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Item 2. Management’s Discussion and Analysis

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 
 The following discussion should be read in conjunction with the Corporation’s Audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2019, and in conjunction with the condensed Unaudited Consolidated Financial Statements and notes thereto included in Item 1 of this report. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results for the full-year ended December 31, 2020 or any future period. 
 
 Forward-Looking Statements 
 This report contains statements that are “forward-looking statements.” We may also make forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “outlook,” “will,” “should,” and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different than the anticipated future results, performance or achievements expressed or implied by the forward-looking statements. 
 
 Some of the factors that might cause these differences include the following: the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; the length and extent of the economic contraction as a result of the COVID-19 pandemic; continued deterioration in local, regional, national or international economic conditions or conditions affecting the banking or financial services industries, financial capital markets and the customers and communities we serve; changes in consumer behavior due to changing political, business and economic conditions, including increased unemployment, or legislative or regulatory initiatives; the possibility that future credits losses are higher than currently expected due to changes in economic assumptions or adverse economic developments; volatility in national and international financial markets; reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits; reductions in the market value or outflows of wealth management assets under administration; decreases in the value of securities and other assets; reductions in loan demand; changes in loan collectibility, increases in defaults and charge-off rates; changes in the size and nature of our competition; changes in legislation or regulation and accounting principles, policies and guidelines; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; reputational risk relating to our participation in the Paycheck Protection Program and other pandemic-related legislative and regulatory initiatives and programs; and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC, may result in these differences. You should carefully review all of these factors and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. 
 
 Critical Accounting Policies and Estimates 
 Accounting policies involving significant judgments, estimates and assumptions by management, which have, or could have, a material impact on the Corporation’s consolidated financial statements are considered critical accounting policies. As of September 30, 2020, management considers the following to be its critical accounting policies: the determination of allowance for credit losses on loans, the valuation of goodwill and identifiable intangible assets, and accounting for defined benefit pension plans. 
 
 See our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 for a description of the Corporation’s critical accounting policies for the valuation of goodwill and identifiable intangible assets and accounting for defined benefit pension plans. Given the composition and nature of the Corporation’s investment security portfolio, management no longer considers the assessment of investment securities for impairment as a critical accounting policy. 
 
 As a result of the adoption of Topic 326 effective January 1, 2020, Washington Trust updated its critical accounting policy for the Allowance of Credit Losses on Loans. The updated policy is described in detail below. 
 
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 Management's Discussion and Analysis 

 Allowance for Credit Losses on Loans 
 The ACL on loans is management’s estimate of expected credit losses over the expected life of the loans at the reporting date. 
 
 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 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 
 
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 Management's Discussion and Analysis 

 external factors such as legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio. Qualitative loss factors are applied to each portfolio segment with the amounts determined by historical loan charge-offs of a peer group of similar-sized regional banks. 
 
 Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. 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. 
 
 Recently Issued Accounting Pronouncements 
 See Note 2 to the Unaudited Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Corporation’s financial statements. 
 
 Overview 
 The Corporation offers a comprehensive product line of banking and financial services to individuals and businesses, including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut; its ATMs; telephone banking; mobile banking and its internet website (www.washtrust.com). 
 
 Our largest source of operating income is net interest income, which is the difference between interest earned on loans and securities and interest paid on deposits and borrowings. In addition, we generate noninterest income from a number of sources, including wealth management services, mortgage banking activities and deposit services. Our principal noninterest expenses include salaries and employee benefit costs, outsourced services provided by third party vendors, occupancy and facility-related costs and other administrative expenses. 
 
 We continue to leverage our strong regional brand to build market share and remain steadfast in our commitment to provide superior service. 
 
 The COVID-19 pandemic has caused an unprecedented disruption to the economy and the communities we serve. In the first quarter of 2020, we implemented our business continuity and pandemic plans, which included remote working arrangements for the majority of our workforce, closing our branches and offering drive-through banking or special banking services by appointment only, and promoting social distancing. In July 2020, we reopened our branch lobbies to customers while adhering to social distancing guidelines. Remote working arrangements continue for a significant portion of our workforce. 
 
 On March 27, 2020, the CARES Act was enacted to address the economic effects of the COVID-19 pandemic. The CARES Act initially appropriated $349 billion for “paycheck protection loans” through the PPP. The amount appropriated was subsequently increased to $659 billion. Loans under the PPP that meet SBA requirements may be forgiven in certain circumstances, and are 100% guaranteed by SBA. As of September 30, 2020, there were 1,770 PPP loans totaling $216.8 million included in our commercial and industrial loan portfolio. PPP loans are fully guaranteed by the U.S. government, have either a two-year or five-year term and earn interest at a rate of 1%. We currently expect a significant portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. In conjunction with the PPP, the FRB has created the PPPLF, a lending facility for qualified financial institutions. Only loans issued under the PPP can be pledged as collateral to access the facility. The PPPLF extends credit to depository institutions at a fixed interest rate of 0.35% with maturity terms matching the maturity date of the pledged PPP loans. In the second quarter of 2020, Washington Trust began participating in PPPLF and as of September 30, 2020, PPPLF borrowings amounted to $105.7 million. 
 
 The CARES Act also provided TDR accounting relief. From March 1, 2020 through the earlier of December 31, 2020 or 60 days after the termination date of the National Emergency, a financial institution may elect to suspend the requirements under GAAP for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR, including impairment accounting. This TDR relief applies for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. Financial institutions are required to maintain 
 
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 Management's Discussion and Analysis 

 records of the volume of loans involved in modifications to which TDR relief is applicable. Washington Trust has made this election. Through September 30, 2020, we have executed loan payment deferment modifications on 617 loans totaling $685.4 million. Eligible deferment modifications are not classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. As of September 30, 2020, we have active deferrals on 253 loans totaling $418.2 million, or 10% of total loans excluding PPP loans. As of November 2, 2020, we have active deferrals on 146 loans totaling $252.9 million, or 6% of total loans excluding PPP loans. 
 
 Risk Management 
 The Corporation has a comprehensive enterprise risk management (“ERM”) program through which the Corporation identifies, measures, monitors and controls current and emerging material risks. 
 
 The Board of Directors is responsible for oversight of the ERM program. The ERM program enables the aggregation of risk across the Corporation and ensures the Corporation has the tools, programs and processes in place to support informed decision making, to anticipate risks before they materialize and to maintain the Corporation’s risk profile consistent with its risk strategy. 
 
 The Board of Directors has approved an enterprise risk management policy that addresses each category of risk. The risk categories include: credit risk, interest rate risk, liquidity risk, price and market risk, compliance risk, strategic and reputation risk, and operational risk. A description of each risk category is provided below. 
 
 Credit risk represents the possibility that borrowers or other counterparties may not repay loans or other contractual obligations according to their terms due to changes in the financial capacity, ability and willingness of such borrowers or counterparties to meet their obligations. In some cases, the collateral securing payment of the loans may be sufficient to assure repayment, but in other cases the Corporation may experience significant credit losses which could have an adverse effect on its operating results. The Corporation makes various assumptions and judgments about the collectibility of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of the real estate and other assets serving as collateral for the repayment of loans. Credit risk also exists with respect to investment securities. For further discussion regarding the credit risk and the credit quality of the Corporation’s loan portfolio, see Note 5 and Note 6 to the Unaudited Consolidated Financial Statements. For further discussion regarding credit risk associated with unfunded commitments, see Note 18 to the Unaudited Consolidated Financial Statements. For further discussion regarding the Corporation’s securities portfolio, see Note 4 to the Unaudited Consolidated Financial Statements. 
 
 Interest rate risk is the risk of loss to future earnings due to changes in interest rates. It exists because the repricing frequency and magnitude of interest-earning assets and interest-bearing liabilities are not identical. Liquidity risk is the risk that the Corporation will not have the ability to generate adequate amounts of cash for it to meet its maturing liability obligations and customer loan demand. For detailed disclosure regarding liquidity management, asset/liability management and interest rate risk, see “Liquidity and Capital Resources” and “Asset/Liability Management and Interest Rate Risk” sections below. 
 
 Price and market risk refers to the risk of loss arising from adverse changes in interest rates and other relevant market rates and prices, such as equity prices. Interest rate risk, discussed above, is the most significant market risk to which the Corporation is exposed. The Corporation is also exposed to financial market risk and housing market risk. 
 
 Compliance risk represents the risk of regulatory sanctions or financial loss resulting from the failure to comply with laws, rules and regulations and standards of good banking practice. Activities which may expose the Corporation to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, adherence to all applicable laws and regulations, and employment and tax matters. 
 
 Strategic and reputation risk represent the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, and failure to assess existing and new opportunities and threats in business, markets, and products. 
 
 Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, natural disasters and security risks. 
 
 ERM is an overarching program that includes all areas of the Corporation. A framework approach is utilized to assign responsibility and to ensure that the various business units and activities involved in the risk management life-cycle are effectively integrated. The Corporation has adopted the “three lines of defense” concept that is an industry best practice for 
 
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 Management's Discussion and Analysis 

 ERM. Business units are the first line of defense in managing risk. They are responsible for identifying, measuring, monitoring, and controlling current and emerging risks. They must report on and escalate their concerns. Corporate functions such as Credit Risk Management, Financial Administration, Information Assurance and Compliance, comprise the second line of defense. They are responsible for policy setting and for reviewing and challenging the risk management activities of the business units. They collaborate closely with business units on planning and resource allocation with respect to risk management. Internal Audit is the third line of defense. They provide independent assurance to the Board of Directors of the effectiveness of the first and second lines in fulfilling their risk management responsibilities. 
 
 For additional factors that could adversely impact Washington Trust’s future results of operations and financial condition, see the section labeled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC. 
 
 Results of Operations 
 The following table presents a summarized consolidated statement of operations: 
 
 (Dollars in thousands) Three Months Nine Months 
 Change Change 
 For the periods ended September 30, 2020 2019 $ % 2020 2019 $ % 
 Net interest income $31,654 $32,978 ($1,324) (4 %) $95,201 $101,420 ($6,219) (6 %) 
 Noninterest income 25,468 18,342 7,126 39 71,715 50,462 21,253 42 
 Total revenues 57,122 51,320 5,802 11 166,916 151,882 15,034 10 
 Provision for credit losses 1,325 400 925 231 10,561 1,575 8,986 571 
 Noninterest expense 32,344 26,870 5,474 20 91,275 81,985 9,290 11 
 Income before income taxes 23,453 24,050 (597) (2) 65,080 68,322 (3,242) (5) 
 Income tax expense 5,131 5,236 (105) (2) 13,817 14,740 (923) (6) 
 Net income $18,322 $18,814 ($492) (3 %) $51,263 $53,582 ($2,319) (4 %) 

 The following table presents a summary of performance metrics and ratios: 
 
 Three Months Nine Months 
 For the periods ended September 30, 2020 2019 2020 2019 
 Diluted earnings per common share $1.06 $1.08 $2.95 $3.07 
 Return on average assets (net income divided by average assets) 1.24 % 1.44 % 1.20 % 1.39 % 
 Return on average equity (net income available for common shareholders divided by average equity) 
 13.99 % 15.20 % 13.36 % 15.09 % 
 Net interest income as a percentage of total revenues 55 % 64 % 57 % 67 % 
 Noninterest income as a percentage of total revenues 45 % 36 % 43 % 33 % 

 Net income totaled $18.3 million and $51.3 million, respectively, for the three and nine months ended September 30, 2020, compared to $18.8 million and $53.6 million, respectively, for the same periods in 2019. 
 
 Net interest income in 2020 was negatively impacted by the decline in market interest rates, as interest-earning asset yields declined faster than the downward repricing of interest-bearing liabilities. However, the decline in market interest rates also spurred mortgage origination, refinancing and sales activity, resulting in strong mortgage banking results in 2020. Our 2020 results also reflected an increase in provision for credit losses due to the anticipated impact of the COVID-19 pandemic under the CECL accounting methodology. Noninterest expenses increased in 2020, largely due to increases in salaries and employee benefits expense, which included volume-related increases in mortgage banking commissions expense. 
 
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 Management's Discussion and Analysis 

 Average Balances / Net Interest Margin - Fully Taxable Equivalent (FTE) Basis 
 The following table presents average balance and interest rate information. Tax-exempt income is converted to a fully taxable equivalent basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. Unrealized gains (losses) on available for sale securities and fair value adjustments on mortgage loans held for sale are excluded from the average balance and yield calculations. Nonaccrual loans, as well as interest recognized on these loans, are included in amounts presented for loans. 
 
