What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-04 compared with 2020-08-06 · 473 added, 367 removed, 757 unchanged (53% of the section changed)

1 unchanged sentence

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 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.

Operating results for the three and nine months ended September 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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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 June 30, 2020 management considers the following to be its critical accounting policies:

As of September 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.

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The updated policy is described in detail below.

Management's Discussion and Analysis

Allowance for Credit Losses on Loans

The ACL on loans is management’s estimate of expected credit losses over the expected life of the loans at the reporting date.

Management's Discussion and Analysis

The level of the ACL on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts.

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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 (including PPP loans), residential real estate (including homeowner construction), home equity and other consumer loans.

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

The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments.

Individually analyzed loans include nonaccrual commercial loans, loans classified as TDRs and certain other loans based on the underlying risk characteristics and the discretion of management to individually analyze such loans.

Individually analyzed loans include nonaccrual commercial loans, reasonably expected TDRs and executed TDRs, as well as 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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8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations;

and 9) the effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.

Qualitative loss factors are applied to each portfolio segment with the amounts determined by historical loan charge-offs of a peer group of similar-sized regional banks.

and 9) the effect of other

Management's Discussion and Analysis

external factors such as legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio.

Qualitative loss factors are applied to each portfolio segment with the amounts determined by historical loan charge-offs of a peer group of similar-sized regional banks.

Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations.

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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 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.

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

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

As of September 30, 2020, there were 1,770 PPP loans totaling $216.8 million included in our commercial and industrial loan portfolio.

PPP loans are fully guaranteed by the U.S.

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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 .

In the second quarter of 2020, Washington Trust began participating in PPPLF and as of September 30, 2020, PPPLF borrowings amounted to $105.7 million.

The CARES Act also provided TDR accounting relief.

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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

Financial institutions are required to maintain

Management's Discussion and Analysis

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.

records of the volume of loans involved in modifications to which TDR relief is applicable.

Washington Trust has made this election.

Through September 30, 2020, we have executed loan payment deferment modifications on 617 loans totaling $685.4 million.

Eligible deferment modifications are not classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms.

As of September 30, 2020, we have active deferrals on 253 loans totaling $418.2 million, or 10% of total loans excluding PPP loans.

As of November 2, 2020, we have active deferrals on 146 loans totaling $252.9 million, or 6% of total loans excluding PPP loans.

Risk Management

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A framework approach is utilized to assign responsibility and to ensure that the various business units and activities involved in the risk management life-cycle are effectively integrated.

The Corporation has adopted the “three lines of defense” concept that is an industry best practice for ERM.

The Corporation has adopted the “three lines of defense” concept that is an industry best practice for

Management's Discussion and Analysis

Business units are the first line of defense in managing risk.

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

Internal Audit is

Management's Discussion and Analysis

the third line of defense.

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.

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The following table presents a summarized consolidated statement of operations:

(Dollars in thousands)

For the periods ended June 30,

(Dollars in thousands) Three Months Nine Months

Change Change

For the periods ended September 30, 2020 2019 $ % 2020 2019 $ %

Net interest income $31,654 $32,978 ($1,324) (4 %) $95,201 $101,420 ($6,219) (6 %)

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Income tax expense 5,131 5,236 (105) (2) 13,817 14,740 (923) (6)

Net income $18,322 $18,814 ($492) (3 %) $51,263 $53,582 ($2,319) (4 %)

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

For the periods ended June 30,

Three Months Nine Months

For the periods ended September 30, 2020 2019 2020 2019

Diluted earnings per common share $1.06 $1.08 $2.95 $3.07

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Return on average equity (net income available for common shareholders divided by average equity)

13.99 % 15.20 % 13.36 % 15.09 %

Net interest income as a percentage of total revenues 55 % 64 % 57 % 67 %

Noninterest income as a percentage of total revenues 45 % 36 % 43 % 33 %

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 income totaled $18.3 million and $51.3 million, respectively, for the three and nine months ended September 30, 2020, compared to $18.8 million and $53.6 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.

However, the decline in market interest rates also spurred mortgage origination, refinancing 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 anticipated impact of the COVID-19 pandemic under the CECL accounting methodology.

Noninterest expenses increased in 2020, largely due to increases in salaries and employee benefits expense, which included volume-related increases in mortgage banking commissions expense.

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 June 30,

(Dollars in thousands)

Average Balance

Three months ended September 30, 2020 2019 Change

(Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate

Cash, federal funds sold and short-term investments

$168,106 $39 0.09 $96,231 $493 2.03 $71,875 ($454) (1.94)

Mortgage loans held for sale 61,043 468 3.05 39,771 410 4.09 21,272 58 (1.04)

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Total securities

906,977 4,870 2.14 920,985 6,321 2.72 (14,008) (1,451) (0.58)

FHLB stock 43,839 532 4.83 47,982 747 6.18 (4,143) (215) (1.35)

Commercial real estate 1,652,136 11,649 2.81 1,490,878 17,314 4.61 161,258 (5,665) (1.80)

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Total commercial

2,501,588 18,569 2.95 2,075,479 24,260 4.64 426,109 (5,691) (1.69)

Residential real estate 1,510,621 14,047 3.70 1,367,017 13,728 3.98 143,604 319 (0.28)

Home equity 276,221 2,320 3.34 291,058 3,615 4.93 (14,837) (1,295) (1.59)

Other 18,706 237 5.04 22,270 278 4.95 (3,564) (41) 0.09

Total consumer

294,927 2,557 3.45 313,328 3,893 4.93 (18,401) (1,336) (1.48)

4,307,136 35,173 3.25 3,755,824 41,881 4.42 551,312 (6,708) (1.17)

Total interest-earning assets

5,487,101 41,082 2.98 4,860,793 49,852 4.07 626,308 (8,770) (1.09)

Noninterest-earning assets 377,348 320,223 57,125

$5,864,449 $5,181,016 $683,433

Liabilities and Shareholders’ Equity:

Interest-bearing demand deposits $157,986 $83 0.21 $137,980 $649 1.87 $20,006 ($566) (1.66)

NOW accounts 631,148 99 0.06 471,302 69 0.06 159,846 30 —

Money market accounts 839,032 977 0.46 699,138 2,094 1.19 139,894 (1,117) (0.73)

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Junior subordinated debentures

Other borrowings

22,681 135 2.37 22,681 245 4.29 — (110) (1.92)

PPPLF borrowings 180,128 159 0.35 — — — 180,128 159 0.35

Total interest-bearing liabilities

4,314,734 9,180 0.85 3,948,931 16,549 1.66 365,803 (7,369) (0.81)

Noninterest-bearing demand deposits 842,949 626,408 216,541

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Total liabilities and shareholders’ equity

$5,864,449 $5,181,016 $683,433

Net interest income (FTE)

$31,902 $33,303 ($1,401)

Interest rate spread 2.13 2.41 (0.28)

3 unchanged sentences

(Dollars in thousands)

Three months ended June 30,

Three months ended September 30, 2020 2019 Change

Commercial loans $248 $323 ($75)

Nontaxable debt securities — 2 (2)

