Edgar Filing: WASHINGTON TRUST BANCORP INC

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended MARCH 31, 2016 or



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

Commission file number: 001-32991

WASHINGTON TRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)



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



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

(401) 348-1200

(Registrant’s telephone number, including area code)

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

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

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



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

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

o Yes x No

The number of shares of common stock of the registrant outstanding as of April 30, 2016 was 17,061,017.



FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended March 31, 2016

TABLE OF CONTENTS
	Page Number
	Page Number
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015	3
Consolidated Statements of Income for the three months ended March 31, 2016 and 2015	4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015	5
Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2016 and 2015	6
Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015	7
Condensed Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3. Quantitative and Qualitative Disclosures About Market Risk	60
Item 4. Controls and Procedures	60
PART II. Other Information
Item 1. Legal Proceedings	60
Item 1A. Risk Factors	60
Item 6. Exhibits	60
Signatures	61

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PART I. Financial Information

Item 1. Financial Statements



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



	March 31, 2016			December 31, 2015
Assets:
Cash and due from banks		$89,966			$93,222
Short-term investments	4,931			4,409
Mortgage loans held for sale (including $19,994 at March 31, 2016 and $33,969 at December 31, 2015 measured at fair value)	22,895			38,554
Securities:
Available for sale, at fair value	411,352			375,044
Held to maturity, at amortized cost (fair value $19,664 at March 31, 2016 and $20,516 at December 31, 2015)	19,040			20,023
Total securities	430,392			395,067
Federal Home Loan Bank stock, at cost	26,515			24,316
Loans:
Commercial	1,698,811			1,654,547
Residential real estate	1,004,349			1,013,555
Consumer	343,833			345,025
Total loans	3,046,993			3,013,127
Less allowance for loan losses	26,137			27,069
Net loans	3,020,856			2,986,058
Premises and equipment, net	29,882			29,593
Investment in bank-owned life insurance	66,000			65,501
Goodwill	64,059			64,059
Identifiable intangible assets, net	11,137			11,460
Other assets	71,577			59,365
Total assets		$3,838,210			$3,771,604
Liabilities:
Deposits:
Demand deposits		$539,119			$537,298
NOW accounts	394,873			412,602
Money market accounts	763,565			823,490
Savings accounts	331,800			326,967
Time deposits	850,294			833,898
Total deposits	2,879,651			2,934,255
Federal Home Loan Bank advances	487,189			378,973
Junior subordinated debentures	22,681			22,681
Other liabilities	67,409			60,307
Total liabilities	3,456,930			3,396,216
Commitments and contingencies
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 30,000,000 shares; issued and outstanding 17,023,749 shares at March 31, 2016 and 17,019,578 shares at December 31, 2015	1,064			1,064
Paid-in capital	111,641			110,949
Retained earnings	277,810			273,074
Accumulated other comprehensive loss	(9,235		)	(9,699		)
Total shareholders’ equity	381,280			375,388
Total liabilities and shareholders’ equity		$3,838,210			$3,771,604

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



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



Three months ended March 31,		2016			2015
Interest income:
Interest and fees on loans			$29,998			$28,353
Interest on securities:	Taxable	2,370			2,259
	Nontaxable	327			435
Dividends on Federal Home Loan Bank stock		210			165
Other interest income		64			25
Total interest and dividend income		32,969			31,237
Interest expense:
Deposits		2,968			3,389
Federal Home Loan Bank advances		2,152			1,902
Junior subordinated debentures		112			241
Other interest expense		2			3
Total interest expense		5,234			5,535
Net interest income		27,735			25,702
Provision for loan losses		500			—
Net interest income after provision for loan losses		27,235			25,702
Noninterest income:
Wealth management revenues		9,174			8,435
Mortgage banking revenues		2,198			2,585
Service charges on deposit accounts		907			935
Card interchange fees		797			714
Income from bank-owned life insurance		499			490
Loan related derivative income		645			645
Equity in earnings (losses) of unconsolidated subsidiaries		(88		)	(86		)
Other income		502			302
Total noninterest income		14,634			14,020
Noninterest expense:
Salaries and employee benefits		16,380			15,494
Net occupancy		1,807			1,886
Equipment		1,501			1,340
Outsourced services		1,363			1,247
Legal, audit and professional fees		629			676
FDIC deposit insurance costs		493			473
Advertising and promotion		265			267
Amortization of intangibles		323			155
Debt prepayment penalties		431			—
Other expenses		2,258			1,993
Total noninterest expense		25,450			23,531
Income before income taxes		16,419			16,191
Income tax expense		5,484			5,181
Net income			$10,935			$11,010

