousands)	Days Past Due
December 31, 2016	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$901		$—		$7,807		$8,708		$1,065,478		$1,074,186
Construction & development	—		—		—		—		121,371		121,371
Commercial & industrial	409		—		745		1,154		574,955		576,109
Residential Real Estate:
Mortgages	5,381		652		6,193		12,226		1,082,598		1,094,824
Homeowner construction	—		—		—		—		27,924		27,924
Consumer:
Home equity lines	655		26		—		681		263,519		264,200
Home equity loans	776		76		658		1,510		35,762		37,272
Other	32		1		110		143		38,342		38,485
Total loans		$8,154		$755		$15,513		$24,422		$3,209,949		$3,234,371

Included in past due loans as of September 30, 2017 and December 31, 2016, were nonaccrual loans of $13.2 million and $18.6 million, respectively.

All loans 90 days or more past due at September 30, 2017 and December 31, 2016 were classified as nonaccrual.

- 16-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Impaired Loans

Impaired loans are loans for which it is probable that the Corporation will not be able to collect all amounts due according to the contractual terms of the loan agreements and loans restructured in a troubled debt restructuring.

The following is a summary of impaired loans:



(Dollars in thousands)	Recorded Investment (1)				Unpaid Principal				Related Allowance
	Sep 30, 2017		Dec 31, 2016		Sep 30, 2017		Dec 31, 2016		Sep 30, 2017		Dec 31, 2016
No Related Allowance Recorded:
Commercial:
Mortgages		$776		$4,676		$773		$9,019		$—		$—
Construction & development	—		—		—		—		—		—
Commercial & industrial	5,077		6,458		5,183		6,550		—		—
Residential real estate:
Mortgages	9,430		14,385		9,574		14,569		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	27		—		27		—		—		—
Home equity loans	453		1,137		453		1,177		—		—
Other	14		116		14		116		—		—
Subtotal	15,777		26,772		16,024		31,431		—		—
With Related Allowance Recorded:
Commercial:
Mortgages		$5,886		$5,104		$9,909		$6,087		$933		$448
Construction & development	—		—		—		—		—		—
Commercial & industrial	734		662		775		699		48		3
Residential real estate:
Mortgages	2,640		1,285		2,667		1,310		157		151
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	—		—		—		—		—		—
Home equity loans	—		—		—		—		—		—
Other	134		28		135		29		7		4
Subtotal	9,394		7,079		13,486		8,125		1,145		606
Total impaired loans		$25,171		$33,851		$29,510		$39,556		$1,145		$606
Total:
Commercial		$12,473		$16,900		$16,640		$22,355		$981		$451
Residential real estate	12,070		15,670		12,241		15,879		157		151
Consumer	628		1,281		629		1,322		7		4
Total impaired loans		$25,171		$33,851		$29,510		$39,556		$1,145		$606

(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 impaired accruing loans (troubled debt restructurings for which management has concluded that the collectibility of the loan is not in doubt), the recorded investment also includes accrued interest.

- 17-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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




(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Three months ended September 30,	2017		2016		2017		2016
Commercial:
Mortgages		$8,041		$13,159		$21		$40
Construction & development	—		—		—		—
Commercial & industrial	6,427		2,342		67		21
Residential Real Estate:
Mortgages	15,107		13,962		102		86
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	73		297		1		2
Home equity loans	470		1,328		4		9
Other	142		145		2		3
Totals		$30,260		$31,233		$197		$161




(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Nine months ended September 30,	2017		2016		2017		2016
Commercial:
Mortgages		$9,117		$13,856		$73		$220
Construction & development	—		—		—		—
Commercial & industrial	6,750		3,141		219		42
Residential Real Estate:
Mortgages	15,750		11,985		374		253
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	81		427		5		10
Home equity loans	653		1,240		20		33
Other	142		147		8		7
Totals		$32,493		$30,796		$699		$565

Troubled Debt Restructurings

Loans are considered restructured in a troubled debt restructuring when the Corporation has granted concessions,that it otherwise would not have considered, to a borrower experiencing financial difficulties. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection.

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

- 18-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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

Troubled debt restructurings are classified as impaired loans. The Corporation identifies loss allocations for impaired loans on an individual loan basis. The recorded investment in troubled debt restructurings was $13.5 million and $22.3 million, respectively, at September 30, 2017 and December 31, 2016. These amounts included insignificant balances of accrued interest. The allowance for loan losses included specific reserves for these troubled debt restructurings of $1.1 million and $567 thousand, respectively, at September 30, 2017 and December 31, 2016.

As of September 30, 2017, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

The following tables present loans modified as a troubled debt restructuring:




(Dollars in thousands)			Outstanding Recorded Investment (1)
	# of Loans		Pre-Modifications				Post-Modifications
Three months ended September 30,	2017	2016	2017		2016		2017		2016
Commercial:
Mortgages	—	—		$—		$—		$—		$—
Construction & development	—	—	—