Six months ended June 30,

(Dollars in thousands)

Average Balance

Total $248 $325 ($77)

Nine months ended September 30, 2020 2019 Change

(Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate

Cash, federal funds sold and short-term investments $156,296 $424 0.36 $75,333 $1,232 2.19 $80,963 ($808) (1.83)

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Total debt securities 905,692 16,181 2.39 973,113 20,574 2.83 (67,421) (4,393) (0.44)

FHLB stock 49,236 1,826 4.95 48,185 2,162 6.00 1,051 (336) (1.05)

Commercial real estate 1,623,612 40,326 3.32 1,461,736 51,702 4.73 161,876 (11,376) (1.41)

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Residential real estate 1,492,589 42,660 3.82 1,358,606 41,099 4.04 133,983 1,561 (0.22)

Home equity 281,488 7,802 3.70 284,657 10,757 5.05 (3,169) (2,955) (1.35)

Other 19,171 716 4.99 24,017 887 4.94 (4,846) (171) 0.05

Total consumer 300,659 8,518 3.78 308,674 11,644 5.04 (8,015) (3,126) (1.26)

Total loans 4,166,765 111,718 3.58 3,732,159 126,417 4.53 434,606 (14,699) (0.95)

Total interest-earning assets 5,326,559 131,342 3.29 4,857,169 151,263 4.16 469,390 (19,921) (0.87)

Noninterest-earning assets 357,133 292,702 64,431

Total assets $5,683,692 $5,149,871 $533,821

Liabilities and Shareholders’ Equity:

Interest-bearing demand deposits $158,594 $725 0.61 $144,306 $1,959 1.82 $14,288 ($1,234) (1.21)

NOW accounts 569,283 253 0.06 462,856 228 0.07 106,427 25 (0.01)

Money market accounts 818,530 4,439 0.72 668,330 5,534 1.11 150,200 (1,095) (0.39)

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Junior subordinated debentures 22,681 519 3.06 22,681 750 4.42 — (231) (1.36)

Other borrowings

PPPLF borrowings 61,333 161 0.35 — — — 61,333 161 0.35

Total interest-bearing liabilities 4,273,821 35,361 1.11 3,964,220 48,860 1.65 309,601 (13,499) (0.54)

9 unchanged sentences

(Dollars in thousands)

Six months ended June 30,

Nine months ended September 30, 2020 2019 Change

Commercial loans $780 $977 ($197)

Nontaxable debt securities — 6 (6)

Total $780 $983 ($203)

Net Interest Income

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

Net interest income for the three and six months ended June 30, 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 for the three and nine months ended September 30, 2020 totaled $31.7 million, and $95.2 million, respectively, compared to $33.0 million and $101.4 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 and six months ended June 30, 2020 and 2019 was not material.

Prepayment penalty income associated with loan payoffs for both the three and nine months ended September 30, 2020 and 2019 was immaterial.

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.

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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 $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 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.

As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans amounted to $4.1 million for the nine months ended September 30, 2020, up by $988 thousand from the same period in 2019.

FTE net interest income for the three and nine months ended September 30, 2020 amounted to $31.9 million and $96.0 million, respectively, down by $1.4 million and $6.4 million, respectively, from the same periods in 2019.

Growth in average interest-earning assets, net of increased average interest-bearing liability balances, contributed approximately $6.1 million and $12.8 million, respectively, of additional net interest income for the three and nine months ended September 30, 2020, however, this was offset by declines in asset yields out-pacing declines in funding costs, which reduced net interest income by $7.5 million and $19.2 million, respectively.

The net interest margin was 2.31% and 2.41%, respectively, for the three and nine months ended September 30, 2020, compared to 2.72% and 2.82%, 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 downward repricing of liabilities.

Total average securities for the three and nine months ended September 30, 2020 decreased by $14.0 million and $67.4 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 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 .

The FTE rate of return on the securities portfolio for the three and nine months ended September 30, 2020 was 2.14% and 2.39%, respectively, compared to 2.72% and 2.83%, 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 nine months ended September 30, 2020 increased by $551.3 million and $434.6 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 2020, as well as 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 nine months ended September 30, 2020 was 3.25% and 3.58%, respectively, compared to 4.42% and 4.53%, respectively, for the same periods in 2019.

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

Management's Discussion and Analysis

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 average balance of FHLB advances for the three and nine months ended September 30, 2020 decreased by $119.3 million and $2.2 million, respectively, compared to the average balances for the same periods in 2019.

The average rate paid on such advances for the three and nine months ended September 30, 2020 was 1.55% and 1.77%, respectively, compared to 2.64% and 2.64%, 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 decreased by $11.3 million and $13.6 million, respectively, from the same periods in 2019.

The average rate paid on wholesale brokered time deposits for the three and nine months ended September 30, 2020 was 1.11% and 1.41%, respectively, compared to 2.28% and 2.24%, 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 .

Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, for the three and nine months ended September 30, 2020 increased by $316.3 million and $264.1 million, respectively, from the average balances for the same periods in 2019.

The increases largely reflected growth in average lower-cost deposit categories, partially offset by maturities of higher-cost promotional time deposits.

The average rate paid on in-market interest-bearing deposits for the three and nine months ended September 30, 2020 decreased by 52 basis points and 29 basis points, respectively, compared to the same periods in 2019, largely due to downward repricing of interest-bearing in-market deposits reflecting lower market interest rates.

The average balance of noninterest-bearing demand deposits for the three and nine months ended September 30, 2020 increased by $216.5 million and $119.4 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.”

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The net change attributable to both volume and rate has been allocated proportionately.

(Dollars in thousands)

Three Months Ended June 30, 2020 vs.

Six Months Ended June 30,

Change Due to

(Dollars in thousands) Three Months Ended September 30, 2020 vs.

2019 Nine Months Ended September 30,

Change Due to Change Due to

Volume Rate Net Change Volume Rate Net Change

Interest on Interest-Earning Assets:

Cash, federal funds sold and other short-term investments

$214 ($668) ($454) $705 ($1,513) ($808)

Mortgage loans held for sale 181 (123) 58 526 (211) 315

2 unchanged sentences

Total securities (97) (1,354) (1,451) (1,356) (3,037) (4,393)

FHLB stock (60) (155) (215) 46 (382) (336)

Commercial real estate 1,713 (7,378) (5,665) 5,260 (16,636) (11,376)

1 unchanged sentence

Total commercial

4,272 (9,963) (5,691) 9,934 (23,068) (13,134)

Residential real estate 1,369 (1,050) 319 3,862 (2,301) 1,561

Home equity (176) (1,119) (1,295) (118) (2,837) (2,955)

Other (45) 4 (41) (181) 10 (171)

Total consumer (221) (1,115) (1,336) (299) (2,827) (3,126)

Total loans 5,420 (12,128) (6,708) 13,497 (28,196) (14,699)

Total interest income 5,658 (14,428) (8,770) 13,418 (33,339) (19,921)

1 unchanged sentence

Interest-bearing demand deposits 83 (649) (566) 179 (1,413) (1,234)

NOW accounts 30 — 30 58 (33) 25

Money market accounts 359 (1,476) (1,117) 1,092 (2,187) (1,095)

14 unchanged sentences

Prior to January 1, 2020, the provision for loan losses was based on an incurred loss model.

