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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-07 · 433 added, 327 removed, 691 unchanged (52% of the section changed)

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The following discussion should be read in conjunction with the Corporation’s Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2019 , and in conjunction with the condensed Unaudited Consolidated Financial Statements and notes thereto included in Item 1 of this report.

Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results for the full-year ended December 31, 2020 or any future period.

Certain previously reported amounts have been reclassified to conform to current year’s presentation.

Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results for the full-year ended December 31, 2020 or any future period.

Forward-Looking Statements

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continued deterioration in local, regional, national or international economic conditions or conditions affecting the banking or financial services industries, financial capital markets and the customers and communities we serve;

changes in consumer behavior due to changing business and economic conditions or legislative or regulatory initiatives;

continued volatility in national and international financial markets;

changes in consumer behavior due to changing political, business and economic conditions, including increased unemployment, or legislative or regulatory initiatives;

the possibility that future credits losses are higher than currently expected due to changes in economic assumptions or adverse economic developments;

volatility in national and international financial markets;

reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits;

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Accounting policies involving significant judgments, estimates and assumptions by management, which have, or could have, a material impact on the Corporation’s consolidated financial statements are considered critical accounting policies.

As of March 31, 2020, management considers the following to be its critical accounting policies:

As of June 30, 2020 management considers the following to be its critical accounting policies:

the determination of allowance for credit losses on loans, the valuation of goodwill and identifiable intangible assets, and accounting for defined benefit pension plans.

See our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 for a description of the Corporation’s critical accounting policies for the valuation of goodwill and identifiable intangible assets and accounting for defined benefit pension plans.

Given the composition and nature of the Corporation’s investment security portfolio, management no longer considers the assessment of investment securities for impairment as a critical accounting policy as of March 31, 2020.

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

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The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics.

Pooled loan portfolio segments include commercial real estate (including commercial construction), commercial and industrial, residential real estate (including homeowner construction), home equity and other consumer loans.

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 troubled debt restructured loans and certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans.

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.

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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 troubled debt restructured loans, estimated costs to sell are not incorporated into the measurement.

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 troubled debt restructuring 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 is nonaccrual, the loan has been modified in a troubled debt restructuring or the loan is risk-rated as special mention or classified.

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.

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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 collectability of the portfolio, including the condition of various market segments;

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;

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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 as of March 31, 2020 , continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the ACL.

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.

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

Regulatory Developments - The CARES Act

On March 27, 2020, Congress passed, and the President signed, the CARES Act to address the economic effects of the COVID-19 pandemic.

Paycheck Protection Program .

The CARES Act appropriated $349 billion for “paycheck protection loans” through the PPP.

The COVID-19 pandemic has caused an unprecedented disruption to the economy and the communities we serve.

In response, we are committed to working with and supporting our customers experiencing financial difficulty due to the COVID-19 pandemic, including loan payment deferrals and participation in the SBA’s PPP.

In addition, in the first quarter of 2020, we implemented our business continuity and pandemic plans, which included remote working arrangements for the majority of our workforce, closing our branches and offering drive-through banking or special banking services by appointment only, and promoting social distancing.

In July 2020, we reopened our branch lobbies to customers while adhering to social distancing guidelines.

Remote working arrangements continue for a significant portion of our workforce.

On March 27, 2020, the CARES Act was enacted to address the economic effects of the COVID-19 pandemic.

The CARES Act initially appropriated $349 billion for “paycheck protection loans” through the PPP.

The amount appropriated was subsequently increased to $659 billion.

Loans under the PPP that meet SBA requirements may be forgiven in certain circumstances, and are 100% guaranteed by SBA.

As of May 1, 2020 , Washington Trust has obtained SBA approval for 1,345 PPP loans totaling $211 million .

As of June 30, 2020 , there were 1,690 PPP loans totaling $212.2 million included in the commercial and industrial loan portfolio.

PPP loans are fully guaranteed by the U.S.

government, have a two-year term and earn interest at a rate of 1%.

government, have either a two-year or five-year term and earn interest at a rate of 1%.

We currently expect a significant portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.

In conjunction with the PPP, the FRB has created a lending facility for qualified financial institutions.

The Paycheck Protection Program Liquidity Facility (the “PPPLF”) will extend credit to depository institutions with a term of up to two years at an interest rate of 0.35%.

In conjunction with the PPP, the FRB has created the PPPLF, a lending facility for qualified financial institutions.

Only loans issued under the PPP can be pledged as collateral to access the facility.

Troubled Debt Restructuring Relief .

From March 1, 2020 through the earlier of December 31, 2020 or 60 days after the termination date of the National Emergency, a financial institution may elect to suspend the requirements under GAAP for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a troubled debt restructuring, including impairment accounting.

This troubled debt restructuring relief applies for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019.

Financial institutions are required to maintain records of the volume of loans involved in modifications to which troubled debt restructuring relief is applicable.

As of May 1, 2020 , we have executed 396 short-term deferments on loan balances of $406 million , which represented 10% of total loan balances as of March 31, 2020 .

Eligible short-term deferments are not classified as troubled debt restructured loans and will not be reported as past due provided that they are performing in accordance with the modified terms.

Banks, savings associations, credit unions, bank holding companies and their affiliates are not required to comply with Topic 326, commonly referred to as CECL, from the date of the law’s enactment until the earlier of the end of the National Emergency or December 31, 2020.

On March 27, 2020, the FRB, the FDIC and the Office of the Comptroller of the Currency issued an IFR that allows banking organizations that are required to adopt CECL this year

The PPPLF extends credit to depository institutions at a fixed interest rate of 0.35% with maturity terms matching the maturity date of the pledged PPP loans.

In June 2020, Washington Trust began participating in PPPLF and as of June 30, 2020 , PPPLF borrowings amounted to $38.9 million .

The CARES Act also provided TDR accounting relief.

This TDR relief applies for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019.

Financial institutions are required to maintain records of the volume of loans involved in modifications to which TDR relief is applicable.

Washington Trust has made this election.

As of June 30, 2020 , we have executed 583 short-term deferments on loan balances of $652 million , which represented

Management's Discussion and Analysis

to mitigate the estimated cumulative regulatory capital effects for up to two years.

The relief afforded by the CARES Act and IFR is in addition to the three-year transition period already in place.

The Corporation adopted CECL effective January 1, 2020 and elected to apply the IFR.

Reduction of the Community Bank Leverage Ratio .

The CARES Act reduced the community bank leverage ratio from 9% to 8% until the earlier of the end of the national emergency or December 31, 2020.

In response to the CARES Act, federal banking regulators set the community bank leverage ratio at 8% for the remainder of 2020, 8.5% for 2021 and 9% thereafter.

The Bancorp and the Bank did not elect to use the community bank leverage framework.

Revival of Bank Debt Guarantee Program .

The CARES Act amends the Dodd-Frank Act to provide the FDIC with the authority to guarantee bank-issued debt and noninterest-bearing transaction accounts that exceed the FDIC's $250,000 limit through December 31, 2020.

The FDIC has discretion to determine whether and how to exercise this authority.

Forbearance .

The CARES Act codifies in part guidance from state and federal regulators and government-sponsored enterprises, including the 60-day suspension of foreclosures on federally-backed mortgages and requirements that servicers grant forbearance to borrowers affected by COVID-19.

Moratorium on Negative Credit Reporting .

Any furnisher of credit information that agrees to defer payments, forbear on any delinquent credit or account, or provide any other relief to consumers affected by the COVID-19 pandemic must report the credit obligation or account as current if the credit obligation or account was current before the accommodation.

Massachusetts COVID-19 Emergency Legislation

On April 20, 2020, legislation enacted in Massachusetts in response to the COVID-19 emergency declared by Governor Baker was signed into law by the Governor.

The legislation establishes a temporary moratorium on foreclosures on one- to four-family, owner occupied residential real estate in Massachusetts.

The legislation also requires a creditor to grant to a borrower of a mortgage loan secured by one- to four-family, owner occupied residential real estate in Massachusetts a forbearance of up to 180 days, if requested by the borrower, who must affirm that the borrower has experienced a financial impact from the COVID-19 pandemic.

A borrower is entitled to request a forbearance while the legislation is in effect even if the borrower is already in default.

In connection with a forbearance, a creditor may not charge fees, penalties or interest beyond the amounts scheduled and calculated as if the borrower made all contractual payments on time and in full under the terms of the relevant loan agreement.

The legislation specifies that a payment subject to forbearance shall be added to the end of the term of the loan unless otherwise agreed by the parties.

The legislation also prohibits a creditor from furnishing negative information to a consumer reporting agency related to mortgage payments subject to forbearance.

Because the legislation was enacted on an emergency basis, it went into effect immediately upon being signed into law.

The legislation provides that the temporary moratorium on foreclosures expires 120 days after the effective date of the legislation, which is August 18, 2020, or 45 days after the COVID-19 emergency declaration has been lifted, whichever is sooner, but the Governor may extend the moratorium in increments of up 90 days as long as the moratorium ends not later than 45 days after the COVID-19 emergency declaration has been lifted.

A borrower may request a forbearance under the legislation at any time while the foreclosure moratorium is in effect.

15% of total loan balances as of June 30, 2020 .

Eligible short-term deferments are not classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms.

Risk Management

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In some cases, the collateral securing payment of the loans may be sufficient to assure repayment, but in other cases the Corporation may experience significant credit losses which could have an adverse effect on its operating results.