 Three months ended September 30, 2020 2019 Change 
 (Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate 
 Assets: 
 Cash, federal funds sold and short-term investments 
 $168,106 $39 0.09 $96,231 $493 2.03 $71,875 ($454) (1.94) 
 Mortgage loans held for sale 61,043 468 3.05 39,771 410 4.09 21,272 58 (1.04) 
 Taxable debt securities 906,977 4,870 2.14 920,910 6,318 2.72 (13,933) (1,448) (0.58) 
 Nontaxable debt securities — — — 75 3 15.87 (75) (3) (15.87) 
 
 Total securities 
 906,977 4,870 2.14 920,985 6,321 2.72 (14,008) (1,451) (0.58) 
 FHLB stock 43,839 532 4.83 47,982 747 6.18 (4,143) (215) (1.35) 
 
 Commercial real estate 1,652,136 11,649 2.81 1,490,878 17,314 4.61 161,258 (5,665) (1.80) 
 Commercial & industrial 849,452 6,920 3.24 584,601 6,946 4.71 264,851 (26) (1.47) 
 Total commercial 
 2,501,588 18,569 2.95 2,075,479 24,260 4.64 426,109 (5,691) (1.69) 
 Residential real estate 1,510,621 14,047 3.70 1,367,017 13,728 3.98 143,604 319 (0.28) 
 Home equity 276,221 2,320 3.34 291,058 3,615 4.93 (14,837) (1,295) (1.59) 
 Other 18,706 237 5.04 22,270 278 4.95 (3,564) (41) 0.09 
 Total consumer 
 294,927 2,557 3.45 313,328 3,893 4.93 (18,401) (1,336) (1.48) 
 Total loans 
 4,307,136 35,173 3.25 3,755,824 41,881 4.42 551,312 (6,708) (1.17) 
 Total interest-earning assets 
 5,487,101 41,082 2.98 4,860,793 49,852 4.07 626,308 (8,770) (1.09) 
 Noninterest-earning assets 377,348 320,223 57,125 
 Total assets 
 $5,864,449 $5,181,016 $683,433 
 Liabilities and Shareholders’ Equity: 
 Interest-bearing demand deposits $157,986 $83 0.21 $137,980 $649 1.87 $20,006 ($566) (1.66) 
 NOW accounts 631,148 99 0.06 471,302 69 0.06 159,846 30 — 
 Money market accounts 839,032 977 0.46 699,138 2,094 1.19 139,894 (1,117) (0.73) 
 Savings accounts 428,781 67 0.06 362,142 72 0.08 66,639 (5) (0.02) 
 Time deposits (in-market) 730,464 3,015 1.64 800,571 4,181 2.07 (70,107) (1,166) (0.43) 
 Total interest-bearing in-market deposits 2,787,411 4,241 0.61 2,471,133 7,065 1.13 316,278 (2,824) (0.52) 
 Wholesale brokered time deposits 463,756 1,291 1.11 475,026 2,727 2.28 (11,270) (1,436) (1.17) 
 Total interest-bearing deposits 3,251,167 5,532 0.68 2,946,159 9,792 1.32 305,008 (4,260) (0.64) 
 FHLB advances 860,758 3,354 1.55 980,091 6,512 2.64 (119,333) (3,158) (1.09) 
 Junior subordinated debentures 
 22,681 135 2.37 22,681 245 4.29 — (110) (1.92) 
 PPPLF borrowings 180,128 159 0.35 — — — 180,128 159 0.35 
 Total interest-bearing liabilities 
 4,314,734 9,180 0.85 3,948,931 16,549 1.66 365,803 (7,369) (0.81) 
 Noninterest-bearing demand deposits 842,949 626,408 216,541 
 Other liabilities 186,981 115,480 71,501 
 Shareholders’ equity 519,785 490,197 29,588 
 Total liabilities and shareholders’ equity 
 $5,864,449 $5,181,016 $683,433 
 Net interest income (FTE) 
 $31,902 $33,303 ($1,401) 
 Interest rate spread 2.13 2.41 (0.28) 
 Net interest margin 2.31 2.72 (0.41) 

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 Management's Discussion and Analysis 

 Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: 
 
 (Dollars in thousands) 
 Three months ended September 30, 2020 2019 Change 
 Commercial loans $248 $323 ($75) 
 Nontaxable debt securities — 2 (2) 
 
 Total $248 $325 ($77) 

 Nine months ended September 30, 2020 2019 Change 
 (Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate 
 Assets: 
 Cash, federal funds sold and short-term investments $156,296 $424 0.36 $75,333 $1,232 2.19 $80,963 ($808) (1.83) 
 Mortgage loans held for sale 48,570 1,193 3.28 28,379 878 4.14 20,191 315 (0.86) 
 Taxable debt securities 905,692 16,181 2.39 972,511 20,550 2.83 (66,819) (4,369) (0.44) 
 Nontaxable debt securities — — — 602 24 5.33 (602) (24) (5.33) 
 
 Total debt securities 905,692 16,181 2.39 973,113 20,574 2.83 (67,421) (4,393) (0.44) 
 FHLB stock 49,236 1,826 4.95 48,185 2,162 6.00 1,051 (336) (1.05) 
 
 Commercial real estate 1,623,612 40,326 3.32 1,461,736 51,702 4.73 161,876 (11,376) (1.41) 
 Commercial & industrial 749,905 20,214 3.60 603,143 21,972 4.87 146,762 (1,758) (1.27) 
 Total commercial 2,373,517 60,540 3.41 2,064,879 73,674 4.77 308,638 (13,134) (1.36) 
 Residential real estate 1,492,589 42,660 3.82 1,358,606 41,099 4.04 133,983 1,561 (0.22) 
 Home equity 281,488 7,802 3.70 284,657 10,757 5.05 (3,169) (2,955) (1.35) 
 Other 19,171 716 4.99 24,017 887 4.94 (4,846) (171) 0.05 
 Total consumer 300,659 8,518 3.78 308,674 11,644 5.04 (8,015) (3,126) (1.26) 
 Total loans 4,166,765 111,718 3.58 3,732,159 126,417 4.53 434,606 (14,699) (0.95) 
 Total interest-earning assets 5,326,559 131,342 3.29 4,857,169 151,263 4.16 469,390 (19,921) (0.87) 
 Noninterest-earning assets 357,133 292,702 64,431 
 Total assets $5,683,692 $5,149,871 $533,821 
 Liabilities and Shareholders’ Equity: 
 Interest-bearing demand deposits $158,594 $725 0.61 $144,306 $1,959 1.82 $14,288 ($1,234) (1.21) 
 NOW accounts 569,283 253 0.06 462,856 228 0.07 106,427 25 (0.01) 
 Money market accounts 818,530 4,439 0.72 668,330 5,534 1.11 150,200 (1,095) (0.39) 
 Savings accounts 402,243 195 0.06 365,911 204 0.07 36,332 (9) (0.01) 
 Time deposits (in-market) 752,443 10,571 1.88 795,559 11,900 2.00 (43,116) (1,329) (0.12) 
 Total interest-bearing in-market deposits 2,701,093 16,183 0.80 2,436,962 19,825 1.09 264,131 (3,642) (0.29) 
 Wholesale brokered time deposits 471,771 4,997 1.41 485,405 8,132 2.24 (13,634) (3,135) (0.83) 
 Total interest-bearing deposits 3,172,864 21,180 0.89 2,922,367 27,957 1.28 250,497 (6,777) (0.39) 
 FHLB advances 1,016,943 13,501 1.77 1,019,172 20,153 2.64 (2,229) (6,652) (0.87) 
 Junior subordinated debentures 22,681 519 3.06 22,681 750 4.42 — (231) (1.36) 
 PPPLF borrowings 61,333 161 0.35 — — — 61,333 161 0.35 
 Total interest-bearing liabilities 4,273,821 35,361 1.11 3,964,220 48,860 1.65 309,601 (13,499) (0.54) 
 Noninterest-bearing demand deposits 733,359 613,917 119,442 
 Other liabilities 164,928 98,012 66,916 
 Shareholders’ equity 511,584 473,722 37,862 
 Total liabilities and shareholders’ equity $5,683,692 $5,149,871 $533,821 
 Net interest income (FTE) $95,981 $102,403 ($6,422) 
 Interest rate spread 2.18 2.51 (0.33) 
 Net interest margin 2.41 2.82 (0.41) 

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 Management's Discussion and Analysis 

 Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: 
 
 (Dollars in thousands) 
 Nine months ended September 30, 2020 2019 Change 
 Commercial loans $780 $977 ($197) 
 Nontaxable debt securities — 6 (6) 
 
 Total $780 $983 ($203) 

 Net Interest Income 
 Net interest income continues to be the primary source of our operating income. Net interest income for the three and nine months ended September 30, 2020 totaled $31.7 million, and $95.2 million, respectively, compared to $33.0 million and $101.4 million, respectively, for the same periods in 2019. Net interest income is affected by the level of, and changes in, interest rates, and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Prepayment penalty income associated with loan payoffs is included in net interest income. 
 
 The following discussion presents net interest income on a fully taxable equivalent (“FTE”) basis by adjusting income and yields on tax-exempt loans and securities to be comparable to taxable loans and securities. 
 
 The analysis of net interest income, net interest margin and the yield on loans may be impacted by the periodic recognition of prepayment penalty income associated with loan payoffs. Prepayment penalty income associated with loan payoffs for both the three and nine months ended September 30, 2020 and 2019 was immaterial. The analysis of net interest income, net interest margin and the yield on loans is also impacted by changes in the level of net amortization of premiums and discounts on securities and loans, which is included in interest income. As market interest rates decline, loan prepayments and the receipt of payments on mortgage-backed securities generally increase. This results in accelerated levels of amortization reducing net interest income and may also result in the proceeds having to be reinvested at a lower rate than the loan or mortgage-backed security being prepaid. As noted in the Unaudited Consolidated Statements of Cash Flows, net amortization of premiums and discounts on securities and loans amounted to $4.1 million for the nine months ended September 30, 2020, up by $988 thousand from the same period in 2019. 
 
 FTE net interest income for the three and nine months ended September 30, 2020 amounted to $31.9 million and $96.0 million, respectively, down by $1.4 million and $6.4 million, respectively, from the same periods in 2019. Growth in average interest-earning assets, net of increased average interest-bearing liability balances, contributed approximately $6.1 million and $12.8 million, respectively, of additional net interest income for the three and nine months ended September 30, 2020, however, this was offset by declines in asset yields out-pacing declines in funding costs, which reduced net interest income by $7.5 million and $19.2 million, respectively. 
 
 The net interest margin was 2.31% and 2.41%, respectively, for the three and nine months ended September 30, 2020, compared to 2.72% and 2.82%, respectively, for the same periods a year ago. Compression in net interest margin resulted from the downward repricing of assets, which occurred at a faster pace than the downward repricing of liabilities. 
 
 Total average securities for the three and nine months ended September 30, 2020 decreased by $14.0 million and $67.4 million, respectively, from the average balances for the same periods a year earlier. The decline in the average balance of securities was due to timing of reinvestment of security portfolio cash flows. The FTE rate of return on the securities portfolio for the three and nine months ended September 30, 2020 was 2.14% and 2.39%, respectively, compared to 2.72% and 2.83%, respectively, for the same periods in 2019, reflecting purchases of relatively lower yielding debt securities and lower market interest rates. 
 
 Total average loan balances for the three and nine months ended September 30, 2020 increased by $551.3 million and $434.6 million, respectively, from the average loan balances for the comparable 2019 period. This reflected growth in average commercial loan balances, which included the origination of PPP loans in 2020, as well as growth in average residential real estate loan balances, which included purchases of residential mortgage loans in the latter portion of 2019 and first quarter of 2020. The yield on total loans for the three and nine months ended September 30, 2020 was 3.25% and 3.58%, respectively, compared to 4.42% and 4.53%, respectively, for the same periods in 2019. Yields on LIBOR-based and prime-based loans reflected lower market interest rates. 
 
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 Management's Discussion and Analysis 

 The average balance of FHLB advances for the three and nine months ended September 30, 2020 decreased by $119.3 million and $2.2 million, respectively, compared to the average balances for the same periods in 2019. The average rate paid on such advances for the three and nine months ended September 30, 2020 was 1.55% and 1.77%, respectively, compared to 2.64% and 2.64%, respectively, for the same periods in 2019, due to lower rates on short-term advances. 
 