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

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

Management's Discussion and Analysis

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

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;

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.

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.

Provisions for credit losses of $1.3 million and $10.6 million, respectively, were charged to earnings for the three and nine months ended September 30, 2020, compared to $400 thousand and $1.6 million, respectively, for the same periods in 2019.

In addition to the change in accounting methodology described above, the year-over-year increase in the year-to-date provision was attributable to anticipated losses related 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 $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 .

Net charge-offs totaled $96 thousand and $1.0 million, respectively, for the three and nine months ended September 30, 2020, compared to $801 thousand and $1.7 million, respectively, for the same periods in 2019.

The allowance for credit losses on loans was $42.6 million, or 1.00% of total loans, at September 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.

2 unchanged sentences

The principal categories of noninterest income are shown in the following table:

(Dollars in thousands)

Periods ended June 30,

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2020 2019 $ % 2020 2019 $ %

Noninterest income:

1 unchanged sentence

Mortgage banking revenues

12,353 4,840 7,513 155 33,300 11,126 22,174 199

Card interchange fees 1,161 1,099 62 6 3,139 3,114 25 1

1 unchanged sentence

Loan related derivative income

1,264 1,407 (143) (10) 3,818 2,877 941 33

Income from bank-owned life insurance 567 569 (2) — 1,922 1,784 138 8

Net realized gains on securities — — — — — (80) 80 100

Other income 571 335 236 70 1,313 944 369 39

Total noninterest income

$25,468 $18,342 $7,126 39 % $71,715 $50,462 $21,253 42 %

Noninterest Income Analysis

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 .

Revenue from wealth management services represented 37% of total noninterest income for the nine months ended September 30, 2020, compared to 55% 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.

3 unchanged sentences

The categories of wealth management revenues are shown in the following table:

(Dollars in thousands)

Periods ended June 30,

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2020 2019 $ % 2020 2019 $ %

Wealth management revenues:

2 unchanged sentences

Total wealth management revenues $8,954 $9,153 ($199) (2 %) $26,248 $27,954 ($1,706) (6 %)

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.

Wealth management revenues for the three and nine months ended September 30, 2020 decreased by $199 thousand and $1.7 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)

Periods ended June 30,

(Dollars in thousands) Three Months Nine Months

Periods ended September 30, 2020 2019 2020 2019

Wealth management assets under administration:

Balance at the beginning of period $6,138,845 $6,478,890 $6,235,801 $5,910,814

Net investment appreciation (depreciation) & income

Net client asset inflows (outflows)

Net investment appreciation & income 335,209 66,514 234,076 809,060

Net client asset outflows (78,402) (419,077) (74,225) (593,547)

Balance at the end of period $6,395,652 $6,126,327 $6,395,652 $6,126,327

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 .

Wealth management AUA amounted to $6.4 billion at September 30, 2020, up by $269.3 million, or 4%, from the balance at September 30, 2019, reflecting net investment appreciation offset, in part, by net client asset outflows.

AUA and related asset-based revenues were adversely impacted by client outflows in the second half of 2019, which was largely associated with the departures of two senior counselors in June 2019.

The average balance of AUA for the three and nine months ended September 30, 2020 decreased by approximately 0.2% and 4%, respectively, from the average balances for the same periods in 2019.

Mortgage banking revenues represented 46% of total noninterest income for the nine months ended September 30, 2020, compared to 22% 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.

Management's Discussion and Analysis

The composition of mortgage banking revenues and the volume of loans sold to the secondary market are shown in the following table:

(Dollars in thousands)

Periods ended June 30,

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2020 2019 $ % 2020 2019 $ %

Mortgage banking revenues:

Realized gains on loan sales, net (1)

Unrealized gains (losses), net (2)

$14,280 $4,509 $9,771 217 % $28,614 $9,370 $19,244 205 %

Unrealized (losses) gains, net (2)

(1,555) 243 (1,798) (740) 5,185 1,379 3,806 276

Loan servicing fee income, net (3)

(372) 88 (460) (523) (499) 377 (876) (232)

Total mortgage banking revenues $12,353 $4,840 $7,513 155 % $33,300 $11,126 $22,174 199 %

Loans sold to the secondary market (4)

$354,170 $184,976 $169,194 91 % $821,585 $414,469 $407,116 98 %

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

2 unchanged sentences

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

Management's Discussion and Analysis

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.

For the three and nine months ended September 30, 2020, mortgage banking revenues were up by $7.5 million and $22.2 million, respectively, compared to the same periods in 2019, primarily due to an increase in net realized 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 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.

For the three and nine months ended September 30, 2020, mortgage loans sold to the secondary market totaled $354.2 million and $821.6 million, respectively, compared to $185.0 million and $414.5 million, respectively, for the same periods in 2019.

As noted in the above table, mortgage banking revenues also include net unrealized gains and losses and net loan servicing fee income.

Net unrealized gains and losses correlate to changes in the mortgage pipeline and corresponding changes in the fair value of mortgage loan commitments.

Net loan servicing fee income associated with loans sold with servicing retained, declined in 2020, largely due to increased amortization of servicing rights resulting from higher prepayment speeds on the serviced mortgage portfolio.

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

For the three and nine months ended September 30, 2020, service charges on deposit accounts decreased by $341 thousand and $768 thousand, respectively, compared to the same periods in 2019, primarily due to lower overdraft activity and related fee income.

Loan related derivative income for the three months ended September 30, 2020 decreased by $143 thousand from the same period in 2019.

Loan-related derivative income for the nine months ended September 30, 2020 increased by $941 thousand from the comparable period in 2019, reflecting higher gains on commercial borrower interest rate swap transactions.

Management's Discussion and Analysis

Noninterest Expense

The following table presents noninterest expense comparisons:

(Dollars in thousands)

Periods ended June 30,

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2020 2019 $ % 2020 2019 $ %

Noninterest expense:

2 unchanged sentences

Net occupancy 2,012 1,933 79 4 5,940 5,835 105 2

Equipment 934 1,046 (112) (11) 2,806 3,085 (279) (9)

Legal, audit and professional fees 1,252 645 607 94 2,733 1,843 890 48

2 unchanged sentences

Amortization of intangibles 228 236 (8) (3) 688 714 (26) (4)

Other 2,090 2,048 42 2 7,023 6,634 389 6

Total noninterest expense $32,344 $26,870 $5,474 20 % $91,275 $81,985 $9,290 11 %

Noninterest Expense Analysis

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.

Salaries and employee benefits expense for the three and nine months ended September 30, 2020 increased by $3.6 million and $6.4 million, respectively, compared to the same periods in 2019, largely reflecting volume-related increases in mortgage banking commissions expense, higher staffing levels, annual merit increases, and increases in performance-based compensation expense.

These were partially offset by increases in deferred labor costs (a contra expense) associated with loan originations in 2020.