The Corporation makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of the real estate and other assets serving as collateral for the

Management's Discussion and Analysis

repayment of loans.

The Corporation makes various assumptions and judgments about the collectibility of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of the real estate and other assets serving as collateral for the repayment of loans.

Credit risk also exists with respect to investment securities.

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They collaborate closely with business units on planning and resource allocation with respect to risk management.

Internal Audit is the third line of defense.

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

For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and Part II.

Item 1A of this Form 10-Q.

Internal Audit is

Management's Discussion and Analysis

the third line of defense.

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

Results of Operations

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(Dollars in thousands)

For the three months ended March 31,

For the periods ended June 30,

Net interest income

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

For the three months ended March 31,

For the periods ended June 30,

Diluted earnings per common share

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Noninterest income as a percentage of total revenues

Net income totaled $11.9 million for the three months ended March 31, 2020 , compared to $17.5 million for the same period in 2019 .

Income before taxes for the three months ended decreased by $7.3 million , or 33% , from the same period in 2019 .

Our results for the first quarter of 2020 reflect the adoption of the CECL accounting methodology and the impacts of the COVID-19 pandemic and lower market interest rates.

Net income totaled $21.0 million and $32.9 million , respectively, for the three and six months ended June 30, 2020 , compared to $17.3 million and $34.8 million , respectively, for the same periods in 2019 .

Net interest income in 2020 was negatively impacted by the decline in market interest rates, as interest-earning asset yields declined faster than the downward repricing of interest-bearing liabilities.

However, the decline in market interest rates also spurred mortgage origination and sales activity, resulting in strong mortgage banking results in 2020.

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

Management's Discussion and Analysis

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Nonaccrual loans, as well as interest recognized on these loans, are included in amounts presented for loans.

Three months ended March 31,

Three months ended June 30,

(Dollars in thousands)

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Junior subordinated debentures

Other borrowings

Total interest-bearing liabilities

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(Dollars in thousands)

Three months ended March 31,

Three months ended June 30,

Commercial loans

Nontaxable debt securities

Six months ended June 30,

(Dollars in thousands)

Average Balance

Cash, federal funds sold and short-term investments

Mortgage loans held for sale

Taxable debt securities

Nontaxable debt securities

Total debt securities

Commercial real estate

Commercial & industrial

Total commercial

Residential real estate

Total consumer

Total interest-earning assets

Noninterest-earning assets

Liabilities and Shareholders’ Equity:

Interest-bearing demand deposits

Money market accounts

Savings accounts

Time deposits (in-market)

Total interest-bearing in-market deposits

Wholesale brokered time deposits

Total interest-bearing deposits

FHLB advances

Junior subordinated debentures

Other borrowings

Total interest-bearing liabilities

Noninterest-bearing demand deposits

Other liabilities

Shareholders’ equity

Total liabilities and shareholders’ equity

Net interest income (FTE)

Interest rate spread

Net interest margin

Management's Discussion and Analysis

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

(Dollars in thousands)

Six months ended June 30,

Commercial loans

Nontaxable debt securities

Net Interest Income

Net interest income continues to be the primary source of our operating income.

Net interest income for the three months ended March 31, 2020 totaled $32.6 million , compared to $34.6 million for the same period in 2019 .

Net interest income for the three and six months ended June 30, 2020 totaled $30.9 million , and $63.5 million , respectively, compared to $33.9 million and $68.4 million , respectively, for the same periods in 2019 .

Net interest income is affected by the level of, and changes in, interest rates, and changes in the amount and composition of interest-earning assets and interest-bearing liabilities.

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The analysis of net interest income, net interest margin and the yield on loans may be impacted by the periodic recognition of prepayment penalty income associated with loan payoffs.

Prepayment penalty income associated with loan payoffs for both the three months ended March 31, 2020 and 2019 was not material.

Prepayment penalty income associated with loan payoffs for both the three and six months ended June 30, 2020 and 2019 was not material.

The analysis of net interest income, net interest margin and the yield on loans is also impacted by changes in the level of net amortization of premiums and discounts on securities and loans, which is included in interest income.

As market interest rates decline, as they did in the latter portion of 2019 and first quarter of 2020, loan prepayments and the receipt of payments on mortgage-backed securities generally increase.

As market interest rates decline, loan prepayments and the receipt of payments on mortgage-backed securities generally increase.

This results in accelerated levels of amortization reducing net interest income and may also result in the proceeds having to be reinvested at a lower rate than the loan or mortgage-backed security being prepaid.

As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans amounted to $1.5 million for the three months ended March 31, 2020 , up by $697 thousand from the same period in 2019 .

FTE net interest income for the three months ended March 31, 2020 amounted to $32.9 million , down by $2.0 million , or 6% , from the same period in 2019 .

Growth in average interest-earning assets, net of increased average interest-bearing liability balances, contributed approximately $2.0 million of additional net interest income;

however, this was offset by lower asset yields out-pacing declines in funding costs, which reduced net interest income by $4.0 million .

The net interest margin was 2.61% for the three months ended March 31, 2020 , compared to 2.93% for the same period a year ago.

As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans amounted to $2.7 million for the six months ended June 30, 2020 , up by $822 thousand from the same period in 2019 .

FTE net interest income for the three and six months ended June 30, 2020 amounted to $31.2 million and $64.1 million , respectively, down by $3.0 million and $5.0 million , respectively, from the same periods in 2019 .

Growth in average interest-earning assets, net of increased average interest-bearing liability balances, contributed approximately $4.3 million and $6.6 million , respectively, of additional net interest income for the three and six months ended June 30, 2020 , however, this was offset by declines in asset yields out-pacing declines in funding costs, which reduced net interest income by $7.3 million and $11.6 million , respectively.

The net interest margin was 2.31% and 2.46% , respectively, for the three and six months ended June 30, 2020 , compared to 2.81% and 2.87% , respectively, for the same periods a year ago.

Compression in net interest margin resulted from the downward repricing of assets, which occurred at a faster pace than the repricing of liabilities.

Total average securities for the three months ended March 31, 2020 decreased by $96.6 million , or 10% , from the average balances for the same period a year earlier.

Total average securities for the three and six months ended June 30, 2020 decreased by $92.6 million and $94.6 million , respectively, from the average balances for the same periods a year earlier.

The decline in the average balance of securities was due to timing of reinvestment of security portfolio cash flows.

The FTE rate of return on the securities portfolio for the three months ended March 31, 2020 was 2.59% , compared to 2.93% for the same period in 2019 , reflecting purchases of relatively lower yielding debt securities, as well as lower market rates.

Total average loan balances for the three months ended March 31, 2020 increased by $259.8 million , or 7% , from the average loan balances for the comparable 2019 period, primarily due to growth in average commercial real estate and residential real estate loan balances, including purchases of residential mortgage loans in the latter portion of 2019 and first quarter of 2020.

The yield on total loans for the three months ended March 31, 2020 was 4.09% compared to 4.60% for the same period in 2019 .

The FTE rate of return on the securities portfolio for the three and six months ended June 30, 2020 was 2.43% and 2.51% , respectively, compared to 2.82% and 2.88% , respectively, for the same periods in 2019 , reflecting purchases of relatively lower yielding debt securities and lower market interest rates.

Total average loan balances for the three and six months ended June 30, 2020 increased by $491.7 million and $375.7 million , respectively, from the average loan balances for the comparable 2019 period.

This reflected growth in average commercial loan balances, which included the origination of PPP loans in the second quarter of 2020, and growth in average residential real estate loan balances, which included purchases of residential mortgage loans in the latter portion of 2019 and first quarter of 2020.

The yield on total loans for the three and six months ended June 30, 2020 was 3.45% and 3.76% , respectively, compared to 4.56% and 4.58% , respectively, for the same periods in 2019 .

Yields on LIBOR-based and prime-based loans reflected lower market interest rates.

The average balance of FHLB advances for the three months ended March 31, 2020 increased by $96.5 million , or 9% , compared to the average balances for the same period in 2019 .

The average rate paid on such advances for the three months ended March 31, 2020 was 2.06% , compared to 2.63% for the same period in 2019 , due to lower rates on short-term advances.

Management's Discussion and Analysis

Included in total average interest-bearing deposits were of out-of-market wholesale brokered time deposits, which decreased by $82.0 million , or 17% , from the same period in 2019 .

The average rate paid on wholesale brokered time deposits for the three months ended March 31, 2020 was 1.81% , compared to 2.16% for the same period in 2019 , as maturities were replaced with wholesale brokered time deposits with lower rates.

Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, for the three months ended March 31, 2020 increased by $185.1 million , or 8% , from the average balances for the same period in 2019 .

The year-over-year increase in average in-market interest bearing deposits largely reflected growth in money market accounts.

The average rate paid on in-market interest-bearing deposits for the three months ended March 31, 2020 increased by 1 basis point, compared to the same period in 2019 .

The average balance of noninterest-bearing demand deposits for the three months ended March 31, 2020 increased by $3.8 million , or 1% , from the average balances for the same period in 2019 .

The average balance of FHLB advances for the three and six months ended June 30, 2020 increased by $17.4 million and $56.9 million , respectively, compared to the average balances for the same periods in 2019 .

The average rate paid on such advances for the three and six months ended June 30, 2020 was 1.65% and 1.86% , respectively, compared to 2.66% and 2.65% , respectively, for the same periods in 2019 , due to lower rates on short-term advances.