Weighted average common shares outstanding - basic		17,023			16,759
Weighted average common shares outstanding - diluted		17,157			16,939
Per share information:	Basic earnings per common share		$0.64			$0.65
	Diluted earnings per common share		$0.64			$0.65
	Cash dividends declared per share		$0.36			$0.34

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



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



Three months ended March 31,	2016			2015
Net income		$10,935			$11,010
Other comprehensive income, net of tax:
Net change in fair value of securities available for sale	364			664
Cash flow hedges:
Change in fair value of cash flow hedges	(66		)	(8		)
Net cash flow hedge losses reclassified into earnings	—			93
Net change in fair value of cash flow hedges	(66		)	85
Defined benefit plan obligation adjustment	166			235
Total other comprehensive income, net of tax	464			984
Total comprehensive income		$11,399			$11,994

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



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



	Common Shares Outstanding	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total
Balance at January 1, 2016	17,020		$1,064		$110,949		$273,074			($9,699	)		$375,388
Net income						10,935						10,935
Total other comprehensive income, net of tax									464			464
Cash dividends declared						(6,199		)				(6,199		)
Share-based compensation				592								592
Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit	4	—		100								100
Balance at March 31, 2016	17,024		$1,064		$111,641		$277,810			($9,235	)		$381,280



	Common Shares Outstanding	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total
Balance at January 1, 2015	16,746		$1,047		$101,204		$252,837			($8,809	)		$346,279
Net income						11,010						11,010
Total other comprehensive income, net of tax									984			984
Cash dividends declared						(5,778		)				(5,778		)
Share-based compensation				580								580
Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit	27	1		803								804
Balance at March 31, 2015	16,773		$1,048		$102,587		$258,069			($7,825	)		$353,879

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



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



Three months ended March 31,		2016			2015
Cash flows from operating activities:
Net income			$10,935			$11,010
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		500			—
Depreciation of premises and equipment		888			882
Net amortization of premium and discount		390			358
Amortization of intangibles		323			155
Share-based compensation		592			580
Income from bank-owned life insurance		(499		)	(490		)
Net gains on loan sales and commissions on loans originated for others		(2,134		)	(2,585		)
Net gain on sale of portfolio loans		(135		)	—
Equity in losses of unconsolidated subsidiaries		88			86
Proceeds from sales of loans		96,741			117,571
Loans originated for sale		(79,498		)	(116,502		)
(Increase) decrease in other assets		(11,971		)	169
Increase (decrease) in other liabilities		6,872			(1,948		)
Net cash provided by operating activities		23,092			9,286
Cash flows from investing activities:
Purchases of:	Mortgage-backed securities available for sale	(31,055		)	—
	Other investment securities available for sale	(19,995		)	—
Maturities and principal payments of:	Mortgage-backed securities available for sale	10,548			12,533
	Other investment securities available for sale	4,501			4,986
	Mortgage-backed securities held to maturity	935			1,137
Purchase of Federal Home Loan Bank stock		(2,199		)	—
Net increase in loans		(35,705		)	(20,620		)
Net proceeds from sale of portfolio loans		510			—
Purchases of loans, including purchased interest		(98		)	(856		)
Purchases of premises and equipment		(1,177		)	(1,226		)
Net cash used in investing activities		(73,735		)	(4,046		)
Cash flows from financing activities:
Net (decrease) increase in deposits		(54,604		)	28,325
Proceeds from Federal Home Loan Bank advances		272,500			120,000
Repayment of Federal Home Loan Bank advances		(164,284		)	(140,305		)
Proceeds from stock option exercises and issuance of other equity instruments		75			698
Tax benefit from stock option exercises and other equity instruments		25			106
Cash dividends paid		(5,803		)	(5,381		)
Net cash provided by financing activities		47,909			3,443
Net (decrease) increase in cash and cash equivalents		(2,734		)	8,683
Cash and cash equivalents at beginning of period		97,631			80,350
Cash and cash equivalents at end of period			$94,897			$89,033



