WASHINGTON TRUST BANCORP INC 10-Q

Item 1. Financial Statements Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) (Dollars in thousands, except par value) September 30, 2020 December 31, 2019 Assets: Cash and due from banks $ 204,113 $ 132,193 Short-term investments 7,902 6,262 Mortgage loans held for sale, at fair value 68,095 27,833 Available for sale debt securities, at fair value (amortized cost $ 899,839 ; net of allowance for credit losses on securities of $ 0 at September 30, 2020) 913,850 899,490 Federal Home Loan Bank stock, at cost 37,469 50,853 Loans: Total loans 4,282,047 3,892,999 Less: allowance for credit losses on loans 42,645 27,014 Net loans 4,239,402 3,865,985 Premises and equipment, net 27,711 28,700 Operating lease right-of-use assets 29,861 26,792 Investment in bank-owned life insurance 83,623 82,490 Goodwill 63,909 63,909 Identifiable intangible assets, net 6,530 7,218 Other assets 167,327 100,934 Total assets $ 5,849,792 $ 5,292,659 Liabilities: Deposits: Noninterest-bearing deposits $ 840,444 $ 609,924 Interest-bearing deposits 3,445,249 2,888,958 Total deposits 4,285,693 3,498,882 Federal Home Loan Bank advances 713,868 1,141,464 Payment Protection Program Lending Facility 105,746 — Junior subordinated debentures 22,681 22,681 Operating lease liabilities 32,012 28,861 Other liabilities 162,099 97,279 Total liabilities 5,322,099 4,789,167 Commitments and contingencies (Note 18) Shareholders’ Equity: Common stock of $ .0625 par value; authorized 60,000,000 shares; 17,363,457 shares issued and 17,260,219 shares outstanding at September 30, 2020 and 17,363,455 shares issued and outstanding at December 31, 2019 1,085 1,085 Paid-in capital 124,768 123,281 Retained earnings 408,773 390,363 Accumulated other comprehensive income (loss) ( 3,403 ) ( 11,237 ) Treasury stock, at cost; 103,238 shares at September 30, 2020 ( 3,530 ) — Total shareholders’ equity 527,693 503,492 Total liabilities and shareholders’ equity $ 5,849,792 $ 5,292,659 The accompanying notes are an integral part of these unaudited consolidated financial statements. -3- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Income (unaudited) (Dollars and shares in thousands, except per share amounts) Three Months Nine Months Periods ended September 30, 2020 2019 2020 2019 Interest income: Interest and fees on loans $ 34,925 $ 41,558 $ 110,938 $ 125,440 Interest on mortgage loans held for sale 468 410 1,193 878 Taxable interest on debt securities 4,870 6,318 16,181 20,550 Nontaxable interest on debt securities — 1 — 18 Dividends on Federal Home Loan Bank stock 532 747 1,826 2,162 Other interest income 39 493 424 1,232 Total interest and dividend income 40,834 49,527 130,562 150,280 Interest expense: Deposits 5,532 9,792 21,180 27,957 Federal Home Loan Bank advances 3,354 6,512 13,501 20,153 Junior subordinated debentures 135 245 519 750 Other interest expense 159 — 161 — Total interest expense 9,180 16,549 35,361 48,860 Net interest income 31,654 32,978 95,201 101,420 Provision for credit losses 1,325 400 10,561 1,575 Net interest income after provision for credit losses 30,329 32,578 84,640 99,845 Noninterest income: Wealth management revenues 8,954 9,153 26,248 27,954 Mortgage banking revenues 12,353 4,840 33,300 11,126 Card interchange fees 1,161 1,099 3,139 3,114 Service charges on deposit accounts 598 939 1,975 2,743 Loan related derivative income 1,264 1,407 3,818 2,877 Income from bank-owned life insurance 567 569 1,922 1,784 Net realized losses on securities — — — ( 80 ) Other income 571 335 1,313 944 Total noninterest income 25,468 18,342 71,715 50,462 Noninterest expense: Salaries and employee benefits 21,892 18,332 60,824 54,387 Outsourced services 3,160 2,722 8,944 7,846 Net occupancy 2,012 1,933 5,940 5,835 Equipment 934 1,046 2,806 3,085 Legal, audit and professional fees 1,252 645 2,733 1,843 FDIC deposit insurance costs 392 ( 460 ) 1,488 509 Advertising and promotion 384 368 829 1,132 Amortization of intangibles 228 236 688 714 Other expenses 2,090 2,048 7,023 6,634 Total noninterest expense 32,344 26,870 91,275 81,985 Income before income taxes 23,453 24,050 65,080 68,322 Income tax expense 5,131 5,236 13,817 14,740 Net income $ 18,322 $ 18,814 $ 51,263 $ 53,582 Net income available to common shareholders $ 18,285 $ 18,778 $ 51,154 $ 53,477 Weighted average common shares outstanding - basic 17,260 17,338 17,287 17,324 Weighted average common shares outstanding - diluted 17,317 17,414 17,369 17,406 Per share information: Basic earnings per common share $ 1.06 $ 1.08 $ 2.96 $ 3.09 Diluted earnings per common share $ 1.06 $ 1.08 $ 2.95 $ 3.07 The accompanying notes are an integral part of these unaudited consolidated financial statements. -4- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income (unaudited) (Dollars in thousands) Three Months Nine Months Periods ended September 30, 2020 2019 2020 2019 Net income $ 18,322 $ 18,814 $ 51,263 $ 53,582 Other comprehensive income (loss), net of tax: Net change in fair value of available for sale debt securities ( 3,505 ) 2,886 7,493 19,940 Net change in fair value of cash flow hedges 154 ( 171 ) ( 888 ) ( 1,235 ) Net change in defined benefit plan obligations 410 227 1,229 680 Total other comprehensive (loss) income, net of tax ( 2,941 ) 2,942 7,834 19,385 Total comprehensive income $ 15,381 $ 21,756 $ 59,097 $ 72,967 The accompanying notes are an integral part of these unaudited consolidated financial statements. -5- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (unaudited) (Dollars and shares in thousands) For the three months ended September 30, 2020 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock Total Balance at June 30, 2020 17,260 $ 1,085 $ 123,684 $ 399,386 ($ 462 ) ($ 3,530 ) $ 520,163 Net income — — — 18,322 — — 18,322 Total other comprehensive loss — — — — ( 2,941 ) — ( 2,941 ) Cash dividends declared ($ 0.51 per share) — — — ( 8,935 ) — — ( 8,935 ) Share-based compensation — — 1,083 — — — 1,083 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered — — 1 — — — 1 Balance at September 30, 2020 17,260 $ 1,085 $ 124,768 $ 408,773 ($ 3,403 ) ($ 3,530 ) $ 527,693 For the nine months ended September 30, 2020 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Treasury Stock Total Balance at December 31, 2019 17,363 $ 1,085 $ 123,281 $ 390,363 ($ 11,237 ) $ — $ 503,492 Cumulative effect of change in accounting principle - Topic 326 — — — ( 6,108 ) — — ( 6,108 ) Net income — — — 51,263 — — 51,263 Total other comprehensive income — — — — 7,834 — 7,834 Cash dividends declared ($ 1.53 per share) — — — ( 26,745 ) — — ( 26,745 ) Share-based compensation — — 2,696 — — — 2,696 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 22 — ( 1,209 ) — — 792 ( 417 ) Treasury stock purchased under 2019 Stock Repurchase Program ( 125 ) — — — — ( 4,322 ) ( 4,322 ) Balance at September 30, 2020 17,260 $ 1,085 $ 124,768 $ 408,773 ($ 3,403 ) ($ 3,530 ) $ 527,693 The accompanying notes are an integral part of these unaudited consolidated financial statements. -6- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity (unaudited) (Dollars and shares in thousands) For the three months ended September 30, 2019 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Treasury Stock Total Balance at June 30, 2019 17,336 $ 1,083 $ 121,115 $ 373,873 ($ 11,866 ) $ — $ 484,205 Net income — — — 18,814 — — 18,814 Total other comprehensive income — — — — 2,942 — 2,942 Cash dividends declared ($ 0.51 per share) — — — ( 8,922 ) — — ( 8,922 ) Share-based compensation — — 792 — — — 792 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 2 1 ( 7 ) — — — ( 6 ) Balance at September 30, 2019 17,338 $ 1,084 $ 121,900 $ 383,765 ($ 8,924 ) $ — $ 497,825 For the nine months ended September 30, 2019 Common Shares Outstanding Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income Treasury Stock Total Balance at December 31, 2018 17,302 $ 1,081 $ 119,888 $ 355,524 ($ 28,309 ) $ — $ 448,184 Cumulative effect of change in accounting principle - Topic 842 — — — 722 — — 722 Net income — — — 53,582 — — 53,582 Total other comprehensive income — — — — 19,385 — 19,385 Cash dividends declared ($ 1.49 per share) — — — ( 26,063 ) — — ( 26,063 ) Share-based compensation — — 2,295 — — — 2,295 Exercise of stock options, issuance of other compensation-related equity awards, net of awards surrendered 36 3 ( 283 ) — — — ( 280 ) Balance at September 30, 2019 17,338 $ 1,084 $ 121,900 $ 383,765 ($ 8,924 ) $ — $ 497,825 The accompanying notes are an integral part of these unaudited consolidated financial statements. -7- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statement of Cash Flows (unaudited) (Dollars in thousands) Nine months ended September 30, 2020 2019 Cash flows from operating activities: Net income $ 51,263 $ 53,582 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 10,561 1,575 Depreciation of premises and equipment 2,318 2,478 Net amortization of premiums and discounts on debt securities and loans 4,101 3,113 Amortization of intangibles 688 714 Share-based compensation 2,696 2,295 Tax (expense) benefit from stock option exercises and other equity awards ( 70 ) 202 Income from bank-owned life insurance ( 1,922 ) ( 1,784 ) Net gains on loan sales, including fair value adjustments ( 33,799 ) ( 10,749 ) Net realized losses on securities — 80 Proceeds from sales of loans, net 586,677 365,057 Loans originated for sale ( 599,789 ) ( 380,635 ) (Increase) decrease in operating lease right-of-use assets ( 3,069 ) 1,422 Increase (decrease) in operating lease liabilities 3,151 ( 1,312 ) Increase in other assets ( 67,262 ) ( 41,239 ) Increase in other liabilities 62,634 42,575 Net cash provided by operating activities 18,178 37,374 Cash flows from investing activities: Purchases of: Available for sale debt securities: Mortgage-backed ( 247,957 ) ( 72,262 ) Available for sale debt securities: Other ( 129,000 ) ( 10,507 ) Proceeds from sale of: Other investment securities available for sale — 9,920 Maturities, calls and principal payments of: Available for sale debt securities: Mortgage-backed 228,268 96,521 Available for sale debt securities: Other 140,500 51,135 Net redemption (purchases) of Federal Home Loan Bank stock 13,384 1,038 Net increase in loans ( 332,850 ) ( 92,135 ) Purchases of loans ( 51,081 ) ( 7,324 ) Proceeds from the sale of property acquired through foreclosure or repossession 1,107 — Purchases of premises and equipment ( 1,331 ) ( 2,768 ) Proceeds from surrender of bank-owned life insurance 787 326 Equity investment in real estate limited partnership — ( 1,256 ) Net cash used in investing activities ( 378,173 ) ( 27,312 ) Cash flows from financing activities: Net increase in deposits 786,811 62,105 Proceeds from Federal Home Loan Bank advances 1,592,500 1,334,000 Repayment of Federal Home Loan Bank advances ( 2,020,096 ) ( 1,327,936 ) Proceeds from Payment Protection Program Lending Facility 200,628 — Repayment of Payment Protection Program Lending Facility ( 94,882 ) — Treasury stock purchased ( 4,322 ) — Net proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered ( 417 ) ( 280 ) Cash dividends paid ( 26,667 ) ( 25,322 ) Net cash provided by financing activities 433,555 42,567 Net increase in cash and cash equivalents 73,560 52,629 Cash and cash equivalents at beginning of period 138,455 93,475 Cash and cash equivalents at end of period $ 212,015 $ 146,104 The accompanying notes are an integral part of these unaudited consolidated financial statements. -8- Washington Trust Bancorp, Inc. and Subsidiaries Consolidated Statement of Cash Flows – continued (unaudited) (Dollars in thousands) Nine months ended September 30, 2020 2019 Noncash Activities: Loans charged off $ 1,072 $ 1,888 Loans transferred to property acquired through foreclosure or repossession 28 2,000 In conjunction with the adoption of ASU 2016-02 as detailed in Note 2 to the Unaudited Consolidated Financial Statements, the following assets and liabilities were recognized: Operating lease right-of-use assets — 28,923 Operating lease liabilities — 30,853 In conjunction with the adoption of ASU 2017-12 as detailed in Note 2 to the Unaudited Consolidated Financial Statements, the following qualifying debt securities classified as held to maturity were transferred to available for sale: Fair value of debt securities transferred from held to maturity to available for sale — 10,316 Supplemental Disclosures: Interest payments $ 36,868 $ 47,168 Income tax payments 15,039 14,531 The accompanying notes are an integral part of these unaudited consolidated financial statements. -9- Condensed Notes to Unaudited Consolidated Financial Statements Note 1 - Basis of Presentation Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company that has elected to be a financial holding company. The Bancorp’s subsidiaries include The Washington Trust Company, of Westerly (the “Bank”), a Rhode Island chartered commercial bank founded in 1800, and Weston Securities Corporation (“WSC”). Through its subsidiaries, the Bancorp offers a complete product line of financial services, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut. The Unaudited Consolidated Financial Statements include the accounts of the Bancorp and its subsidiaries (collectively the “Corporation” or “Washington Trust”). All intercompany balances and transactions have been eliminated. The Bancorp also owns the common stock of two capital trusts, which have issued trust preferred securities. These capital trusts are variable interest entities in which the Bancorp is not the primary beneficiary and, therefore, are not consolidated. The capital trust’s only assets are junior subordinated debentures issued by the Bancorp, which were acquired by the capital trusts using the proceeds from the issuance of the trust preferred securities and common stock. The Bancorp’s equity interest in the capital trusts, classified in other assets, and the junior subordinated debentures are included in the Unaudited Consolidated Balance Sheets. Interest expense on the junior subordinated debentures is included in the Unaudited Consolidated Statements of Income. The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The Unaudited Consolidated Financial Statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying Unaudited Consolidated Financial Statements have been included. Interim results are not necessarily indicative of the results of the entire year. The accompanying Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Risks and Uncertainties The COVID-19 pandemic has caused an unprecedented disruption to the economy and the communities we serve. The U.S. government and regulatory agencies have taken several actions to provide support to the U.S. economy. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion stimulus bill, was signed into law on March 27, 2020. The goal of the CARES Act was to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The CARES Act also included extensive emergency funding for hospitals and providers. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act, as well as other recent legislative and regulatory relief efforts, could have a material impact on the Corporation’s operations. Also, the actions of the Board of Governors of the Federal Reserve System (the “FRB”) to combat the economic contraction caused by the COVID-19 pandemic, including the reduction of the target federal funds rate and quantitative easing programs, could, if prolonged, adversely affect the Corporation’s net interest income and margins, and profitability. Continued uncertainty regarding the severity and duration of the COVID-19 pandemic and related economic effects will continue to affect the accounting for credit losses. It also is possible that asset quality could worsen, expenses associated with collection efforts could increase and loan charge-offs could increase. Washington Trust is participating in the Small Business Administration's (“SBA’s”) Paycheck Protection Program (“PPP”), providing loans to small businesses negatively impacted by the COVID-19 pandemic. PPP loans are fully guaranteed by the U.S. government, if that should change, Washington Trust could be required to increase its allowance for credit losses through an additional provision for credit losses charged to earnings. PPP loans amounted to $ 216.8 million as of September 30, 2020. -10- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The extent to which the COVID-19 pandemic will continue to impact the Corporation’s business, results of operations, and financial condition, as well as regulatory capital and liquidity ratios, will depend on future developments, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic, as well as further actions the Corporation may take as may be required by government authorities or that the Corporation determines is in the best interests of its employees and customers. There is no certainty that such measures will be sufficient to mitigate the risks posed by the pandemic. Note 2 - Recently Issued Accounting Pronouncements Accounting Standards Adopted in 2020 Financial Instruments - Credit Losses - Topic 326 Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses” (“ASU 2016-13”), was issued in June 2016. ASU 2016-13 requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures at the reporting date. The measurement is based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. For available for sale debt securities with unrealized losses, Topic 326 requires credit losses to be recognized as an allowance rather than a reduction in the amortized cost of the securities. As a result, improvements to estimated credit losses are recognized immediately in earnings rather than as interest income over time. ASU 2016-13 provides for a modified retrospective transition, resulting in a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective. This ASU was effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The Corporation adopted ASU 2016-13, including the subsequent ASUs issued to clarify Topic 326, on January 1, 2020. The Corporation assembled a cross-functional project team that met regularly to address the additional data requirements, to determine the approach for implementation and to identify new internal controls over enhanced accounting processes for estimating the allowance for credit losses (“ACL”). This included assessing the adequacy of existing loan and loss data, assessing models for default and loss estimates, conducting limited “trial” runs and analytical reviews through December 31, 2019, and completing independent model validation and documentation of ACL processes and controls in the first quarter of 2020. In accordance with Topic 326, the Corporation has updated its ACL accounting policies. Required policy disclosures are provided in Notes 4, 5, 6 and 18. Upon adoption of Topic 326 on January 1, 2020, the ACL for loans (a contra-asset) increased by $ 6.5 million and the ACL for unfunded commitments (a liability) increased by $ 1.5 million, as compared to December 31, 2019. The increases in the ACL on loans and unfunded commitments upon adoption resulted in a one-time cumulative-effect adjustment that decreased retained earnings by $ 6.1 million, net of deferred tax balances of $ 1.9 million. The Corporation elected the five-year phase-in option, provided by regulatory guidance issued by the Federal Deposit Insurance Corporation (“FDIC”) in March 2020, which delays the estimated impact of Topic 326 on regulatory capital for the first two years and then phases it in over a three-year period beginning in 2022. See Note 8 for additional disclosure on regulatory capital. Fair Value Measurement - Topic 820 Accounting Standards Update No. 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), was issued in August 2018 to modify the disclosure requirements related to fair value. ASU 2018-13 was effective for fiscal years beginning after December 15, 2019. Certain provisions under ASU 2018-13 required prospective application, while other provisions required retrospective application to all periods presented in the consolidated financial statements upon adoption. The Corporation adopted the provisions of ASU 2018-13 effective January 1, 2020 and the adoption did not have a material impact on the Corporation’s consolidated financial statements. -11- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Intangibles - Goodwill and Other - Internal-Use Software - Topic 350 Accounting Standards Update No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract” (“ASU 2018-15”), was issued in August 2018 to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with those requirements that currently exist in GAAP for capitalizing implementation costs incurred to develop or obtain internal-use software. Implementation costs would either be capitalized or expensed as incurred depending on the project stage. All costs in the preliminary and post-implementation project stages are expensed as incurred, while certain costs within the application development stage are capitalized. ASU 2018-15 was effective for fiscal years beginning after December 15, 2019. Effective January 1, 2020, the Corporation adopted the provision of ASU 2018-15 prospectively, as permitted, and the adoption did not have a material impact on the Corporation’s consolidated financial statements. Accounting Standards Pending Adoption Compensation - Retirement Benefits - Topic 715 Accounting Standards Update No. 2018-14, “Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”), was issued in August 2018 to modify the disclosure requirements associated with defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The provisions under ASU 2018-14 are required to be applied retrospectively. The adoption of ASU 2018-14 is not expected to have a material impact on the Corporation’s consolidated financial statements. Income Taxes - Topic 745 Accounting Standards Update No. 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), was issued in December 2019 to simplify the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective application through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. The adoption of ASU 2019-12 is not expected to have a material impact on the Corporation’s consolidated financial statements. Reference Rate Reform - Topic 848 Accounting Standards Update No. 2020-04, “Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), was issued in March 2020 to ease the potential burden in accounting for recognizing the effects of reference rate reform on financial reporting. Such challenges include the accounting and operational implications for contract modifications and hedge accounting. The provisions in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to loan and lease agreements, contracts, hedging relationships, and other transactions affected by reference rate reform. These provisions apply to contract modifications that reference LIBOR or another reference rate expected to be discounted because of reference rate reform. Qualifying modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification would be considered "minor" so that any existing unamortized deferred loan origination fees and costs would carry forward and continue to be amortized. Qualifying modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for hedge accounting. The Corporation has assembled a cross-functional project team that meets periodically to discuss the implementation of ASU 2020-04. The Corporation has completed an inventory of contracts that reference LIBOR and is currently reviewing underlying documents and contracts, as well as assessing the risks with the transition to a new reference rate. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022, with adoption permitted as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected, the amendments must be applied prospectively for all eligible contract modifications. The Corporation has not yet adopted ASU 2020-04 and is currently evaluating the effect that this ASU will have on the Corporation’s consolidated financial statements. -12- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Receivables - Topic 310 Accounting Standards Update No. 2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs” (“ASU 2020-08”), was issued in October 2020 to provide further clarification and update the previously issued guidance in ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20: Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”). ASU 2017-08 shortened the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. The Corporation early adopted the provisions of ASU 2017-08, effective January 1, 2017. ASU 2020-08 requires that at each reporting period, to the extent that the amortized cost of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess premium shall be amortized to the next call date. ASU 2020-08 is effective for fiscal years ending after December 15, 2020 and early adoption is not permitted. The provisions under ASU 2020-08 are required to be applied prospectively. The adoption of ASU 2020-08 is not expected to have a material impact on the Corporation’s consolidated financial statements. Note 3 - Cash and Due from Banks The Bank maintains certain average reserve balances to meet the requirements of the FRB. Some or all of these reserve requirements may be satisfied with vault cash. Effective March 26, 2020, the FRB reduced the reserve requirement ratios to zero percent to eliminate the need for depository institutions, such as the Bank, to maintain balances in accounts at the FRB to satisfy reserve requirements. At December 31, 2019, the reserve balance was $ 27.9 million and was included in cash and due from banks in the Unaudited Consolidated Balance Sheets. As of September 30, 2020 and December 31, 2019, cash and due from banks includes interest-bearing deposits in other banks of $ 162.8 million and $ 83.4 million, respectively. See Note 9 for additional disclosure regarding cash collateral pledged to derivative counterparties. Note 4 - Securities Adoption of Topic 326 Effective January 1, 2020, the Corporation adopted the provisions of Topic 326 using the modified retrospective method. Therefore, prior period comparative information has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 326. There was no ACL on available for sale debt securities recognized upon the adoption of Topic 326. Accounting Policy Updates Effective January 1, 2020, the Corporation has modified its accounting policy for the assessment of available for sale debt securities for impairment. The updated policy is detailed below. The Corporation has made an accounting policy election to exclude accrued interest from the amortized cost basis of debt securities and reports accrued interest separately in other assets in the Unaudited Consolidated Balance Sheets. The Corporation also excludes accrued interest from the estimate of credit losses. Accrued interest receivable on available for sale debt securities totaled $ 2.5 million and $ 2.9 million, respectively, as of September 30, 2020 and December 31, 2019. A debt security is placed on nonaccrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a debt security placed on nonaccrual is reversed against interest income. There were no debt securities on nonaccrual status and therefore there was no accrued interest related to debt securities reversed against interest income for the three and nine months ended September 30, 2020 and 2019. For available for sale debt securities in an unrealized loss position, management first assesses whether the Corporation intends to sell, or if it is likely that the Corporation will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit losses charge to earnings. For debt securities available for sale that do not meet either of these criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers both quantitative and qualitative factors. A substantial portion of available for sale debt securities held by the Corporation are obligations issued by U.S. government agency and U.S. government-sponsored enterprises, including mortgage-backed securities. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies and have a long -13- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) history of no credit losses. For these securities, management takes into consideration the long history of no credit losses and other factors to assess the risk of nonpayment even if the U.S. government were to default. As such, the Corporation utilized a zero credit loss estimate for these securities. For available for sale debt securities that are not guaranteed by U.S. government agencies and U.S. government-sponsored enterprises, such as individual name issuer trust preferred debt securities and corporate bonds, management utilizes a third party credit modeling tool based on observable market data, which assists management in identifying any potential credit risk associated with these available for sale debt securities. This model estimates probability of default, loss given default and exposure at default for each security. In addition, qualitative factors are also considered, including the extent to which fair value is less than amortized cost, changes to the credit rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If a credit loss exists based on the results of this assessment, an ACL (contra asset) is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is considered market-related and is recognized in other comprehensive income, net of taxes. Changes in the ACL on available for sale debt securities are recorded as provision for (or reversal of) credit losses. Losses are charged against the ACL when management believes the uncollectibility of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Available for Sale Debt Securities The following table presents the amortized cost, gross unrealized holding gains, gross unrealized holding losses, ACL on securities and fair value of securities by major security type and class of security: (Dollars in thousands) September 30, 2020 Amortized Cost Unrealized Gains Unrealized Losses Allowance for Credit Losses Fair Value Available for Sale Debt Securities: Obligations of U.S. government-sponsored enterprises $ 145,778 $ 1,058 ($ 296 ) $ — $ 146,540 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 729,575 16,239 ( 743 ) — 745,071 Individual name issuer trust preferred debt securities 13,336 — ( 973 ) — 12,363 Corporate bonds 11,150 — ( 1,274 ) — 9,876 Total available for sale debt securities $ 899,839 $ 17,297 ($ 3,286 ) $ — $ 913,850 The following table presents the amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of securities by major security type and class of security: (Dollars in thousands) December 31, 2019 Amortized Cost Unrealized Gains Unrealized Losses Fair Value Available for Sale Debt Securities: Obligations of U.S. government-sponsored enterprises $ 157,255 $ 626 ($ 233 ) $ 157,648 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 713,553 8,491 ( 2,964 ) 719,080 Individual name issuer trust preferred debt securities 13,324 — ( 745 ) 12,579 Corporate bonds 11,141 — ( 958 ) 10,183 Total available for sale debt securities $ 895,273 $ 9,117 ($ 4,900 ) $ 899,490 As of September 30, 2020 and December 31, 2019, debt securities with a fair value of $ 312.2 million and $ 431.9 million, respectively, were pledged as collateral for FHLB borrowings, potential borrowings with the FRB’s discount window, certain public deposits and for other purposes. See Note 7 for additional disclosure on FHLB borrowings. -14- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The schedule of maturities of available for sale debt securities is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments. All other debt securities are included based on contractual maturities. Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. (Dollars in thousands) Available for Sale September 30, 2020 Amortized Cost Fair Value Due in one year or less $ 103,108 $ 105,289 Due after one year to five years 314,187 320,191 Due after five years to ten years 304,576 307,688 Due after ten years 177,968 180,682 Total debt securities $ 899,839 $ 913,850 Included in the above table are debt securities with an amortized cost balance of $ 169.0 million and a fair value of $ 167.4 million at September 30, 2020 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 4 years to 16 years, with call features ranging from 1 month to 2 years. The following table summarizes amounts relating to sales of securities: (Dollars in thousands) Three Months Nine Months For the periods ended September 30, 2020 2019 2020 2019 Proceeds from sales $ — $ — $ — $ 9,920 Gross realized gains $ — $ — $ — $ — Gross realized losses — — — ( 80 ) Net realized losses on securities $ — $ — $ — ($ 80 ) Assessment of Available for Sale Debt Securities for Impairment Management assesses the decline in fair value of investment securities on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, vol atility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates both qualitative and quantitative factors to assess whether an impairment exists. For the accounting policy on the assessment of available for sale debt securities for impairment that was in effect prior to the adoption of Topic 326 on January 1, 2020, see Note 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The following table summarizes available for sale debt securities in an unrealized loss position for which an allowance for credit losses on securities has not been recorded at September 30, 2020, segregated by length of time the securities have been in a continuous unrealized loss position: (Dollars in thousands) Less than 12 Months 12 Months or Longer Total September 30, 2020 # Fair Value Unrealized Losses # Fair Value Unrealized Losses # Fair Value Unrealized Losses Obligations of U.S. government-sponsored enterprises 4 $ 43,704 ($ 296 ) — $ — $ — 4 $ 43,704 ($ 296 ) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 16 148,609 ( 743 ) — — — 16 148,609 ( 743 ) Individual name issuer trust preferred debt securities — — — 5 12,363 ( 973 ) 5 12,363 ( 973 ) Corporate bonds — — — 3 9,876 ( 1,274 ) 3 9,876 ( 1,274 ) Total 20 $ 192,313 ($ 1,039 ) 8 $ 22,239 ($ 2,247 ) 28 $ 214,552 ($ 3,286 ) -15- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following tables summarize temporarily impaired securities, segregated by length of time the securities have been in a continuous unrealized loss position: (Dollars in thousands) Less than 12 Months 12 Months or Longer Total December 31, 2019 # Fair Value Unrealized Losses # Fair Value Unrealized Losses # Fair Value Unrealized Losses Obligations of U.S. government-sponsored enterprises 3 $ 20,364 ($ 136 ) 3 $ 49,902 ($ 97 ) 6 $ 70,266 ($ 233 ) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 4 41,150 ( 56 ) 23 216,804 ( 2,908 ) 27 257,954 ( 2,964 ) Individual name issuer trust preferred debt securities — — — 5 12,579 ( 745 ) 5 12,579 ( 745 ) Corporate bonds — — — 3 10,183 ( 958 ) 3 10,183 ( 958 ) Total 7 $ 61,514 ($ 192 ) 34 $ 289,468 ($ 4,708 ) 41 $ 350,982 ($ 4,900 ) Further deterioration in credit quality of the underlying issuers of the securities, deterioration in the condition of the financial services industry, worsening of the current economic environment, or additional declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as credit losses, and the Corporation may incur write-downs. Obligations of U.S. Government Agency and U.S. Government-Sponsored Enterprise Securities, including Mortgage-Backed Securities The gross unrealized losses on U.S. government agency and U.S. government-sponsored debt securities, including mortgage-backed securities, were primarily attributable to relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at September 30, 2020. Management believes that the unrealized losses on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no allowance for credits losses on securities was recorded at September 30, 2020. Individual Name Issuer Trust Preferred Debt Securities Included in debt securities in an unrealized loss position at September 30, 2020 were five trust preferred securities issued by four individual companies in the banking sector. Based on the information available through the filing date of this report, all individual name issuer trust preferred debt securities held in our portfolio continue to accrue interest and make payments as expected with no payment deferrals or defaults on the part of the issuers. Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information. As of September 30, 2020, there were two individual name issuer trust preferred debt securities with an amortized cost of $ 4.0 million and unrealized losses of $ 358 thousand that were rated below investment grade by Standard & Poors, Inc. (“S&P”). We noted no additional downgrades to below investment grade between September 30, 2020 and the filing date of this report. Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates and not material changes in the credit quality of the issuers of the debt securities. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no allowance for credit losses on securities was recorded at September 30, 2020. Corporate Bonds At September 30, 2020, the Corporation had three corporate bond holdings with unrealized losses totaling $ 1.3 million. These investment grade corporate bonds were issued by large corporations in the financial services industry. The issuers of these securities continue to make timely principal and interest payments and none of these securities were past due at September 30, 2020. Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as -16- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information. Management believes the unrealized losses on these debt securities are primarily attributable to changes in the investment spreads and interest rates and not changes in the credit quality of the issuers of the debt securities. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is likely that the Corporation will not be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, no allowance for credit losses was recorded at September 30, 2020. Note 5 - Loans The following is a summary of loans: (Dollars in thousands) September 30, 2020 December 31, 2019 Commercial: Commercial real estate (1) $ 1,665,745 $ 1,547,572 Commercial & industrial (2) 822,269 585,289 Total commercial 2,488,014 2,132,861 Residential Real Estate: Residential real estate (3) 1,506,726 1,449,090 Consumer: Home equity 268,551 290,874 Other (4) 18,756 20,174 Total consumer 287,307 311,048 Total loans (5) $ 4,282,047 $ 3,892,999 (1) Commercial real estate (“CRE”) consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. (2) Commercial and industrial (“C&I”) consists of loans to businesses and individuals, a portion of which are fully or partially collateralized by real estate. C&I also includes $ 216.8 million of PPP loans as of September 30, 2020. (3) Residential real estate consists of mortgage and homeowner construction loans secured by one- to four-family residential properties. (4) Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans. (5) Includes net unamortized loan origination fees of $ 670 thousand at September 30, 2020 and net unamortized loan origination costs of $ 5.3 million, at December 31, 2019 and net unamortized premiums on purchased loans of $ 919 thousand and $ 995 thousand, respectively, at September 30, 2020 and December 31, 2019. As of September 30, 2020 and December 31, 2019, loans amounting to $ 2.2 billion and $ 2.1 billion, respectively, were pledged as collateral to the FHLB under a blanket pledge agreement and to the FRB. See Note 7 for additional disclosure regarding borrowings. Concentrations of Credit Risk A significant portion of our loan portfolio is concentrated among borrowers in southern New England and a substantial portion of the portfolio is collateralized by real estate in this area. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in the Corporation’s market area. -17- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Past Due Loans Past due status is based on the contractual payment terms of the loan. The following tables present an age analysis of past due loans, segregated by class of loans: (Dollars in thousands) Days Past Due September 30, 2020 30-59 60-89 Over 90 Total Past Due Current Total Loans Commercial: Commercial real estate $ — $ — $ 431 $ 431 $ 1,665,314 $ 1,665,745 Commercial & industrial 21 — — 21 822,248 822,269 Total commercial 21 — 431 452 2,487,562 2,488,014 Residential Real Estate: Residential real estate 2,689 890 4,502 8,081 1,498,645 1,506,726 Consumer: Home equity 969 166 618 1,753 266,798 268,551 Other 18 2 88 108 18,648 18,756 Total consumer 987 168 706 1,861 285,446 287,307 Total loans $ 3,697 $ 1,058 $ 5,639 $ 10,394 $ 4,271,653 $ 4,282,047 (Dollars in thousands) Days Past Due December 31, 2019 30-59 60-89 Over 90 Total Past Due Current Total Loans Commercial: Commercial real estate $ 830 $ — $ 603 $ 1,433 $ 1,546,139 $ 1,547,572 Commercial & industrial 1 — — 1 585,288 585,289 Total commercial 831 — 603 1,434 2,131,427 2,132,861 Residential Real Estate: Residential real estate 4,574 2,155 4,700 11,429 1,437,661 1,449,090 Consumer: Home equity 971 729 996 2,696 288,178 290,874 Other 42 — 88 130 20,044 20,174 Total consumer 1,013 729 1,084 2,826 308,222 311,048 Total loans $ 6,418 $ 2,884 $ 6,387 $ 15,689 $ 3,877,310 $ 3,892,999 Included in past due loans as of September 30, 2020 and December 31, 2019, were nonaccrual loans of $ 8.8 million and $ 11.5 million, respectively. All loans 90 days or more past due at September 30, 2020 and December 31, 2019 were classified as nonaccrual. Nonaccrual Loans Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. When loans are placed on nonaccrual status, interest previously accrued but not collected is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectibility of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for a period of time, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible. -18- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following is a summary of nonaccrual loans, segregated by class of loans: (Dollars in thousands) Sep 30, 2020 Dec 31, 2019 Commercial: Commercial real estate $ 431 $ 603 Commercial & industrial — 657 Total commercial 431 1,260 Residential Real Estate: Residential real estate 12,792 14,297 Consumer: Home equity 1,429 1,763 Other 88 88 Total consumer 1,517 1,851 Total nonaccrual loans $ 14,740 $ 17,408 Accruing loans 90 days or more past due $ — $ — For nonaccrual loans with a carrying value of $ 2.9 million as of September 30, 2020, no ACL was deemed necessary. As of September 30, 2020 and December 31, 2019, nonaccrual loans secured by one- to four-family residential property amounting to $ 2.9 million and $ 5.8 million, respectively, were in process of foreclosure. Nonaccrual loans of $ 5.9 million were current as to the payment of principal and interest at both September 30, 2020 and December 31, 2019. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2020. The following table presents interest income recognized on nonaccrual loans segregated by loan class: (Dollars in thousands) Interest Income Recognized Periods ended September 30, 2020 Three Months Nine Months Commercial: Commercial real estate $ — $ — Commercial & industrial — — Total commercial — — Residential Real Estate: Residential real estate 70 341 Consumer: Home equity 11 51 Other — — Total consumer 11 51 Total $ 81 $ 392 Troubled Debt Restructurings A loan that has been modified or renewed is considered to be a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or a transaction with similar credit risk characteristics. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal -19- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring of a loan in lieu of aggressively enforcing the collection of the loan may benefit the Corporation by increasing the ultimate probability of collection. The Corporation's ACL reflects the effects of a TDR when management reasonably expects at the reporting date that a TDR will be executed with an individual borrower. A TDR is considered reasonably expected no later than the point when management concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession to avoid a default. Reasonably expected TDRs and executed TDRs are evaluated individually to determine the required ACL. Troubled debt restructurings that did not involve a below-market rate concession and perform in accordance with their modified contractual terms for a reasonable period of time may be included in the Corporation’s existing pools based on the underlying risk characteristics of the loan to measure the ACL. 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. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term and full collection of principal and interest is in doubt. TDRs are reported as such for at least one year from the date of the restructuring. In years after the restructuring, TDRs are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is performing in accordance with their modified contractual terms for a reasonable period of time. The recorded investment in TDRs consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs, at the time of the restructuring. For accruing TDRs, the recorded investment also includes accrued interest. The following table presents the recorded investment in TDRs and certain other information related to TDRs: (Dollars in thousands) Sep 30, 2020 Dec 31, 2019 Accruing TDRs $ 5,756 $ 377 Nonaccrual TDRs 2,894 492 Total TDRs $ 8,650 $ 869 Specific reserves on TDRs included in the ACL on loans $ 101 $ 97 Additional commitments to lend to borrowers with TDRs $ — $ — The Corporation has elected to account for eligible loan modifications under Section 4013 of the CARES Act. To be eligible, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) December 31, 2020. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status in accordance with the nonaccrual loans accounting policy described above. Through September 30, 2020, we have executed loan payment deferment modifications on 617 loans totaling $ 685.4 million. The majority of these modifications qualified as eligible loan modifications under Section 4013 of the CARES Act and therefore, were not required to be classified as TDRs and were not reported as past due. Seventeen of these modifications 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. Washington Trust has active deferrals on 253 loans totaling $ 418.2 million as of September 30, 2020. -20- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following tables present loans modified as a TDR: (Dollars in thousands) Outstanding Recorded Investment # of Loans Pre-Modifications Post-Modifications Three months ended September 30, 2020 2019 2020 2019 2020 2019 Commercial: Commercial real estate — — $ — $ — $ — $ — Commercial & industrial — — — — — — Total commercial — — — — — — Residential Real Estate: Residential real estate 4 — 2,092 — 2,092 — Consumer: Home equity 1 — 71 — 71 — Other — — — — — — Total consumer 1 — $ 71 $ — $ 71 $ — Total 5 — $ 2,163 $ — $ 2,163 $ — (Dollars in thousands) Outstanding Recorded Investment # of Loans Pre-Modifications Post-Modifications Nine months ended September 30, 2020 2019 2020 2019 2020 2019 Commercial: Commercial real estate 1 — $ 841 $ — $ 841 $ — Commercial & industrial 2 — 460 — 460 — Total commercial 3 — 1,301 — 1,301 — Residential Real Estate: Residential real estate 10 — 5,604 — 5,604 — Consumer: Home equity 4 — 873 — 873 — Other — — — — — — Total consumer 4 — $ 873 $ — $ 873 $ — Total 17 — $ 7,778 $ — $ 7,778 $ — The following table presents information on how loans were modified as a TDR: (Dollars in thousands) Three Months Nine Months Periods ended September 30, 2020 2019 2020 2019 Below-market interest rate concession $ — $ — $ — $ — Payment deferral 2,163 — 7,365 — Maturity / amortization concession — — — — Interest only payments — — — — Combination (1) — — 413 — Total $ 2,163 $ — $ 7,778 $ — (1) Loans included in this classification were modified with a combination of any two of the concessions listed in this table. -21- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following tables present payment defaults on TDRs modified within the previous 12 months: (Dollars in thousands) # of Loans Recorded Investment Three months ended September 30, 2020 2019 2020 2019 Residential real estate: Residential real estate 1 — $ 903 $ — Consumer: Home equity 1 — 47 — Other — — — — Totals 2 — $ 950 $ — (Dollars in thousands) # of Loans Recorded Investment Nine months ended September 30, 2020 2019 2020 2019 Residential real estate: Residential real estate 1 — $ 903 $ — Consumer: Home equity 1 — 47 — Other — — — — Totals 2 — $ 950 $ — Individually Analyzed Loans Effective January 1, 2020, 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. As of September 30, 2020, the carrying value of individually analyzed loans amounted to $ 15.7 million, of which $ 7.5 million were considered collateral dependent. For collateral dependent loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the loan is to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. See Note 10 for additional disclosure regarding fair value of individually analyzed collateral dependent loans. -22- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the carrying value of collateral dependent individually analyzed loans: (Dollars in thousands) As of September 30, 2020 Carrying Value Related Allowance Commercial: Commercial real estate (1) $ 431 $ 146 Commercial & industrial (2) 409 — Total commercial 840 146 Residential Real Estate: Residential real estate (3) 5,845 — Consumer: Home equity (3) 825 232 Other — — Total consumer 825 232 Total $ 7,510 $ 378 (1) Secured by income-producing property. (2) Secured by business assets. (3) Secured by one- to four-family residential properties. -23- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Prior to January 1, 2020, impaired loans included nonaccrual loans and executed TDRs. The Corporation identified loss allocations for impaired loans on an individual loan basis. The following is a summary of impaired loans: (Dollars in thousands) As of December 31, 2019 Recorded Investment (1) Unpaid Principal Related Allowance No Related Allowance Recorded Commercial: Commercial real estate $ — $ — $ — Commercial & industrial — — — Total commercial — — — Residential Real Estate: Residential real estate 13,968 14,803 — Consumer: Home equity 1,471 1,472 — Other 88 88 — Total consumer 1,559 1,560 — Subtotal 15,527 16,363 — With Related Allowance Recorded Commercial: Commercial real estate $ 603 $ 926 $ — Commercial & industrial 657 657 580 Total commercial 1,260 1,583 580 Residential Real Estate: Residential real estate 687 714 95 Consumer: Home equity 292 291 291 Other 18 18 2 Total consumer 310 309 293 Subtotal 2,257 2,606 968 Total impaired loans $ 17,784 $ 18,969 $ 968 Total: Commercial $ 1,260 $ 1,583 $ 580 Residential real estate 14,655 15,517 95 Consumer 1,869 1,869 293 Total impaired loans $ 17,784 $ 18,969 $ 968 (1) The recorded investment in impaired loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs. For accruing impaired loans (TDRs for which management has concluded that the collectibility of the loan is not in doubt), the recorded investment also includes accrued interest. -24- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class. (Dollars in thousands) Three Months Nine Months For the periods ended September 30, 2019 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial: Commercial real estate $ 886 $ — $ 929 $ 1 Commercial & industrial — — 2,835 103 Total commercial 886 — 3,764 104 Residential Real Estate: Residential real estate 12,017 109 10,972 331 Consumer: Home equity 1,414 16 1,409 43 Other 108 3 55 2 Total consumer 1,522 19 1,464 45 Total $ 14,425 $ 128 $ 16,200 $ 480 Credit Quality Indicators Commercial The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. The Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for credit losses on loans. See Note 6 for additional information. A description of the commercial loan categories is as follows: Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality, but may exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, performance or may be in an industry or of a loan type known to have a higher degree of risk. These weaknesses may be mitigated by secondary sources of repayment, including SBA guarantees. Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies. Classified - Loans identified as “substandard,” “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be placed on nonaccrual status when management determines there is uncertainty of collectibility. A “doubtful” loan is placed on nonaccrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined. “Loss” is not intended to imply that the loan has no recovery value, but rather, it is not practical or desirable to continue to carry the asset. -25- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The Corporation’s procedures call for loan ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. On a quarterly basis, management reviews the watched asset list, which generally consists of commercial loans that are risk-rated 6 or worse, highly leveraged transaction loans, high-volatility commercial real estate and other selected loans. Management’s review focuses on the current status of the loans and strategies to improve the credit. An annual loan review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio. Residential and Consumer Management monitors the relatively homogeneous residential real estate and consumer loan portfolios on an ongoing basis using delinquency information by loan type. In addition, other techniques are utilized to monitor indicators of credit deterioration in the residential real estate loans and home equity consumer loans. Among these techniques is the periodic tracking of loans with an updated Fair Isaac Corporation (“FICO”) score and an estimated loan to value (“LTV”) ratio. LTV is estimated based on such factors as the location, the original LTV ratio, and the date of origination of the loan and do not reflect actual appraisal amounts. The results of these analyses and other loan review procedures, including selected targeted internal reviews, are taken into consideration in the determination of qualitative loss factors for residential real estate and home equity consumer credits. -26- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table summarizes the Corporation’s loan portfolio by credit quality indicator and loan portfolio segment: (Dollars in thousands) Term Loans Amortized Cost by Origination Year As of September 30, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Revolving Loans Converted to Term Loans Total Commercial: CRE: Pass $ 231,992 $ 387,398 $ 317,206 $ 253,085 $ 158,862 $ 270,453 $ 14,778 $ 2,406 $ 1,636,180 Special Mention 649 — 18,104 9,537 — 844 — — 29,134 Classified — — — — — 431 — — 431 Total CRE 232,641 387,398 335,310 262,622 158,862 271,728 14,778 2,406 1,665,745 C&I: Pass 284,453 96,228 83,099 62,716 67,899 98,371 98,285 1,380 792,431 Special Mention 1,398 573 — 2,429 293 15,007 3,273 68 23,041 Classified 409 — — — — 6,388 — — 6,797 Total C&I 286,260 96,801 83,099 65,145 68,192 119,766 101,558 1,448 822,269 Residential Real Estate: Residential real estate: Current 351,153 300,217 176,465 179,310 145,739 345,761 — — 1,498,645 Past Due — 238 627 768 401 6,047 — — 8,081 Total residential real estate 351,153 300,455 177,092 180,078 146,140 351,808 — — 1,506,726 Consumer: Home equity: Current 8,821 8,247 4,425 1,858 1,379 4,432 225,650 11,986 266,798 Past Due — — — 50 — 63 489 1,151 1,753 Total home equity 8,821 8,247 4,425 1,908 1,379 4,495 226,139 13,137 268,551 Other: Current 2,801 2,437 1,713 1,992 628 8,746 330 1 18,648 Past Due 9 11 — — 88 — — — 108 Total other 2,810 2,448 1,713 1,992 716 8,746 330 1 18,756 Total Loans $ 881,685 $ 795,349 $ 601,639 $ 511,745 $ 375,289 $ 756,543 $ 342,805 $ 16,992 $ 4,282,047 Consistent with industry practice, Washington Trust may renew commercial loans at or immediately prior to their maturity. In the table above, renewals subject to full credit evaluation before being granted are reported as originations in the period renewed. The following table presents the commercial loan portfolio, segregated by category of credit quality indicator: (Dollars in thousands) As of December 31, 2019 Pass Special Mention Classified Commercial: Commercial real estate $ 1,546,139 $ 830 $ 603 Commercial & industrial 549,416 24,961 10,912 Total commercial $ 2,095,555 $ 25,791 $ 11,515 -27- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the residential and consumer loan portfolios, segregated by category of credit quality indicator: (Dollars in thousands) As of December 31, 2019 Current Past Due Residential Real Estate: Residential real estate $ 1,437,661 $ 11,429 Consumer: Home equity $ 288,178 $ 2,696 Other 20,044 130 Total consumer $ 308,222 $ 2,826 Note 6 - Allowance for Credit Losses on Loans Adoption of Topic 326 Effective January 1, 2020, the Corporation adopted the provisions of Topic 326 using the modified retrospective method. Therefore, prior period comparative information has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 326. As a result of adopting Topic 326, the Corporation increased the ACL on loans by $ 6.5 million on January 1, 2020. Accounting Policy Updates Effective January 1, 2020, the Corporation has modified its accounting policy for the ACL on loans. The updated policy is detailed below. The Corporation has made an accounting policy election to exclude accrued interest from the amortized cost basis of loans and reports accrued interest separately in other assets in the Unaudited Consolidated Balance Sheets. The Corporation also excludes accrued interest from the estimate of credit losses. Accrued interest receivable on loans totaled $ 10.9 million and $ 11.0 million, respectively, as of September 30, 2020 and December 31, 2019. The ACL on loans is management’s estimate of expected credit losses over the expected life of the loans at the reporting date. The ACL on loans is increased through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income and by recoveries of amounts previously charged-off. The ACL on loans is reduced by charge-offs on loans. Loan charge-offs are recognized when management believes the collectibility of the principal balance outstanding is unlikely. Full or partial charge-offs on collateral dependent individually analyzed loans are generally recognized when the collateral is deemed to be insufficient to support the carrying value of the loan. The level of the ACL on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the calculation of loss given default and the estimation of expected credit losses. As discussed further below, adjustments to historical information are made for differences in specific risk characteristics, such as differences in underwriting standards, portfolio mix, delinquency level, or term, as well as for changes in environmental conditions, that may not be reflected in historical loss rates. Management employs a process and methodology to estimate the ACL on loans that evaluates both quantitative and qualitative factors. The methodology for evaluating quantitative factors consists of two basic components. The first component involves pooling loans into portfolio segments for loans that share similar risk characteristics. 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, 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. Factors management considers when measuring the extent of expected credit loss include payment -28- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due. For collateral dependent loans for which repayment is to be provided substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral dependent loans for which repayment is to be provided substantially through the operation of the collateral, such as accruing TDRs, estimated costs to sell are not incorporated into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the collateral. For pooled loans, the Corporation utilizes a discounted cash flow (“DCF”) methodology to estimate credit losses over the expected life of the loan. The life of the loan excludes expected extensions, renewal and modifications, unless 1) the extension or renewal options are included in the original or modified contract terms and not unconditionally cancellable by the Corporation, or 2) management reasonably expects at the reporting date that a TDR will be executed with an individual borrower. The methodology incorporates the probability of default and loss given default, which are identified by default triggers such as past due by 90 or more days, whether a charge-off has occurred, the loan has been placed on nonaccrual status, the loan has been modified in a TDR or the loan is risk-rated as special mention or classified. The probability of default for the life of the loan is determined by the use of an econometric factor. Management utilizes the national unemployment rate as an econometric factor with a one-year forecast period and one-year straight-line reversion period to the historical mean of its macroeconomic assumption in order to estimate the probability of default for each loan portfolio segment. Utilizing a third party regression model, the forecasted national unemployment rate is correlated with the probability of default for each loan portfolio segment. The DCF methodology combines the probability of default, the loss given default, maturity date and prepayment speeds to estimate a reserve for each loan. The sum of all the loan level reserves are aggregated for each portfolio segment and a loss rate factor is derived. Quantitative loss factors are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. These qualitative risk factors include: 1) changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; 2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments; 3) changes in the nature and volume of the portfolio and in the terms of loans; 4) changes in the experience, ability, and depth of lending management and other relevant staff; 5) changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or rated loans; 6) changes in the quality of the institution’s loan review system; 7) changes in the value of underlying collateral for collateral dependent loans; 8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and 9) the effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. Qualitative loss factors are applied to each portfolio segment with the amounts determined by historical loan charge-offs of a peer group of similar-sized regional banks. Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. While significant deterioration in the economic forecast due to the COVID-19 pandemic was estimated in the ACL on loans, continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the ACL. Deteriorating conditions or assumptions could lead to further increases in the ACL on loans. In addition, various regulatory agencies periodically review the ACL on loans. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. The ACL on loans is an estimate, and ultimate losses may vary from management’s estimate. -29- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the activity in the ACL on loans for the three months ended September 30, 2020: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 20,283 $ 11,278 $ 31,561 $ 8,053 $ 1,394 $ 433 $ 1,827 $ 41,441 Charge-offs — ( 2 ) ( 2 ) ( 99 ) — ( 10 ) ( 10 ) ( 111 ) Recoveries — 2 2 — 4 9 13 15 Provision 1,474 ( 93 ) 1,381 ( 35 ) ( 51 ) 5 ( 46 ) 1,300 Ending Balance $ 21,757 $ 11,185 $ 32,942 $ 7,919 $ 1,347 $ 437 $ 1,784 $ 42,645 The following table presents the activity in the ACL on loans for the nine months ended September 30, 2020: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 14,741 $ 3,921 $ 18,662 $ 6,615 $ 1,390 $ 347 $ 1,737 $ 27,014 Adoption of Topic 326 (1) 3,405 3,029 6,434 221 ( 106 ) ( 48 ) ( 154 ) 6,501 Charge-offs ( 172 ) ( 585 ) ( 757 ) ( 99 ) ( 174 ) ( 42 ) ( 216 ) ( 1,072 ) Recoveries — 11 11 — 11 23 34 45 Provision 3,783 4,809 8,592 1,182 226 157 383 10,157 Ending Balance $ 21,757 $ 11,185 $ 32,942 $ 7,919 $ 1,347 $ 437 $ 1,784 $ 42,645 (1) Adoption of the CECL accounting standard effective January 1, 2020. For the accounting policy on the allowance for loan losses that was in effect prior to the adoption of Topic 326, see Note 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The following table presents the activity in the allowance for loan losses for the three months ended September 30, 2019: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 16,882 $ 4,453 $ 21,335 $ 4,857 $ 913 $ 293 $ 1,206 $ 27,398 Charge-offs ( 947 ) ( 1 ) ( 948 ) — — ( 18 ) ( 18 ) ( 966 ) Recoveries — 123 123 — 36 6 42 165 Provision 866 ( 1,128 ) ( 262 ) 554 64 44 108 400 Ending Balance $ 16,801 $ 3,447 $ 20,248 $ 5,411 $ 1,013 $ 325 $ 1,338 $ 26,997 The following table presents the activity in the allowance for loan losses for the nine months ended September 30, 2019: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 15,381 $ 5,847 $ 21,228 $ 3,987 $ 1,603 $ 254 $ 1,857 $ 27,072 Charge-offs ( 947 ) ( 19 ) ( 966 ) ( 486 ) ( 372 ) ( 64 ) ( 436 ) ( 1,888 ) Recoveries — 151 151 — 71 16 87 238 Provision 2,367 ( 2,532 ) ( 165 ) 1,910 ( 289 ) 119 ( 170 ) 1,575 Ending Balance $ 16,801 $ 3,447 $ 20,248 $ 5,411 $ 1,013 $ 325 $ 1,338 $ 26,997 -30- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the Corporation’s loan portfolio and associated allowance for loan losses by portfolio segment and by impairment methodology as of December 31, 2019: (Dollars in thousands) Loans Related Allowance Loans Individually Analyzed for Credit Losses Commercial: Commercial real estate $ 603 $ — Commercial & industrial 657 580 Total commercial 1,260 580 Residential Real Estate: Residential real estate 14,654 95 Consumer: Home equity 1,763 291 Other 106 2 Total consumer 1,869 293 Subtotal 17,783 968 Loans Collectively Evaluated for Credit Losses Commercial: Commercial real estate 1,546,969 14,741 Commercial & industrial 584,632 3,341 Total commercial 2,131,601 18,082 Residential Real Estate: Residential real estate 1,434,436 6,520 Consumer: Home equity 289,111 1,099 Other 20,068 345 Total consumer 309,179 1,444 Subtotal 3,875,216 26,046 Total $ 3,892,999 $ 27,014 -31- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 7 - Borrowings Advances payable to the FHLB amounted to $ 713.9 million and $ 1.1 billion, respectively, at September 30, 2020 and December 31, 2019. As of September 30, 2020 and December 31, 2019, the Bank had access to a $ 40.0 million unused line of credit and also had remaining available borrowing capacity of $ 828.4 million and $ 535.0 million, respectively, with the FHLB. The Bank pledges certain qualified investment securities and loans as collateral to the FHLB. The following table presents maturities and weighted average interest rates on FHLB advances outstanding as of September 30, 2020: (Dollars in thousands) Scheduled Maturity Weighted Average Rate October 1, 2020 to December 31, 2020 $ 365,437 1.33 % 2021 258,222 1.04 2022 813 5.12 2023 5,238 3.80 2024 40,900 2.51 2025 and thereafter 43,258 3.29 Balance at September 30, 2020 $ 713,868 1.44 % In the second quarter of 2020, Washington Trust began participating in the FRB’s Paycheck Protection Program Liquidity Facility ("PPPLF"). PPPLF extends credit to depository institutions at a fixed interest rate of 0.35 %. Only PPP loans can be pledged as collateral to access the facility. The maturity date of the PPPLF borrowings matches the maturity date of the pledged PPP loans. As of September 30, 2020, PPPLF borrowings amounted to $ 105.7 million and have scheduled maturities in the second quarter of 2022. PPP loans totaling $ 105.7 million were pledged as collateral to the FRB as of September 30, 2020. Note 8 - Shareholders' Equity 2019 Stock Repurchase Program The Corporation’s 2019 Stock Repurchase Program authorizes the repurchase of up to 850,000 shares, or approximately 5 %, of the Corporation’s outstanding common stock. This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The 2019 Stock Repurchase Program expired October 31, 2020. As of September 30, 2020, 124,863 shares had been repurchased under the 2019 Stock Repurchase Program, totaling $ 4.3 million, at an average price of $ 34.61 . All of the shares were repurchased prior to the suspension of the 2019 Stock Repurchase Program effective March 25, 2020. -32- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Regulatory Capital Requirements Capital levels at September 30, 2020 exceeded the regulatory minimum levels to be considered “well capitalized.” The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios, as well as the corresponding minimum and well capitalized regulatory amounts and ratios that were in effect during the respective periods: (Dollars in thousands) Actual For Capital Adequacy Purposes To Be “Well Capitalized” Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio September 30, 2020 Total Capital (to Risk-Weighted Assets): Corporation $ 527,140 13.09 % $ 322,243 8.00 % N/A N/A Bank 524,468 13.02 322,164 8.00 $ 402,705 10.00 % Tier 1 Capital (to Risk-Weighted Assets): Corporation 492,683 12.23 241,682 6.00 N/A N/A Bank 490,011 12.17 241,623 6.00 322,164 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets): Corporation 470,684 11.69 181,262 4.50 N/A N/A Bank 490,011 12.17 181,217 4.50 261,758 6.50 Tier 1 Capital (to Average Assets): (1) Corporation 492,683 8.77 224,714 4.00 N/A N/A Bank 490,011 8.73 224,625 4.00 280,782 5.00 December 31, 2019 Total Capital (to Risk-Weighted Assets): Corporation 494,603 12.94 305,728 8.00 N/A N/A Bank 490,993 12.85 305,693 8.00 382,116 10.00 Tier 1 Capital (to Risk-Weighted Assets): Corporation 467,296 12.23 229,296 6.00 N/A N/A Bank 463,686 12.13 229,270 6.00 305,693 8.00 Common Equity Tier 1 Capital (to Risk-Weighted Assets): Corporation 445,298 11.65 171,972 4.50 N/A N/A Bank 463,686 12.13 171,952 4.50 248,375 6.50 Tier 1 Capital (to Average Assets): (1) Corporation 467,296 9.04 206,682 4.00 N/A N/A Bank 463,686 8.98 206,596 4.00 258,245 5.00 (1) Leverage ratio. In addition to the minimum regulatory capital required for capital adequacy purposes outlined in the table above, the Corporation is required to maintain a minimum capital conservation buffer, in the form of common equity, of 2.50% in order to avoid restrictions on capital distributions and discretionary bonuses. The Corporation’s capital levels exceeded the minimum regulatory capital requirements plus the capital conservation buffer at September 30, 2020 and December 31, 2019. The Bancorp owns the common stock of two capital trusts, which have issued trust preferred securities. In accordance with GAAP, the capital trusts are treated as unconsolidated subsidiaries. At both September 30, 2020 and December 31, 2019, $ 22.0 million in trust preferred securities were included in the Tier 1 Capital of the Corporation for regulatory capital reporting purposes pursuant to the FRB’s capital adequacy guidelines. In response to the recent disruptions in economic conditions caused by the COVID-19 pandemic and the uncertainty of its overall effects on the economy, the FDIC issued an interim final rule (“IFR”) on March 27, 2020 that delays the estimated impact on regulatory capital stemming from the adoption of Topic 326, often referred to as CECL. The amount of capital relief provided in the CECL IFR is an estimate of the approximate difference in ACL under the CECL accounting methodology relative to the previously used incurred loss accounting methodology for the first two years of the five-year -33- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) transition period. The cumulative difference at the end of the second year of the transition period will then be phased-in to regulatory capital over a three-year transition period beginning in 2022. As discussed in Note 2, the Corporation has elected this five-year phase-in option. Note 9 - Derivative Financial Instruments The Corporation’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Corporation’s known or expected cash receipts and its known or expected cash payments principally to manage the Corporation’s interest rate risk. Additionally, the Corporation enters into interest rate derivatives to accommodate the business requirements of its customers. All derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and resulting designation. Interest Rate Risk Management Agreements Interest rate risk management agreements, such as caps, swaps and floors, are used from time to time as part of the Corporation’s interest rate risk management strategy. Interest rate swaps are agreements in which the Corporation and another party agree to exchange interest payments (e.g., fixed-rate for variable-rate payments) computed on a notional principal amount. Interest rate caps and floors represent options purchased by the Corporation to manage the interest rate paid throughout the term of the option contract. The credit risk associated with these transactions is the risk of default by the counterparty. To minimize this risk, the Corporation enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure. Cash Flow Hedging Instruments As of September 30, 2020 and December 31, 2019, the Corporation had two interest rate caps with a total notional amount of $ 22.7 million that were designated as cash flow hedges to hedge the interest rate risk associated with our variable rate junior subordinated debentures. For both interest rate caps, the Corporation obtained the right to receive the difference between 3-month LIBOR and a 4.5 % strike. The caps mature in November and December of 2020. As of September 30, 2020 and December 31, 2019, the Corporation had two interest rate swap contracts with a total notional amount of $ 60.0 million that were designated as cash flow hedges to hedge the interest rate risk associated with short-term variable rate FHLB advances. The interest rate swaps mature in 2021 and 2023. As of September 30, 2020, the Corporation had no interest rate floor contracts. As of December 31, 2019, the Corporation had three interest rate floor contracts with a total notional amount of $ 300.0 million. These contracts were designated as cash flow hedges to hedge the interest rate risk associated with a pool of variable rate commercial loans. The Corporation obtained the right to receive the difference between 1-month LIBOR and a 1.0 % strike for each of the interest rate floors. During the nine months ended September 30, 2020, the three interest rate floor contracts matured. The changes in fair value of derivatives designated as cash flow hedges are recorded in other comprehensive income and subsequently reclassified to earnings when gains or losses are realized. Loan Related Derivative Contracts Interest Rate Swap Contracts with Customers The Corporation has entered into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert variable-rate loan payments to fixed-rate loan payments. When the Corporation enters into an interest rate swap contract with a commercial loan borrower, it simultaneously enters into a “mirror” swap contract with a third party. The third party exchanges the client’s fixed-rate loan payments for variable-rate loan payments. The Corporation retains the risk that is associated with the potential failure of counterparties and the risk inherent in originating loans. As of September 30, 2020 and December 31, 2019, Washington Trust had interest rate swap contracts with commercial loan borrowers with notional amounts of $ 995.7 million and $ 813.5 million, respectively, and equal amounts of “mirror” swap contracts with third party financial institutions. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. -34- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Risk Participation Agreements The Corporation has entered into risk participation agreements with other banks in commercial loan arrangements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Under a risk participation-out agreement, a derivative asset, the Corporation participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Corporation assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower for a fee received from the other bank. As of September 30, 2020, the notional amounts of risk participation-out agreements and risk participation-in agreements were $ 60.4 million and $ 92.9 million, respectively, compared to $ 61.2 million and $ 72.9 million, respectively, as of December 31, 2019. Mortgage Loan Commitments Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Forward sale commitments are contracts for delayed delivery or net settlement of the underlying instrument, such as a residential real estate mortgage loan, where the seller agrees to deliver on a specified future date, either a specified instrument at a specified price or yield or the net cash equivalent of an underlying instrument. Both interest rate lock commitments and forward sale commitments are derivative financial instruments, but do not meet criteria for hedge accounting and therefore, the changes in fair value of these commitments are reflected in earnings. As of September 30, 2020, the notional amounts of interest rate lock commitments and forward sale commitments were $ 180.1 million and $ 312.1 million, respectively, compared to $ 51.4 million and $ 94.8 million, respectively, as of December 31, 2019. -35- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the fair values of derivative instruments in the Unaudited Consolidated Balance Sheets: (Dollars in thousands) Derivative Assets Derivative Liabilities Fair Value Fair Value Balance Sheet Location Sep 30, 2020 Dec 31, 2019 Balance Sheet Location Sep 30, 2020 Dec 31, 2019 Derivatives Designated as Cash Flow Hedging Instruments: Interest rate risk management contracts: Interest rate caps Other assets $ — $ — Other liabilities $ — $ — Interest rate swaps Other assets — — Other liabilities 2,224 730 Interest rate floors Other assets — 3 Other liabilities — — Derivatives not Designated as Hedging Instruments: Loan related derivative contracts: Interest rate swaps with customers Other assets 86,500 27,736 Other liabilities — 358 Mirror swaps with counterparties Other assets — 351 Other liabilities 86,955 27,819 Risk participation agreements Other assets 25 1 Other liabilities 3 1 Mortgage loan commitments: Interest rate lock commitments Other assets 6,882 1,097 Other liabilities — — Forward sale commitments Other assets 111 30 Other liabilities 3,726 827 Gross amounts 93,518 29,218 92,908 29,735 Less amounts offset in Consolidated Balance Sheets (1) — 354 — 354 Net amounts presented in Consolidated Balance Sheets 93,518 28,864 92,908 29,381 Less collateral pledged (2) — — 85,516 27,105 Net amounts $ 93,518 $ 28,864 $ 7,392 $ 2,276 (1) Interest rate risk management contracts and loan related derivative contracts with counterparties are subject to master netting arrangements. (2) Collateral pledged to derivative counterparties is in the form of cash. Washington Trust may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions. The following tables present the effect of derivative instruments in the Unaudited Consolidated Statements of Changes in Shareholders’ Equity and Unaudited Consolidated Statements of Income: (Dollars in thousands) Gain (Loss) Recognized in Other Comprehensive Income, Net of Tax Three Months Nine Months Periods ended September 30, 2020 2019 2020 2019 Derivatives Designated as Cash Flow Hedging Instruments: Interest rate risk management contracts: Interest rate caps $ 25 $ 18 $ 71 $ 32 Interest rate swaps 214 ( 211 ) ( 1,109 ) ( 1,442 ) Interest rate floors ( 85 ) 22 150 175 Total $ 154 ($ 171 ) ($ 888 ) ($ 1,235 ) For derivatives designated as cash flow hedging instruments, see Note 15 for additional disclosure pertaining to the amounts and location of reclassifications from accumulated other comprehensive income into earnings. -36- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (Dollars in thousands) Amount of Gain (Loss) Recognized in Income on Derivatives Three Months Nine Months Periods ended September 30, Statement of Income Location 2020 2019 2020 2019 Derivatives not Designated as Hedging Instruments: Loan related derivative contracts: Interest rate swaps with customers Loan related derivative income $ 767 $ 12,284 $ 67,258 $ 39,568 Mirror swaps with counterparties Loan related derivative income 499 ( 11,108 ) ( 63,655 ) ( 36,958 ) Risk participation agreements Loan related derivative income ( 2 ) 213 215 213 Foreign exchange contracts Loan related derivative income — 18 — 54 Mortgage loan commitments: Interest rate lock commitments Mortgage banking revenues ( 1,499 ) ( 340 ) 5,785 955 Forward sale commitments Mortgage banking revenues ( 4,743 ) ( 101 ) ( 10,733 ) ( 1,969 ) Total ($ 4,978 ) $ 966 ($ 1,130 ) $ 1,863 Note 10 - Fair Value Measurements The Corporation uses fair value measurements to record fair value adjustments on certain assets and liabilities and to determine fair value disclosures. Items recorded at fair value on a recurring basis include securities available for sale, mortgage loans held for sale and derivatives. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as collateral dependent individually analyzed / impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets. Fair value is a market-based measurement, not an entity-specific measurement. Fair value measurements are determined based on the assumptions the market participants would use in pricing the asset or liability. In addition, GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Corporation’s market assumptions. These two types of inputs have created the following fair value hierarchy: • Level 1 – Quoted prices for identical assets or liabilities in active markets. • Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. • Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in the markets and which reflect the Corporation’s market assumptions. Fair Value Option Election GAAP allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation has elected the fair value option for mortgage loans held for sale to better match changes in fair value of the loans with changes in the fair value of the forward sale commitment contracts used to economically hedge them. The following table presents a summary of mortgage loans held for sale accounted for under the fair value option: (Dollars in thousands) September 30, 2020 December 31, 2019 Aggregate fair value $ 68,095 $ 27,833 Aggregate principal balance 65,263 27,168 Difference between fair value and principal balance $ 2,832 $ 665 Changes in fair value of mortgage loans held for sale accounted for under the fair value option election amounted to increases of $ 1.1 million and $ 2.2 million, respectively, in the three and nine months ended September 30, 2020, compared to increases -37- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) of $ 82 thousand and $ 462 thousand, respectively, in the three and nine months ended September 30, 2019. These amounts were partially offset in earnings by the changes in fair value of forward sale commitments used to economically hedge them. The changes in fair value are reported as a component of mortgage banking revenues in the Unaudited Consolidated Statements of Income. There were no mortgage loans held for sale 90 days or more past due as of September 30, 2020 and December 31, 2019. Valuation Techniques Debt Securities Available for sale debt securities are recorded at fair value on a recurring basis. When available, the Corporation uses quoted market prices to determine the fair value of debt securities; such items are classified as Level 1. There were no Level 1 debt securities held at September 30, 2020 and December 31, 2019. Level 2 debt securities are traded less frequently than exchange-traded instruments. The fair value of these securities is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category includes obligations of U.S. government-sponsored enterprises, including mortgage-backed securities, individual name issuer trust preferred debt securities and corporate bonds. Debt securities not actively traded whose fair value is determined through the use of cash flows utilizing inputs that are unobservable are classified as Level 3. There were no Level 3 debt securities held at September 30, 2020 and December 31, 2019. Mortgage Loans Held for Sale The fair value of mortgage loans held for sale is estimated based on current market prices for similar loans in the secondary market and therefore are classified as Level 2 assets. Collateral Dependent Individually Analyzed / Impaired Loans The fair value of collateral dependent loans that are individually analyzed or were previously deemed impaired is determined based upon the appraised fair value of the underlying collateral. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. For collateral dependent loans for which repayment is to be provided substantially through the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral dependent loans for which repayment is to be provided substantially through the operation of the collateral, such as accruing TDRs, estimated costs to sell are not incorporated into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the collateral. Internal valuations may be utilized to determine the fair value of other business assets. Collateral dependent individually analyzed / impaired loans are categorized as Level 3. Loan Servicing Rights Loans sold with the retention of servicing result in the recognition of loan servicing rights. Loan servicing rights are included in other assets in the Consolidated Balance Sheets and are amortized as an offset to mortgage banking revenues over the estimated period of servicing. Loan servicing rights are evaluated quarterly for impairment based on their fair value. Impairment exists if the carrying value exceeds the estimated fair value. Impairment is measured on an aggregated basis by stratifying the loan servicing rights based on homogeneous characteristics such as note rate and loan type. The fair value is estimated using an independent valuation model that estimates the present value of expected cash flows, incorporating assumptions for discount rates and prepayment rates. Any impairment is recognized through a valuation allowance and as a reduction to mortgage banking revenues. Loan servicing rights are categorized as Level 3. Property Acquired Through Foreclosure or Repossession Property acquired through foreclosure or repossession included in other assets in the Unaudited Consolidated Balance Sheets is adjusted to fair value less costs to sell upon transfer out of loans through a charge to allowance for credit losses on loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Such subsequent valuation charges are charged through earnings. Fair value is generally based upon appraised values of the collateral. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3. -38- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Derivatives Interest rate cap, swap and floor contracts are traded in over-the-counter markets where quoted market prices are not readily available. Fair value measurements are determined using independent pricing models that utilize primarily market observable inputs, such as swap rates of different maturities and LIBOR rates. The Corporation also evaluates the credit risk of its counterparties, as well as that of the Corporation. Accordingly, factors such as the likelihood of default by the Corporation and its counterparties, its net exposures and remaining contractual life are considered in determining if any fair value adjustments related to credit risk are required. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position, if any. Although the Corporation has determined that the majority of the inputs used to value its interest rate swap, cap and floor contracts fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with interest rate contracts and risk participation agreements utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Corporation and its counterparties. However, as of September 30, 2020 and December 31, 2019, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation has classified its derivative valuations in their entirety as Level 2. Fair value measurements of forward loan commitments (interest rate lock commitments and forward sale commitments) are primarily based on current market prices for similar assets in the secondary market for mortgage loans and therefore are classified as Level 2 assets. The fair value of interest rate lock commitments is also dependent on the ultimate closing of the loans. Pull-through rates are based on the Corporation’s historical data and reflect the Corporation’s best estimate of the likelihood that a commitment will result in a closed loan. Although the pull-through rates are Level 3 inputs, the Corporation has assessed the significance of the impact of pull-through rates on the overall valuation of its interest rate lock commitments and has determined that they are not significant to the overall valuation. As a result, the Corporation has classified its interest rate lock commitments as Level 2. Items Recorded at Fair Value on a Recurring Basis The following tables present the balances of assets and liabilities reported at fair value on a recurring basis: (Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) September 30, 2020 Assets: Available for sale debt securities: Obligations of U.S. government-sponsored enterprises $ 146,540 $ — $ 146,540 $ — Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 745,071 — 745,071 — Individual name issuer trust preferred debt securities 12,363 — 12,363 — Corporate bonds 9,876 — 9,876 — Mortgage loans held for sale 68,095 — 68,095 — Derivative assets 93,518 — 93,518 — Total assets at fair value on a recurring basis $ 1,075,463 $ — $ 1,075,463 $ — Liabilities: Derivative liabilities $ 92,908 $ — $ 92,908 $ — Total liabilities at fair value on a recurring basis $ 92,908 $ — $ 92,908 $ — -39- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2019 Assets: Available for sale debt securities: Obligations of U.S. government-sponsored enterprises $ 157,648 $ — $ 157,648 $ — Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 719,080 — 719,080 — Individual name issuer trust preferred debt securities 12,579 — 12,579 — Corporate bonds 10,183 — 10,183 — Mortgage loans held for sale 27,833 — 27,833 — Derivative assets 28,864 — 28,864 — Total assets at fair value on a recurring basis $ 956,187 $ — $ 956,187 $ — Liabilities: Derivative liabilities $ 29,381 $ — $ 29,381 $ — Total liabilities at fair value on a recurring basis $ 29,381 $ — $ 29,381 $ — Items Recorded at Fair Value on a Nonrecurring Basis The following table presents the carrying value of assets held at September 30, 2020, which were written down to fair value during the nine months ended September 30, 2020: (Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Collateral dependent individually analyzed CRE loan $ 285 $ — $ — $ 285 Loan servicing rights 6,584 — — 6,584 Total assets at fair value on a nonrecurring basis $ 6,869 $ — $ — $ 6,869 The following table presents the carrying value of assets held at December 31, 2019, which were written down to fair value during the year ended December 31, 2019: (Dollars in thousands) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Collateral dependent impaired loans $ 1,448 $ — $ — $ 1,448 Property acquired through foreclosure or repossession 1,109 — — 1,109 Total assets at fair value on a nonrecurring basis $ 2,557 $ — $ — $ 2,557 -40- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following tables present valuation techniques and unobservable inputs for assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value: (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range of Inputs Utilized (Weighted Average) September 30, 2020 Collateral dependent individually analyzed CRE loan $ 285 Appraisals of collateral Discount for costs to sell 0 % - 25 % ( 14 %) Appraisal adjustments (1) 0 % - 100 % ( 43 %) Loan servicing rights $ 6,584 Discounted Cash Flow Discount rates 10 % - 14 % ( 10 %) Prepayment rates 18 % - 39 % ( 20 %) (1) Management may adjust appraisal values to reflect market value declines or other discounts resulting from its knowledge of the property. (Dollars in thousands) Fair Value Valuation Technique Unobservable Input Range of Inputs Utilized (Weighted Average) December 31, 2019 Collateral dependent impaired loans $ 1,448 Appraisals of collateral Discount for costs to sell 0 % - 20 % ( 5 %) Appraisal adjustments (1) 0 % - 100 % ( 67 %) Property acquired through foreclosure or repossession $ 1,109 Appraisals of collateral Discount for costs to sell 12 % Appraisal adjustments (1) 22 % (1) Management may adjust appraisal values to reflect market value declines or other discounts resulting from its knowledge of the property. Valuation of Financial Instruments The estimated fair values and related carrying amounts for financial instruments for which fair value is only disclosed are presented below as of the periods indicated. The tables exclude financial instruments for which the carrying value approximates fair value such as cash and cash equivalents, FHLB stock, accrued interest receivable, bank-owned life insurance, non-maturity deposits, PPPLF