Included in total average interest-bearing deposits were of out-of-market wholesale brokered time deposits, which increased by $52.4 million and decreased by $14.9 million , respectively, from the same periods in 2019 .

The average rate paid on wholesale brokered time deposits for the three and six months ended June 30, 2020 was 1.40% and 1.57% , respectively, compared to 2.27% and 2.22% , respectively, for the same periods in 2019 .

The decline in the yield on average wholesale brokered time deposits reflected lower market interest rates.

Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, for the three and six months ended June 30, 2020 increased by $290.6 million and $237.9 million , respectively, from the average balances for the same periods in 2019 .

The increases largely reflected growth in average money market account balances, partially offset by maturities of higher-cost promotional time deposits.

The average rate paid on in-market interest-bearing deposits for the three and six months ended June 30, 2020 decreased by 33 basis points and 16 basis points, respectively, compared to the same periods in 2019 , largely due to downward repricing of interest-bearing demand deposit and money market accounts as market interest rates have declined from the prior periods.

The average balance of noninterest-bearing demand deposits for the three and six months ended June 30, 2020 increased by $137.0 million and $70.4 million , respectively, from the average balances for the same periods in 2019 .

See additional disclosure regarding PPP loan funding deposits under the caption “Sources of Funds.”

Management's Discussion and Analysis

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

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(Dollars in thousands)

Three Months Ended June 30, 2020 vs.

Six Months Ended June 30,

Change Due to

Three Months Ended March 31, 2020 vs.

Change Due to

Interest on Interest-Earning Assets:

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Junior subordinated debentures

Other borrowings

Total interest expense

Net interest income (FTE)

Management's Discussion and Analysis

Provision for Credit Losses

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The incurred loss model was based on management’s periodic assessment of the adequacy of the allowance for credit losses on loans which, in turn, was based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics;

the levels of nonperforming loans, past due loans and net charge-offs, both current and historic;

the levels of nonperforming

Management's Discussion and Analysis

loans, past due loans and net charge-offs, both current and historic;

local economic and credit conditions;

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The provision for loan losses was charged against earnings in order to maintain an allowance that reflected management’s best estimate of probable losses inherent in the loan portfolio at the balance sheet date.

For the three months ended March 31, 2020 , a provision for credit losses of $7.0 million was charged to earnings, compared to $650 thousand for the same period in 2019 .

The year-over-year increase was mainly attributable to the significant deterioration in the economic forecast due to the COVID-19 pandemic and also reflected loan growth and changes in the underlying portfolio.

Provisions for credit losses of $2.2 million and $9.2 million , respectively, were charged to earnings for the three and six months ended June 30, 2020 , compared to $525 thousand and $1.2 million , respectively, for the same periods in 2019 .

In addition to the change in accounting methodologies described above, the year-over-year increase in the provision was attributable to the significant deterioration in the economic forecast due to the COVID-19 pandemic and also reflected loan growth and changes in the underlying portfolio.

Estimating an appropriate level of ACL in loans necessarily involves a high degree of judgment and continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the ACL.

Net charge-offs totaled $623 thousand for the three months ended March 31, 2020 .

This compared to net charge-offs of $78 thousand for the same period in 2019 .

The allowance for credit losses on loans was $39.7 million , or 0.97% of total loans, at March 31, 2020 , compared to an allowance for loan losses of $27.0 million , or 0.69% of total loans, at December 31, 2019 .

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

The allowance for credit losses on loans was $41.4 million , or 0.97% of total loans, at June 30, 2020 , compared to an allowance for loan losses of $27.0 million , or 0.69% of total loans, at December 31, 2019 .

See additional discussion under the caption “Asset Quality” for further information on the allowance for credit losses on loans.

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(Dollars in thousands)

Three months ended March 31,

Periods ended June 30,

Noninterest income:

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Income from bank-owned life insurance

Net realized gains on securities

Total noninterest income

Noninterest Income Analysis

Revenue from wealth management services is our largest source of noninterest income, representing 44% of total noninterest income for the three months ended March 31, 2020 , compared to 60% for the same period in 2019 .

Revenue from wealth management services represented 37% of total noninterest income for the six months ended June 30, 2020 , compared to 59% for the same period in 2019 .

A substantial portion of wealth management revenues is dependent on the value of wealth management assets under administration and is closely tied to the performance of the financial markets.

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(Dollars in thousands)

Three months ended March 31,

Periods ended June 30,

Wealth management revenues:

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Total wealth management revenues

Wealth management revenues for the three months ended March 31, 2020 decreased by $563 thousand , or 6% , from the comparable period in 2019 , due to a decline in asset-based revenues.

The following table presents the changes in wealth management assets under administration (“AUA”):

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

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

The following table presents the changes in wealth management AUA:

(Dollars in thousands)

Three months ended March 31,

Periods ended June 30,

Wealth management assets under administration:

Balance at the beginning of period

Net investment appreciation & income

Net client asset flows

Net investment appreciation (depreciation) & income

Net client asset inflows (outflows)

Balance at the end of period

Wealth management AUA amounted to $5.3 billion at March 31, 2020 , down by $1.0 billion , or 16% , from the balance at March 31, 2019.

AUA and related asset-based revenues have been adversely impacted by net client outflows concentrated in the second half of 2019 and largely associated with the departures of two senior counselors in June 2019.

Also, the $898 million decline in AUA from the balance at December 31, 2019 was largely attributable to declines in financial markets in March 2020.

Mortgage banking revenues represented 31% of total noninterest income for the three months ended March 31, 2020 , compared to 17% for the same period in 2019 .

Wealth management AUA amounted to $6.1 billion at June 30, 2020 , down by $340.0 million , or 5% , from the balance at June 30, 2019 .

AUA was adversely impacted by net client outflows in the second half of 2019, which was largely associated with the departures of two senior counselors in June 2019.

AUA was also adversely impacted by the volatility in financial markets in 2020.

The average balance of AUA for the three and six months ended June 30, 2020 decreased by approximately 10% and 6% , respectively, from the average balances for the same periods in 2019 .

Mortgage banking revenues represented 45% of total noninterest income for the six months ended June 30, 2020 , compared to 20% for the same period in 2019 .

These revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets.

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(Dollars in thousands)

Three months ended March 31,

Periods ended June 30,

Mortgage banking revenues:

Gains on loan sales, net (1)

Realized gains on loan sales, net (1)

Unrealized gains (losses), net (2)

Loan servicing fee income, net (3)

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Loans sold to the secondary market (4)

Includes gains on loan sales, commission income on loans originated for others, servicing right gains, fair value adjustments on mortgage loans held for sale, and fair value adjustments and gains (losses) on forward loan commitments.

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

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

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

Includes brokered loans (loans originated for others).

For the three months ended March 31, 2020 , mortgage banking revenues were up by $3.5 million , or 130% , compared to the same period in 2019 .

The increase in mortgage banking revenues reflected a higher sales volume and sales yield on loans sold to the secondary market, as well as an increase in the mortgage pipeline and a corresponding increase in the fair value of mortgage loan commitments and loans held for sale.

For the three months ended March 31, 2020 , mortgage loans sold to the secondary

Management's Discussion and Analysis

market totaled $162.2 million , compared to $92.1 million for the same period in 2019 .

For the three and six months ended June 30, 2020 , mortgage banking revenues were up by $11.2 million and $14.7 million , respectively, compared to the same periods in 2019 , reflecting increases in both realized and unrealized gains associated with mortgage banking activities.

Net realized gains rose due to increases in both sales volume and sales yield on loans sold to the secondary market.

For the three and six months ended June 30, 2020 , mortgage loans sold to the secondary market totaled $305.2 million and $467.4 million , respectively, compared to $137.4 million and $229.5 million , respectively, for the same periods in 2019 .

Net unrealized gains also increased, reflecting growth in the mortgage pipeline and a corresponding increase in the fair value of mortgage loan commitments.

Mortgage origination and sales activity increased year-over-year in response to declines in market interest rates.

Loan related derivative income for the three months ended March 31, 2020 increased by $1.7 million , or 239% , from the comparable period in 2019 , reflecting higher gains on commercial borrower interest rate swap transactions.

Loan related derivative income for the three months ended June 30, 2020 decreased by $647 thousand from the same period in 2019, reflecting a lower volume of commercial borrower interest rate swap transactions.

Loan-related derivative income for the six months ended June 30, 2020 increased by $1.1 million from the comparable period in 2019 , reflecting higher gains on commercial borrower interest rate swap transactions.

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

Income from BOLI for the three and six months ended June 30, 2020 was up by $225 thousand and $140 thousand , respectively, from the same periods in 2019 .

Included in income from BOLI for the three and six months ended June 30, 2020 was a $229 thousand non-taxable gain due to the receipt of life insurance proceeds.

Noninterest Expense

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(Dollars in thousands)

Three months ended March 31,

Periods ended June 30,

Noninterest expense:

8 unchanged sentences

Noninterest Expense Analysis

Salaries and employee benefits expense for the three months ended March 31, 2020 increased by $1.8 million , or 10% , compared to the same period in 2019 , largely reflecting annual merit and staffing increases, as well as volume-related increases in mortgage banking commission expense.

Outsourced services expense for the three months ended March 31, 2020 increased by $394 thousand , or 15% , compared to the same period in 2019 , reflects volume-related increase in third party processing costs and the expansion of services provided by third party vendors.