 Included in total average interest-bearing deposits were of out-of-market wholesale brokered time deposits, which decreased by $11.3 million and $13.6 million, respectively, from the same periods in 2019. The average rate paid on wholesale brokered time deposits for the three and nine months ended September 30, 2020 was 1.11% and 1.41%, respectively, compared to 2.28% and 2.24%, respectively, for the same periods in 2019. The decline in the yield on average wholesale brokered time deposits reflected lower market interest rates. 
 
 Average in-market interest-bearing deposits, which excludes wholesale brokered time deposits, for the three and nine months ended September 30, 2020 increased by $316.3 million and $264.1 million, respectively, from the average balances for the same periods in 2019. The increases largely reflected growth in average lower-cost deposit categories, partially offset by maturities of higher-cost promotional time deposits. The average rate paid on in-market interest-bearing deposits for the three and nine months ended September 30, 2020 decreased by 52 basis points and 29 basis points, respectively, compared to the same periods in 2019, largely due to downward repricing of interest-bearing in-market deposits reflecting lower market interest rates. 
 
 The average balance of noninterest-bearing demand deposits for the three and nine months ended September 30, 2020 increased by $216.5 million and $119.4 million, respectively, from the average balances for the same periods in 2019. See additional disclosure regarding PPP loan funding deposits under the caption “Sources of Funds.” 
 
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 Management's Discussion and Analysis 

 Volume / Rate Analysis - Interest Income and Expense (FTE Basis) 
 The following table presents certain information on a FTE basis regarding changes in our interest income and interest expense for the period indicated. The net change attributable to both volume and rate has been allocated proportionately. 
 
 (Dollars in thousands) Three Months Ended September 30, 2020 vs. 2019 Nine Months Ended September 30, 
2020 vs. 2019 
 Change Due to Change Due to 
 Volume Rate Net Change Volume Rate Net Change 
 Interest on Interest-Earning Assets: 
 Cash, federal funds sold and other short-term investments 
 $214 ($668) ($454) $705 ($1,513) ($808) 
 Mortgage loans held for sale 181 (123) 58 526 (211) 315 
 Taxable debt securities (95) (1,353) (1,448) (1,344) (3,025) (4,369) 
 Nontaxable debt securities (2) (1) (3) (12) (12) (24) 
 
 Total securities (97) (1,354) (1,451) (1,356) (3,037) (4,393) 
 FHLB stock (60) (155) (215) 46 (382) (336) 
 
 Commercial real estate 1,713 (7,378) (5,665) 5,260 (16,636) (11,376) 
 Commercial & industrial 2,559 (2,585) (26) 4,674 (6,432) (1,758) 
 Total commercial 
 4,272 (9,963) (5,691) 9,934 (23,068) (13,134) 
 Residential real estate 1,369 (1,050) 319 3,862 (2,301) 1,561 
 Home equity (176) (1,119) (1,295) (118) (2,837) (2,955) 
 Other (45) 4 (41) (181) 10 (171) 
 Total consumer (221) (1,115) (1,336) (299) (2,827) (3,126) 
 Total loans 5,420 (12,128) (6,708) 13,497 (28,196) (14,699) 
 Total interest income 5,658 (14,428) (8,770) 13,418 (33,339) (19,921) 
 Interest on Interest-Bearing Liabilities: 
 Interest-bearing demand deposits 83 (649) (566) 179 (1,413) (1,234) 
 NOW accounts 30 — 30 58 (33) 25 
 Money market accounts 359 (1,476) (1,117) 1,092 (2,187) (1,095) 
 Savings accounts 13 (18) (5) 19 (28) (9) 
 Time deposits (in-market) (343) (823) (1,166) (636) (693) (1,329) 
 Total interest-bearing in-market deposits 142 (2,966) (2,824) 712 (4,354) (3,642) 
 Wholesale brokered time deposits (63) (1,373) (1,436) (221) (2,914) (3,135) 
 Total interest-bearing deposits 79 (4,339) (4,260) 491 (7,268) (6,777) 
 FHLB advances (717) (2,441) (3,158) (44) (6,608) (6,652) 
 Junior subordinated debentures — (110) (110) — (231) (231) 
 Other borrowings 159 — 159 161 — 161 
 Total interest expense (479) (6,890) (7,369) 608 (14,107) (13,499) 
 Net interest income (FTE) $6,137 ($7,538) ($1,401) $12,810 ($19,232) ($6,422) 

 Provision for Credit Losses 
 Effective January 1, 2020, Washington Trust adopted Topic 326, often referred to as CECL, which 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. CECL requires that the allowance for credit losses, or ACL, be calculated based on current expected credit losses over the full remaining expected life of the financial assets and also consider expected future changes in macroeconomic conditions. See Note 2 to the Unaudited Consolidated Financial Statements for additional disclosure on the impact of adopting Topic 326. 
 
 Prior to January 1, 2020, the provision for loan losses was based on an incurred loss model. The incurred loss model was based on management’s periodic assessment of the adequacy of the allowance for credit losses on loans which, in turn, was 
 
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 Management's Discussion and Analysis 

 based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics; the levels of nonperforming loans, past due loans and net charge-offs, both current and historic; local economic and credit conditions; the direction of real estate values; and regulatory guidelines. The provision for loan losses was charged against earnings in order to maintain an allowance that reflected management’s best estimate of probable losses inherent in the loan portfolio at the balance sheet date. 
 
 Provisions for credit losses of $1.3 million and $10.6 million, respectively, were charged to earnings for the three and nine months ended September 30, 2020, compared to $400 thousand and $1.6 million, respectively, for the same periods in 2019. In addition to the change in accounting methodology described above, the year-over-year increase in the year-to-date provision was attributable to anticipated losses related the COVID-19 pandemic and also reflected loan growth and changes in the underlying portfolio. Estimating an appropriate level of ACL in loans necessarily involves a high degree of judgment and continued uncertainty regarding the severity and duration of the pandemic and related economic effects will continue to affect the ACL. 
 
 Net charge-offs totaled $96 thousand and $1.0 million, respectively, for the three and nine months ended September 30, 2020, compared to $801 thousand and $1.7 million, respectively, for the same periods in 2019. 
 
 The allowance for credit losses on loans was $42.6 million, or 1.00% of total loans, at September 30, 2020, compared to an allowance for loan losses of $27.0 million, or 0.69% of total loans, at December 31, 2019. See additional discussion under the caption “Asset Quality” for further information on the allowance for credit losses on loans. 
 
 Noninterest Income 
 Noninterest income is an important source of revenue for Washington Trust. The principal categories of noninterest income are shown in the following table: 
 
 (Dollars in thousands) Three Months Nine Months 
 Change Change 
 Periods ended September 30, 2020 2019 $ % 2020 2019 $ % 
 Noninterest income: 
 Wealth management revenues $8,954 $9,153 ($199) (2 %) $26,248 $27,954 ($1,706) (6 %) 
 
 Mortgage banking revenues 
 12,353 4,840 7,513 155 33,300 11,126 22,174 199 
 Card interchange fees 1,161 1,099 62 6 3,139 3,114 25 1 
 Service charges on deposit accounts 598 939 (341) (36) 1,975 2,743 (768) (28) 
 Loan related derivative income 
 1,264 1,407 (143) (10) 3,818 2,877 941 33 
 Income from bank-owned life insurance 567 569 (2) — 1,922 1,784 138 8 
 Net realized gains on securities — — — — — (80) 80 100 
 
 Other income 571 335 236 70 1,313 944 369 39 
 
 Total noninterest income 
 $25,468 $18,342 $7,126 39 % $71,715 $50,462 $21,253 42 % 

 Noninterest Income Analysis 
 Revenue from wealth management services represented 37% of total noninterest income for the nine months ended September 30, 2020, compared to 55% for the same period in 2019. A substantial portion of wealth management revenues is dependent on the value of wealth management assets under administration and is closely tied to the performance of the financial markets. This portion of wealth management revenues is referred to as “asset-based” and includes trust and investment management fees. Wealth management revenues also include “transaction-based” revenues, such as financial planning, commissions and other service fees that are not primarily derived from the value of assets. 
 
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 Management's Discussion and Analysis 

 The categories of wealth management revenues are shown in the following table: 
 
 (Dollars in thousands) Three Months Nine Months 
 Change Change 
 Periods ended September 30, 2020 2019 $ % 2020 2019 $ % 
 Wealth management revenues: 
 
 Asset-based revenues $8,786 $9,013 ($227) (3 %) $25,297 $27,075 ($1,778) (7 %) 
 Transaction-based revenues 168 140 28 20 951 879 72 8 
 Total wealth management revenues $8,954 $9,153 ($199) (2 %) $26,248 $27,954 ($1,706) (6 %) 

 Wealth management revenues for the three and nine months ended September 30, 2020 decreased by $199 thousand and $1.7 million, respectively, from the comparable periods in 2019, due to a decline in asset-based revenues. The decrease in asset-based revenues correlated to declines in the average balances of assets under administration (“AUA”) for the comparable periods in 2019. 
 
 The following table presents the changes in wealth management AUA: 
 
 (Dollars in thousands) Three Months Nine Months 
 Periods ended September 30, 2020 2019 2020 2019 
 Wealth management assets under administration: 
 Balance at the beginning of period $6,138,845 $6,478,890 $6,235,801 $5,910,814 
 Net investment appreciation & income 335,209 66,514 234,076 809,060 
 Net client asset outflows (78,402) (419,077) (74,225) (593,547) 
 Balance at the end of period $6,395,652 $6,126,327 $6,395,652 $6,126,327 

 Wealth management AUA amounted to $6.4 billion at September 30, 2020, up by $269.3 million, or 4%, from the balance at September 30, 2019, reflecting net investment appreciation offset, in part, by net client asset outflows. AUA and related asset-based revenues were adversely impacted by client outflows in the second half of 2019, which was largely associated with the departures of two senior counselors in June 2019. The average balance of AUA for the three and nine months ended September 30, 2020 decreased by approximately 0.2% and 4%, respectively, from the average balances for the same periods in 2019. 
 
 Mortgage banking revenues represented 46% of total noninterest income for the nine months ended September 30, 2020, compared to 22% for the same period in 2019. These revenues are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets. 
 
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 Management's Discussion and Analysis 

 The composition of mortgage banking revenues and the volume of loans sold to the secondary market are shown in the following table: 
 
 (Dollars in thousands) Three Months Nine Months 
 Change Change 
 Periods ended September 30, 2020 2019 $ % 2020 2019 $ % 
 Mortgage banking revenues: 
 Realized gains on loan sales, net (1) 
 $14,280 $4,509 $9,771 217 % $28,614 $9,370 $19,244 205 % 
 Unrealized (losses) gains, net (2) 
 (1,555) 243 (1,798) (740) 5,185 1,379 3,806 276 
 Loan servicing fee income, net (3) 
 (372) 88 (460) (523) (499) 377 (876) (232) 
 Total mortgage banking revenues $12,353 $4,840 $7,513 155 % $33,300 $11,126 $22,174 199 % 
 
 Loans sold to the secondary market (4) 
 $354,170 $184,976 $169,194 91 % $821,585 $414,469 $407,116 98 % 

 (1) Includes gains on loan sales, commission income on loans originated for others, servicing right gains, and gains (losses) on forward loan commitments. 
 (2) Represents fair value adjustments on mortgage loans held for sale and forward loan commitments. 
 (3) Represents loan servicing fee income, net of servicing right amortization and valuation adjustments. 
 (4) Includes brokered loans (loans originated for others). 
 
 For the three and nine months ended September 30, 2020, mortgage banking revenues were up by $7.5 million and $22.2 million, respectively, compared to the same periods in 2019, primarily due to an increase in net realized gains associated with mortgage banking activities. Net realized gains rose due to increases in both sales volume and sales yield on loans sold to the secondary market. For the three and nine months ended September 30, 2020, mortgage loans sold to the secondary market totaled $354.2 million and $821.6 million, respectively, compared to $185.0 million and $414.5 million, respectively, for the same periods in 2019. As noted in the above table, mortgage banking revenues also include net unrealized gains and losses and net loan servicing fee income. Net unrealized gains and losses correlate to changes in the mortgage pipeline and corresponding changes in the fair value of mortgage loan commitments. Net loan servicing fee income associated with loans sold with servicing retained, declined in 2020, largely due to increased amortization of servicing rights resulting from higher prepayment speeds on the serviced mortgage portfolio. Mortgage origination, refinancing and sales activity increased year-over-year in response to declines in market interest rates. 
 