Noncash Investing and Financing Activities:
Loans charged off		$1,475		$321
Loans transferred to property acquired through foreclosure or repossession	610		230
Supplemental Disclosures:
Interest payments		$4,986		$5,459
Income tax payments	706		310

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

Condensed Notes to Unaudited Consolidated Financial Statements

(1) General Information

Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company and financial holding company. The Bancorp owns all of the outstanding common stock of The Washington Trust Company, of Westerly (the “Bank”), a Rhode Island chartered commercial bank founded in 1800. Through its subsidiaries, the Bancorp offers a complete product line of financial services including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut.

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

The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates.

The unaudited consolidated financial statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying consolidated financial statements have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

(2) Recently Issued Accounting Pronouncements

Revenue from Contracts with Customers - Topic 606

Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), was issued in May 2014 and provides a revenue recognition framework for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other accounting standards. ASU 2014-09 is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period with early adoption not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, Accounting Standards Update No. 2015-14, “Deferral of the Effective Date” (“ASU 2015-14”) was issued and delayed the effective date of ASU 2014-09 to annual and interim periods in fiscal years beginning after December 15, 2017. In March 2016, Accounting Standards Update No. 2016-08, “Principal versus Agent Considerations” (“ASU 2016-08”), was issued. In April 2016, Accounting Standards Update No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”), was issued. Both ASU 2016-08 and ASU 2016-10 do not change the core principle for revenue recognition in Topic 606, instead the amendments provide more detailed guidance in a few areas and additional implementation guidance and examples, which are expected to reduce the degree of judgment necessary to comply with Topic 606. The effective date and transition requirements for both ASU 2016-08 and ASU 2016-10 are the same as those provided by ASU 2015-14. The Corporation is currently evaluating the impact that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Corporation has not yet selected a transition method nor has it determined the effect of ASU 2014-09 on its ongoing financial reporting.

Business Combinations - Topic 805

Accounting Standards Update No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”), was issued in September 2015 and eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. ASU 2015-16 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The adoption of ASU 2015-16 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Financial Instruments - Topic 825

Accounting Standards Update No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), was issued in January 2016 and provides revised guidance related to the accounting for and reporting of financial instruments. Some of the main provisions include: requiring most equity securities to be reported at fair value with unrealized gains and losses reported in the income statement; requiring separate presentation of financial assets and liabilities by

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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

measurement category and form (i.e. securities or loans); clarifying that entities must assess valuation allowances on a deferred tax asset related to available for sale debt securities in combination with their other deferred tax assets; and eliminating the requirement to disclose the method and significant assumptions used to estimate fair value for financial instruments measured at amortized cost on the balance sheet. ASU 2016-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Corporation has not yet determined the effect of ASU 2016-01 on its ongoing financial reporting.

Leases - Topic 842

Accounting Standards Update No. 2016-02, “Leases” (“ASU 2016-02”), was issued in February 2016 and provides revised guidance related to the accounting and reporting of leases. ASU 2016-02 requires lessees to recognize most leases on the balance sheet. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. ASU 2016-02 requires a modified retrospective transition, with a number of practical expedients that entities may elect to apply. ASU 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Corporation has not yet determined the effect of ASU 2016-02 on its ongoing financial reporting.

Stock Compensation - Topic 718

Accounting Standards Update No. 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), was issued in March 2016. ASU 2016-09 includes multiple provisions intended to simplify several aspects of the accounting for share-based payment transactions, including income tax consequences and the classification of certain tax-related transactions on the statement of cash flows. ASU 2016-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted in any interim or annual period. Amendments should be applied using the appropriate transition method as detailed by the provisions of ASU 2016-09. The Corporation has not yet determined the effect of ASU 2016-09 on its ongoing financial reporting.