Other expenses for the three months ended March 31, 2020 increased by $967 thousand , or 42% , compared to the same period in 2019 .

In the first quarter of 2020, we established a contingency reserve of approximately $800 thousand largely due to a potential loss associated with counterfeit checks drawn on a commercial customer's account, which arose at the end of March 2020 and remains under investigation.

Salaries and employee benefits expense for the three and six months ended June 30, 2020 increased by $1.0 million and $2.9 million , respectively, compared to the same periods in 2019 , largely reflecting volume-related increases in mortgage banking commission expense and annual merit increases.

These increases were partially offset by an increase in deferred labor costs (a contra expense) associated with PPP loan originations in the second quarter of 2020, as well as lower wealth management compensation costs associated with the departure of personnel.

Outsourced services expense for the three and six months ended June 30, 2020 increased by $266 thousand and $660 thousand , respectively, compared to the same periods in 2019 , reflecting volume-related increases in third party processing costs and the expansion of services provided by third party vendors.

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

Management's Discussion and Analysis

Other expenses for the three and six months ended June 30, 2020 decreased by $620 thousand and increased by $347 thousand , respectively, compared to the same periods in 2019 .

Included in other expenses in the first quarter of 2020, was a contingency reserve of approximately $800 thousand that was established largely due to a potential loss associated with counterfeit checks drawn on a commercial customer’s account.

This matter was resolved in the second quarter of 2020 and resulted in a reduction of $170 thousand from the previously established reserve, which was recognized as a reduction of other expenses in the second quarter of 2020.

Excluding the impact of the aforementioned item, other expenses for the three and six months ended June 30, 2020 decreased by $450 thousand and $283 thousand, respectively, from the same periods in 2019 , reflecting lower levels of business travel and entertainment expenses and modest declines in a variety of other expense categories.

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

(Dollars in thousands)

Three months ended March 31,

Periods ended June 30,

Income tax expense

Effective income tax rate

The effective income tax rates for the three months ended March 31, 2020 and 2019 differed from the federal rate of 21%, primarily due to state income tax expense, offset by the benefits of tax-exempt income, income from BOLI, federal tax credits and the recognition of excess tax benefits (expense) associated with the settlement of share-based awards.

The decrease in the effective tax rate for the three months ended March 31, 2020 compared to the same period in 2019 largely reflected a decrease in state tax expense and an increase in the proportion of tax-exempt income to pre-tax income.

Management's Discussion and Analysis

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

The decrease in the effective tax rate for the three and six months ended June 30, 2020 compared to the same periods in 2019 largely reflected lower state tax exposure.

Segment Reporting

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(Dollars in thousands)

Three months ended March 31,

Periods ended June 30,

Net interest income

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Income tax expense

Net interest income for the Commercial Banking segment for the three months ended March 31, 2020 , increased by $1.7 million , or 6% , from the same period in 2019 , reflecting growth in loans, which was partially offset by lower yields on loans due to declines in market interest rates.

For the three months ended March 31, 2020 , a provision for credit losses of $7.0 million was charged to earnings, compared to $650 thousand for the same period in 2019 .

The year-over-year increase was mainly attributable to the significant deterioration in the economic forecast due to the COVID-19 pandemic.

Noninterest income derived from the Commercial Banking segment for the three months ended March 31, 2020 was up by $5.2 million , or 96% , from the comparable period in 2019 .

The increase largely reflected higher mortgage banking revenues and loan related derivative income.

See additional discussion under the caption “Noninterest Income” above.

Commercial Banking noninterest expenses for the three months ended March 31, 2020 were up by $3.0 million , or 18% , from the same period in 2019 , reflecting increases in salaries and employee benefits and outsourced services expenses.

See further discussion under the caption “Noninterest Expense” above.

Net interest income for the Commercial Banking segment for the three and six months ended June 30, 2020 , increased by $4.7 million and $6.4 million , respectively, from the same periods in 2019 , reflecting growth in loans partially offset by lower yields on loans due to declines in market interest rates.

Management's Discussion and Analysis

In addition to the change in accounting methodologies described above under the caption “Provision for Credit Losses,” the year-over-year increase in the provision was attributable to the significant deterioration in the economic forecast due to the COVID-19 pandemic and also reflected loan growth and changes in the underlying portfolio.

Noninterest income derived from the Commercial Banking segment for the three and six months ended June 30, 2020 was up by $10.2 million and $15.4 million , respectively, from the comparable periods in 2019 largely due to higher mortgage banking revenues.

See additional discussion regarding mortgage banking revenues, loan related derivative income and service charges on deposits under the caption “Noninterest Income” above.

Commercial Banking noninterest expenses for the three and six months ended June 30, 2020 were up by $894 thousand and $3.8 million , respectively, from the same periods in 2019 , reflecting increases in salaries and employee benefits and outsourced services expenses.

See additional discussion under the caption “Noninterest Expense” above.

Wealth Management Services

1 unchanged sentence

(Dollars in thousands)

Three months ended March 31,

Periods ended June 30,

Net interest expense

3 unchanged sentences

Income tax expense

Management's Discussion and Analysis

For the three months ended March 31, 2020 , noninterest income derived from the Wealth Management Services segment decreased by $563 thousand , or 6% , compared to the same period in 2019 .

For the three and six months ended June 30, 2020 , noninterest income derived from the Wealth Management Services segment decreased by $952 thousand and $1.5 million , respectively, compared to the same periods in 2019 , due to a decline in asset-based revenues.

See further discussion of wealth management revenues under the caption “Noninterest Income” above.

For the three months ended March 31, 2020 , noninterest expenses for the Wealth Management Services segment increased by $357 thousand .

The increase reflects higher legal expenses, as well as modest increases across a variety of noninterest expense categories.

For the three and six months ended June 30, 2020 , noninterest expenses for the Wealth Management Services segment decreased by $721 thousand and $205 thousand , respectively, from the same periods in 2019 , largely reflecting lower salaries and employee benefits expense.

The decline in year-over-year second quarter noninterest expenses also included modest decreases across a variety of noninterest expense categories.

See further discussion under the caption “Noninterest Expense” above.

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(Dollars in thousands)

Three months ended March 31,

Net interest income

Periods ended June 30,

Net interest (expense) income

Noninterest income

Noninterest expense

Income before income taxes

Income tax expense

Net interest income for the Corporate unit for the three months ended March 31, 2020 was down by $3.7 million , or 51% , compared to the same period in 2019 .

This decline reflected lower interest income on securities due to a decline in average balances of securities and lower yields, which was partially offset by lower wholesale funding costs.

(Loss) income before income taxes

Income tax (benefit) expense

Net (loss) income

Net interest income for the Corporate unit for the three and six months ended June 30, 2020 was down by $7.7 million and $11.5 million , respectively, compared to the same periods in 2019 .

Lower interest income on securities resulting from a decline

Management's Discussion and Analysis

in average balances of securities and lower yields was partially offset by lower wholesale funding costs.

The decline in net interest income for the Corporate unit also reflected unfavorable net funds transfer pricing allocations with the Commercial Banking segment as the downward repricing of assets occurred at a faster pace than the repricing of liabilities.

Financial Condition

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Total shareholders’ equity

Total assets amounted to $5.6 billion at March 31, 2020 , up by $ 328.3 million , or 6% , from the end of 2019 .

The increase in total assets reflected increases in total loans, the balance of cash and due from banks and total securities.

The increase in cash and due from banks was largely due to increased levels of cash collateral pledged to derivative counterparties.

Total assets amounted to $5.9 billion at June 30, 2020 , up by $ 584.3 million , or 11% , from the end of 2019 .

This growth in total assets reflected increases in total loans, the balance of cash and due from banks and total securities.

Cash and due from banks balances rose largely due to increased levels of cash collateral pledged to derivative counterparties.

See Note 9 to the Unaudited Consolidated Financial Statements for additional disclosure regarding derivative financial instruments.

2 unchanged sentences

See additional disclosure in the Asset Quality section under the caption “Allowance for credit losses on loans.”

Total deposits increased by $207.4 million , or 6% , and FHLB advances increased by $57.1 million , or 5% , from December 31, 2019 .

Shareholders’ equity amounted to $508.6 million at March 31, 2020 , up by $5.1 million , or 1% , from the balance at December 31, 2019 .

As of March 31, 2020 , the Bancorp and the Bank were “well capitalized.” See Note 8 to the Unaudited Consolidated Financial Statements for additional discussion on regulatory capital requirements.

Management's Discussion and Analysis

Total deposits increased by $602.6 million , or 17% , reflecting increases in both in-market deposits and wholesale brokered time deposits.

FHLB advances decreased by $136.4 million , or 12% , from December 31, 2019 .

Shareholders’ equity amounted to $520.2 million at June 30, 2020 , up by $16.7 million , or 3% , from the balance at December 31, 2019 .

As of June 30, 2020 , the Bancorp and the Bank were “well capitalized.” See Note 8 to the Unaudited Consolidated Financial Statements for additional discussion on regulatory capital requirements.

I nvestment security activity is monitored by the Investment Committee, the members of which also sit on the Asset/Liability Committee (“ALCO”).

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Debt securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized.

Debt securities held to maturity are reported at amortized cost.

Determination of Fair Value

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The prices provided by the independent pricing service are generally based on observable market data in active markets.