 For the three and nine months ended September 30, 2020, service charges on deposit accounts decreased by $341 thousand and $768 thousand, respectively, compared to the same periods in 2019, primarily due to lower overdraft activity and related fee income. 
 
 Loan related derivative income for the three months ended September 30, 2020 decreased by $143 thousand from the same period in 2019. Loan-related derivative income for the nine months ended September 30, 2020 increased by $941 thousand from the comparable period in 2019, reflecting higher gains on commercial borrower interest rate swap transactions. 
 
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 Management's Discussion and Analysis 

 Noninterest Expense 
 The following table presents noninterest expense comparisons: 
 
 (Dollars in thousands) Three Months Nine Months 
 Change Change 
 Periods ended September 30, 2020 2019 $ % 2020 2019 $ % 
 Noninterest expense: 
 Salaries and employee benefits $21,892 $18,332 $3,560 19 % $60,824 $54,387 $6,437 12 % 
 Outsourced services 3,160 2,722 438 16 8,944 7,846 1,098 14 
 Net occupancy 2,012 1,933 79 4 5,940 5,835 105 2 
 Equipment 934 1,046 (112) (11) 2,806 3,085 (279) (9) 
 
 Legal, audit and professional fees 1,252 645 607 94 2,733 1,843 890 48 
 FDIC deposit insurance costs 392 (460) 852 185 1,488 509 979 192 
 Advertising and promotion 384 368 16 4 829 1,132 (303) (27) 
 Amortization of intangibles 228 236 (8) (3) 688 714 (26) (4) 
 
 Other 2,090 2,048 42 2 7,023 6,634 389 6 
 Total noninterest expense $32,344 $26,870 $5,474 20 % $91,275 $81,985 $9,290 11 % 

 Noninterest Expense Analysis 
 Salaries and employee benefits expense for the three and nine months ended September 30, 2020 increased by $3.6 million and $6.4 million, respectively, compared to the same periods in 2019, largely reflecting volume-related increases in mortgage banking commissions expense, higher staffing levels, annual merit increases, and increases in performance-based compensation expense. These were partially offset by increases in deferred labor costs (a contra expense) associated with loan originations in 2020. 
 
 Outsourced services expense for the three and nine months ended September 30, 2020 increased by $438 thousand and $1.1 million, respectively, compared to the same periods in 2019, reflecting volume-related increases in third party processing costs and the expansion of services provided by third party vendors. 
 
 Legal, audit and professional fees for the three and nine months ended September 30, 2020 increased by $607 thousand and $890 thousand, respectively, compared to the same periods in 2019, reflecting increased costs associated with various legal and consulting matters. 
 
 FDIC deposit insurance costs for the three and nine months ended September 30, 2020 increased by $852 thousand and $979 thousand, respectively, compared to the same periods in 2019, largely due to approximately $900 thousand of FDIC assessment credits recognized in the third quarter of 2019. 
 
 Income Taxes 
 The following table presents the Corporation’s income tax provision and applicable tax rates for the periods indicated: 
 
 (Dollars in thousands) Three Months Nine Months 
 Periods ended September 30, 2020 2019 2020 2019 
 Income tax expense $5,131 $5,236 $13,817 $14,740 
 Effective income tax rate 21.9 % 21.8 % 21.2 % 21.6 % 

 The effective income tax rates for the three and nine months ended September 30, 2020 and 2019 differed from the federal rate of 21%, primarily due to state income tax expense, offset by the benefits of tax-exempt income, income from BOLI, federal tax credits and the recognition of excess tax benefits (expense) associated with the settlement of share-based awards. 
 
 The modest decrease in the effective tax rate for the nine months ended September 30, 2020 compared to the same period in 2019 largely reflected lower state tax exposure. 
 
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 Management's Discussion and Analysis 

 Segment Reporting 
 The Corporation manages its operations through two business segments, Commercial Banking and Wealth Management Services. Activity not related to the segments, including activity related to the investment securities portfolio, wholesale funding matters and administrative units are considered Corporate. The Corporate unit also includes income from BOLI and the residual impact of methodology allocations such as funds transfer pricing offsets. Methodologies used to allocate income and expenses to business lines are periodically reviewed and revised. See Note 14 to the Unaudited Consolidated Financial Statements for additional disclosure related to business segments. 
 
 Commercial Banking 
 The following table presents a summarized statement of operations for the Commercial Banking business segment: 
 
 (Dollars in thousands) Three Months Nine Months 
 Change Change 
 Periods ended September 30, 2020 2019 $ % 2020 2019 $ % 
 Net interest income $33,103 $28,515 $4,588 16 % $94,692 $83,684 $11,008 13 % 
 Provision for credit losses 1,325 400 925 231 10,561 1,575 8,986 571 
 Net interest income after provision for credit losses 
 31,778 28,115 3,663 13 84,131 82,109 2,022 2 
 Noninterest income 15,940 8,607 7,333 85 43,515 20,753 22,762 110 
 Noninterest expense 20,874 16,897 3,977 24 58,403 50,661 7,742 15 
 Income before income taxes 26,844 19,825 7,019 35 69,243 52,201 17,042 33 
 Income tax expense 5,828 4,347 1,481 34 14,769 11,371 3,398 30 
 Net income $21,016 $15,478 $5,538 36 % $54,474 $40,830 $13,644 33 % 

 Net interest income for the Commercial Banking segment for the three and nine months ended September 30, 2020, increased by $4.6 million and $11.0 million, respectively, from the same periods in 2019, reflecting growth in loans partially offset by lower yields on loans due to declines in market interest rates. 
 
 Provisions for credit losses of $1.3 million and $10.6 million, respectively, were charged to earnings for the three and nine months ended September 30, 2020, compared to $400 thousand and $1.6 million, respectively, for the same periods in 2019. In addition to the change in accounting methodology described above under the caption “Provision for Credit Losses,” anticipated losses related the COVID-19 pandemic and also reflected loan growth and changes in the underlying portfolio. 
 
 Noninterest income derived from the Commercial Banking segment for the three and nine months ended September 30, 2020 was up by $7.3 million and $22.8 million, respectively, from the comparable periods in 2019 largely due to higher mortgage banking revenues. See additional discussion regarding mortgage banking revenues, loan related derivative income and service charges on deposits under the caption “Noninterest Income” above. 
 
 Commercial Banking noninterest expenses for the three and nine months ended September 30, 2020 were up by $4.0 million and $7.7 million, respectively, from the same periods in 2019, reflecting increases in salaries and employee benefits, FDIC deposit insurance costs, outsourced services and legal expenses. See additional discussion under the caption “Noninterest Expense” above. 
 
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 Management's Discussion and Analysis 

 Wealth Management Services 
 The following table presents a summarized statement of operations for the Wealth Management Services business segment: 
 
 (Dollars in thousands) Three Months Nine Months 
 Change Change 
 Periods ended September 30, 2020 2019 $ % 2020 2019 $ % 
 Net interest expense ($24) ($114) $90 79 % ($117) ($361) $244 68 % 
 
 Noninterest income 8,954 9,153 (199) (2) 26,248 27,961 (1,713) (6) 
 Noninterest expense 7,528 6,577 951 14 21,466 20,720 746 4 
 Income before income taxes 1,402 2,462 (1,060) (43) 4,665 6,880 (2,215) (32) 
 Income tax expense 403 646 (243) (38) 1,216 1,845 (629) (34) 
 Net income $999 $1,816 ($817) (45 %) $3,449 $5,035 ($1,586) (31 %) 

 For the three and nine months ended September 30, 2020, noninterest income derived from the Wealth Management Services segment decreased by $199 thousand and $1.7 million, respectively, compared to the same periods in 2019, due to a decline in asset-based revenues. See further discussion of wealth management revenues under the caption “Noninterest Income” above. 
 
 For the three and nine months ended September 30, 2020, noninterest expenses for the Wealth Management Services segment increased by $951 thousand and $746 thousand, respectively, from the same periods in 2019, including increases salaries and employee benefits, legal and outsourced services expenses. See further discussion under the caption “Noninterest Expense” above. 
 
 Corporate 
 The following table presents a summarized statement of operations for the Corporate unit: 
 
 (Dollars in thousands) Three Months Nine Months 
 Change Change 
 Periods ended September 30, 2020 2019 $ % 2020 2019 $ % 
 Net interest (expense) income ($1,425) $4,577 ($6,002) (131 %) $626 $18,097 ($17,471) (97 %) 
 
 Noninterest income 574 582 (8) (1) 1,952 1,748 204 12 
 Noninterest expense 3,942 3,396 546 16 11,406 10,604 802 8 
 (Loss) income before income taxes (4,793) 1,763 (6,556) (372) (8,828) 9,241 (18,069) (196) 
 Income tax (benefit) expense (1,100) 243 (1,343) (553) (2,168) 1,524 (3,692) (242) 
 Net (loss) income ($3,693) $1,520 ($5,213) (343 %) ($6,660) $7,717 ($14,377) (186 %) 

 Net interest income for the Corporate unit for the three and nine months ended September 30, 2020 was down by $6.0 million and $17.5 million, respectively, compared to the same periods in 2019. Lower interest income on securities, resulting from a decline in average balances of securities and lower yields on securities, was partially offset by lower wholesale funding costs. The decline in net interest income for the Corporate unit also reflected unfavorable net funds transfer pricing allocations with the Commercial Banking segment as the downward repricing of assets occurred at a faster pace than the repricing of liabilities. 
 
 For the three and nine months ended September 30, 2020, noninterest expenses for the Corporate unit increased by $546 thousand and $802 thousand, respectively from the same periods in 2019, including increases in salaries and benefits, legal and other professional fees and outsourced services. 
 
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 Management's Discussion and Analysis 

 Financial Condition 
 Summary 
 The following table presents selected financial condition data: 
 
 (Dollars in thousands) Change 
 September 30,
2020 December 31,
2019 $ % 
 Cash and due from banks $204,113 $132,193 $71,920 54 % 
 Total securities 913,850 899,490 14,360 2 
 Total loans 4,282,047 3,892,999 389,048 10 
 Allowance for credit losses on loans 42,645 27,014 15,631 58 
 Total assets 5,849,792 5,292,659 557,133 11 
 Total deposits 4,285,693 3,498,882 786,811 22 
 FHLB advances 713,868 1,141,464 (427,596) (37) 
 Total shareholders’ equity 527,693 503,492 24,201 5 

 Total assets amounted to $5.8 billion at September 30, 2020, up by $557.1 million, or 11%, from the end of 2019. This reflected growth in total loans and an increase in the balance of cash and due from banks. The cash and due from banks balance rose largely due to increased levels of cash collateral pledged to derivative counterparties. See Note 9 to the Unaudited Consolidated Financial Statements for additional disclosure regarding derivative financial instruments. 
 
 The allowance for credit losses on loans increased by $15.6 million, or 58%, from the end of 2019. This reflected the adoption of the CECL accounting methodology effective January 1, 2020, as well as the estimated impact of the COVID-19 pandemic. See additional disclosure in the Asset Quality section under the caption “Allowance for credit losses on loans.” 
 
 Total deposits increased by $786.8 million, or 22%, reflecting increases in both in-market deposits and wholesale brokered time deposits. FHLB advances decreased by $427.6 million, or 37%, from December 31, 2019. Shareholders’ equity amounted to $527.7 million at September 30, 2020, up by $24.2 million, or 5%, from the balance at December 31, 2019. As of September 30, 2020, the Bancorp and the Bank were “well capitalized.” See Note 8 to the Unaudited Consolidated Financial Statements for additional discussion on regulatory capital requirements. 
 
 Securities 
 I nvestment security activity is monitored by the Investment Committee, the members of which also sit on the Asset/Liability Committee (“ALCO”). Asset and liability management objectives are the primary influence on the Corporation’s investment activities. However, the Corporation also recognizes that there are certain specific risks inherent in investment activities. The securities portfolio is managed in accordance with regulatory guidelines and established internal corporate investment policies that provide limitations on specific risk factors such as market risk, credit risk and concentration, liquidity risk and operational risk to help monitor risks associated with investing in securities. Reports on the activities conducted by Investment Committee and the ALCO are presented to the Board of Directors on a regular basis. 
 
 The Corporation’s securities portfolio is managed to generate interest income, to implement interest rate risk management strategies, and to provide a readily available source of liquidity for balance sheet management. Securities are designated as either available for sale, held to maturity or trading at the time of purchase. The Corporation does not maintain a portfolio of trading securities. As of September 30, 2020 and December 31, 2019, the Corporation did not have securities designated as held to maturity. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Debt securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized. 
 
 Determination of Fair Value 
 The Corporation uses an independent pricing service to obtain quoted prices. The prices provided by the independent pricing service are generally based on observable market data in active markets. The determination of whether markets are active or inactive is based upon the level of trading activity for a particular security class. Management reviews the independent pricing service’s documentation to gain an understanding of the appropriateness of the pricing methodologies. Management 
 
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 Management's Discussion and Analysis 

 also reviews the prices provided by the independent pricing service for reasonableness based upon current trading levels for similar securities. If the prices appear unusual, they are re-examined and the value is either confirmed or revised. In addition, management periodically performs independent price tests of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of September 30, 2020 and December 31, 2019, management did not make any adjustments to the prices provided by the pricing service. 
 
 Our fair value measurements generally utilize Level 2 inputs, representing quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and model-derived valuations in which all significant input assumptions are observable in active markets. 
 
 See Notes 4 and 10 to the Unaudited Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities. 
 
 Securities Portfolio 
 The carrying amounts of securities held are as follows: 
 
 (Dollars in thousands) September 30, 2020 December 31, 2019 
 Amount % Amount % 
 Available for Sale Debt Securities: 
 Obligations of U.S. government-sponsored enterprises 
 $146,540 16 % $157,648 18 % 
 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 
 745,071 82 719,080 80 
 
 Individual name issuer trust preferred debt securities 12,363 1 12,579 1 
 
 Corporate bonds 9,876 1 10,183 1 
 
 Total available for sale debt securities $913,850 100 % $899,490 100 % 

 The securities portfolio stood at $913.9 million as of September 30, 2020, or 16% of total assets, compared to $899.5 million as of December 31, 2019, or 17% of total assets. The largest component of the securities portfolio is mortgage-backed securities, all of which are issued by U.S. government agencies or U.S. government-sponsored enterprises. 
 
 The securities portfolio increased by $14.4 million, or 2%, from the end of 2019, reflecting purchases of debt securities totaling $377.0 million, with a weighted average yield of 1.96%, as well as an increase in the fair value of available for sale securities. These were partially offset by routine paydowns on mortgage-backed securities, calls and maturities of debt securities. 
 
 As of September 30, 2020, the net unrealized gain position on available for sale debt securities amounted to $14.0 million, compared to $4.2 million as of December 31, 2019. These net positions included gross unrealized losses of $3.3 million and $4.9 million, respectively, of as September 30, 2020 and December 31, 2019. 
 
 See Note 4 to the Unaudited Consolidated Financial Statements for additional information. 
 
 Loans 
 Total loans amounted to $4.3 billion at September 30, 2020, up by $389.0 million, or 10%, from the end of 2019, largely due to commercial loan growth and first quarter 2020 purchases of residential real estate mortgage loans. Growth in commercial loans was largely due to second quarter 2020 originations of PPP loans within the commercial and industrial portfolio. 
 
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 Management's Discussion and Analysis 

 The following is a summary of loans: 
 
 (Dollars in thousands) September 30, 2020 December 31, 2019 
 Amount % Amount % 
 Commercial: 
 Commercial real estate (1) 
 $1,665,745 39 % $1,547,572 40 % 
 Commercial & industrial (2) 
 822,269 19 585,289 15 
 Total commercial 2,488,014 58 2,132,861 55 
 Residential Real Estate: 
 Residential real estate (3) 
 1,506,726 35 1,449,090 37 
 Consumer: 
 Home equity 268,551 6 290,874 7 
 Other (4) 
 18,756 1 20,174 1 
 Total consumer 287,307 7 311,048 8 
 Total loans $4,282,047 100 % $3,892,999 100 % 

 (1) CRE consists of commercial mortgages primarily secured by income-producing property, as well as construction and development loans. Construction and development loans are made to businesses for land development or the on-site construction of industrial, commercial, or residential buildings. 
 (2) C&I consists of loans to businesses and individuals, a portion of which are fully or partially collateralized by real estate. C&I also includes PPP loans. 
 (3) Residential real estate consists of mortgage and homeowner construction loans secured by one- to four-family residential properties. 
 (4) Other consists of loans to individuals secured by general aviation aircraft and other personal installment loans. 
 
 Washington Trust continues to work with and support our customers experiencing financial difficulty due to the COVID-19 pandemic. Through September 30, 2020, we have executed loan payment deferral modifications on 617 loans totaling $685.4 million. The majority of these deferments qualified as eligible loan modifications under Section 4013 of the CARES Act and therefore, were not required to be classified as TDRs and were not reported as past due. Seventeen of these deferments executed on loan balances of $7.8 million were past due before the COVID-19 pandemic and therefore, were classified as TDRs and were included in past due loans as of September 30, 2020. 
 
 As of September 30, 2020, we had active deferrals on 253 loans totaling $418.2 million, or 10% of total loans excluding PPP loans. As of November 2, 2020, we have active deferrals on 146 loans totaling $252.9 million, or 6% of total loans excluding PPP loans. 
 
 Management continues to actively monitor the deferments and loan portfolios in certain industry segments that it considers “at risk” of significant impact. Deferment extensions are prudently underwritten and have resulted in loan risk rating downgrades when warranted. Management considers deferments when estimating the allowance for credit losses. Loss exposure within these industries is mitigated by a number of factors such as collateral values, LTV ratios, and other key indicators, however, some degree of credit loss is expected and has been incorporated into the allowance for credit loss recognition under the CECL methodology. 
 
 Commercial Loans 
 The commercial loan portfolio represented 58% of total loans at September 30, 2020. 
 
 In making commercial loans, we may occasionally solicit the participation of other banks. The Bank also participates in commercial loans originated by other banks. In such cases, these loans are individually underwritten by us using standards similar to those employed for our self-originated loans. Our participation in commercial loans originated by other banks amounted to $430.6 million and $399.7 million, respectively, at September 30, 2020 and December 31, 2019. Our participation in commercial loans originated by other banks also includes shared national credits. Shared national credits are defined as participations in loans or loan commitments of at least $100.0 million that are shared by three or more banks. 
 
 Commercial loans fall into two major categories, commercial real estate and commercial and industrial loans. Commercial real estate loans consist of commercial mortgages secured by real property where the primary source of repayment is derived from rental income associated with the property or the proceeds of the sale, refinancing or permanent financing of the property. Commercial real estate loans also include construction loans made to businesses for land development or the on- 
 
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 Management's Discussion and Analysis 

 site construction of industrial, commercial, or residential buildings. Commercial and industrial loans primarily provide working capital, equipment financing and financing for other business-related purposes. Commercial and industrial loans are frequently collateralized by equipment, inventory, accounts receivable, and/or general business assets. A portion of the Bank’s commercial and industrial loans is also collateralized by real estate. Commercial and industrial loans also include tax-exempt loans made to states and political subdivisions, as well as industrial development or revenue bonds issued through quasi-public corporations for the benefit of a private or non-profit entity where that entity rather than the governmental entity is obligated to pay the debt service. 
 
 Commercial Real Estate Loans (“CRE”) 
 CRE loans totaled $1.7 billion at September 30, 2020, up by $118.2 million, or 8%, from the balance at December 31, 2019. Included in CRE loans were construction and development loans of $101.4 million and $211.5 million, respectively, as of September 30, 2020 and December 31, 2019. For the nine months ended September 30, 2020, CRE loan originations and advances totaled approximately $211 million, which were partially offset by payoffs and paydowns. 
 
 The following table presents a geographic summary of CRE loans by property location: 
 
 (Dollars in thousands) September 30, 2020 December 31, 2019 
 Outstanding Balance % of Total Outstanding Balance % of Total 
 Connecticut $653,853 39 % $616,484 40 % 
 Massachusetts 501,243 30 458,029 30 
 Rhode Island 432,252 26 394,929 25 
 Subtotal 1,587,348 95 1,469,442 95 
 All other states 78,397 5 78,130 5 
 Total $1,665,745 100 % $1,547,572 100 % 

 The following table presents a summary of CRE loans by property type segmentation: 
 
 (Dollars in thousands) September 30, 2020 December 31, 2019 
 Count Outstanding Balance % of Total Count Outstanding Balance % of Total 
 CRE Portfolio Segmentation: 
 Multi-family dwelling 137 $542,971 33 % 123 $430,502 28 % 
 Retail 134 336,071 20 110 314,661 20 
 Office 75 292,154 18 78 294,910 19 
 Hospitality 39 148,164 9 32 128,867 8 
 Healthcare 16 120,429 7 16 110,409 7 
 Industrial and warehouse 26 96,819 6 25 82,432 5 
 Commercial mixed use 21 42,908 3 48 73,895 5 
 Other 42 86,229 4 70 111,896 8 
 Total CRE loans 
 490 $1,665,745 100 % 502 $1,547,572 100 % 
 
 Average CRE loan size 
 $3,399 $3,083 
 Largest individual CRE loan outstanding 
 $32,200 $25,962 

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 Management's Discussion and Analysis 

 The following table presents a summary of CRE loan deferments by industry segmentation: 
 
 (Dollars in thousands) November 2, 2020 September 30, 2020 June 30, 2020 
 Count Balance % of Outstanding Balance (1) Count Balance % of Outstanding Balance (1) Count Balance % of Outstanding Balance (2) 
 CRE Deferments by Segment: 
 Hospitality 18 $78,602 53 % 21 $89,049 60 % 31 $117,665 81 % 
 Retail 12 68,763 20 32 122,596 36 43 124,071 38 
 Healthcare 2 22,161 18 4 46,084 38 5 64,326 54 
 Office 3 9,248 3 4 17,679 6 15 74,099 26 
 Commercial mixed use 1 637 1 — — — 6 3,089 7 
 Multi-family dwelling 3 633 — 9 10,732 2 20 34,318 7 
 
 Other 7 27,785 32 11 28,635 33 12 29,838 35 
 Total CRE deferments 
 46 $207,829 12 % 81 $314,775 19 % 132 $447,406 27 % 

 (1) Percent of respective outstanding portfolio segment balance as of September 30, 2020. 
 (2) Percent of respective outstanding portfolio segment balance as of June 30, 2020. 
 
 As of November 2, 2020, we have active deferrals on 46 CRE loans totaling $207.8 million, which represented 12% of the total CRE portfolio at September 30, 2020. 
 
 While various industries have and will continue to experience adverse effects as a result of the COVID-19 pandemic, management currently considers the following CRE industry segments to be “at-risk” of significant impact: 
 
 • The retail segment consisted of 134 loans with balances totaling $336.1 million at September 30, 2020, representing 20% of the total CRE portfolio. Our retail properties generally have single tenant drugstores or strong anchor tenants, often national grocery store chains. At November 2, 2020, we have active deferrals on 12 retail loans totaling $68.8 million, which represented 20% of this segment’s balance at September 30, 2020. 
 • The hospitality segment consisted of 39 loans with balances totaling $148.2 million at September 30, 2020, representing 9% of the total CRE portfolio. We generally underwrite this segment at an LTV of 65% or less. Our hospitality properties are largely limited service properties with no restaurants and limited meeting space. This segment also includes leisure travel properties that are located on the New England coastline. At November 2, 2020, we have active deferrals on 18 hospitality loans totaling $78.6 million, which represented 53% of this segment’s balance at September 30, 2020. 
 • The healthcare segment consisted of 16 loans with balances totaling $120.4 million at September 30, 2020, representing 7% of the total CRE portfolio. This segment is composed of assisted living, nursing homes and continuing care retirement communities. At November 2, 2020, we have active deferrals on 2 healthcare loans totaling $22.2 million, which represented 18% of this segment’s balance at September 30, 2020. 
 
 Commercial and Industrial Loans (“C&I”) 
 C&I loans amounted to $822.3 million at September 30, 2020, up by $237.0 million, or 40%, from the balance at December 31, 2019. For the nine months ended September 30, 2020, C&I loan originations amounted to $284 million and were partially offset by paydowns, payoffs and a modest decline in line utilization. C&I originations were concentrated in PPP loans. As of September 30, 2020, there were 1,770 PPP loans with a carrying value of $216.8 million included in the C&I portfolio. The average PPP loan size was $122 thousand. Net unamortized loan origination fees on PPP loans amounted to $5.1 million at September 30, 2020. 
 
 Shared national credit balances outstanding included in the C&I loan portfolio totaled $49.4 million at September 30, 2020. All of these loans were included in the pass-rated category of commercial loan credit quality and were current with respect to contractual payment terms at September 30, 2020. 
 
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 Management's Discussion and Analysis 

 The following table presents a summary of C&I loan by industry segmentation: 
 
 (Dollars in thousands) September 30, 2020 December 31, 2019 
 Count Outstanding Balance % of Total Count Outstanding Balance % of Total 
 C&I Portfolio Segmentation: 
 Healthcare and social assistance 263 $185,628 23 % 86 $138,857 24 % 
 Manufacturing 150 90,981 11 65 53,561 9 
 Retail 201 67,851 8 75 43,386 7 
 Educational services 60 67,357 8 22 56,556 10 
 Owner occupied and other real estate 279 65,949 8 157 46,033 8 
 Professional, scientific and technical 
 268 44,703 5 66 37,599 6 
 Accommodation and food services 276 43,525 5 64 16,562 3 
 Entertainment and recreation 
 93 34,537 4 35 30,807 5 
 Information 
 36 30,071 4 11 22,162 4 
 Transportation and warehousing 
 44 27,459 3 23 20,960 4 
 Finance and insurance 
 107 26,213 3 57 28,501 5 
 Public administration 
 26 23,845 3 23 25,107 4 
 Other 
 799 114,150 15 225 65,198 11 
 Total C&I loans 
 2,602 $822,269 100 % 909 $585,289 100 % 
 
 Average C&I loan size 
 $316 $644 
 Largest individual C&I loan outstanding 
 $18,551 $19,001 

 PPP loans were included in the C&I portfolio. The following table presents a summary of PPP loans by industry segmentation: 
 
 September 30, 2020 
 Count Outstanding Balance % of Total 
 PPP Loans by Segment: 
 Healthcare and social assistance 183 $49,331 23 % 
 Accommodation and food services 217 25,410 12 
 Manufacturing 94 25,395 12 
 Professional, scientific and technical 
 223 20,848 10 
 Retail 138 12,731 6 
 Educational services 36 11,490 5 
 Owner occupied and other real estate 117 9,268 4 
 Entertainment and recreation 
 65 4,293 2 
 Information 
 24 3,914 2 
 Finance and insurance 
 56 2,423 1 
 Transportation and warehousing 
 21 2,050 1 
 Public administration 
 4 482 — 
 Other 
 592 49,149 22 
 Total PPP loans (included in the C&I loan portfolio) 
 1,770 $216,784 100 % 
 
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 Management's Discussion and Analysis 

 The following table presents a summary of C&I loan deferments by industry segmentation: 
 
 (Dollars in thousands) November 2, 2020 September 30, 2020 June 30, 2020 
 Count Balance % of Outstanding Balance, excl PPP loans (1) 
 Count Balance % of Outstanding Balance, excl PPP loans (1) 
 Count Balance % of Outstanding Balance, excl PPP loans (2) 
 
 C&I Deferments by Segment: 
 Accommodation and food services 
 3 $3,201 18 % 4 $3,480 19 % 18 $12,252 61 % 
 Healthcare and social assistance 2 1,613 1 4 14,947 11 6 15,384 11 
 Owner occupied and other real estate 4 1,382 2 5 2,243 4 21 5,128 8 
 Transportation and warehousing 
 4 1,120 4 5 1,408 6 5 1,414 5 
 Manufacturing 2 940 1 1 1,538 2 4 2,505 4 
 Entertainment and recreation 
 2 418 1 5 2,970 10 11 13,045 42 
 Educational services — — — 4 7,400 13 4 7,329 12 
 Retail — — — 1 1,068 2 5 2,693 5 
 
 Professional, scientific and technical — — — — — — 1 41 — 
 
 Public administration 
 — — — — — — 1 98 — 
 Other 
 2 170 — 7 10,221 16 24 14,533 23 
 Total C&I deferments 
 19 $8,844 1 % 36 $45,275 8 % 100 $74,422 12 % 

 (1) Percent of respective outstanding portfolio segment balance, excluding PPP loans, as of September 30, 2020. 
 (2) Percent of respective outstanding portfolio segment balance, excluding PPP loans, as of June 30, 2020. 
 
 As of November 2, 2020, we have active deferrals on 19 C&I loans totaling $8.8 million, which represented 1% of the total C&I portfolio (excluding PPP loans) at September 30, 2020. 
 
 Healthcare and social assistance totaled $185.6 million as of September 30, 2020 and is our largest single C&I industry segment, representing 23% of the total C&I portfolio. This segment includes specialty medical practices, elder services and community and mental health centers. At November 2, 2020, we have active deferrals on 2 healthcare and social assistance loans of $1.6 million, which represented 1% of this industry segment’s balances (excluding PPP loans) as of September 30, 2020. It is possible that there will be further disruption in this industry segment. 
 
 While various industries have and will continue to experience adverse effects as a result of the COVID-19 pandemic, management currently considers the following C&I industry segments to be “at-risk” of significant impact: 
 
 • The accommodation and food services industry segment consisted of 276 loans with balances totaling $43.5 million as of September 30, 2020, representing 5% of the total C&I portfolio. At November 2, 2020, we have active deferrals on 3 accommodation and food services loans totaling $3.2 million, which represented 18% of this industry segment’s balance (excluding PPP loans) at September 30, 2020. The deferrals were executed for restaurant and food establishments. 
 • The entertainment and recreation industry segment consisted of 93 loans with balances totaling $34.5 million as of September 30, 2020, representing 4% of the total C&I portfolio. This industry segment consists largely of golf courses and marinas. At November 2, 2020, we have active deferrals on 2 entertainment and recreation industry loans totaling $418 thousand, which represented 1% of this industry segment’s balance (excluding PPP loans) at September 30, 2020. The deferments were executed for a gym. 
 
 Residential Real Estate Loans 
 The residential real estate loan portfolio represented 35% of total loans at September 30, 2020. 
 
 Residential real estate loans are originated both for sale to the secondary market as well as for retention in the Bank’s loan portfolio. We also originate residential real estate loans for various investors in a broker capacity, including conventional mortgages and reverse mortgages. 
 
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 Management's Discussion and Analysis 

 The table below presents residential real estate loan origination activity: 
 
 (Dollars in thousands) Three Months Nine Months 
 Periods ended September 30, 2020 2019 2020 2019 
 Amount % of Total Amount % of Total Amount % of Total Amount % of Total 
 Originations for retention in portfolio (1) $132,726 26 % $105,075 36 % $368,118 30 % $226,508 34 % 
 Originations for sale to the secondary market (2) 377,137 74 189,979 64 859,680 70 437,928 66 
 Total $509,863 100 % $295,054 100 % $1,227,798 100 % $664,436 100 % 

 (1) Includes the full commitment amount of homeowner construction loans. 
 (2) Includes brokered loans (loans originated for others). 
 
 The table below presents residential real estate loan sales activity: 
 
 (Dollars in thousands) 
 Three Months Nine Months 
 Periods ended September 30, 2020 2019 2020 2019 
 Amount % of Total Amount % of Total Amount % of Total Amount % of Total 
 Loans sold with servicing rights retained $317,920 90 % $25,766 14 % $609,363 74 % $53,548 13 % 
 Loans sold with servicing rights released (1) 
 36,250 10 159,210 86 212,222 26 360,921 87 
 Total $354,170 100 % $184,976 100 % $821,585 100 % $414,469 100 % 

 (1) Includes brokered loans (loans originated for others). 
 
 Loans are sold with servicing retained or released. Loans sold with servicing rights retained result in the capitalization of servicing rights. Loan servicing rights are included in other assets and are subsequently amortized as an offset to mortgage banking revenues over the estimated period of servicing. The net balance of capitalized servicing rights amounted to $6.6 million and $3.5 million, respectively, as of September 30, 2020 and December 31, 2019. The balance of residential mortgage loans serviced for others, which are not included in the Unaudited Consolidated Balance Sheets, amounted to $1.1 billion and $587.0 million, respectively, as of September 30, 2020 and December 31, 2019. 
 
 Residential real estate loans held in portfolio amounted to $1.5 billion at September 30, 2020, up by $57.6 million, or 4%, from the balance at December 31, 2019. During the nine months ended September 30, 2020, Washington Trust purchased $51.2 million of residential real estate mortgage loans with a weighted average yield of 3.38% from another financial institution. These loans were individually evaluated to Washington Trust’s underwriting standards and predominantly secured by properties in Massachusetts. 
 
 The following is a geographic summary of residential real estate mortgages by property location: 
 
 (Dollars in thousands) September 30, 2020 December 31, 2019 
 Amount % of Total Amount % of Total 
 Massachusetts 
 $1,017,659 68 % $932,726 64 % 
 Rhode Island 342,344 23 356,392 25 
 Connecticut 
 125,568 8 140,574 10 
 Subtotal 1,485,571 99 1,429,692 99 
 All other states 21,155 1 19,398 1 
 Total (1) 
 $1,506,726 100 % $1,449,090 100 % 

 (1) Includes residential real estate loans purchased from other financial institutions totaling $149.4 million and $151.8 million, respectively, as of September 30, 2020 and December 31, 2019. 
 
 As of November 2, 2020, we have active deferrals on 69 residential real estate loans totaling $35.1 million, which represented 2% of the total residential real estate portfolio balance as of September 30, 2020. The average size of residential real estate 
 
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 Management's Discussion and Analysis 

 loans with active deferrals as of November 2, 2020 was approximately $509 thousand and these loans have an estimated LTV ratio of 57%. 
 
 Consumer Loans 
 Consumer loans include home equity loans and lines of credit and personal installment loans. 
 
 The consumer loan portfolio totaled $287.3 million at September 30, 2020, down by $23.7 million, or 8%, from December 31, 2019. Home equity lines of credit and home equity loans represented 93% of the total consumer portfolio at September 30, 2020. The Bank estimates that approximately 60% of the combined home equity lines of credit and home equity loan balances are first lien positions or subordinate to other Washington Trust mortgages. Purchased consumer loans, consisting of loans to individuals secured by general aviation aircraft, amounted to $10.6 million and $12.8 million, respectively, at September 30, 2020 and December 31, 2019. 
 
 As of November 2, 2020, we have active deferrals on 12 consumer loans totaling $1.1 million, which represented 0.4% of the total consumer portfolio balance as of September 30, 2020. 
 
 Asset Quality 
 Nonperforming Assets 
 Nonperforming assets include nonaccrual loans and property acquired through foreclosure or repossession. 
 
 The following table presents nonperforming assets and additional asset quality data: 
 
 (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 
 
 Property acquired through foreclosure or repossession, net — 1,109 
 Total nonperforming assets $14,740 $18,517 
 
 Nonperforming assets to total assets 0.25 % 0.35 % 
 Nonperforming loans to total loans 0.34 % 0.45 % 
 Total past due loans to total loans 0.24 % 0.40 % 
 Accruing loans 90 days or more past due $— $— 

 Total nonperforming assets decreased by $3.8 million from December 31, 2019. This included a $2.7 million decrease in nonaccrual loans and a $1.1 million decrease in property acquired through foreclosure (“OREO”). The decrease in OREO reflected sales of two properties essentially at their carrying value during the nine months ended September 30, 2020. At September 30, 2020, there were no properties held in OREO. 
 
 Nonaccrual Loans 
 During the nine months ended September 30, 2020, the Corporation made no changes in its practices or policies concerning the placement of loans into nonaccrual status. 
 
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 Management's Discussion and Analysis 

 The following table presents the activity in nonaccrual loans: 
 
 (Dollars in thousands) Three Months Nine Months 
 For the periods ended September 30, 2020 2019 2020 2019 
 Balance at beginning of period $16,017 $12,867 $17,408 $11,707 
 Additions to nonaccrual status 971 5,672 2,937 9,216 
 Loans returned to accruing status (1,623) (597) (2,170) (1,570) 
 Loans charged-off (111) (966) (1,071) (1,888) 
 Loans transferred to other real estate owned — (2,000) (28) (2,000) 
 Payments, payoffs and other changes (514) (74) (2,336) (563) 
 Balance at end of period $14,740 $14,902 $14,740 $14,902 

 The following table presents additional detail on nonaccrual loans: 
 
 (Dollars in thousands) September 30, 2020 December 31, 2019 
 Days Past Due Days Past Due 
 Over 90 Under 90 Total % (1) 
 Over 90 Under 90 Total % (1) 
 
 Commercial: 
 Commercial real estate $431 $— $431 0.03 % $603 $— $603 0.04 % 
 Commercial & industrial — — — — — 657 657 0.11 
 Total commercial 
 431 — 431 0.02 603 657 1,260 0.06 
 Residential Real Estate: 
 
 Residential real estate 
 4,502 8,290 12,792 0.85 4,700 9,597 14,297 0.99 
 Consumer: 
 Home equity 618 811 1,429 0.53 996 767 1,763 0.61 
 Other 88 — 88 0.47 88 — 88 0.44 
 Total consumer 706 811 1,517 0.53 1,084 767 1,851 0.60 
 Total nonaccrual loans $5,639 $9,101 $14,740 0.34 % $6,387 $11,021 $17,408 0.45 % 

 (1) Percentage of nonaccrual loans to the total loans outstanding within the respective category. 
 
 There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2020. 
 
 As of September 30, 2020, the composition of nonaccrual loans was 97% residential and consumer and 3% commercial, compared to 93% and 7%, respectively, at December 31, 2019. 
 
 Nonaccrual residential real estate mortgage loans amounted to $12.8 million at September 30, 2020, down by $1.5 million from the end of 2019. As of September 30, 2020, the balance of nonaccrual residential mortgage loans was predominately secured by properties in Massachusetts, Rhode Island and Connecticut. Included in total nonaccrual residential real estate loans at September 30, 2020 were five loans purchased for portfolio and serviced by others amounting to $1.6 million. Management monitors the collection efforts of its third party servicers as part of its assessment of the collectibility of nonperforming loans. 
 
 Troubled Debt Restructurings 
 A loan that has been modified or renewed is considered to be a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or a transaction with similar credit risk characteristics. These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection. 
 
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 Management's Discussion and Analysis 

 TDRs are classified as accruing or non-accruing based on management’s assessment of the collectibility of the loan. Loans that are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term and full collection of principal and interest is in doubt. 
 
 TDRs are reported as such for at least one year from the date of the restructuring. In years after the restructuring, TDRs are removed from this classification if the restructuring did not involve a below-market rate concession and the loan is performing in accordance with their modified contractual terms for a reasonable period of time. 
 
 As of September 30, 2020, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured in a TDR. 
 
 See Note 5 for disclosure regarding the Corporation’s election to account for eligible loan modifications under Section 4013 of the CARES Act. 
 
 The following table sets forth information on TDRs as of the dates indicated. The amounts below consist of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. Accrued interest is not included in the carrying amounts set forth below. 
 
 (Dollars in thousands) Sep 30,
2020 Dec 31,
2019 
 Accruing TDRs 
 Commercial: 
 Commercial real estate 
 $844 $— 
 Commercial & industrial 
 457 — 
 Total commercial 
 1,301 — 
 Residential Real Estate: 
 Residential real estate 
 3,589 358 
 Consumer: 
 Home equity 
 804 — 
 Other 
 15 18 
 Total consumer 
 819 18 
 Accruing TDRs 5,709 376 
 Nonaccrual TDRs 
 
 Residential Real Estate: 
 Residential real estate 2,823 492 
 Consumer: 
 Home equity 
 71 — 
 Other 
 — — 
 Total consumer 
 71 — 
 Nonaccrual TDRs 2,894 492 
 Total TDRs $8,603 $868 

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

 Past Due Loans 
 The following table presents past due loans by category: 
 
 (Dollars in thousands) September 30, 2020 December 31, 2019 
 Amount % (1) 
 Amount % (1) 
 
 Commercial: 
 Commercial real estate $431 0.03 % $1,433 0.09 % 
 Commercial & industrial 21 — 1 — 
 Total commercial 452 0.02 1,434 0.07 
 Residential Real Estate: 
 Residential real estate 8,081 0.54 11,429 0.79 
 Consumer: 
 Home equity 1,753 0.65 2,696 0.93 
 Other 108 0.58 130 0.64 
 Total consumer 1,861 0.65 2,826 0.91 
 Total past due loans $10,394 0.24 % $15,689 0.40 % 

 (1) Percentage of past due loans to the total loans outstanding within the respective category. 
 
 As of September 30, 2020, the composition of past due loans (loans past due 30 days or more) was 96% residential and consumer and 4% commercial, compared to 91% and 9%, respectively, at December 31, 2019. Total past due loans decreased by $5.3 million from the end of 2019. 
 
 Total past due loans included $8.8 million of nonaccrual loans as of September 30, 2020, compared to $11.5 million as of December 31, 2019. All loans 90 days or more past due at September 30, 2020 and December 31, 2019 were classified as nonaccrual. 
 
 Potential Problem Loans 
 The Corporation classifies certain loans as “substandard,” “doubtful,” or “loss” based on criteria consistent with guidelines provided by banking regulators. Potential problem loans consist of classified accruing commercial loans that were less than 90 days past due at September 30, 2020 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future. These loans are not included in the amounts of nonaccrual or restructured loans presented above. Management cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require increased allowance coverage and provision for loan losses. 
 
 Management has identified approximately $6.4 million in potential problem loans at September 30, 2020, compared to $10.3 million at December 31, 2019. As of September 30, 2020, the balance of potential problem loans consisted of two commercial relationships, which were both current with respect to payment terms. Potential problem loans are assessed for loss exposure using the methods described in Note 5 to the Unaudited Consolidated Financial Statements under the caption “Credit Quality Indicators.” 
 
 In addition, see discussion regarding certain commercial industry segments that management considers to be "at-risk" of significant impact from the COVID-19 pandemic under the caption "Commercial Loans" within the Financial Condition section. 
 
 Allowance for Credit Losses on Loans 
 The ACL on loans is management’s estimated valuation allowance at each reporting date in accordance with GAAP. 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. 
 
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 Management's Discussion and Analysis 

 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. The second component involves individually analyzed loans that do not share similar risk characteristics with loans that are pooled into portfolio segments. 
 
 The following table presents additional detail on the Corporation’s loan portfolio and associated allowance: 
 
 (Dollars in thousands) September 30, 2020 December 31, 2019 
 Loans Related Allowance Allowance / Loans Loans Related Allowance Allowance / Loans 
 Individually analyzed loans $15,654 $523 3.34 % $17,783 $968 5.44 % 
 Pooled (collectively evaluated) loans 4,266,393 42,122 0.99 3,875,216 26,046 0.67 
 Total $4,282,047 $42,645 1.00 % $3,892,999 $27,014 0.69 % 

 In 2020, for loans that are individually analyzed, the ACL is measured using a DCF method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or, if the loan is collateral dependent, at the fair value of the collateral. 
 
 In 2020, Washington Trust utilizes a DCF methodology to estimate credit losses for each pooled portfolio segment. The methodology incorporates the probability of default and loss given default. Management utilizes the national unemployment rate as an econometric factor with a one-year forecast period and one-year straight-line reversion period to its historical mean 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 for pooled loans are also supplemented by certain qualitative risk factors reflecting management’s view of how losses may vary from those represented by quantitative loss rates. 
 
 See Note 6 to the Unaudited Consolidated Financial Statements for additional disclosure regarding the process and methodology to estimate the ACL on loans. 
 
 The following table presents the allocation of the ACL on loans by portfolio segment. The total ACL on loans is available to absorb losses from any segment of the loan portfolio. 
 
 (Dollars in thousands) September 30, 2020 December 31, 2019 
 Allocated ACL ACL to Loans Loans to Total Portfolio (1) Allocated ACL ACL to Loans Loans to Total Portfolio (1) 
 Commercial: 
 
 Commercial real estate $21,757 1.31 % 39 % $14,741 0.95 % 40 % 
 Commercial & industrial 11,185 1.36 % 19 3,921 0.67 % 15 
 Total commercial 
 32,942 1.32 % 58 18,662 0.87 % 55 
 
 Residential Real Estate: 
 Residential real estate 7,919 0.53 % 35 6,615 0.46 % 37 
 Consumer: 
 Home equity 1,347 0.50 % 6 1,390 0.48 % 7 
 Other 437 2.33 % 1 347 1.72 % 1 
 Total consumer 1,784 0.62 % 7 1,737 0.56 % 8 
 
 Total allowance for credit losses on loans at end of period $42,645 1.00 % 100 % $27,014 0.69 % 100 % 

 (1) Percentage of loans outstanding in respective category to total loans outstanding. 
 
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 Management's Discussion and Analysis 

 The ACL on loans amounted to $42.6 million at September 30, 2020, up by $15.6 million from the balance at December 31, 2019. Upon adoption of CECL on January 1, 2020, Washington Trust's ACL on loans increased by $6.5 million, or 24%. See Note 2 to the Unaudited Consolidated Financial Statements for additional disclosure on the impact of adopting Topic 326. 
 
 Provisions for credit losses of $1.3 million and $10.6 million, respectively, were charged to earnings for the three and nine months ended September 30, 2020, compared to $400 thousand and $1.6 million, respectively, for the same periods in 2019. In addition to the change in accounting methodology described above, the year-over-year increase in the year-to-date provision was attributable to anticipated losses related the COVID-19 pandemic and also reflected loan growth and changes in the underlying portfolio. 
 
 Net charge-offs totaled $96 thousand and $1.0 million, respectively, for the three and nine months ended September 30, 2020, compared to $801 thousand and $1.7 million, respectively, for the same periods in 2019. 
 
 The Corporation’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely. Full or partial charge-offs on collateral dependent individually analyzed loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan. The Corporation does not recognize a recovery when an updated appraisal indicates a subsequent increase in value. 
 
 Appraisals are generally obtained with values determined on an “as is” basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower’s credit status. Updates to appraisals are generally obtained for troubled or nonaccrual loans or when management believes it is warranted. The Corporation has continued to maintain appropriate professional standards regarding the professional qualifications of appraisers and has an internal review process to monitor the quality of appraisals. 
 
 For residential real estate loans and real estate collateral dependent consumer loans that are in the process of collection, valuations are obtained from independent appraisal firms with values determined on an “as is” basis. 
 
 Estimating an appropriate level of ACL in loans necessarily involves a high degree of judgment. 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. 
 
 Sources of Funds 
 Our sources of funds include deposits, brokered time deposits, FHLB advances, other borrowings and proceeds from the sales, maturities and payments of loans and investment securities. The Corporation uses funds to originate and purchase loans, purchase investment securities, conduct operations, expand the branch network and pay dividends to shareholders. 
 
 Deposits 
 The Corporation offers a wide variety of deposit products to consumer and business customers. Deposits provide an important source of funding for the Bank as well as an ongoing stream of fee revenue. 
 
 The Bank is a participant in the Demand Deposit Marketplace program, Insured Cash Sweep program and the Certificate of Deposit Account Registry Service program. The Bank uses these deposit sweep services to place customer and client funds into interest-bearing demand accounts, money market accounts, and/or time deposits issued by other participating banks. Customer and client funds are placed at one or more participating banks to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a program participant, we receive reciprocal amounts of deposits from other participating banks. We consider these reciprocal deposit balances to be in-market deposits as distinguished from traditional out-of-market wholesale brokered deposits. 
 
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 Management's Discussion and Analysis 

 The following table presents a summary of deposits: 
 
 (Dollars in thousands) Change 
 September 30,
2020 December 31, 2019 $ % 
 Noninterest-bearing demand deposits $840,444 $609,924 $230,520 38 % 
 Interest-bearing demand deposits 170,198 159,938 10,260 6 
 NOW accounts 644,909 520,295 124,614 24 
 Money market accounts 877,536 765,899 111,637 15 
 Savings accounts 439,383 373,503 65,880 18 
 Time deposits (in-market) 729,058 784,481 (55,423) (7) 
 Total in-market deposits 3,701,528 3,214,040 487,488 15 
 Wholesale brokered time deposits 584,165 284,842 299,323 105 
 Total deposits $4,285,693 $3,498,882 $786,811 22 % 

 Total deposits amounted to $4.3 billion at September 30, 2020, up by $786.8 million, or 22%, from December 31, 2019. This included an increase of $299.3 million, or 105%, in out-of-market brokered time deposits. Excluding out-of-market brokered time deposits, in-market deposits were up by $487.5 million, or 15%, from the balance at December 31, 2019. In-market deposit growth included temporary PPP loan fundings deposited into customer accounts at Washington Trust. 
 
 Borrowings 
 FHLB advances are used to meet short-term liquidity needs and also to fund loan growth and additions to the securities portfolio. FHLB advances totaled $713.9 million at September 30, 2020, down by $427.6 million, or 37%, from the balance at the end of 2019. 
 
 In June 2020, Washington Trust began participating in the FRB’s PPPLF, which extends credit to depository institutions at a fixed interest rate of 0.35%. 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, with a corresponding amount of PPP loans pledged as collateral. 
 
 See Note 7 to the Unaudited Consolidated Financial Statements for additional information regarding Borrowings. 
 
 Liquidity and Capital Resources 
 Liquidity Management 
 Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. The Corporation’s primary source of liquidity is in-market deposits, which funded approximately 60% of total average assets in the nine months ended September 30, 2020. While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and brokered time deposits), cash flows from the Corporation’s securities portfolios and loan repayments. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs, although management has no intention to do so at this time. 
 
 The Corporation has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management employs stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as usual” cash flows. In management’s estimation, risks are concentrated in two major categories: (1) runoff of in-market deposit balances; and (2) unexpected drawdown of loan commitments. Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our stress test scenarios, therefore, emphasize attempts to quantify deposits at risk over selected time horizons. In addition to these unexpected outflow risks, several other “business as usual” factors enter into the calculation of the adequacy of contingent liquidity including: (1) payment proceeds from loans and investment securities; (2) maturing debt obligations; and (3) maturing time deposits. The Corporation has established collateralized borrowing capacity with the FRB and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business. Borrowing capacity is impacted by the amount and type of assets available to be pledged. 
 
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 Management's Discussion and Analysis 

 See additional disclosure regarding Washington Trust’s participation in the FRB’s PPPLF under the caption “Borrowings” in the section “Sources of Funds.” 
 
 The table below presents unused funding capacity by source as of the dates indicated: 
 
 (Dollars in thousands)
 September 30,
2020 December 31,
2019 
 Additional Funding Capacity: 
 Federal Home Loan Bank of Boston (1) 
 $828,386 $534,990 
 Federal Reserve Bank of Boston (2) 
 20,718 24,686 
 Unencumbered investment securities 593,439 461,850 
 Total $1,442,543 $1,021,526 

 (1) As of September 30, 2020 and December 31, 2019, loans with a carrying value of $2.1 billion and $2.1 billion, respectively, and securities available for sale with carrying values of $164.7 million and $271.4 million, respectively, were pledged to the FHLB resulting in this additional borrowing capacity. 
 (2) As of September 30, 2020 and December 31, 2019, loans with a carrying value of $13.5 million and $16.6 million, respectively, and securities available for sale with a carrying value of $14.7 million and $17.0 million, respectively, were pledged to the FRB for the discount window resulting in this additional unused borrowing capacity. 
 
 In addition to the amounts presented above, the Bank also had access to a $40.0 million unused line of credit with the FHLB. 
 
 The ALCO establishes and monitors internal liquidity measures to manage liquidity exposure. Liquidity remained within target ranges established by the ALCO during the nine months ended September 30, 2020. Based on its assessment of the liquidity considerations described above, management believes the Corporation’s sources of funding meet anticipated funding needs. 
 
 Net cash provided by operating activities amounted to $18.2 million for the nine months ended September 30, 2020. Net income of $51.3 million was offset by mortgage banking related adjustments to reconcile net income to net cash used in operating activities. Net cash used in investing activities totaled $378.2 million for the nine months ended September 30, 2020, reflecting outflows to fund the increase in and purchases of loans, as well as purchases of debt securities. These outflows were partially offset by net inflows from maturities, calls and principal payments of securities. For the nine months ended September 30, 2020, net cash provided by financing activities amounted to $433.6 million, with net increases in deposits, FHLB advances and PPPLF borrowings, partially offset by the payment of dividends to shareholders and treasury stock purchases. See the Unaudited Consolidated Statements of Cash Flows for further information about sources and uses of cash. 
 
 Capital Resources 
 Total shareholders’ equity amounted to $527.7 million at September 30, 2020, up by $24.2 million from December 31, 2019. This included net income of $51.3 million and an increase of $7.8 million in the accumulated comprehensive income component of shareholders’ equity, largely reflecting an increase in the fair value of available for sale debt securities. These increases were partially offset by $26.7 million in dividend declarations, a $6.1 million decrease to retained earnings due to the adoption of CECL, and a net increase in treasury stock of $3.5 million. 
 
 The Corporation declared a quarterly dividend of 51 cents per share for the three months ended September 30, 2020, unchanged from the 51 cents per share declared for the same period in 2019. On a year-to-date basis, dividend declarations totaled $1.53 per share in 2020, compared to $1.49 per share in 2019. 
 
 The ratio of total equity to total assets amounted to 9.02% at September 30, 2020 compared to a ratio of 9.51% at December 31, 2019. Book value per share at September 30, 2020 and December 31, 2019 amounted to $30.57 and $29.00, respectively. 
 
 The Bancorp and the Bank are subject to various regulatory capital requirements and are considered “well capitalized” with a total risk-based capital ratio of 13.09% at September 30, 2020, compared to 12.94% at December 31, 2019. See Note 8 to the Unaudited Consolidated Financial Statements for additional discussion of regulatory capital requirements and the election of the CECL phase-in option provided by regulatory guidance, which delays the estimated impact of CECL on regulatory capital and phases it in over a three-year period beginning in 2022. 
 
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 Management's Discussion and Analysis 

 Off-Balance Sheet Arrangements 
 In the normal course of business, the Corporation engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. Such transactions are used to meet the financing needs of its customers and to manage the exposure to fluctuations in interest rates. These financial transactions include commitments to extend credit, standby letters of credit, forward loan commitments, loan related derivative contracts and interest rate risk management contracts. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. The Corporation’s credit policies with respect to interest rate swap agreements with commercial borrowers, commitments to extend credit, and standby letters of credit are similar to those used for loans. Interest rate risk management contracts with other counterparties are generally subject to bilateral collateralization terms. 
 
 For additional information on derivative financial instruments and financial instruments with off-balance sheet risk see Notes 9 and 18 to the Unaudited Consolidated Financial Statements. 
 
 Asset/Liability Management and Interest Rate Risk 
 Interest rate risk is the risk of loss to future earnings due to changes in interest rates. The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. Periodically, the ALCO reports on the status of liquidity and interest rate risk matters to the Bank’s Board of Directors. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with the Corporation’s liquidity, capital adequacy, growth, risk and profitability goals. 
 
 The Corporation utilizes the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, off-balance sheet interest rate contracts and the pricing and structure of loans and deposits, to manage interest rate risk. The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract. The notional amount of the interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk. See Notes 9 and 18 to the Unaudited Consolidated Financial Statements for additional information. 
 
 The ALCO uses income simulation to measure interest rate risk inherent in the Corporation’s on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 12-month horizon, a 13- to 24-month horizon and a 60-month horizon. The simulations assume that the size and general composition of the Corporation’s balance sheet remain static over the simulation horizons, with the exception of certain deposit mix shifts from low-cost core savings to higher-cost time deposits in selected interest rate scenarios. Additionally, the simulations take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency. 
 
 The ALCO reviews simulation results to determine whether the Corporation’s exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. As of September 30, 2020 and December 31, 2019, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation. All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where both interest rates and the composition of the Corporation’s balance sheet remain stable for a 60-month period. In addition to measuring the change in net interest income as compared to an unchanged rate scenario, the ALCO also measures the trend of both net interest income and net interest margin over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios. 
 
 The ALCO regularly reviews a wide variety of interest rate shift scenario results to evaluate interest rate risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve of up to 500 basis points, as well as parallel changes in interest rates of up to 400 basis points. Because income simulations assume that the Corporation’s balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts. 
 
 -87- 

 Management's Discussion and Analysis 

 The following table sets forth the estimated change in net interest income from an unchanged rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation’s on- and off-balance sheet financial instruments as of September 30, 2020 and December 31, 2019. Interest rates are assumed to shift by a parallel 100, 200 or 300 basis points upward or 100 basis points downward over a 12-month period, except for core savings deposits, which are assumed to shift by lesser amounts due to their relative historical insensitivity to market interest rate movements. Further, deposits are assumed to have certain minimum rate levels below which they will not fall. It should be noted that the rate scenarios shown do not necessarily reflect the ALCO’s view of the “most likely” change in interest rates over the periods indicated. 
 
 September 30, 2020 December 31, 2019 
 Months 1 - 12 Months 13 - 24 Months 1 - 12 Months 13 - 24 
 100 basis point rate decrease (1.69)% (2.78)% (3.71)% (5.57)% 
 100 basis point rate increase 5.00 6.24 2.88 1.02 
 200 basis point rate increase 10.28 11.96 6.60 3.37 
 300 basis point rate increase 15.26 16.86 10.35 5.53 

 The ALCO estimates that the negative exposure of net interest income to falling rates as compared to an unchanged rate scenario results from a more rapid decline in earning asset yields compared to rates paid on deposits. If market interest rates were to fall and remain lower for a sustained period, certain core savings and time deposit rates could decline more slowly and by a lesser amount than other market interest rates. Asset yields would likely decline more rapidly than deposit costs as current asset holdings mature or reprice, since cash flow from mortgage-related prepayments and redemption of callable securities would increase as market interest rates fall. 
 
 The overall positive exposure of net interest income to rising rates as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term. For simulation purposes, deposit rate changes are anticipated to lag behind other market interest rates in both timing and magnitude. The ALCO’s estimate of interest rate risk exposure to rising rate environments, including those involving changes to the shape of the yield curve, incorporates certain assumptions regarding the shift in deposit balances from low-cost core savings categories to higher-cost deposit categories, which has characterized a shift in funding mix during the past rising interest rate cycles. 
 
 The relative change in interest rate sensitivity for declining rates from December 31, 2019 as shown in the above table was attributable to a lower absolute level of market interest rates with certain rates and yields reaching floors or zero in declining rate scenarios. The relative increase in interest rate sensitivity for rising rates from December 31, 2019 was attributable to a relative increase in the proportion of low-cost core deposits to total sources of funds. Interest rate risk modeling assumes that core deposits reprice more slowly and by a lesser amount than the repricing of wholesale funding in response to changes in market interest rates. 
 
 While the ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the repricing, maturity and prepayment characteristics of financial instruments and the composition of the Corporation’s balance sheet may change to a different degree than estimated. Simulation modeling assumes a static balance sheet, with the exception of certain modeled deposit mix shifts from low-cost core savings deposits to higher-cost time deposits in rising rate scenarios as noted above. 
 
 As market interest rates have declined, the banking industry has attracted low-cost core savings deposits. The ALCO recognizes that a portion of these increased levels of low-cost balances could shift into higher yielding alternatives in the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above. Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment, which may cause interest rate sensitivity to differ from the results as presented. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The relationship between short-term interest rate changes and core deposit rate and balance changes may differ from the ALCO’s estimates used in income simulation. 
 
 It should also be noted that the static balance sheet assumption does not necessarily reflect the Corporation’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior. 
 
 -88- 

 Management's Discussion and Analysis 

 Mortgage-backed securities and residential real estate loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income. 
 
 The Corporation also monitors the potential change in market value of its available for sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to the Corporation’s capital position. Results are calculated using industry-standard analytical techniques and securities data. 
 
 The following table summarizes the potential change in market value of the Corporation’s available for sale debt securities as of September 30, 2020 and December 31, 2019 resulting from immediate parallel rate shifts: 
 
 (Dollars in thousands) 
 Security Type Down 100 Basis Points Up 200 Basis Points 
 
 U.S. government-sponsored enterprise securities (callable) $1,259 ($9,359) 
 
 Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 
 9,418 (54,363) 
 Trust preferred debt and other corporate debt securities (175) 242 
 Total change in market value as of September 30, 2020 $10,502 ($63,480) 
 Total change in market value as of December 31, 2019 $17,741 ($81,705) 

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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
WASHINGTON TRUST BANCORP INC 10-Q

Item 2. Management’s Discussion and Analysis