Outsourced services expense for the three and nine months ended September 30, 2020 increased by $438 thousand and $1.1 million, 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.

Legal, audit and professional fees for the three and nine months ended September 30, 2020 increased by $607 thousand and $890 thousand, respectively, compared to the same periods in 2019, reflecting increased costs associated with various legal and consulting matters.

FDIC deposit insurance costs for the three and nine months ended September 30, 2020 increased by $852 thousand and $979 thousand, respectively, compared to the same periods in 2019, largely due to approximately $900 thousand of FDIC assessment credits recognized in the third quarter of 2019.

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

(Dollars in thousands)

Periods ended June 30,

(Dollars in thousands) Three Months Nine Months

Periods ended September 30, 2020 2019 2020 2019

Income tax expense $5,131 $5,236 $13,817 $14,740

Effective income tax rate 21.9 % 21.8 % 21.2 % 21.6 %

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.

The effective income tax rates for the three and nine months ended September 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 modest decrease in the effective tax rate for the nine months ended September 30, 2020 compared to the same period in 2019 largely reflected lower state tax exposure.

Management's Discussion and Analysis

Segment Reporting

6 unchanged sentences

The following table presents a summarized statement of operations for the Commercial Banking business segment:

(Dollars in thousands)

Periods ended June 30,

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2020 2019 $ % 2020 2019 $ %

Net interest income $33,103 $28,515 $4,588 16 % $94,692 $83,684 $11,008 13 %

1 unchanged sentence

Net interest income after provision for credit losses

31,778 28,115 3,663 13 84,131 82,109 2,022 2

Noninterest income 15,940 8,607 7,333 85 43,515 20,753 22,762 110

2 unchanged sentences

Income tax expense 5,828 4,347 1,481 34 14,769 11,371 3,398 30

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.

Net income $21,016 $15,478 $5,538 36 % $54,474 $40,830 $13,644 33 %

Net interest income for the Commercial Banking segment for the three and nine months ended September 30, 2020, increased by $4.6 million and $11.0 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.

In addition to the change in accounting methodology described above under the caption “Provision for Credit Losses,” anticipated losses related 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 nine months ended September 30, 2020 was up by $7.3 million and $22.8 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.

Commercial Banking noninterest expenses for the three and nine months ended September 30, 2020 were up by $4.0 million and $7.7 million, respectively, from the same periods in 2019, reflecting increases in salaries and employee benefits, FDIC deposit insurance costs, outsourced services and legal expenses.

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

Management's Discussion and Analysis

Wealth Management Services

The following table presents a summarized statement of operations for the Wealth Management Services business segment:

(Dollars in thousands)

Periods ended June 30,

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2020 2019 $ % 2020 2019 $ %

Net interest expense ($24) ($114) $90 79 % ($117) ($361) $244 68 %

3 unchanged sentences

Income tax expense 403 646 (243) (38) 1,216 1,845 (629) (34)

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.

Net income $999 $1,816 ($817) (45 %) $3,449 $5,035 ($1,586) (31 %)

For the three and nine months ended September 30, 2020, noninterest income derived from the Wealth Management Services segment decreased by $199 thousand and $1.7 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 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.

For the three and nine months ended September 30, 2020, noninterest expenses for the Wealth Management Services segment increased by $951 thousand and $746 thousand, respectively, from the same periods in 2019, including increases salaries and employee benefits, legal and outsourced services expenses.

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

The following table presents a summarized statement of operations for the Corporate unit:

(Dollars in thousands)

Periods ended June 30,

(Dollars in thousands) Three Months Nine Months

Change Change

Periods ended September 30, 2020 2019 $ % 2020 2019 $ %

Net interest (expense) income ($1,425) $4,577 ($6,002) (131 %) $626 $18,097 ($17,471) (97 %)

4 unchanged sentences

Net (loss) income ($3,693) $1,520 ($5,213) (343 %) ($6,660) $7,717 ($14,377) (186 %)

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.

Net interest income for the Corporate unit for the three and nine months ended September 30, 2020 was down by $6.0 million and $17.5 million, respectively, compared to the same periods in 2019.

Lower interest income on securities, resulting from a decline in average balances of securities and lower yields on securities, 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.

For the three and nine months ended September 30, 2020, noninterest expenses for the Corporate unit increased by $546 thousand and $802 thousand, respectively from the same periods in 2019, including increases in salaries and benefits, legal and other professional fees and outsourced services.

Management's Discussion and Analysis

Financial Condition

The following table presents selected financial condition data:

(Dollars in thousands)

(Dollars in thousands) Change

September 30,

2020 December 31,

Cash and due from banks $204,113 $132,193 $71,920 54 %

Total securities 913,850 899,490 14,360 2

Total loans 4,282,047 3,892,999 389,048 10

Allowance for credit losses on loans 42,645 27,014 15,631 58

Total assets 5,849,792 5,292,659 557,133 11

Total deposits 4,285,693 3,498,882 786,811 22

1 unchanged sentence

Total shareholders’ equity 527,693 503,492 24,201 5

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.

Total assets amounted to $5.8 billion at September 30, 2020, up by $557.1 million, or 11%, from the end of 2019.

This reflected growth in total loans and an increase in the balance of cash and due from banks.

The cash and due from banks balance 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.

The allowance for credit losses on loans increased by $15.6 million, or 58%, from the end of 2019.

The increase reflects the adoption of the CECL accounting methodology, as well as the impact of the COVID-19 pandemic.

This reflected the adoption of the CECL accounting methodology effective January 1, 2020, as well as the estimated impact of the COVID-19 pandemic.

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

1 unchanged sentence

FHLB advances decreased by $427.6 million, or 37%, 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.

Shareholders’ equity amounted to $527.7 million at September 30, 2020, up by $24.2 million, or 5%, from the balance at December 31, 2019.

As of September 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”).

5 unchanged sentences

Securities are designated as either available for sale, held to maturity or trading at the time of purchase.

The Corporation has not maintained a portfolio of trading securities.

The Corporation does not maintain a portfolio of trading securities.

As of September 30, 2020 and December 31, 2019, the Corporation did not have securities designated as held to maturity.

Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements.

3 unchanged sentences

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

Management's Discussion and Analysis

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

The determination of whether markets are active or 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.

Management also reviews the prices provided by the independent pricing service for reasonableness based upon current trading levels for similar securities.

Management's Discussion and Analysis

also reviews the prices provided by the independent pricing service for reasonableness based upon current trading levels for similar securities.

If the prices appear unusual, they are re-examined and the value is either confirmed or revised.

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

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

As of September 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.

2 unchanged sentences

The carrying amounts of securities held are as follows:

(Dollars in thousands)

June 30, 2020

December 31, 2019

(Dollars in thousands) September 30, 2020 December 31, 2019

Amount % Amount %

Available for Sale Debt Securities:

1 unchanged sentence

government-sponsored enterprises

$146,540 16 % $157,648 18 %

Mortgage-backed securities issued by U.S.

1 unchanged sentence

government-sponsored enterprises

745,071 82 719,080 80

Individual name issuer trust preferred debt securities 12,363 1 12,579 1

1 unchanged sentence

Total available for sale debt securities $913,850 100 % $899,490 100 %

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 securities portfolio stood at $913.9 million as of September 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.