(3) Cash and Due from Banks

The Bank maintains certain average reserve balances to meet the requirements of the Board of Governors of the Federal Reserve System (“FRB”). Some or all of these reserve requirements may be satisfied with vault cash. Reserve balances amounted to $9.6 million at March 31, 2016 and $10.5 million at December 31, 2015 and were included in cash and due from banks in the Consolidated Balance Sheets.

As of March 31, 2016 and December 31, 2015, cash and due from banks included interest-bearing deposits in other banks of $49.6 million and $48.2 million, respectively.

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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

(4) Securities

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



(Dollars in thousands)
March 31, 2016	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$97,151		$160		($26	)		$97,285
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	249,141		8,322		—			257,463
Obligations of states and political subdivisions	31,025		511		—			31,536
Individual name issuer trust preferred debt securities	29,824		—		(6,743		)	23,081
Corporate bonds	1,965		32		(10		)	1,987
Total securities available for sale		$409,106		$9,025		($6,779	)		$411,352
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$19,040		$624		$—			$19,664
Total securities held to maturity		$19,040		$624		$—			$19,664
Total securities		$428,146		$9,649		($6,779	)		$431,016



(Dollars in thousands)
December 31, 2015	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$77,330		$73		($388	)		$77,015
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	228,908		6,398		(450		)	234,856
Obligations of states and political subdivisions	35,353		727		—			36,080
Individual name issuer trust preferred debt securities	29,815		—		(4,677		)	25,138
Corporate bonds	1,970		5		(20		)	1,955
Total securities available for sale		$373,376		$7,203		($5,535	)		$375,044
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$20,023		$493		$—			$20,516
Total securities held to maturity		$20,023		$493		$—			$20,516
Total securities		$393,399		$7,696		($5,535	)		$395,560

At March 31, 2016 and December 31, 2015, securities available for sale and held to maturity with a fair value of $357.5 million and $346.1 million, respectively, were pledged as collateral for Federal Home Loan Bank of Boston (“FHLBB”) borrowings, potential borrowings with the FRB, certain public deposits and for other purposes. See Note 7 for additional disclosure on FHLBB borrowings.

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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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



(Dollars in thousands)	Available for Sale				Held to Maturity
March 31, 2016	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less		$42,724		$44,084		$2,473		$2,554
Due after one year to five years	143,155		147,073		7,650		7,901
Due after five years to ten years	157,073		159,571		5,978		6,174
Due after ten years	66,154		60,624		2,939		3,035
Total securities		$409,106		$411,352		$19,040		$19,664

Included in the above table are debt securities with an amortized cost balance of $155.0 million and a fair value of $148.9 million at March 31, 2016 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 11 months to 21 years, with call features ranging from 1 month to 5 years.

Other-Than-Temporary Impairment Assessment

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

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



(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
March 31, 2016	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored enterprises	1		$9,974		($26	)	—		$—		$—		1		$9,974		($26	)
Individual name issuer trust preferred debt securities	—	—		—			10	23,081		(6,743		)	10	23,081		(6,743		)
Corporate bonds	1	491		(10		)	—	—		—			1	491		(10		)
Total temporarily impaired securities	2		$10,465		($36	)	10		$23,081		($6,743	)	12		$33,546		($6,779	)



(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
December 31, 2015	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored enterprises	4		$34,767		($388	)	—		$—		$—		4		$34,767		($388	)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	9	61,764		(450		)	—	—		—			9	61,764		(450		)
Individual name issuer trust preferred debt securities	—	—		—			10	25,138		(4,677		)	10	25,138		(4,677		)
Corporate bonds	3	1,235		(20		)	—	—		—			3	1,235		(20		)
Total temporarily impaired securities	16		$97,766		($858	)	10		$25,138		($4,677	)	26		$122,904		($5,535	)

Further deterioration in credit quality of the underlying issuers of the securities, further deterioration in the condition of the financial services industry, a continuation or worsening of the current economic environment, or additional declines in real estate

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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods, and the Corporation may incur write-downs.