The determination of whether markets are active or inactive is based upon the level of trading activity for a particular security class.

The determination of whether markets are active or

Management's Discussion and Analysis

inactive is based upon the level of trading activity for a particular security class.

Management reviews the independent pricing service’s documentation to gain an understanding of the appropriateness of the pricing methodologies.

2 unchanged sentences

In addition, management periodically performs independent price tests of securities to ensure proper valuation and to verify our understanding of how securities are priced.

As of March 31, 2020 and December 31, 2019 , management did not make any adjustments to the prices provided by the pricing service.

As of June 30, 2020 and December 31, 2019 , management did not make any adjustments to the prices provided by the pricing service.

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

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(Dollars in thousands)

March 31, 2020

June 30, 2020

December 31, 2019

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Total available for sale debt securities

The securities portfolio stood at $917.4 million as of March 31, 2020 , or 16% of total assets, compared to $899.5 million as of December 31, 2019 , or 17% of total assets.

The securities portfolio stood at $938.4 million as of June 30, 2020 , or 16% of total assets, compared to $899.5 million as of December 31, 2019 , or 17% of total assets.

The largest component of the securities portfolio is mortgage-backed securities, all of which are issued by U.S.

1 unchanged sentence

government-sponsored enterprises.

Management's Discussion and Analysis

The securities portfolio increased by $39.0 million , or 4% , from the end of 2019 , reflecting purchases of debt securities totaling $248.2 million, with a weighted average yield of 2.10%, as well as an increase in the fair value of available for sale securities.

These increases were partially offset by routine pay-downs on mortgage-backed securities and calls of debt securities.

As of March 31, 2020 , the net unrealized gain position on available for sale debt securities amounted to $21.0 million , compared to $4.2 million as of December 31, 2019 .

These net positions included gross unrealized losses of $5.1 million and $4.9 million , respectively, of as March 31, 2020 and December 31, 2019 .

The increase in gross unrealized losses in 2020 was primarily concentrated in trust preferred debt securities and corporate bonds, and 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.

Therefore, no ACL on securities was established in the first quarter of 2020.

These increases were partially offset by routine pay-downs on mortgage-backed securities, calls and maturities of debt securities.

As of June 30, 2020 , the net unrealized gain position on available for sale debt securities amounted to $18.6 million , compared to $4.2 million as of December 31, 2019 .

These net positions included gross unrealized losses of $3.8 million and $4.9 million , respectively, of as June 30, 2020 and December 31, 2019 .

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

Total loans amounted to $4.1 billion at March 31, 2020 , up by $197.4 million , or 5% , from the end of 2019 , largely due to commercial loan growth and purchases of residential real estate mortgage loans in the first quarter 2020.

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

Growth in commercial loans was largely concentrated in the commercial and industrial portfolio, reflecting originations of PPP loans in the second quarter of 2020.

Management's Discussion and Analysis

The following is a summary of loans:

(Dollars in thousands)

March 31, 2020

June 30, 2020

December 31, 2019

7 unchanged sentences

Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.

C&I consists of loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.

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.

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

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

Washington Trust is working with and supporting our customers experiencing financial difficulty due to the COVID-19 pandemic.

Depending on the demonstrated need of the borrower, Washington Trust is deferring principal and interest payments for up to six months.

Generally, the deferred interest is capitalized when deemed fully collectible and the modified balance is then re-amortized over the remaining term or amortization period.

As of May 1, 2020 , we have executed 396 short-term deferments on loan balances of $406 million , which represented 10% of total loan balances as of March 31, 2020 .

In accordance with regulatory guidance and GAAP, these short-term deferments are not required to be classified as troubled debt restructured loans 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 in Note 5 to the Unaudited Consolidated Financial Statements.

Washington Trust continues to work with and support our customers experiencing financial difficulty due to the COVID-19 pandemic.

As of June 30, 2020 , we have executed 583 short-term loan payment deferments on loan balances of $652.2 million , which represented 15% of total loan balances as of June 30, 2020 .

The majority of these deferments qualified as eligible loan modifications under Section 4013 of the CARES Act and therefore, were not required to be classified as TDRs and were not reported as past due.

Twelve of these short-term deferments executed on loan balances of $5.6 million were past due before the COVID-19 pandemic and therefore, were classified as TDRs and were included in past due loans as of June 30, 2020 .

Management is actively monitoring the short-term deferments and a significant portion will reach their initial expiration date in the third quarter of 2020.

We expect that some borrowers will seek extensions and it is also possible that asset quality metrics could worsen.

Interest income will continue to be recognized on loans with short-term deferments, unless the loan is placed on nonaccrual status in accordance with the nonaccrual loans accounting policy described in Note 5 to the Unaudited Consolidated Financial Statements.

Commercial Loans

The commercial loan portfolio represented 56% of total loans at March 31, 2020 .

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

In making commercial loans, we may occasionally solicit the participation of other banks.

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In such cases, these loans are individually underwritten by us using standards similar to those employed for our self-originated loans.

Our participation in commercial loans originated by other banks amounted to $455.5 million and $399.7 million , respectively, at March 31, 2020 and December 31, 2019 .

Our participation in commercial

Management's Discussion and Analysis

loans originated by other banks also includes shared national credits.

Our participation in commercial loans originated by other banks amounted to $439.5 million and $399.7 million , respectively, at June 30, 2020 and December 31, 2019 .

Our participation in commercial loans originated by other banks also includes shared national credits.

Shared national credits are defined as participations in loans or loan commitments of at least $100.0 million that are shared by three or more banks.

4 unchanged sentences

Commercial and industrial loans are frequently collateralized by equipment, inventory, accounts receivable, and/or general business assets.

A significant portion of the Bank’s commercial and industrial loans is also collateralized by real estate.

A portion of the Bank’s commercial and industrial loans is also collateralized by real estate.

Commercial and industrial loans also include tax-exempt loans made to states and political subdivisions, as well as industrial development or revenue bonds issued through quasi-public corporations for the benefit of a private or non-profit entity where that entity rather than the governmental entity is obligated to pay the debt service.

Management's Discussion and Analysis

Commercial Real Estate Loans

Commercial real estate loans totaled $1.6 billion at March 31, 2020 , up by $70.4 million , or 5% , from the balance at December 31, 2019 .

Included in commercial real estate loans were construction and development loans of $175.4 million and $211.5 million , respectively, as of March 31, 2020 and December 31, 2019 .

For the three months ended March 31, 2020 , commercial real estate loan originations and advances totaled approximately $118 million, which were partially offset by payoffs.

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

March 31, 2020

December 31, 2019

Commercial Real Estate Loans by Property Type:

Multi-family dwelling

Industrial and warehouse

Commercial mixed use

Total commercial real estate loans

The average commercial real estate loan size was $3.2 million and the largest individual commercial real estate loan outstanding was $32.2 million as of March 31, 2020 .

Commercial real estate loans totaled $1.6 billion at June 30, 2020 , up by $83.4 million , or 5% , from the balance at December 31, 2019 .

Included in commercial real estate loans were construction and development loans of $138.7 million and $211.5 million , respectively, as of June 30, 2020 and December 31, 2019 .

For the six months ended June 30, 2020 , commercial real estate loan originations and advances totaled approximately $167 million, which were partially offset by payoffs.

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

(Dollars in thousands)

March 31, 2020

June 30, 2020

December 31, 2019

Outstanding Balance

Massachusetts

All other states

As of May 1, 2020 , we have executed 88 short-term deferments on commercial real estate balances of $273 million , which represented 17% of total commercial real estate portfolio balances as of March 31, 2020 .

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

(Dollars in thousands)

June 30, 2020

December 31, 2019

Outstanding Balance

CRE Portfolio Segmentation:

Multi-family dwelling

Industrial and warehouse

Commercial mixed use

Total commercial real estate loans

Average CRE loan size

Largest individual CRE loan outstanding

Management's Discussion and Analysis

Office and multi-family dwelling property types totaled $770 million as of March 31, 2020 and together represented 48% of the total commercial real estate portfolio.

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

(Dollars in thousands)

June 30, 2020

Deferment Balance

% of Outstanding Balance

CRE Portfolio Segmentation:

Multi-family dwelling

Industrial and warehouse

Commercial mixed use

Total commercial real estate loans

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

Office and multi-family dwelling property types consisted of 217 loans totaling $814.7 million as of June 30, 2020 and together represented 50% of the total commercial real estate portfolio.

Our office properties tend to be for smaller-footprint suburban tenants.

Our multi-family properties are located primarily in southern New England.

As of May 1, 2020 , we have executed 22 short-term deferments on loan balances of $56 million , which represented 7% of these segments’ aggregate balances as of March 31, 2020 .

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

Retail totaled $311 million as of March 31, 2020 , or 19% of the total commercial real estate portfolio.

As of June 30, 2020 , we have executed 35 short-term deferments on loan balances of $108.4 million , which represented 13% of these segments’ aggregate balances as of June 30, 2020 .

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

Retail consisted of 133 loans with balances totaling $327.1 million at June 30, 2020 , representing 20% of the total commercial real estate portfolio.

Our retail properties generally have single tenant drugstores or strong anchor tenants, often national grocery store chains.

As of May 1, 2020 , we have executed 29 short-term deferments on loan balances of $95 million , which represented 31% of this segment’s balances as of March 31, 2020 .

Hospitality totaled $137 million , or 8% of the total commercial real estate portfolio.