borrowings and accrued interest payable. (Dollars in thousands) September 30, 2020 Carrying Amount Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets: Loans, net of allowance for credit losses on loans $ 4,239,402 $ 4,236,032 $ — $ — $ 4,236,032 Financial Liabilities: Time deposits $ 1,313,223 $ 1,320,698 $ — $ 1,320,698 $ — FHLB advances 713,868 724,614 — 724,614 — Junior subordinated debentures 22,681 18,578 — 18,578 — -41- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) (Dollars in thousands) December 31, 2019 Carrying Amount Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets: Loans, net of allowance for loan losses $ 3,865,985 $ 3,869,192 $ — $ — $ 3,869,192 Financial Liabilities: Time deposits $ 1,069,323 $ 1,082,830 $ — $ 1,082,830 $ — FHLB advances 1,141,464 1,145,242 — 1,145,242 — Junior subordinated debentures 22,681 19,628 — 19,628 — Note 11 - Revenue from Contracts with Customers The following tables summarize total revenues as presented in the Unaudited Consolidated Statements of Income and the related amounts that are from contracts with customers within the scope of Topic 606. As shown below, a substantial portion of our revenues are specifically excluded from the scope of Topic 606. For the three months ended September 30, 2020 2019 (Dollars in thousands) Revenue (1) ASC 606 Revenue (2) Revenue (1) ASC 606 Revenue (2) Net interest income $ 31,654 $ — $ 32,978 $ — Noninterest income: Asset-based wealth management revenues 8,786 8,786 9,013 9,013 Transaction-based wealth management revenues 168 168 140 140 Total wealth management revenues 8,954 8,954 9,153 9,153 Mortgage banking revenues 12,353 — 4,840 — Card interchange fees 1,161 1,161 1,099 1,099 Service charges on deposit accounts 598 598 939 939 Loan related derivative income 1,264 — 1,407 — Income from bank-owned life insurance 567 — 569 — Net realized losses on securities — — — — Other income 571 491 335 323 Total noninterest income 25,468 11,204 18,342 11,514 Total revenues $ 57,122 $ 11,204 $ 51,320 $ 11,514 (1) As reported in the Consolidated Statements of Income. (2) Revenue from contracts with customers in scope of ASC 606. -42- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) For the nine months ended September 30, 2020 2019 (Dollars in thousands) Revenue (1) ASC 606 Revenue (2) Revenue (1) ASC 606 Revenue (2) Net interest income $ 95,201 $ — $ 101,420 $ — Noninterest income: Asset-based wealth management revenues 25,297 25,297 27,075 27,075 Transaction-based wealth management revenues 951 951 879 879 Total wealth management revenues 26,248 26,248 27,954 27,954 Mortgage banking revenues 33,300 — 11,126 — Card interchange fees 3,139 3,139 3,114 3,114 Service charges on deposit accounts 1,975 1,975 2,743 2,743 Loan related derivative income 3,818 — 2,877 — Income from bank-owned life insurance 1,922 — 1,784 — Net realized losses on securities — — ( 80 ) — Other income 1,313 1,026 944 917 Total noninterest income 71,715 32,388 50,462 34,728 Total revenues $ 166,916 $ 32,388 $ 151,882 $ 34,728 (1) As reported in the Consolidated Statements of Income. (2) Revenue from contracts with customers in scope of ASC 606. The Corporation recognizes revenue that is transactional in nature and such revenue is earned at a point in time. Revenue that is recognized at a point in time includes card interchange fees (fee income related to debit card transactions), ATM fees, wire transfer fees, overdraft charge fees, and stop-payment and returned check fees. Such revenue is derived from transactional information and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction. The Corporation recognizes revenue over a period of time, generally monthly, as services are performed and performance obligations are satisfied. Such revenue includes wealth management revenues and service charges on deposit accounts. Wealth management revenues are categorized as either asset-based revenues or transaction-based revenues. Asset-based revenues include trust and investment management fees that are earned based upon a percentage of asset values under administration. Transaction-based revenues include financial planning fees, tax preparation fees, commissions and other service fees. Fee revenue from service charges on deposit accounts represent service charges assessed to customers who hold deposit accounts at the Bank. The following table presents revenue from contracts with customers based on the timing of revenue recognition: (Dollars in thousands) Three Months Nine Months Periods ended September 30, 2020 2019 2020 2019 Revenue recognized at a point in time: Card interchange fees $ 1,161 $ 1,099 $ 3,139 $ 3,114 Service charges on deposit accounts 447 728 1,488 2,109 Other income 441 268 895 771 Revenue recognized over time: Wealth management revenues 8,954 9,153 26,248 27,954 Service charges on deposit accounts 151 211 487 634 Other income 50 55 131 146 Total revenues from contracts in scope of Topic 606 $ 11,204 $ 11,514 $ 32,388 $ 34,728 -43- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Receivables for revenue from contracts with customers primarily consist of amounts due for wealth management services performed for which the Corporation’s performance obligations have been fully satisfied. Receivables amounted to $ 4.3 million at September 30, 2020, compared to $ 4.5 million at December 31, 2019 and were included in other assets in the Unaudited Consolidated Balance Sheets. Deferred revenues, which are considered contract liabilities under Topic 606, represent advance consideration received from customers for which the Corporation has a remaining performance obligation to fulfill. Contract liabilities are recognized as revenue over the life of the contract as the performance obligations are satisfied. The balances of contract liabilities were insignificant at both September 30, 2020 and December 31, 2019 and were included in other liabilities in the Unaudited Consolidated Balance Sheets. For commissions and incentives that are in-scope of Topic 606, such as those paid to employees in our wealth management services and commercial banking segments in order to obtain customer contracts, contract cost assets are established. The contract cost assets are capitalized and amortized over the estimated useful life that the asset is expected to generate benefits. The carrying value of contract cost assets amounted to $ 1.2 million at September 30, 2020, compared to $ 905 thousand at December 31, 2019 and were included in other assets in the Unaudited Consolidated Balance Sheets. -44- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 12 - Defined Benefit Pension Plans Washington Trust maintains a qualified pension plan for the benefit of certain eligible employees who were hired prior to October 1, 2007. Washington Trust also has non-qualified retirement plans to provide supplemental retirement benefits to certain employees, as defined in the plans. The defined benefit pension plans were previously amended to freeze benefit accruals after a 10 -year transition period ending in December 2023. The qualified pension plan is funded on a current basis, in compliance with the requirements of ERISA. The following table presents components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss), on a pre-tax basis: (Dollars in thousands) Qualified Pension Plan Non-Qualified Retirement Plans Three Months Nine Months Three Months Nine Months Periods ended September 30, 2020 2019 2020 2019 2020 2019 2020 2019 Net Periodic Benefit Cost: Service cost (1) $ 541 $ 510 $ 1,623 $ 1,528 $ 43 $ 31 $ 128 $ 94 Interest cost (2) 626 741 1,879 2,225 116 140 349 422 Expected return on plan assets (2) ( 1,135 ) ( 1,124 ) ( 3,404 ) ( 3,371 ) — — — — Amortization of prior service credit (2) — ( 4 ) — ( 12 ) — — — — Recognized net actuarial loss (2) 396 198 1,187 594 139 104 419 307 Net periodic benefit cost $ 428 $ 321 $ 1,285 $ 964 $ 298 $ 275 $ 896 $ 823 (1) Included in salaries and employee benefits expense in the Unaudited Consolidated Statements of Income. (2) Included in other expenses in the Unaudited Consolidated Statements of Income. The following table presents the measurement date and weighted-average assumptions used to determine net periodic benefit cost: Qualified Pension Plan Non-Qualified Retirement Plans For the nine months ended September 30, 2020 2019 2020 2019 Measurement date Dec 31, 2019 Dec 31, 2018 Dec 31, 2019 Dec 31, 2018 Equivalent single discount rate for benefit obligations 3.42 % 4.38 % 3.30 % 4.28 % Equivalent single discount rate for service cost 3.54 4.44 3.62 4.48 Equivalent single discount rate for interest cost 3.07 4.12 2.93 3.98 Expected long-term return on plan assets 5.75 5.75 N/A N/A Rate of compensation increase 3.75 3.75 3.75 3.75 Note 13 - Share-Based Compensation Arrangements During the nine months ended September 30, 2020, the Corporation granted performance share unit awards and nonvested share unit awards. Performance share awards were granted to certain key employees of the Corporation to provide them with the opportunity to earn shares of common stock of the Corporation. The performance share awards were valued at fair market value as determined by the closing price of the Corporation’s common stock on the award date. The weighted average fair value of the performance share awards was $ 34.22 . The number of shares to be vested will be contingent upon the Corporation’s attainment of certain performance measures as detailed in the performance share award agreements. The performance share awards will be earned over a 3 -year performance period and the current performance assumption estimates that 65,632 shares will be earned. The Corporation granted to certain key employees and non-executive directors 11,765 nonvested share units, with 3 -year cliff vesting. The weighted average grant date fair value of the nonvested share units was $ 39.56 . -45- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 14 - Business Segments Washington Trust segregates financial information in assessing its results among its Commercial Banking and Wealth Management Services operating segments. The amounts in the Corporate unit include activity not related to the segments. Management uses certain methodologies to allocate income and expenses to the business lines. The methodologies are periodically reviewed and revised. Results may be restated, when necessary, to reflect changes in organizational structure or allocation methodology. A funds transfer pricing (“FTP”) methodology is used to assign interest income and interest expense to each interest-earning asset and interest-bearing liability on a matched maturity funding basis. The matched maturity funding concept considers the origination date and the earlier of the maturity date or the repricing date of a financial instrument to assign an FTP rate for loans and deposits originated. Loans are assigned a FTP rate for funds used and deposits are assigned a FTP rate for funds provided. Certain indirect expenses are allocated to segments. These include indirect expenses such as technology, operations and other support functions. Commercial Banking The Commercial Banking segment includes commercial, residential and consumer lending activities; mortgage banking activities; deposit generation; cash management activities; and direct banking activities, which include the operation of automated teller machines (“ATMs”), telephone and internet banking services and customer support and sales. Wealth Management Services Wealth Management Services includes investment management; financial planning; personal trust and estate services, including services as trustee, personal representative, custodian and guardian; and settlement of decedents’ estates. Institutional trust services are also provided, including fiduciary services. Corporate Corporate includes the Treasury Unit, which is responsible for managing the wholesale investment portfolio and wholesale funding needs. It also includes income from bank-owned life insurance (“BOLI”), as well as administrative and executive expenses not allocated to the operating segments and the residual impact of methodology allocations such as FTP offsets. -46- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following table presents the statement of operations and total assets for Washington Trust’s reportable segments: (Dollars in thousands) Commercial Banking Wealth Management Services Corporate Consolidated Total Three months ended September 30, 2020 2019 2020 2019 2020 2019 2020 2019 Net interest income (expense) $ 33,103 $ 28,515 ($ 24 ) ($ 114 ) ($ 1,425 ) $ 4,577 $ 31,654 $ 32,978 Provision for credit losses 1,325 400 — — — — 1,325 400 Net interest income (expense) after provision for credit losses 31,778 28,115 ( 24 ) ( 114 ) ( 1,425 ) 4,577 30,329 32,578 Noninterest income 15,940 8,607 8,954 9,153 574 582 25,468 18,342 Noninterest expenses: Depreciation and amortization expense 601 642 350 360 38 40 989 1,042 Other noninterest expenses 20,273 16,255 7,178 6,217 3,904 3,356 31,355 25,828 Total noninterest expenses 20,874 16,897 7,528 6,577 3,942 3,396 32,344 26,870 Income (loss) before income taxes 26,844 19,825 1,402 2,462 ( 4,793 ) 1,763 23,453 24,050 Income tax expense (benefit) 5,828 4,347 403 646 ( 1,100 ) 243 5,131 5,236 Net income (loss) $ 21,016 $ 15,478 $ 999 $ 1,816 ($ 3,693 ) $ 1,520 $ 18,322 $ 18,814 Total assets at period end $ 4,588,419 $ 3,994,458 $ 74,942 $ 78,812 $ 1,186,431 $ 1,125,608 $ 5,849,792 $ 5,198,878 Expenditures for long-lived assets 360 662 20 87 26 48 406 797 (Dollars in thousands) Commercial Banking Wealth Management Services Corporate Consolidated Total Nine months ended September 30, 2020 2019 2020 2019 2020 2019 2020 2019 Net interest income (expense) $ 94,692 $ 83,684 ($ 117 ) ($ 361 ) $ 626 $ 18,097 $ 95,201 $ 101,420 Provision for credit losses 10,561 1,575 — — — — 10,561 1,575 Net interest income (expense) after provision for loan losses 84,131 82,109 ( 117 ) ( 361 ) 626 18,097 84,640 99,845 Noninterest income 43,515 20,753 26,248 27,961 1,952 1,748 71,715 50,462 Noninterest expenses: Depreciation and amortization expense 1,832 1,985 1,058 1,089 116 118 3,006 3,192 Other noninterest expenses 56,571 48,676 20,408 19,631 11,290 10,486 88,269 78,793 Total noninterest expenses 58,403 50,661 21,466 20,720 11,406 10,604 91,275 81,985 Income (loss) before income taxes 69,243 52,201 4,665 6,880 ( 8,828 ) 9,241 65,080 68,322 Income tax expense (benefit) 14,769 11,371 1,216 1,845 ( 2,168 ) 1,524 13,817 14,740 Net income (loss) $ 54,474 $ 40,830 $ 3,449 $ 5,035 ($ 6,660 ) $ 7,717 $ 51,263 $ 53,582 Total assets at period end $ 4,588,419 $ 3,994,458 $ 74,942 $ 78,812 $ 1,186,431 $ 1,125,608 $ 5,849,792 $ 5,198,878 Expenditures for long-lived assets 1,147 2,259 86 379 98 130 1,331 2,768 -47- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 15 - Other Comprehensive Income (Loss) The following tables present the activity in other comprehensive income (loss): Three months ended September 30, 2020 2019 (Dollars in thousands) Pre-tax Amounts Income Taxes Net of Tax Pre-tax Amounts Income Taxes Net of Tax Securities available for sale: Changes in fair value of available for sale debt securities ($ 4,582 ) ($ 1,077 ) ($ 3,505 ) $ 3,772 $ 886 $ 2,886 Net losses on debt securities reclassified into earnings (1) — — — — — — Net change in fair value of available for sale debt securities ( 4,582 ) ( 1,077 ) ( 3,505 ) 3,772 886 2,886 Cash flow hedges: Change in fair value of cash flow hedges ( 146 ) ( 39 ) ( 107 ) ( 283 ) ( 66 ) ( 217 ) Net cash flow hedge gains reclassified into earnings (2) 344 83 