Unrealized losses on temporarily impaired securities as of March 31, 2016 and December 31, 2015 were concentrated in variable rate trust preferred debt securities.

Trust Preferred Debt Securities of Individual Name Issuers

Included in debt securities in an unrealized loss position at March 31, 2016 were 10 trust preferred security holdings issued by 7 individual companies in the banking sector. Management believes the unrealized loss position in these holdings was attributable to the general widening of spreads for this category of debt securities issued by financial services companies since the time these securities were purchased. Based on the information available through the filing date of this report, all individual name issuer trust preferred debt securities held in our portfolio continue to accrue and make payments as expected with no payment deferrals or defaults on the part of the issuers. As of March 31, 2016, individual name issuer trust preferred debt securities with an amortized cost of $10.9 million and unrealized losses of $2.4 million were rated below investment grade by Standard & Poors, Inc. (“S&P”). Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information. We noted no additional downgrades to below investment grade between December 31, 2015 and the filing date of this report. Based on these analyses, management concluded that it expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more‑likely‑than‑not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2016.

(5) Loans

The following is a summary of loans:



(Dollars in thousands)	March 31, 2016				December 31, 2015
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$976,931	32	%		$931,953	31	%
Construction & development (2)	123,032		4		122,297		4
Commercial & industrial (3)	598,848		20		600,297		20
Total commercial	1,698,811		56		1,654,547		55
Residential real estate:
Mortgages	980,274		32		984,437		33
Homeowner construction	24,075		1		29,118		1
Total residential real estate	1,004,349		33		1,013,555		34
Consumer:
Home equity lines	258,513		8		255,565		8
Home equity loans	45,499		1		46,649		2
Other (4)	39,821		2		42,811		1
Total consumer	343,833		11		345,025		11
Total loans (5)		$3,046,993	100	%		$3,013,127	100	%


(1)	Loans primarily secured by income producing property.


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


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


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


(5)	Includes net unamortized loan origination costs of $2.6 million at both at March 31, 2016 and December 31, 2015 and net unamortized premiums on purchased loans of $78 thousand and $84 thousand, respectively, at March 31, 2016 and December 31, 2015.

- 12-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

At March 31, 2016 and December 31, 2015, there were $1.51 billion and $1.27 billion, respectively, of loans pledged as collateral to the FHLBB under a blanket pledge agreement and to the FRB for the discount window. See Note 7 for additional disclosure regarding borrowings.

Nonaccrual Loans

Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued but not collected on such loans is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectability of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for approximately 6 months, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.

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



(Dollars in thousands)	Mar 31, 2016		Dec 31, 2015
Commercial:
Mortgages		$4,054		$5,711
Construction & development	—		—
Commercial & industrial	2,659		3,018
Residential real estate:
Mortgages	9,367		10,666
Homeowner construction	—		—
Consumer:
Home equity lines	316		528
Home equity loans	1,025		1,124
Other	4		—
Total nonaccrual loans		$17,425		$21,047
Accruing loans 90 days or more past due		$—		$—

As of March 31, 2016 and December 31, 2015, loans secured by one- to four-family residential property amounting to $2.1 million and $2.6 million, respectively, were in process of foreclosure.

Nonaccrual loans of $3.4 million and $7.4 million, respectively, were current as to the payment of principal and interest at March 31, 2016 and December 31, 2015. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2016.

- 13-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Past Due Loans

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



(Dollars in thousands)	Days Past Due
March 31, 2016	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$510		$—		$4,054		$4,564		$972,367		$976,931
Construction & development	—		—		—		—		123,032		123,032
Commercial & industrial	268		1,568		1,070		2,906		595,942		598,848
Residential real estate:
Mortgages	2,695		2,026		3,982		8,703		971,571		980,274
Homeowner construction	—		—		—		—		24,075		24,075
Consumer:
Home equity lines	441		174		206		821		257,692		258,513
Home equity loans	436		373		463		1,272		44,227		45,499
Other	27		2		—		29		39,792		39,821
Total loans		$4,377		$4,143		$9,775		$18,295		$3,028,698		$3,046,993