2 unchanged sentences

The securities portfolio increased by $14.4 million, or 2%, from the end of 2019, reflecting purchases of debt securities totaling $377.0 million, with a weighted average yield of 1.96%, 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, 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 .

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

As of September 30, 2020, the net unrealized gain position on available for sale debt securities amounted to $14.0 million, compared to $4.2 million as of December 31, 2019.

These net positions included gross unrealized losses of $3.3 million and $4.9 million, respectively, of as September 30, 2020 and December 31, 2019.

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

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.

Total loans amounted to $4.3 billion at September 30, 2020, up by $389.0 million, or 10%, from the end of 2019, largely due to commercial loan growth and first quarter 2020 purchases of residential real estate mortgage loans.

Growth in commercial loans was largely due to second quarter 2020 originations of PPP loans within the commercial and industrial portfolio.

Management's Discussion and Analysis

The following is a summary of loans:

(Dollars in thousands)

June 30, 2020

December 31, 2019

(Dollars in thousands) September 30, 2020 December 31, 2019

Amount % Amount %

Commercial real estate (1)

$1,665,745 39 % $1,547,572 40 %

Commercial & industrial (2)

822,269 19 585,289 15

Total commercial 2,488,014 58 2,132,861 55

1 unchanged sentence

Residential real estate (3)

1,506,726 35 1,449,090 37

Home equity 268,551 6 290,874 7

18,756 1 20,174 1

Total consumer 287,307 7 311,048 8

Total loans $4,282,047 100 % $3,892,999 100 %

(1) CRE consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans.

5 unchanged sentences

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 .

Through September 30, 2020, we have executed loan payment deferral modifications on 617 loans totaling $685.4 million.

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.

Seventeen of these deferments executed on loan balances of $7.8 million were past due before the COVID-19 pandemic and therefore, were classified as TDRs and were included in past due loans as of September 30, 2020.

As of September 30, 2020, we had active deferrals on 253 loans totaling $418.2 million, or 10% of total loans excluding PPP loans.

As of November 2, 2020, we have active deferrals on 146 loans totaling $252.9 million, or 6% of total loans excluding PPP loans.

Management continues to actively monitor the deferments and loan portfolios in certain industry segments that it considers “at risk” of significant impact.

Deferment extensions are prudently underwritten and have resulted in loan risk rating downgrades when warranted.

Management considers deferments when estimating the allowance for credit losses.

Loss exposure within these industries is mitigated by a number of factors such as collateral values, LTV ratios, and other key indicators, however, some degree of credit loss is expected and has been incorporated into the allowance for credit loss recognition under the CECL methodology.

Commercial Loans

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

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

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

1 unchanged sentence

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 $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 amounted to $430.6 million and $399.7 million, respectively, at September 30, 2020 and December 31, 2019.

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

2 unchanged sentences

Commercial real estate loans consist of commercial mortgages secured by real property where the primary source of repayment is derived from rental income associated with the property or the proceeds of the sale, refinancing or permanent financing of the property.

Commercial real estate loans also include construction loans made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings.

Commercial real estate loans also include construction loans made to businesses for land development or the on-

Management's Discussion and Analysis

site construction of industrial, commercial, or residential buildings.

Commercial and industrial loans primarily provide working capital, equipment financing and financing for other business-related purposes.

2 unchanged sentences

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 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)

June 30, 2020

December 31, 2019

Outstanding Balance

Commercial Real Estate Loans (“CRE”)

CRE loans totaled $1.7 billion at September 30, 2020, up by $118.2 million, or 8%, from the balance at December 31, 2019.

Included in CRE loans were construction and development loans of $101.4 million and $211.5 million, respectively, as of September 30, 2020 and December 31, 2019.

For the nine months ended September 30, 2020, CRE loan originations and advances totaled approximately $211 million, which were partially offset by payoffs and paydowns.

The following table presents a geographic summary of CRE loans by property location:

(Dollars in thousands) September 30, 2020 December 31, 2019

Outstanding Balance % of Total Outstanding Balance % of Total

Connecticut $653,853 39 % $616,484 40 %

Massachusetts 501,243 30 458,029 30

Rhode Island 432,252 26 394,929 25

Subtotal 1,587,348 95 1,469,442 95

All other states 78,397 5 78,130 5

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

Total $1,665,745 100 % $1,547,572 100 %

The following table presents a summary of CRE loans by property type segmentation:

(Dollars in thousands) September 30, 2020 December 31, 2019

Count Outstanding Balance % of Total Count Outstanding Balance % of Total

CRE Portfolio Segmentation:

Multi-family dwelling 137 $542,971 33 % 123 $430,502 28 %

Retail 134 336,071 20 110 314,661 20

Office 75 292,154 18 78 294,910 19

Hospitality 39 148,164 9 32 128,867 8

Healthcare 16 120,429 7 16 110,409 7

Industrial and warehouse 26 96,819 6 25 82,432 5

Commercial mixed use 21 42,908 3 48 73,895 5

Total commercial real estate loans

Other 42 86,229 4 70 111,896 8

Total CRE loans

490 $1,665,745 100 % 502 $1,547,572 100 %

Average CRE loan size

$3,399 $3,083

Largest individual CRE loan outstanding

$32,200 $25,962

Management's Discussion and Analysis

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

The following table presents a summary of CRE loan deferments by industry segmentation:

(Dollars in thousands) November 2, 2020 September 30, 2020 June 30, 2020

Count Balance % of Outstanding Balance (1) Count Balance % of Outstanding Balance (1) Count Balance % of Outstanding Balance (2)

CRE Deferments by Segment:

Hospitality 18 $78,602 53 % 21 $89,049 60 % 31 $117,665 81 %

Retail 12 68,763 20 32 122,596 36 43 124,071 38

Healthcare 2 22,161 18 4 46,084 38 5 64,326 54

Office 3 9,248 3 4 17,679 6 15 74,099 26

Commercial mixed use 1 637 1 — — — 6 3,089 7

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 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.

Multi-family dwelling 3 633 — 9 10,732 2 20 34,318 7

Other 7 27,785 32 11 28,635 33 12 29,838 35

Total CRE deferments

46 $207,829 12 % 81 $314,775 19 % 132 $447,406 27 %

(1) Percent of respective outstanding portfolio segment balance as of September 30, 2020.

(2) Percent of respective outstanding portfolio segment balance as of June 30, 2020.

As of November 2, 2020, we have active deferrals on 46 CRE loans totaling $207.8 million, which represented 12% of the total CRE portfolio at September 30, 2020.

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

• The retail segment consisted of 134 loans with balances totaling $336.1 million at September 30, 2020, representing 20% of the total CRE portfolio.

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

As of June 30, 2020 , we have executed 43 short-term deferments on loan balances totaling $124.1 million , which represented 38% of this segment’s balance at June 30, 2020 .

Hospitality consisted of 40 loans with balances totaling $145.0 million at June 30, 2020 , representing 9% of the total commercial real estate portfolio.