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 May 1, 2020 , we have executed 18 short-term deferments on loan balances of $81 million , which represented 59% of this segment’s balances as of March 31, 2020 .

Healthcare totaled $115 million , or 7% of the total commercial real estate portfolio.

This segment is composed of senior housing and nursing homes.

As of May 1, 2020 , we have executed 1 short-term deferment on a loan balance of $9 million , which represented 8% of this segment’s balances as of March 31, 2020 .

We expect that there will be further short-term disruption in this segment.

Commercial and Industrial Loans (“C&I”)

Commercial and industrial loans amounted to $655.2 million at March 31, 2020 , up by $69.9 million , or 12% , from the balance at December 31, 2019 .

For the three months ended March 31, 2020 , originations and advances of $51 million and increased line utilization of $25 million, were partially offset by payoffs and paydowns.

Shared national credit balances outstanding included in the commercial and industrial loan portfolio totaled $79.4 million at March 31, 2020 .

All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at March 31, 2020 .

The following table presents a summary of commercial and industrial loan by industry segmentation:

March 31, 2020

As of June 30, 2020 , about 65% of the hospitality portfolio balances were with limited service properties with no restaurants and limited meeting space and 35% was with leisure travel properties that are located on the New England coastline.

As of June 30, 2020 , we have executed 31 short-term deferments on loan balances totaling $117.7 million , which represented 81% of this segment’s balance at June 30, 2020 .

Healthcare consisted of 16 loans with balances totaling $120.2 million at June 30, 2020 , representing 7% of the total commercial real estate portfolio.

This segment is composed of assisted living, nursing homes and continuing care retirement communities.

As of June 30, 2020 , we have executed 5 short-term deferments on loan balances totaling $64.3 million , which represented 54% of this segment’s balance at June 30, 2020 .

Commercial and Industrial Loans

C&I loans amounted to $852.4 million at June 30, 2020 , up by $267.2 million , or 46% , from the balance at December 31, 2019 .

For the six months ended June 30, 2020 , C&I loan originations amounted to $284 million and were partially offset by payoffs, paydowns and a modest decline in line utilization.

C&I originations were concentrated in PPP loans.

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

Management's Discussion and Analysis

Shared national credit balances outstanding included in the C&I loan portfolio totaled $55.0 million at June 30, 2020 .

All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at June 30, 2020 .

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

(Dollars in thousands)

June 30, 2020

December 31, 2019

Commercial & Industrial Loans by Industry Segmentation:

Outstanding Balance

C&I Portfolio Segmentation:

Healthcare and social assistance

2 unchanged sentences

Owner occupied and other real estate

Professional, scientific and technical

Accommodation and food services

1 unchanged sentence

Entertainment and recreation

Professional, scientific and technical

Transportation and warehousing

Public administration

Total commercial & industrial loans

Average C&I loan size

Largest individual C&I loan outstanding

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

(Dollars in thousands)

June 30, 2020

Deferment Balance

% of Outstanding Balance

C&I Portfolio Segmentation:

Healthcare and social assistance

Manufacturing

Educational services

Owner occupied and other real estate

Professional, scientific and technical

Accommodation and food services

Finance and insurance

Entertainment and recreation

Transportation and warehousing

Public administration

Total commercial & industrial loans

The average C&I loan size was $716 thousand and the largest individual C&I outstanding was $25.0 million as of March 31, 2020 .

Management's Discussion and Analysis

As of May 1, 2020 , we have executed 70 short-term deferments on C&I loan balances of $45 million , which represented 7% of total C&I portfolio balances as of March 31, 2020 .

Healthcare and social assistance totaled $138 million as of March 31, 2020 and is our largest single C&I industry segment, representing 21% of the total C&I portfolio.

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

Healthcare and social assistance totaled $189 million as of June 30, 2020 and is our largest single C&I industry segment, representing 22% of the total C&I portfolio.

This segment includes specialty medical practices, elder services and community and mental health centers.

As of May 1, 2020 , we have executed 5 short-term deferments on loan balances of $1 million , which represented 1% of this industry segment’s balances as of March 31, 2020 .

We expect that there will be further short-term disruption in this industry segment.

As of June 30, 2020 , we have executed 6 short-term deferments on loan balances of $15.4 million , which represented 8% of this industry segment’s balances as of June 30, 2020 .

It is possible that there will be further short-term disruption in this industry segment.

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

Retail totaled $59 million as of March 31, 2020 , or 9% of the total C&I portfolio.

As of May 1, 2020 , we have executed 6 short-term deferments on loan balances of $3 million , which represented 5% of this industry segment’s balances as of March 31, 2020 .

Educational services totaled $56 million as of March 31, 2020 , or 9% of the total C&I portfolio.

As of May 1, 2020 , we have executed 4 short-term deferments on loan balances of $7 million , which represented 13% of this industry segment’s balances as of March 31, 2020 .

Accommodation and food services amounted to $44 million as of March 31, 2020 , or 7% of the total C&I portfolio.

A single credit relationship in the gaming industry sector represents over 50% of the accommodation and food services segment.

As of May 1, 2020 , we have executed 13 short-term deferments on loan balances of $11 million , which represented 24% of this industry segment’s balances as of March 31, 2020 .

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 totaled $32 million , or 5% of the total C&I portfolio.

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 May 1, 2020 , we have executed 2 short-term deferments on loan balances of $2 million , which represented 8% of this industry segment’s balances as of March 31, 2020 .

The deferments have been executed for golf courses.

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.

Residential Real Estate Loans

The residential real estate loan portfolio represented 37% of total loans at March 31, 2020 .

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

Residential real estate loans are originated both for sale to the secondary market as well as for retention in the Bank’s loan portfolio.

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(Dollars in thousands)

Three months ended March 31,

Periods ended June 30,

Originations for retention in portfolio (1)

Originations for sale to the secondary market (2)

Includes the full commitment amount of homeowner construction loans.

Includes brokered loans (loans originated for others).

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(Dollars in thousands)

Three months ended March 31,

Periods ended June 30,

Loans sold with servicing rights retained

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Loan servicing rights are included in other assets and are subsequently amortized as an offset to mortgage banking revenues over the estimated period of servicing.

The net balance of capitalized servicing rights amounted to $3.6 million and $3.5 million , respectively, as of March 31, 2020 and December 31, 2019 .

The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $607.5 million and $587.0 million , respectively, as of March 31, 2020 and December 31, 2019 .

Residential real estate loans held in portfolio amounted to $1.5 billion at March 31, 2020 , up by $61.4 million , or 4% , from the balance at December 31, 2019 .

During the three months ended March 31, 2020 , Washington Trust purchased $51.2 million of residential real estate mortgage loans with a weighted average yield of 3.38% from another financial institution.

The net balance of capitalized servicing rights amounted to $5.0 million and $3.5 million , respectively, as of June 30, 2020 and December 31, 2019 .

The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $797.8 million and $587.0 million , respectively, as of June 30, 2020 and December 31, 2019 .

Residential real estate loans held in portfolio amounted to $1.5 billion at June 30, 2020 , up by $59.1 million , or 4% , from the balance at December 31, 2019 .

During the six months ended June 30, 2020 , Washington Trust purchased $51.2 million of residential real estate mortgage loans with a weighted average yield of 3.38% from another financial institution.

These loans were individually evaluated to Washington Trust’s underwriting standards and predominantly secured by properties in Massachusetts.

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(Dollars in thousands)

March 31, 2020

June 30, 2020

December 31, 2019

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All other states

Includes residential real estate loans purchased from other financial institutions totaling $187.9 million and $151.8 million , respectively, as of March 31, 2020 and December 31, 2019 .

As of May 1, 2020 , we executed 175 short-term deferments on residential real estate loan balances of $83 million , which represented 6% of total residential real estate portfolio balances as of March 31, 2020 .

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 .

As of June 30, 2020 , we executed 265 short-term deferments on residential real estate loan balances of $121.8 million , which represented 8% of total residential real estate portfolio balances as of June 30, 2020 .

The average size of the loans with deferments was approximately $460 thousand and these loans have an estimated loan-to-value ratio of 60% .

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

The consumer loan portfolio totaled $306.7 million at March 31, 2020 , down by $4.3 million , or 1% , from December 31, 2019 .

Home equity lines of credit and home equity loans represented 94% of the total consumer portfolio at March 31, 2020 .

The consumer loan portfolio totaled $296.0 million at June 30, 2020 , down by $15.1 million , or 5% , from December 31, 2019 .

Home equity lines of credit and home equity loans represented 94% of the total consumer portfolio at June 30, 2020 .

The Bank estimates that approximately 60% of the combined home equity lines of credit and home equity loan balances are first lien positions or subordinate to other Washington Trust mortgages.

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $12.2 million and $12.8 million , respectively, at March 31, 2020 and December 31, 2019 .

As of May 1, 2020 , we executed 63 short-term deferments on consumer loan balances of $5 million , which represented 2% of total consumer portfolio balances as of March 31, 2020 .

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $11.3 million and $12.8 million , respectively, at June 30, 2020 and December 31, 2019 .

Management's Discussion and Analysis

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

Asset Quality

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Accruing loans 90 days or more past due

Total nonperforming assets decreased by $571 thousand from December 31, 2019 .

This included a $1.1 million decrease in property acquired through foreclosure, which resulted from the first quarter sale of a commercial property essentially at its carrying value, and was partially offset by a $510 thousand increase in nonaccrual loans.