261 60 14 46 Net change in fair value of cash flow hedges 198 44 154 ( 223 ) ( 52 ) ( 171 ) Defined benefit plan obligations: Amortization of net actuarial losses (3) 535 125 410 300 70 230 Amortization of net prior service credits (3) — — — ( 4 ) ( 1 ) ( 3 ) Net change in defined benefit plan obligations 535 125 410 296 69 227 Total other comprehensive (loss) income ($ 3,849 ) ($ 908 ) ($ 2,941 ) $ 3,845 $ 903 $ 2,942 (1) The pre-tax amount is reported in net realized losses on securities in the Unaudited Consolidated Statements of Income. (2) The pre-tax amounts are included in interest expense on FHLB advances, interest expense on junior subordinated debentures and interest and fees on loans in the Unaudited Consolidated Statements of Income. (3) The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Income. Nine months ended September 30, 2020 2019 (Dollars in thousands) Pre-tax Amounts Income Taxes Net of Tax Pre-tax Amounts Income Taxes Net of Tax Securities available for sale: Changes in fair value of available for sale debt securities $ 9,794 $ 2,301 $ 7,493 $ 25,985 $ 6,106 $ 19,879 Net losses on debt securities reclassified into earnings (1) — — — 80 19 61 Net change in fair value of available for sale debt securities 9,794 2,301 7,493 26,065 6,125 19,940 Cash flow hedges: Change in fair value of cash flow hedges ( 1,994 ) ( 473 ) ( 1,521 ) ( 1,653 ) ( 388 ) ( 1,265 ) Net cash flow hedge gains (losses) reclassified into earnings (2) 829 196 633 39 9 30 Net change in fair value of cash flow hedges ( 1,165 ) ( 277 ) ( 888 ) ( 1,614 ) ( 379 ) ( 1,235 ) Defined benefit plan obligations: Amortization of net actuarial losses (3) 1,606 377 1,229 900 211 689 Amortization of net prior service credits (3) — — — ( 12 ) ( 3 ) ( 9 ) Net change in defined benefit plan obligations 1,606 377 1,229 888 208 680 Total other comprehensive income $ 10,235 $ 2,401 $ 7,834 $ 25,339 $ 5,954 $ 19,385 (1) The pre-tax amount is reported in net realized losses on securities in the Unaudited Consolidated Statements of Income. (2) The pre-tax amounts are included in interest expense on FHLB advances, interest expense on junior subordinated debentures and interest and fees on loans in the Unaudited Consolidated Statements of Income. (3) The pre-tax amounts are included in other expenses in the Unaudited Consolidated Statements of Inc ome. -48- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax: (Dollars in thousands) Net Unrealized Gains (Losses) on Available For Sale Debt Securities Net Unrealized (Losses) Gains on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total For the three months ended September 30, 2020 Balance at June 30, 2020 $ 14,224 ($ 1,835 ) ($ 12,851 ) ($ 462 ) Other comprehensive loss before reclassifications ( 3,505 ) ( 107 ) — ( 3,612 ) Amounts reclassified from accumulated other comprehensive income — 261 410 671 Net other comprehensive (loss) income ( 3,505 ) 154 410 ( 2,941 ) Balance at September 30, 2020 $ 10,719 ($ 1,681 ) ($ 12,441 ) ($ 3,403 ) (Dollars in thousands) Net Unrealized Gains on Available For Sale Debt Securities Net Unrealized (Losses) Gains on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total For the nine months ended September 30, 2020 Balance at December 31, 2019 $ 3,226 ($ 793 ) ($ 13,670 ) ($ 11,237 ) Other comprehensive income (loss) before reclassifications 7,493 ( 1,521 ) — 5,972 Amounts reclassified from accumulated other comprehensive income — 633 1,229 1,862 Net other comprehensive income (loss) 7,493 ( 888 ) 1,229 7,834 Balance at September 30, 2020 $ 10,719 ($ 1,681 ) ($ 12,441 ) ($ 3,403 ) (Dollars in thousands) Net Unrealized Gains on Available For Sale Debt Securities Net Unrealized (Losses) Gains on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total For the three months ended September 30, 2019 Balance at June 30, 2019 $ 292 ($ 873 ) ($ 11,285 ) ($ 11,866 ) Other comprehensive income (loss) before reclassifications 2,886 ( 217 ) — 2,669 Amounts reclassified from accumulated other comprehensive income — 46 227 273 Net other comprehensive income (loss) 2,886 ( 171 ) 227 2,942 Balance at September 30, 2019 $ 3,178 ($ 1,044 ) ($ 11,058 ) ($ 8,924 ) (Dollars in thousands) Net Unrealized (Losses) Gains on Available For Sale Debt Securities Net Unrealized Gains (Losses) on Cash Flow Hedges Defined Benefit Pension Plan Adjustment Total For the nine months ended September 30, 2019 Balance at December 31, 2018 ($ 16,762 ) $ 191 ($ 11,738 ) ($ 28,309 ) Other comprehensive income (loss) before reclassifications 19,879 ( 1,265 ) — 18,614 Amounts reclassified from accumulated other comprehensive income 61 30 680 771 Net other comprehensive income (loss) 19,940 ( 1,235 ) 680 19,385 Balance at September 30, 2019 $ 3,178 ($ 1,044 ) ($ 11,058 ) ($ 8,924 ) -49- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 16 - Earnings per Common Share The following table presents the calculation of earnings per common share: (Dollars and shares in thousands, except per share amounts) Three Months Nine Months Periods ended September 30, 2020 2019 2020 2019 Earnings per common share - basic: Net income $ 18,322 $ 18,814 $ 51,263 $ 53,582 Less dividends and undistributed earnings allocated to participating securities ( 37 ) ( 36 ) ( 109 ) ( 105 ) Net income available to common shareholders $ 18,285 $ 18,778 $ 51,154 $ 53,477 Weighted average common shares 17,260 17,338 17,287 17,324 Earnings per common share - basic $ 1.06 $ 1.08 $ 2.96 $ 3.09 Earnings per common share - diluted: Net income $ 18,322 $ 18,814 $ 51,263 $ 53,582 Less dividends and undistributed earnings allocated to participating securities ( 37 ) ( 36 ) ( 109 ) ( 105 ) Net income available to common shareholders $ 18,285 $ 18,778 $ 51,154 $ 53,477 Weighted average common shares 17,260 17,338 17,287 17,324 Dilutive effect of common stock equivalents 57 76 82 82 Weighted average diluted common shares 17,317 17,414 17,369 17,406 Earnings per common share - diluted $ 1.06 $ 1.08 $ 2.95 $ 3.07 Weighted average common stock equivalents, not included in common stock equivalents above because they were anti-dilutive, totaled 223,210 and 221,047 , respectively for the three and nine months ended September 30, 2020, compared to 93,075 and 87,775 , respectively, for the same periods in 2019. -50- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 17 - Leases The Corporation has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception. As of September 30, 2020, there were no operating leases that had not yet commenced, compared to one operating lease that had not yet commenced as of December 31, 2019. Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $ 1.0 million and $ 3.0 million respectively, for the three and nine months ended September 30, 2020, compared to $ 944 thousand and $ 2.8 million, respectively, for the same periods in 2019. Variable lease components, such as consumer price index adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities. The following table presents information regarding Corporation’s operating leases: Sep 30, 2020 Dec 31, 2019 Weighted average discount rate 3.36 % 3.67 % Range of lease expiration dates 10 months - 20 years 4 months - 21 years Range of lease renewal options 1 year - 5 years 1 year - 5 years Weighted average remaining lease term 13.6 years 14.0 years The following table presents the undiscounted annual lease payments under the terms of the Corporation’s operating leases at September 30, 2020, including a reconciliation to the present value of operating lease liabilities recognized in the Unaudited Consolidated Balance Sheets: (Dollars in thousands) October 1, 2020 to December 31, 2020 $ 3,905 2021 3,801 2022 3,775 2023 3,625 2024 3,061 2025 and thereafter 22,566 Total operating lease payments (1) 40,733 Less interest 8,721 Present value of operating lease liabilities (2) $ 32,012 (1) Includes $ 2.6 million related to options to extend lease terms that are reasonably certain of being exercised. (2) Includes short-term operating lease liabilities of $ 2.9 million. The following table presents the components of total lease expense and operating cash flows: (Dollars in thousands) Three Months Nine Months Periods ended September 30, 2020 2019 2020 2019 Lease Expense: Operating lease expense $ 1,005 $ 931 $ 2,915 $ 2,787 Variable lease expense 14 13 41 36 Total lease expense (1) $ 1,019 $ 944 $ 2,956 $ 2,823 Cash Paid: Cash paid reducing operating lease liabilities $ 956 $ 926 $ 2,831 $ 2,677 (1) Included in net occupancy expenses in the Unaudited Consolidated Income Statement. -51- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) Note 18 - Commitments and Contingencies Adoption of Topic 326 As disclosed in Note 2, Topic 326 requires the measurement of expected lifetime credit losses for unfunded commitments that are considered off-balance sheet credit exposures. The Corporation adopted the provisions of Topic 326 effective January 1, 2020 using the modified retrospective method. Therefore, the prior period comparative information has not been adjusted and continues to be reported under GAAP in effect prior to the adoption of Topic 326. As a result of adopting Topic 326, the Corporation recognized an increase in the ACL on unfunded commitments of $ 1.5 million on January 1, 2020. Accounting Policy Updates Effective January 1, 2020, the Corporation has modified its accounting policy for the ACL on unfunded commitments. The updated policy is detailed below. The ACL on unfunded commitments is management’s estimate of expected credit losses over the expected contractual term (or life) in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. Unfunded commitments for home equity lines of credit and commercial demand loans are considered unconditionally cancellable for regulatory capital purposes and, therefore, are excluded from the calculation to estimate the ACL on unfunded commitments. For each portfolio, estimated loss rates and funding factors are applied to the corresponding balance of unfunded commitments. For each portfolio, the estimated loss rates applied to unfunded commitments are the same quantitative and qualitative loss rates applied to the corresponding on-balance sheet amounts in determining the ACL on loans. The estimated funding factor applied to unfunded commitments represents the likelihood that the funding will occur and is based upon the Corporation’s average historical utilization rate for each portfolio. The ACL on unfunded commitments is included in other liabilities in the Unaudited Consolidated Balance Sheets. The ACL on unfunded commitments is adjusted through a provision for credit losses recognized in the Unaudited Consolidated Statements of Income. Financial Instruments with Off-Balance Sheet Risk The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage the Corporation’s exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Unaudited Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. Financial Instruments Whose Contract Amounts Represent Credit Risk (Unfunded Commitments) Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer as long as there are no violations of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements. Each borrower’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the borrower. Standby Letters of Credit Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support the financing needs of the Bank’s commercial customers. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The collateral supporting those commitments is essentially the same as for other commitments. Most standby letters of credit extend for one year. The maximum potential amount of undiscounted future payments, not reduced by amounts that may be recovered totaled $ 10.3 million and $ 13.7 million, respectively, as of September 30, 2020 and December 31, 2019. At September 30, 2020 and December 31, 2019, there were no liabilities to beneficiaries resulting from standby letters of credit. Fee income on standby letters of credit was insignificant for the three and nine months ended September 30, 2020 and 2019. -52- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) A substantial portion of the standby letters of credit were supported by pledged collateral. The collateral obtained is determined based on management’s credit evaluation of the customer. Should the Corporation be required to make payments to the beneficiary, repayment from the customer to the Corporation is required. Financial Instruments Whose Notional Amounts Exceed the Amount of Credit Risk Mortgage Loan Commitments Interest rate lock commitments are extended to borrowers and relate to the origination of mortgage loans held for sale. To mitigate the interest rate risk and pricing risk associated with these rate locks and mortgage loans held for sale, the Corporation enters into forward sale commitments. Both interest rate lock commitments and forward sale commitments are derivative financial instruments. Loan Related Derivative Contracts The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers are similar to those used for loans. The interest rate swaps with other counterparties are generally subject to bilateral collateralization terms. The following table presents the contractual and notional amounts of financial instruments with off-balance sheet risk: (Dollars in thousands) Sep 30, 2020 Dec 31, 2019 Financial instruments whose contract amounts represent credit risk (unfunded commitments): Commitments to extend credit: Commercial loans $ 448,803 $ 471,338 Home equity lines 311,603 295,687 Other loans 79,706 88,613 Standby letters of credit 10,331 13,710 Financial instruments whose notional amounts exceed the amounts of credit risk: Mortgage loan commitments: Interest rate lock commitments 180,095 51,439 Forward sale commitments 312,074 94,829 Loan related derivative contracts: Interest rate swaps with customers 995,661 813,458 Mirror swaps with counterparties 995,661 813,458 Risk participation-in agreements 92,937 72,866 Interest rate risk management contracts: Interest rate swaps 60,000 60,000 See Note 9 for additional disclosure pertaining to derivative financial instruments. The ACL on unfunded commitments amounted to $ 2.2 million at September 30, 2020, compared to $ 293 thousand at December 31, 2019. The activity in the ACL on unfunded commitments for the three months ended September 30, 2020 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 887 $ 1,207 $ 2,094 $ 42 $ — $ 19 $ 19 $ 2,155 Provision ( 30 ) 60 30 ( 5 ) — — — 25 Ending Balance $ 857 $ 1,267 $ 2,124 $ 37 $ — $ 19 $ 19 $ 2,180 -53- Condensed Notes to Unaudited Consolidated Financial Statements – (continued) The activity in the ACL on unfunded commitments for the nine months ended September 30, 2020 is presented below: (Dollars in thousands) Commercial Consumer CRE C&I Total Commercial Residential Real Estate Home Equity Other Total Consumer Total Beginning Balance $ 136 $ 144 $ 280 $ 6 $ — $ 7 $ 7 $ 293 Adoption of Topic 326 (1) 817 626 1,443 34 — 6 6 1,483 Provision ( 96 ) 497 401 ( 3 ) — 6 6 404 Ending Balance $ 857 $ 1,267 $ 2,124 $ 37 $ — $ 19 $ 19 $ 2,180 (1) Adoption of the CECL accounting standard effective January 1, 2020. Other Contingencies Litigation The Corporation is involved in various claims and legal proceedings arising out of the ordinary course of business. Management is of the opinion, based on its review with counsel of the development of such matters to date, that the ultimate disposition of such matters will not materially affect the consolidated balance sheets or statements of income of the Corporation. -54- Management's Discussion and Analysis