We generally underwrite this portfolio at an LTV of 65% or less.

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

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

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

At November 2, 2020, we have active deferrals on 12 retail loans totaling $68.8 million, which represented 20% of this segment’s balance at September 30, 2020.

• The hospitality segment consisted of 39 loans with balances totaling $148.2 million at September 30, 2020, representing 9% of the total CRE portfolio.

We generally underwrite this segment at an LTV of 65% or less.

Our hospitality properties are largely limited service properties with no restaurants and limited meeting space.

This segment also includes leisure travel properties that are located on the New England coastline.

At November 2, 2020, we have active deferrals on 18 hospitality loans totaling $78.6 million, which represented 53% of this segment’s balance at September 30, 2020.

• The healthcare segment consisted of 16 loans with balances totaling $120.4 million at September 30, 2020, representing 7% of the total CRE 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.

At November 2, 2020, we have active deferrals on 2 healthcare loans totaling $22.2 million, which represented 18% of this segment’s balance at September 30, 2020.

Commercial and Industrial Loans (“C&I”)

C&I loans amounted to $822.3 million at September 30, 2020, up by $237.0 million, or 40%, from the balance at December 31, 2019.

For the nine months ended September 30, 2020, C&I loan originations amounted to $284 million and were partially offset by paydowns, payoffs 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.

As of September 30, 2020, there were 1,770 PPP loans with a carrying value of $216.8 million included in the C&I portfolio.

The average PPP loan size was $122 thousand.

Net unamortized loan origination fees on PPP loans amounted to $5.1 million at September 30, 2020.

Shared national credit balances outstanding included in the C&I loan portfolio totaled $49.4 million at September 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 September 30, 2020.

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

Outstanding Balance

(Dollars in thousands) September 30, 2020 December 31, 2019

Count Outstanding Balance % of Total Count Outstanding Balance % of Total

C&I Portfolio Segmentation:

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Manufacturing 150 90,981 11 65 53,561 9

Retail 201 67,851 8 75 43,386 7

Educational services 60 67,357 8 22 56,556 10

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Professional, scientific and technical

268 44,703 5 66 37,599 6

Accommodation and food services 276 43,525 5 64 16,562 3

Finance and insurance

Entertainment and recreation

93 34,537 4 35 30,807 5

36 30,071 4 11 22,162 4

Transportation and warehousing

44 27,459 3 23 20,960 4

Finance and insurance

107 26,213 3 57 28,501 5

Public administration

Total commercial & industrial loans

26 23,845 3 23 25,107 4

799 114,150 15 225 65,198 11

Total C&I loans

2,602 $822,269 100 % 909 $585,289 100 %

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:

$18,551 $19,001

PPP loans were included in the C&I portfolio.

The following table presents a summary of PPP loans by industry segmentation:

September 30, 2020

Count Outstanding Balance % of Total

PPP Loans by Segment:

Healthcare and social assistance 183 $49,331 23 %

Accommodation and food services 217 25,410 12

Manufacturing 94 25,395 12

Professional, scientific and technical

223 20,848 10

Retail 138 12,731 6

Educational services 36 11,490 5

Owner occupied and other real estate 117 9,268 4

Professional, scientific and technical

Accommodation and food services

Finance and insurance

Entertainment and recreation

Finance and insurance

Transportation and warehousing

Public administration

Total commercial & industrial loans

592 49,149 22

Total PPP loans (included in the C&I loan portfolio)

1,770 $216,784 100 %

Management's Discussion and Analysis

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.

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

(Dollars in thousands) November 2, 2020 September 30, 2020 June 30, 2020

Count Balance % of Outstanding Balance, excl PPP loans (1)

Count Balance % of Outstanding Balance, excl PPP loans (2)

C&I Deferments by Segment:

Accommodation and food services

3 $3,201 18 % 4 $3,480 19 % 18 $12,252 61 %

Healthcare and social assistance 2 1,613 1 4 14,947 11 6 15,384 11

Owner occupied and other real estate 4 1,382 2 5 2,243 4 21 5,128 8

Transportation and warehousing

4 1,120 4 5 1,408 6 5 1,414 5

Manufacturing 2 940 1 1 1,538 2 4 2,505 4

Entertainment and recreation

2 418 1 5 2,970 10 11 13,045 42

Educational services — — — 4 7,400 13 4 7,329 12

Retail — — — 1 1,068 2 5 2,693 5

Professional, scientific and technical — — — — — — 1 41 —

Public administration

— — — — — — 1 98 —

2 170 — 7 10,221 16 24 14,533 23

Total C&I deferments

19 $8,844 1 % 36 $45,275 8 % 100 $74,422 12 %

(1) Percent of respective outstanding portfolio segment balance, excluding PPP loans, as of September 30, 2020.

(2) Percent of respective outstanding portfolio segment balance, excluding PPP loans, as of June 30, 2020.

As of November 2, 2020, we have active deferrals on 19 C&I loans totaling $8.8 million, which represented 1% of the total C&I portfolio (excluding PPP loans) at September 30, 2020.

Healthcare and social assistance totaled $185.6 million as of September 30, 2020 and is our largest single C&I industry segment, representing 23% of the total C&I portfolio.

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

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 consisted of 206 loans with balances totaling $67.5 million as of June 30, 2020 , representing 8% of the total C&I portfolio.

As of June 30, 2020 , we have executed 5 short-term deferments on loan balances totaling $2.7 million , which represented 4% of this industry segment’s balance at June 30, 2020 .

The deferments were executed primarily for small retail stores and a gas station.

Educational services consisted of 59 loans with balances totaling $73.2 million as of June 30, 2020 , representing 9% of the total C&I portfolio.

As of June 30, 2020 , we have executed 4 short-term deferments on loan balances totaling $7.3 million , which represented 10% of this industry segment’s balance at June 30, 2020 .

The deferments were executed for a trade school for which remote learning was not an option.

Accommodation and food services consisted of 278 loans with balances totaling $45.3 million as of June 30, 2020 , representing 5% of the total C&I portfolio.

As of June 30, 2020 , we have executed 18 short-term deferments on loan balances totaling $12.3 million , which represented 27% of this industry segment’s balance at June 30, 2020 .

The deferments have been executed for a variety of restaurant and food establishments.

Entertainment and recreation consisted of 94 loans with balances totaling $35.6 million as of June 30, 2020 , representing 4% of the total C&I portfolio.

At November 2, 2020, we have active deferrals on 2 healthcare and social assistance loans of $1.6 million, which represented 1% of this industry segment’s balances (excluding PPP loans) as of September 30, 2020.

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

While various 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:

• The accommodation and food services industry segment consisted of 276 loans with balances totaling $43.5 million as of September 30, 2020, representing 5% of the total C&I portfolio.

At November 2, 2020, we have active deferrals on 3 accommodation and food services loans totaling $3.2 million, which represented 18% of this industry segment’s balance (excluding PPP loans) at September 30, 2020.

The deferrals were executed for restaurant and food establishments.

• The entertainment and recreation industry segment consisted of 93 loans with balances totaling $34.5 million as of September 30, 2020, representing 4% of the total C&I portfolio.

This industry segment consists largely of golf courses and marinas.

As of June 30, 2020 , we have executed 11 short-term deferments on loan balances totaling $13.0 million , which represented 37% of this industry segment’s balance at June 30, 2020 .

The deferments have been executed primarily for golf courses.

At November 2, 2020, we have active deferrals on 2 entertainment and recreation industry loans totaling $418 thousand, which represented 1% of this industry segment’s balance (excluding PPP loans) at September 30, 2020.

The deferments were executed for a gym.

Residential Real Estate Loans

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

The residential real estate loan portfolio represented 35% of total loans at September 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.

We also originate residential real estate loans for various investors in a broker capacity, including conventional mortgages and reverse mortgages.

Management's Discussion and Analysis

The table below presents residential real estate loan origination activity:

(Dollars in thousands)

Periods ended June 30,

(Dollars in thousands) Three Months Nine Months

Periods ended September 30, 2020 2019 2020 2019

Amount % of Total Amount % of Total Amount % of Total Amount % of Total

Originations for retention in portfolio (1) $132,726 26 % $105,075 36 % $368,118 30 % $226,508 34 %

Originations for sale to the secondary market (2) 377,137 74 189,979 64 859,680 70 437,928 66

Total $509,863 100 % $295,054 100 % $1,227,798 100 % $664,436 100 %

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

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

Management's Discussion and Analysis

The table below presents residential real estate loan sales activity:

(Dollars in thousands)

Periods ended June 30,

Three Months Nine Months

Periods ended September 30, 2020 2019 2020 2019

Amount % of Total Amount % of Total Amount % of Total Amount % of Total

Loans sold with servicing rights retained $317,920 90 % $25,766 14 % $609,363 74 % $53,548 13 %

Loans sold with servicing rights released (1)

36,250 10 159,210 86 212,222 26 360,921 87

Total $354,170 100 % $184,976 100 % $821,585 100 % $414,469 100 %

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

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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 $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.

The net balance of capitalized servicing rights amounted to $6.6 million and $3.5 million, respectively, as of September 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 $1.1 billion and $587.0 million, respectively, as of September 30, 2020 and December 31, 2019.

Residential real estate loans held in portfolio amounted to $1.5 billion at September 30, 2020, up by $57.6 million, or 4%, from the balance at December 31, 2019.

During the nine months ended September 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.

The following is a geographic summary of residential real estate mortgages by property location:

(Dollars in thousands)

June 30, 2020

December 31, 2019

(Dollars in thousands) September 30, 2020 December 31, 2019

Amount % of Total Amount % of Total

Massachusetts

$1,017,659 68 % $932,726 64 %

Rhode Island 342,344 23 356,392 25

125,568 8 140,574 10

Subtotal 1,485,571 99 1,429,692 99

All other states 21,155 1 19,398 1

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

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% .

$1,506,726 100 % $1,449,090 100 %

(1) Includes residential real estate loans purchased from other financial institutions totaling $149.4 million and $151.8 million, respectively, as of September 30, 2020 and December 31, 2019.

As of November 2, 2020, we have active deferrals on 69 residential real estate loans totaling $35.1 million, which represented 2% of the total residential real estate portfolio balance as of September 30, 2020.

The average size of residential real estate

Management's Discussion and Analysis

loans with active deferrals as of November 2, 2020 was approximately $509 thousand and these loans have an estimated LTV ratio of 57%.

Consumer Loans

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

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 consumer loan portfolio totaled $287.3 million at September 30, 2020, down by $23.7 million, or 8%, from December 31, 2019.

Home equity lines of credit and home equity loans represented 93% of the total consumer portfolio at September 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 $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 .

Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $10.6 million and $12.8 million, respectively, at September 30, 2020 and December 31, 2019.

As of November 2, 2020, we have active deferrals on 12 consumer loans totaling $1.1 million, which represented 0.4% of the total consumer portfolio balance as of September 30, 2020.

Asset Quality

2 unchanged sentences

The following table presents nonperforming assets and additional asset quality data:

(Dollars in thousands)

(Dollars in thousands) Sep 30,

Commercial real estate $431 $603

3 unchanged sentences

Residential real estate 12,792 14,297

Home equity 1,429 1,763

Total consumer

8 unchanged sentences

This included a $2.7 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.

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

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

Nonaccrual Loans

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.

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

Management's Discussion and Analysis

The following table presents the activity in nonaccrual loans:

(Dollars in thousands)

For the periods ended June 30,

(Dollars in thousands) Three Months Nine Months

For the periods ended September 30, 2020 2019 2020 2019

Balance at beginning of period $16,017 $12,867 $17,408 $11,707

5 unchanged sentences

Balance at end of period $14,740 $14,902 $14,740 $14,902

Management's Discussion and Analysis

The following table presents additional detail on nonaccrual loans:

(Dollars in thousands)

June 30, 2020

December 31, 2019

Days Past Due

(Dollars in thousands) September 30, 2020 December 31, 2019

Days Past Due Days Past Due

Over 90 Under 90 Total % (1)

Commercial real estate $431 $— $431 0.03 % $603 $— $603 0.04 %

1 unchanged sentence

Total commercial

431 — 431 0.02 603 657 1,260 0.06

Residential Real Estate:

Residential real estate

4,502 8,290 12,792 0.85 4,700 9,597 14,297 0.99

Home equity 618 811 1,429 0.53 996 767 1,763 0.61

Other 88 — 88 0.47 88 — 88 0.44

Total consumer 706 811 1,517 0.53 1,084 767 1,851 0.60

1 unchanged sentence

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

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

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

As of September 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 $12.8 million at September 30, 2020, down by $1.5 million from the end of 2019.

As of September 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 September 30, 2020 were five loans purchased for portfolio and serviced by others amounting to $1.6 million.

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

4 unchanged sentences

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 collectibility of the loan.

Management's Discussion and Analysis

TDRs 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.

2 unchanged sentences

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

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

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

2 unchanged sentences

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

(Dollars in thousands)

(Dollars in thousands) Sep 30,

Accruing TDRs

9 unchanged sentences

Residential real estate 2,823 492

Total consumer

Nonaccrual TDRs 2,894 492

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 .

Total TDRs $8,603 $868

TDRs amounted to $8.6 million at September 30, 2020, up by $7.7 million from the end of 2019, due to loan payment deferrals executed on 17 loans that were not eligible for TDR accounting relief provided under the CARES Act.

Management's Discussion and Analysis

Past Due Loans

The following table presents past due loans by category:

(Dollars in thousands)

June 30, 2020

December 31, 2019

(Dollars in thousands) September 30, 2020 December 31, 2019

Commercial real estate $431 0.03 % $1,433 0.09 %

3 unchanged sentences

Residential real estate 8,081 0.54 11,429 0.79

Home equity 1,753 0.65 2,696 0.93

Other 108 0.58 130 0.64

Total consumer 1,861 0.65 2,826 0.91

1 unchanged sentence

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

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.