(Dollars in thousands)	Days Past Due
December 31, 2015	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$51		$—		$4,504		$4,555		$927,398		$931,953
Construction & development	—		—		—		—		122,297		122,297
Commercial & industrial	405		9		48		462		599,835		600,297
Residential real estate:
Mortgages	3,028		2,964		3,294		9,286		975,151		984,437
Homeowner construction	—		—		—		—		29,118		29,118
Consumer:
Home equity lines	883		373		518		1,774		253,791		255,565
Home equity loans	748		490		222		1,460		45,189		46,649
Other	22		—		—		22		42,789		42,811
Total loans		$5,137		$3,836		$8,586		$17,559		$2,995,568		$3,013,127

Included in past due loans as of March 31, 2016 and December 31, 2015, were nonaccrual loans of $14.0 million and $13.6 million, respectively. All loans 90 days or more past due at March 31, 2016 and December 31, 2015 were classified as nonaccrual.

- 14-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Impaired Loans

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

The following is a summary of impaired loans:



(Dollars in thousands)	Recorded Investment (1)				Unpaid Principal				Related Allowance
	Mar 31, 2016		Dec 31, 2015		Mar 31, 2016		Dec 31, 2015		Mar 31, 2016		Dec 31, 2015
No Related Allowance Recorded:
Commercial:
Mortgages		$4,054		$4,292		$4,898		$5,101		$—		$—
Construction & development	—		—		—		—		—		—
Commercial & industrial	1,323		1,849		1,430		1,869		—		—
Residential real estate:
Mortgages	8,049		8,441		8,167		8,826		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	271		6		271		64		—		—
Home equity loans	673		530		685		539		—		—
Other	—		—		—		—		—		—
Subtotal	14,370		15,118		15,451		16,399		—		—
With Related Allowance Recorded:
Commercial:
Mortgages		$9,452		$10,873		$9,427		$10,855		$586		$1,633
Construction & development	—		—		—		—		—		—
Commercial & industrial	2,176		2,024		2,320		2,248		757		771
Residential real estate:
Mortgages	1,967		2,895		2,024		2,941		133		156
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	45		522		45		522		—		2
Home equity loans	436		679		440		783		1		21
Other	147		145		147		144		—		—
Subtotal	14,223		17,138		14,403		17,493		1,477		2,583
Total impaired loans		$28,593		$32,256		$29,854		$33,892		$1,477		$2,583
Total:
Commercial		$17,005		$19,038		$18,075		$20,073		$1,343		$2,404
Residential real estate	10,016		11,336		10,191		11,767		133		156
Consumer	1,572		1,882		1,588		2,052		1		23
Total impaired loans		$28,593		$32,256		$29,854		$33,892		$1,477		$2,583

(1)

The recorded investment in impaired loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs. For impaired accruing loans (troubled debt restructurings for which management has concluded that the collectibility of the loan is not in doubt), the recorded investment also includes accrued interest.

- 15-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class. Prior to the third quarter of 2015, the Corporation had defined impaired loans to include nonaccrual commercial loans, troubled debt restructured loans and certain other loans that were individually evaluated for impairment. In the third quarter of 2015, the Corporation redefined impaired loans to include nonaccrual loans and troubled debt restructured loans. The redefinition of impaired loans resulted in well-secured nonaccrual residential real estate mortgage loans and consumer loans being classified as impaired loans in the third quarter of 2015. See further discussion on the redefinition of impaired loans in Washington Trust’s Form 10-K for the fiscal year ended December 31, 2015.




(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Three months ended March 31,	2016		2015		2016		2015
Commercial:
Mortgages		$14,740		$14,942		$93		$79
Construction & development	—		—		—		—
Commercial & industrial	3,800		3,036		11		19
Residential real estate:
Mortgages	11,069		3,457		69		16
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	671		247		2		—
Home equity loans	1,175		74		13		—
Other	145		146		2		3
Totals		$31,600		$21,902		$190		$117

Troubled Debt Restructurings

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

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectibility of the loan. Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately 6 months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.

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

Troubled debt restructurings are classified as impaired loans. The Corporation identifies loss allocations for impaired loans on an individual loan basis. The recorded investment in troubled debt restructurings was $16.7 million and $18.5 million, respectively, at March 31, 2016 and December 31, 2015. These amounts included insignificant balances of accrued interest. The allowance for loan losses included specific reserves for these troubled debt restructurings of $746 thousand and $1.8 million, respectively, at March 31, 2016 and December 31, 2015. As of March 31, 2016, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

In the three months ended March 31, 2016, there were no loans modified as a troubled debt restructuring. The pre- and post-modification recorded investment of loans modified as a troubled debt restructuring in the three months ended March 31, 2015, amounted to $428 thousand. The 2015 restructurings involved below market rate concessions and payment deferrals.

- 16-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents loans modified in a troubled debt restructuring within the previous twelve months for which there was a payment default:




(Dollars in thousands)	# of Loans		Recorded Investment (1)
Three months ended March 31,	2016	2015	2016		2015
Commercial:
Mortgages	—	—		$—		$—
Construction & development	—	—	—		—
Commercial & industrial	5	2	743		11
Residential real estate:
Mortgages	—	2	—		338
Homeowner construction	—	—	—		—
Consumer:
Home equity lines	—	—	—		—
Home equity loans	1	—	66		—
Other	—	—	—		—
Totals	6	4		$809		$349


(1)	The recorded investment in troubled debt restructurings consists of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. For accruing troubled debt restructured loans, the recorded investment also includes accrued interest.

Credit Quality Indicators

Commercial

The Corporation utilizes an internal rating system to assign a risk to each of its commercial loans. Loans are rated on a scale of 1 to 10. This scale can be assigned to three broad categories including “pass” for ratings 1 through 6, “special mention” for 7-rated loans, and “classified” for loans rated 8, 9 or 10. The loan rating system takes into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, the adequacy of collateral, the adequacy of guarantees and other credit quality characteristics. The weighted average risk rating of the Corporation’s commercial loan portfolio was 4.68 at both March 31, 2016 and December 31, 2015. For non-impaired loans, the Corporation takes the risk rating into consideration along with other credit attributes in the establishment of an appropriate allowance for loan losses. See Note 6 for additional information.

A description of the commercial loan categories are as follows:

Pass - Loans with acceptable credit quality, defined as ranging from superior or very strong to a status of lesser stature. Superior or very strong credit quality is characterized by a high degree of cash collateralization or strong balance sheet liquidity. Lesser stature loans have an acceptable level of credit quality but exhibit some weakness in various credit metrics such as collateral adequacy, cash flow, secondary sources of repayment, or performance inconsistency or may be in an industry or of a loan type known to have a higher degree of risk.

Special Mention - Loans with potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s position as creditor at some future date. Special Mention assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. Examples of these conditions include but are not limited to outdated or poor quality financial data, strains on liquidity and leverage, losses or negative trends in operating results, marginal cash flow, weaknesses in occupancy rates or trends in the case of commercial real estate and frequent delinquencies.

Classified - Loans identified as “substandard”, “doubtful” or “loss” based on criteria consistent with guidelines provided by banking regulators. A “substandard” loan has defined weaknesses which make payment default or principal exposure likely, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. The loans are closely watched and are either already on nonaccrual status or may be

- 17-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

placed on nonaccrual status when management determines there is uncertainty of collectibility. A “doubtful” loan is placed on non-accrual status and has a high probability of loss, but the extent of the loss is difficult to quantify due to dependency upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. A loan in the “loss” category is considered generally uncollectible or the timing or amount of payments cannot be determined. “Loss” is not intended to imply that the loan has no recovery value but rather it is not practical or desirable to continue to carry the asset.

The Corporation’s procedures call for loan ratings and classifications to be revised whenever information becomes available that indicates a change is warranted. The criticized loan portfolio, which consists of commercial loans that are risk rated special mention or worse, are reviewed by management on a quarterly basis, focusing on the current status and strategies to improve the credit. An annual loan review program is conducted by a third party to provide an independent evaluation of the creditworthiness of the commercial loan portfolio, the quality of the underwriting and credit risk management practices and the appropriateness of the risk rating classifications. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio.

The following table presents the commercial loan portfolio, segregated by category of credit quality indicator:



(Dollars in thousands)	Pass				Special Mention				Classified
	Mar 31, 2016		Dec 31, 2015		Mar 31, 2016		Dec 31, 2015		Mar 31, 2016		Dec 31, 2015
Mortgages		$963,155		$914,774		$787		$3,035		$12,989		$14,144
Construction & development	123,032		122,297		—		—		—		—
Commercial & industrial	573,177		577,036		14,871		12,012		10,800		11,249
Total commercial loans		$1,659,364		$1,614,107		$15,658		$15,047		$23,789		$25,393

Residential and Consumer

The residential and consumer portfolios are monitored on an ongoing basis by the Corporation using delinquency information and loan type as credit quality indicators. These credit quality indicators are assessed on an aggregate basis in these relatively homogeneous portfolios. For non-impaired loans, the Corporation assigns loss allocation factors to each respective loan type. See Note 6 for additional information.

Various other techniques are utilized to monitor indicators of credit deterioration in the portfolios of residential real estate mortgages and home equity lines and loans. Among these techniques is the periodic tracking of loans with an updated FICO score and an estimated loan to value (“LTV”) ratio. LTV ratio is determined via statistical modeling analyses. The indicated LTV levels are estimated based on such factors as the location, the original LTV ratio, and the date of origination of the loan and do not reflect actual appraisal amounts. The results of these analyses and other loan review procedures are taken into consideration in the determination of loss allocation factors for residential mortgage and home equity consumer credits. See Note 6 for additional information.

- 18-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following table presents the residential and consumer loan portfolios, segregated by category of credit quality indicator:



(Dollars in thousands)	Current and Under 90 Days Past Due				Over 90 Days Past Due
	Mar 31, 2016		Dec 31, 2015		Mar 31, 2016		Dec 31, 2015
Residential real estate:
Accruing mortgages		$970,907		$973,771		$—		$—
Nonaccrual mortgages	5,385		7,372		3,982		3,294
Homeowner construction	24,075		29,118		—		—
Total residential loans		$1,000,367		$1,010,261		$3,982		$3,294
Consumer:
Home equity lines		$258,307		$255,047		$206		$518
Home equity loans	45,036		46,427		463		222
Other	39,821		42,811		—		—
Total consumer loans		$343,164		$344,285		$669		$740

(6) Allowance for Loan Losses

The allowance for loan losses is management’s best estimate of inherent risk of loss in the loan portfolio as of the balance sheet date. The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes: (1) the identification of loss allocations for individual loans deemed to be impaired and (2) the application of loss allocation factors for non-impaired loans based on historical loss experience and estimated loss emergence period, with adjustments for various exposures that management believes are not adequately represented by historical loss experience.

Prior to December 31, 2015, an unallocated allowance was maintained for measurement imprecision associated with impaired and nonaccrual loans. As a result of further enhancement and refinement of the allowance methodology to provide a more precise quantification of probable losses in the loan portfolio, management concluded that the potential risks anticipated by the unallocated allowance have been incorporated into the allocated component of the methodology, eliminating the need for the unallocated allowance in the fourth quarter of 2015.

The following table presents the activity in the allowance for loan losses for the three months ended March 31, 2016:




(Dollars in thousands)	Commercial
	Mortgages			Construction			C&I (1)			Total Commercial			Residential			Consumer			Un-allocated		Total
Beginning Balance		$9,140			$1,758			$8,202			$19,100			$5,460			$2,509			$—		$27,069
Charge-offs	(1,253		)	—			(8		)	(1,261		)	(136		)	(78		)	—		(1,475		)
Recoveries	4			—			26			30			2			11			—		43
Provision	695			(115		)	41			621			37			(158		)	—		500
Ending Balance		$8,586			$1,643			$8,261			$18,490			$5,363			$2,284			$—		$26,137

(1) Commercial & industrial loans.