At March 31, 2020 , property acquired through foreclosure consisted of one residential property.

Total nonperforming assets decreased by $2.5 million from December 31, 2019 .

This included a $1.4 million decrease in nonaccrual loans and a $1.1 million decrease in property acquired through foreclosure (“OREO”).

The decrease in OREO reflected sales of two properties essentially at their carrying value during the six months ended June 30, 2020 .

At June 30, 2020 , there were no properties held in OREO.

Nonaccrual Loans

During the three months ended March 31, 2020 , the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status.

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

The following table presents the activity in nonaccrual loans:

(Dollars in thousands)

For the three months ended March 31,

For the periods ended June 30,

Balance at beginning of period

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(Dollars in thousands)

March 31, 2020

June 30, 2020

December 31, 2019

9 unchanged sentences

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

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2020 .

As of March 31, 2020 , the composition of nonaccrual loans was 96% residential and consumer and 4% commercial, compared to 93% and 7% , respectively, at December 31, 2019 .

Nonaccrual residential real estate mortgage loans amounted to $15.4 million at March 31, 2020 , up by $1.1 million from the end of 2019 .

As of March 31, 2020 , the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Rhode Island and Connecticut.

Included in total nonaccrual residential real estate loans at March 31, 2020 were four loans purchased for portfolio and serviced by others amounting to $1.4 million.

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

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

Nonaccrual residential real estate mortgage loans amounted to $13.9 million at June 30, 2020 , up by $447 thousand from the end of 2019 .

As of June 30, 2020 , the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Rhode Island and Connecticut.

Included in total nonaccrual residential real estate loans at June 30, 2020 were four loans purchased for portfolio and serviced by others amounting to $1.4 million .

Management monitors the collection efforts of its third party servicers as part of its assessment of the collectibility of nonperforming loans.

The following table sets forth information on troubled debt restructured loans as of the dates indicated.

The amounts below consist of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs.

Accrued interest is not included in the carrying amounts set forth below.

See Note 5 to the Unaudited Consolidated Financial Statements for additional information.

(Dollars in thousands)

Accruing troubled debt restructured loans

Nonaccrual troubled debt restructured loans

Total troubled debt restructured loans

Troubled Debt Restructurings

A loan that has been modified or renewed is considered to be a troubled debt restructuring when two conditions are met:

A loan that has been modified or renewed is considered to be a 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.

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The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection.

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan.

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 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

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.

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

Management's Discussion and Analysis

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.

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 performing in accordance with their modified contractual terms for a reasonable period of time.

As of March 31, 2020 , there were no significant commitments to lend additional funds to borrowers whose loans had been restructured in a troubled debt restructuring.

The allowance for credit losses on loans losses included specific reserves for troubled debt restructurings of $95 thousand and $97 thousand , respectively, at March 31, 2020 and December 31, 2019 .

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

The following table sets forth information on TDRs as of the dates indicated.

The amounts below consist of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs.

Accrued interest is not included in the carrying amounts set forth below.

(Dollars in thousands)

Accruing TDRs

Commercial real estate

Commercial & industrial

Total commercial

Residential Real Estate:

Residential real estate

Total consumer

Accruing TDRs

Nonaccrual TDRs

Residential Real Estate:

Residential real estate

Nonaccrual TDRs

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

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

Past Due Loans

1 unchanged sentence

(Dollars in thousands)

March 31, 2020

June 30, 2020

December 31, 2019

7 unchanged sentences

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

As of March 31, 2020 , the composition of past due loans (loans past due 30 days or more) was 90% residential and consumer and 10% commercial, compared to 91% and 9% , respectively, at December 31, 2019 .

Total past due loans increased by $786 thousand from the end of 2019 , as an increase in past due residential real estate loans was partially offset by a decline in past due commercial real estate loans.

Total past due loans included $11.4 million of nonaccrual loans as of March 31, 2020 , compared to $11.5 million as of December 31, 2019 .

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

Management's Discussion and Analysis

As of June 30, 2020 , the composition of past due loans (loans past due 30 days or more) was 97% residential and consumer and 3% commercial, compared to 91% and 9% , respectively, at December 31, 2019 .

Total past due loans decreased by $1.0 million from the end of 2019 , as decreases in past due commercial and consumer loans were partially offset by an increase in residential real estate loans.

Total past due loans included $10.6 million of nonaccrual loans as of June 30, 2020 , compared to $11.5 million as of December 31, 2019 .

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

Potential Problem Loans

The Corporation classifies certain loans as “substandard,” “doubtful,” or “loss” based on criteria consistent with guidelines provided by banking regulators.

Potential problem loans consist of classified accruing commercial loans that were less than 90 days past due at March 31, 2020 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future.

Potential problem loans consist of classified accruing commercial loans that were less than 90 days past due at June 30, 2020 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future.

These loans are not included in the amounts of nonaccrual or restructured loans presented above.

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Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require increased allowance coverage and provision for loan losses.

Management's Discussion and Analysis

Management has identified approximately $10.1 million in potential problem loans at March 31, 2020 , compared to $10.3 million at December 31, 2019 .

As of March 31, 2020 , the balance of potential problem loans consisted of four commercial relationships, which were all current with respect to payment terms.

Management has identified approximately $9.7 million in potential problem loans at June 30, 2020 , compared to $10.3 million at December 31, 2019 .

As of June 30, 2020 , the balance of potential problem loans consisted of three commercial relationships, which were all current with respect to payment terms.

Potential problem loans are assessed for loss exposure using the methods described in Note 5 to the Unaudited Consolidated Financial Statements under the caption “Credit Quality Indicators.”

In addition, see discussion of commercial industry segments that management considers to be "at-risk" of significant impact from the COVID-19 pandemic under the caption "Commercial Loans" within the Financial Condition section.

Allowance for Credit Losses on Loans

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The ACL on loans is reduced by charge-offs on loans.

Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely.

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.

5 unchanged sentences

(Dollars in thousands)

March 31, 2020

June 30, 2020

December 31, 2019

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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.

Management's Discussion and Analysis

methodology combines the probability of default, the loss given default, maturity date and prepayment speeds to estimate a reserve for each loan.

The sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived.

2 unchanged sentences

With the adoption of CECL on January 1, 2020, management reassessed the underlying risk characteristics of individually analyzed loans and concluded that certain nonaccrual residential and consumer loans previously classified as impaired individually evaluated for impairment shared similar risk characteristics as their pooled loan segment.

The decline in individually analyzed loans from December 31, 2019 was a result of this reassessment.

The decline in individually analyzed loans from December 31, 2019 was a result of this reassessment, partially offset by an increase in TDRs in the second quarter 2020.

See Note 6 to the Unaudited Consolidated Financial Statements for additional disclosure regarding the process and methodology to estimate the ACL on loans.

Management's Discussion and Analysis

The following table presents the allocation of the ACL on loans by portfolio segment.

1 unchanged sentence

(Dollars in thousands)

March 31, 2020

June 30, 2020

December 31, 2019

11 unchanged sentences

Percentage of loans outstanding in respective category to total loans outstanding.

The ACL on loans amounted to $39.7 million at March 31, 2020, up by $12.7 million from the balance at December 31, 2019.

Upon adoption of CECL on January 1, 2020, Washington Trust's ACL on loans increased by $6.5 million, or 24%, See Note 2 to the Unaudited Consolidated Financial Statements for additional disclosure on the impact of adopting Topic 326.

In the first quarter of 2020, a provision for credit losses on loans of $6.8 million was charged to earnings and was mainly attributable to the significant deterioration in the economic forecast due to the COVID-19 pandemic.

The provision also reflected loan growth and changes in the underlying portfolio.

Net charge-offs totaled $623 thousand for the three months ended March 31, 2020 , compared to $78 thousand for the same period in 2019 .

The ACL on loans amounted to $41.4 million at June 30, 2020 , up by $14.4 million from the balance at December 31, 2019.

Upon adoption of CECL on January 1, 2020, Washington Trust's ACL on loans increased by $6.5 million, or 24%.

See Note 2 to the Unaudited Consolidated Financial Statements for additional disclosure on the impact of adopting Topic 326.

The Corporation’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely.

1 unchanged sentence

The Corporation does not recognize a recovery when an updated appraisal indicates a subsequent increase in value.

Management's Discussion and Analysis

Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status.

3 unchanged sentences

Estimating an appropriate level of ACL in loans necessarily involves a high degree of judgment.

Deteriorating conditions or assumptions could lead to further increases in the ACL on loans.

2 unchanged sentences

The ACL on loans is an estimate, and ultimate losses may vary from management’s estimate.

Management's Discussion and Analysis

Sources of Funds

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Total deposits

Total deposits amounted to $3.7 billion at March 31, 2020 , up by $ 207.4 million , or 6% , from December 31, 2019 .

Total deposits amounted to $4.1 billion at June 30, 2020 , up by $ 602.6 million , or 17% , from December 31, 2019 .

This included an increase of $243.7 million , or 86% , in out-of-market brokered time deposits.

Excluding out-of-market brokered time deposits, in-market deposits were up by $60.3 million , or 2% , from the balance at December 31, 2019 , reflecting growth across all non-time deposit categories.

FHLB Advances

Excluding out-of-market brokered time deposits, in-market deposits were up by $358.8 million , or 11% , from the balance at December 31, 2019 .