As of September 30, 2020, the composition of past due loans (loans past due 30 days or more) was 96% residential and consumer and 4% commercial, compared to 91% and 9%, respectively, at December 31, 2019.

Total past due loans decreased by $5.3 million from the end of 2019.

Total past due loans included $8.8 million of nonaccrual loans as of September 30, 2020, compared to $11.5 million as of December 31, 2019.

All loans 90 days or more past due at September 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 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.

Potential problem loans consist of classified accruing commercial loans that were less than 90 days past due at September 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 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.

Management has identified approximately $6.4 million in potential problem loans at September 30, 2020, compared to $10.3 million at December 31, 2019.

As of September 30, 2020, the balance of potential problem loans consisted of two commercial relationships, which were both 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.

In addition, see discussion regarding certain 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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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.

Management's Discussion and Analysis

Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors.

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The following table presents additional detail on the Corporation’s loan portfolio and associated allowance:

(Dollars in thousands)

June 30, 2020

December 31, 2019

Related Allowance

Allowance / Loans

Related Allowance

Allowance / Loans

(Dollars in thousands) September 30, 2020 December 31, 2019

Loans Related Allowance Allowance / Loans Loans Related Allowance Allowance / Loans

Individually analyzed loans $15,654 $523 3.34 % $17,783 $968 5.44 %

Pooled (collectively evaluated) loans 4,266,393 42,122 0.99 3,875,216 26,046 0.67

Total $4,282,047 $42,645 1.00 % $3,892,999 $27,014 0.69 %

In 2020, for loans that are individually analyzed, the ACL is measured using a DCF 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.

In 2020, Washington Trust utilizes a DCF methodology to estimate credit losses for each pooled portfolio segment.

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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.

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

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

Quantitative loss factors for pooled loans are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates.

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, 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.

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The total ACL on loans is available to absorb losses from any segment of the loan portfolio.

(Dollars in thousands)

June 30, 2020

December 31, 2019

Allocated ACL

Loans to Total Portfolio (1)

Allocated ACL

Loans to Total Portfolio (1)

(Dollars in thousands) September 30, 2020 December 31, 2019

Allocated ACL ACL to Loans Loans to Total Portfolio (1) Allocated ACL ACL to Loans Loans to Total Portfolio (1)

Commercial real estate $21,757 1.31 % 39 % $14,741 0.95 % 40 %

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Total commercial

32,942 1.32 % 58 18,662 0.87 % 55

Residential Real Estate:

Residential real estate 7,919 0.53 % 35 6,615 0.46 % 37

Home equity 1,347 0.50 % 6 1,390 0.48 % 7

Other 437 2.33 % 1 347 1.72 % 1

Total consumer 1,784 0.62 % 7 1,737 0.56 % 8

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

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.

Management's Discussion and Analysis

The ACL on loans amounted to $42.6 million at September 30, 2020, up by $15.6 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.

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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.

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We consider these reciprocal deposit balances to be in-market deposits as distinguished from traditional out-of-market wholesale brokered deposits.

Management's Discussion and Analysis

The following table presents a summary of deposits:

(Dollars in thousands)

(Dollars in thousands) Change

September 30,

2020 December 31, 2019 $ %

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Interest-bearing demand deposits 170,198 159,938 10,260 6

NOW accounts 644,909 520,295 124,614 24

Money market accounts 877,536 765,899 111,637 15

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Total deposits $4,285,693 $3,498,882 $786,811 22 %

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

Total deposits amounted to $4.3 billion at September 30, 2020, up by $786.8 million, or 22%, from December 31, 2019.

This included an increase of $299.3 million, or 105%, in out-of-market brokered time deposits.

Excluding out-of-market brokered time deposits, in-market deposits were up by $487.5 million, or 15%, 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

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

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

FHLB advances totaled $713.9 million at September 30, 2020, down by $427.6 million, or 37%, 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%.

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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.

As of September 30, 2020, PPPLF borrowings amounted to $105.7 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.

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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 six months ended June 30, 2020 .

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

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

Management's Discussion and Analysis

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

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(Dollars in thousands)

September 30,

2020 December 31,

Additional Funding Capacity:

Federal Home Loan Bank of Boston (1)

$828,386 $534,990

Federal Reserve Bank of Boston (2)

20,718 24,686

Unencumbered investment securities 593,439 461,850

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.

Total $1,442,543 $1,021,526

(1) As of September 30, 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 $164.7 million and $271.4 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity.

(2) As of September 30, 2020 and December 31, 2019, loans with a carrying value of $13.5 million and $16.6 million, respectively, and securities available for sale with a carrying value of $14.7 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 six months ended June 30, 2020 .

Liquidity remained within target ranges established by the ALCO during the nine months ended September 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 provided by operating activities amounted to $14.9 million for the six months ended June 30, 2020 .

Net cash provided by operating activities amounted to $18.2 million for the nine months ended September 30, 2020.

Net income of $51.3 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 $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.

Net cash used in investing activities totaled $378.2 million for the nine months ended September 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 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.

For the nine months ended September 30, 2020, net cash provided by financing activities amounted to $433.6 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 $520.2 million at June 30, 2020 , up by $16.7 million from December 31, 2019 .

Total shareholders’ equity amounted to $527.7 million at September 30, 2020, up by $24.2 million from December 31, 2019.

This included net income of $51.3 million and an increase of $7.8 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 $26.7 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 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 .

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

On a year-to-date basis, dividend declarations totaled $1.53 per share in 2020, compared to $1.49 per share in 2019.

The ratio of total equity to total assets amounted to 9.02% at September 30, 2020 compared to a ratio of 9.51% at December 31, 2019.

Book value per share at September 30, 2020 and December 31, 2019 amounted to $30.57 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 13.09% at September 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.

Management's Discussion and Analysis

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

Management's Discussion and Analysis

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 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 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.

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

The following table sets forth the estimated change in net interest income from an unchanged rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on- and off-balance sheet financial instruments as of June 30, 2020 and December 31, 2019 .

Management's Discussion and Analysis

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.

June 30, 2020

December 31, 2019

Months 1 - 12

Months 13 - 24

Months 1 - 12

Months 13 - 24

September 30, 2020 December 31, 2019

Months 1 - 12 Months 13 - 24 Months 1 - 12 Months 13 - 24

100 basis point rate decrease (1.69)% (2.78)% (3.71)% (5.57)%

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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

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

The relative 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.

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

Management's Discussion and Analysis

Mortgage-backed securities and residential real estate loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments.

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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 June 30, 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 September 30, 2020 and December 31, 2019 resulting from immediate parallel rate shifts:

(Dollars in thousands)

Security Type

Down 100 Basis Points

Up 200 Basis Points

Security Type Down 100 Basis Points Up 200 Basis Points

government-sponsored enterprise securities (callable) $1,259 ($9,359)

2 unchanged sentences

government-sponsored enterprises

9,418 (54,363)

Trust preferred debt and other corporate debt securities (175) 242

Total change in market value as of June 30, 2020

Total change in market value as of September 30, 2020 $10,502 ($63,480)

Total change in market value as of December 31, 2019 $17,741 ($81,705)

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