In-market deposit growth included PPP loan fundings deposited into customer accounts at Washington Trust.

These funds are expected to decrease as customers use them for business needs.

Management's Discussion and Analysis

FHLB advances are used to meet short-term liquidity needs and also to fund loan growth and additions to the securities portfolio.

FHLB advances totaled $1.2 billion at March 31, 2020 , up by $57.1 million , or 5% , from the balance at the end of 2019 .

See Note 7 to the Unaudited Consolidated Financial Statements for additional information regarding FHLB advances.

FHLB advances totaled $1.0 billion at June 30, 2020 , down by $136.4 million , or 12% , from the balance at the end of 2019 .

In June 2020, Washington Trust began participating in the FRB’s PPPLF, which extends credit to depository institutions at a fixed interest rate of 0.35% .

Only PPP loans can be pledged as collateral to access the facility.

The maturity date of the PPPLF borrowings matches the maturity date of the pledged PPP loans.

As of June 30, 2020 , PPPLF borrowings amounted to $38.9 million , with a corresponding amount of PPP loans pledged as collateral.

As of July 31, 2020, PPPLF borrowings totaled $200.6 million, with a corresponding amount of PPP loans pledged as collateral.

See Note 7 to the Unaudited Consolidated Financial Statements for additional information regarding Borrowings.

Liquidity and Capital Resources

1 unchanged sentence

Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand.

The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 60% of total average assets in the three months ended March 31, 2020 .

The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 60% of total average assets in the six months ended June 30, 2020 .

While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace.

1 unchanged sentence

Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs, although management has no intention to do so at this time.

Management's Discussion and Analysis

The Corporation has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity.

11 unchanged sentences

Borrowing capacity is impacted by the amount and type of assets available to be pledged.

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

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

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Unencumbered investment securities

As of March 31, 2020 and December 31, 2019 , loans with a carrying value of $2.1 billion and $2.1 billion , respectively, and securities available for sale with carrying values of $241.7 million and $271.4 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

As of March 31, 2020 and December 31, 2019 , loans with a carrying value of $16.2 million and $16.6 million , respectively, and securities available for sale with a carrying value of $14.5 million and $17.0 million, respectively, were pledged to the FRB resulting in this additional unused borrowing capacity.

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.

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.

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

Management's Discussion and Analysis

The ALCO establishes and monitors internal liquidity measures to manage liquidity exposure.

Liquidity remained within target ranges established by the ALCO during the three months ended March 31, 2020 .

Liquidity remained within target ranges established by the ALCO during the six months ended June 30, 2020 .

Based on its assessment of the liquidity considerations described above, management believes the Corporation’s sources of funding meet anticipated funding needs.

Net cash used in operating activities amounted to $2.8 million for the three months ended March 31, 2020 .

Net cash provided by operating activities amounted to $14.9 million for the six months ended June 30, 2020 .

Net income of $32.9 million was offset by mortgage banking related adjustments to reconcile net income to net cash used in operating activities.

Net cash used in investing activities totaled $201.3 million for the three months ended March 31, 2020 , reflecting outflows to fund loan growth and purchases as well as purchases of debt securities.

Net cash used in investing activities totaled $412.5 million for the six months ended June 30, 2020 , reflecting outflows to fund the increase in and purchases of loans, as well as purchases of debt securities.

These outflows were partially offset by net inflows from maturities, calls and principal payments of securities.

For the three months ended March 31, 2020 , net cash provided by financing activities amounted to $250.9 million , with net increases in deposits and FHLB advances, partially offset by the payment of dividends to shareholders and treasury stock purchases.

See the Corporation’s Unaudited Consolidated Statements of Cash Flows for further information about sources and uses of cash.

For the six months ended June 30, 2020 , net cash provided by financing activities amounted to $482.5 million , with net increases in deposits, FHLB advances and PPPLF borrowings, partially offset by the payment of dividends to shareholders and treasury stock purchases.

See the Unaudited Consolidated Statements of Cash Flows for further information about sources and uses of cash.

Capital Resources

Total shareholders’ equity amounted to $508.6 million at March 31, 2020 , up by $5.1 million from December 31, 2019 .

Total shareholders’ equity amounted to $520.2 million at June 30, 2020 , up by $16.7 million from December 31, 2019 .

This included net income of $32.9 million and an increase of $10.8 million in the accumulated comprehensive income component of shareholders’ equity, largely reflecting an increase in the fair value of available for sale debt securities.

These increases were partially offset by $17.8 million in dividend declarations, a $6.1 million decrease to retained earnings due to the adoption of CECL, and a net increase in treasury stock of $3.5 million .

The Corporation declared a quarterly dividend of 51 cents per share for the three months ended March 31, 2020 , compared to 47 cents per share for the same period in 2019 .

The ratio of total equity to total assets amounted to 9.05% at March 31, 2020 compared to a ratio of 9.51% at December 31, 2019 .

Book value per share at March 31, 2020 and December 31, 2019 amounted to $29.48 and $29.00 , respectively.

The Bancorp and the Bank are subject to various regulatory capital requirements and are considered “well capitalized” with a total risk-based capital ratio of 12.42% at March 31, 2020 , compared to 12.94% at December 31, 2019 .

See Note 8 to the

Management's Discussion and Analysis

Unaudited Consolidated Financial Statements for additional discussion of regulatory capital requirements and the election of the CECL phase-in option provided by regulatory guidance, which delays the estimated impact of CECL on regulatory capital and phases it in over a three-year period beginning in 2022.

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

The ratio of total equity to total assets amounted to 8.85% at June 30, 2020 compared to a ratio of 9.51% at December 31, 2019 .

Book value per share at June 30, 2020 and December 31, 2019 amounted to $30.14 and $29.00 , respectively.

The Bancorp and the Bank are subject to various regulatory capital requirements and are considered “well capitalized” with a total risk-based capital ratio of 12.78% at June 30, 2020 , compared to 12.94% at December 31, 2019 .

See Note 8 to the Unaudited Consolidated Financial Statements for additional discussion of regulatory capital requirements and the election of the CECL phase-in option provided by regulatory guidance, which delays the estimated impact of CECL on regulatory capital and phases it in over a three-year period beginning in 2022.

Off-Balance Sheet Arrangements

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These interest rate contracts involve, to varying degrees, credit risk and interest rate risk.

Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract.

Credit risk is the possibility that a loss may occur if a

Management's Discussion and Analysis

counterparty to a transaction fails to perform according to terms of the contract.

The notional amount of the interest rate contracts is the amount upon which interest and other payments are based.

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The ALCO reviews simulation results to determine whether the Corporation’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure.

As of March 31, 2020 and December 31, 2019 , net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation.

As of June 30, 2020 and December 31, 2019 , net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation.

All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where both interest rates and the composition of the Corporation’s balance sheet remain stable for a 60-month period.

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The ALCO regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve of up to 500 basis points, as well as parallel changes in interest rates of up to 400 basis points.

Because income simulations assume that the Corporation’s balance sheet

Management's Discussion and Analysis

will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

The following table sets forth the estimated change in net interest income from an unchanged rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on- and off-balance sheet financial instruments as of March 31, 2020 and December 31, 2019 .

Because income simulations assume that the Corporation’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

Interest rates are assumed to shift by a parallel 100, 200 or 300 basis points upward or 100 basis points downward over a 12-month period, except for core savings deposits, which are assumed to shift by lesser amounts due to their relative historical insensitivity to market interest rate movements.

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It should be noted that the rate scenarios shown do not necessarily reflect the ALCO’s view of the “most likely” change in interest rates over the periods indicated.

March 31, 2020

June 30, 2020

December 31, 2019

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For simulation purposes, deposit rate changes are anticipated to lag behind other market interest rates in both timing and magnitude.

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

The ALCO’s estimate

Management's Discussion and Analysis

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

The relative change in interest rate sensitivity for declining rates from December 31, 2019 as shown in the above table was attributable to a lower absolute level of market interest rates with certain rates and yields reaching floors or zero in declining rate scenarios.

The relative increase in interest rate sensitivity for rising rates from December 31, 2019 was attributable to a relative increase in the proportion of low-cost core deposits to total sources of funds.

Interest rate risk modeling assumes that core deposits reprice more slowly and by a lesser amount than the repricing of wholesale funding in response to changes in market interest rates.

While the ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin.

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Simulation modeling assumes a static balance sheet, with the exception of certain modeled deposit mix shifts from low-cost core savings deposits to higher-cost time deposits in rising rate scenarios as noted above.

The banking industry attracted and retained low-cost core savings deposits during the low interest rate cycle that lasted several years.

The ALCO recognizes that a portion of these increased levels of low-cost balances could continue to shift into higher yielding alternatives in the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above.

As market interest rates have declined, the banking industry has attracted low-cost core savings deposits.

The ALCO recognizes that a portion of these increased levels of low-cost balances could shift into higher yielding alternatives in the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above.

Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment, which may cause interest rate sensitivity to differ from the results as presented.

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Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value.

Changes in prepayment speeds

Management's Discussion and Analysis

could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.

Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.

The Corporation also monitors the potential change in market value of its available for sale debt securities in changing interest rate environments.

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Results are calculated using industry-standard analytical techniques and securities data.

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

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

(Dollars in thousands)

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Trust preferred debt and other corporate debt securities

Total change in market value as of March 31, 2020

Total change in market value as of June 30, 2020

Total change in market value as of December 31, 2019

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis