Edgar Filing: WASHINGTON TRUST BANCORP INC

Document

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 SEPTEMBER 30, 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 October 31, 2016 was 17,121,527.



FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended September 30, 2016

TABLE OF CONTENTS
	Page Number
	Page Number
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	3
Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015	4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015	5
Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2016 and 2015	6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015	7
Condensed Notes to Unaudited Consolidated Financial Statements	9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3. Quantitative and Qualitative Disclosures About Market Risk	70
Item 4. Controls and Procedures	70
PART II. Other Information
Item 1. Legal Proceedings	70
Item 1A. Risk Factors	70
Item 6. Exhibits	71
Signatures	72

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PART I. Financial Information

Item 1. Financial Statements



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



	September 30, 2016			December 31, 2015
Assets:
Cash and due from banks		$126,752			$93,222
Short-term investments	2,420			4,409
Mortgage loans held for sale (including $45,162 at September 30, 2016 and $33,969 at December 31, 2015 measured at fair value)	45,162			38,554
Securities:
Available for sale, at fair value	564,256			375,044
Held to maturity, at amortized cost (fair value $17,492 at September 30, 2016 and $20,516 at December 31, 2015)	16,848			20,023
Total securities	581,104			395,067
Federal Home Loan Bank stock, at cost	37,249			24,316
Loans:
Commercial	1,757,215			1,654,547
Residential real estate	1,079,887			1,013,555
Consumer	344,253			345,025
Total loans	3,181,355			3,013,127
Less allowance for loan losses	25,649			27,069
Net loans	3,155,706			2,986,058
Premises and equipment, net	29,433			29,593
Investment in bank-owned life insurance	70,557			65,501
Goodwill	64,059			64,059
Identifiable intangible assets, net	10,493			11,460
Other assets	81,099			59,365
Total assets		$4,204,034			$3,771,604
Liabilities:
Deposits:
Demand deposits		$566,027			$537,298
NOW accounts	404,827			412,602
Money market accounts	794,905			823,490
Savings accounts	357,966			326,967
Time deposits	913,649			833,898
Total deposits	3,037,374			2,934,255
Federal Home Loan Bank advances	671,615			378,973
Junior subordinated debentures	22,681			22,681
Other liabilities	77,037			60,307
Total liabilities	3,808,707			3,396,216
Commitments and contingencies
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 60,000,000 shares at September 30, 2016 and 30,000,000 at December 31, 2015; issued and outstanding 17,107,476 shares at September 30, 2016 and 17,019,578 shares at December 31, 2015	1,069			1,064
Paid-in capital	113,290			110,949
Retained earnings	288,613			273,074
Accumulated other comprehensive loss	(7,645		)	(9,699		)
Total shareholders’ equity	395,327			375,388
Total liabilities and shareholders’ equity		$4,204,034			$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						Nine months
Periods ended September 30,		2016			2015			2016			2015
Interest income:
Interest and fees on loans			$29,633			$28,626			$88,753			$85,718
Interest on securities:	Taxable	3,024			2,178			7,881			6,613
	Nontaxable	218			366			825			1,203
Dividends on Federal Home Loan Bank stock		288			309			729			638
Other interest income		93			47			227			101
Total interest and dividend income		33,256			31,526			98,415			94,273
Interest expense:
Deposits		3,110			3,308			9,059			10,045
Federal Home Loan Bank advances		2,641			1,987			7,106			5,780
Junior subordinated debentures		125			232			356			714
Other interest expense		1			2			4			7
Total interest expense		5,877			5,529			16,525			16,546
Net interest income		27,379			25,997			81,890			77,727
Provision for loan losses		1,800			200			2,750			300
Net interest income after provision for loan losses		25,579			25,797			79,140			77,427
Noninterest income:
Wealth management revenues		9,623			8,902			28,278			26,249
Mortgage banking revenues		3,734			1,990			8,642			7,319
Service charges on deposit accounts		915			986			2,757			2,894
Card interchange fees		870			849			2,527			2,389
Income from bank-owned life insurance		521			498			2,110			1,480
Loan related derivative income		1,178			327			2,331			1,689
Equity in earnings (losses) of unconsolidated subsidiaries		(88		)	(69		)	(265		)	(224		)
Other income		508			430			1,429			1,398
Total noninterest income		17,261			13,913			47,809			43,194
Noninterest expense:
Salaries and employee benefits		16,908			15,971			50,693			46,971
Net occupancy		1,766			1,721			5,376			5,276
Equipment		1,648			1,424			4,652			4,140
Outsourced services		1,254			1,250			3,911			3,774
Legal, audit and professional fees		691			630			1,982			1,916
FDIC deposit insurance costs		504			467			1,488			1,376
Advertising and promotion		370			356			1,055			1,201
Amortization of intangibles		321			260			966			571
Debt prepayment penalties		—			—			431			—
Acquisition related expenses		—			504			—			937
Change in fair value of contingent consideration		(939		)	16			(898		)	16
Other expenses		2,127			1,939			6,474			6,190
Total noninterest expense		24,650			24,538			76,130			72,368
Income before income taxes		18,190			15,172			50,819			48,253
Income tax expense		5,863			4,964			16,500			15,532
Net income			$12,327			$10,208			$34,319			$32,721

Weighted average common shares outstanding - basic		17,090			16,939			17,060			16,837
Weighted average common shares outstanding - diluted		17,203			17,102			17,198			17,027
Per share information:	Basic earnings per common share		$0.72			$0.60			$2.01			$1.94
	Diluted earnings per common share		$0.72			$0.60			$1.99			$1.92
	Cash dividends declared per share		$0.37			$0.34			$1.09			$1.02

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



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



	Three Months						Nine Months
Periods ended September 30,	2016			2015			2016			2015
Net income		$12,327			$10,208			$34,319			$32,721
Other comprehensive income (loss), net of tax:
Net change in fair value of securities available for sale	(91		)	344			1,651			(693		)
Cash flow hedges:
Change in fair value of cash flow hedges	(4		)	(1		)	(94		)	(10		)
Net cash flow hedge losses reclassified into earnings	—			82			—			265
Net change in fair value of cash flow hedges	(4		)	81			(94		)	255
Defined benefit plan obligation adjustment	166			233			497			822
Total other comprehensive income, net of tax	71			658			2,054			384
Total comprehensive income		$12,398			$10,866			$36,373			$33,105

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						34,319						34,319
Total other comprehensive income, net of tax									2,054			2,054
Cash dividends declared						(18,780		)				(18,780		)
Share-based compensation				1,634								1,634
Exercise of stock options, issuance of other compensation-related equity awards and related tax benefit	87	5		707								712
Balance at September 30, 2016	17,107		$1,069		$113,290		$288,613			($7,645	)		$395,327



	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						32,721						32,721
Total other comprehensive income, net of tax									384			384
Cash dividends declared						(17,392		)				(17,392		)
Share-based compensation				1,640								1,640
Common stock issued for acquisition	137	8		5,422								5,430
Exercise of stock options, issuance of other compensation-related equity awards and related tax benefit	102	7		1,458								1,465
Balance at September 30, 2015	16,985		$1,062		$109,724		$268,166			($8,425	)		$370,527

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



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



Nine months ended September 30,		2016			2015
Cash flows from operating activities:
Net income			$34,319			$32,721
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,750			300
Depreciation of premises and equipment		2,737			2,535
Net amortization of premium and discount		1,802			1,149
Amortization of intangibles		966			571
Share-based compensation		1,634			1,640
Income from bank-owned life insurance		(2,110		)	(1,480		)
Net gains on loan sales and commissions on loans originated for others		(8,682		)	(7,296		)
Net gain on sale of portfolio loans		(135		)	—
Equity in (earnings) losses of unconsolidated subsidiaries		265			224
Proceeds from sales of loans		370,526			365,533
Loans originated for sale		(369,746		)	(345,322		)
Change in fair value of contingent consideration liability		(898		)	16
(Increase) decrease in other assets		(22,719		)	2,683
Increase (decrease) in other liabilities		17,635			(5,075		)
Net cash provided by operating activities		28,344			48,199
Cash flows from investing activities:
Purchases of:	Mortgage-backed securities available for sale	(248,221		)	(1,525		)
	Other investment securities available for sale	(70,495		)	(63,229		)
Maturities and principal payments of:	Mortgage-backed securities available for sale	41,446			38,312
	Other investment securities available for sale	89,441			58,583
	Mortgage-backed securities held to maturity	3,029			3,893
Purchases of Federal Home Loan Bank stock		(12,933		)	—
Net increase in loans		(95,759		)	(88,680		)
Net proceeds from sale of portfolio loans		510			—
Purchases of loans		(77,180		)	(2,877		)
Proceeds from the sale of property acquired through foreclosure or repossession		731			637
Purchases of premises and equipment		(2,608		)	(3,220		)
Purchases of bank-owned life insurance		(5,000		)	—
Proceeds from bank-owned life insurance		2,054			—
Cash used in business combination, net of cash acquired		—			(1,671		)
Net cash used in investing activities		(374,985		)	(59,777		)
Cash flows from financing activities:
Net increase in deposits		103,119			81,462
Proceeds from Federal Home Loan Bank advances		981,250			348,000
Repayment of Federal Home Loan Bank advances		(688,608		)	(372,648		)
Proceeds from stock option exercises and issuance of other equity awards, net of awards surrendered		282			946
Tax benefit from stock option exercises and other equity awards		430			518
Cash dividends paid		(18,291		)	(16,976		)
Net cash provided by financing activities		378,182			41,302
Net increase in cash and cash equivalents		31,541			29,724
Cash and cash equivalents at beginning of period		97,631			80,350
Cash and cash equivalents at end of period			$129,172			$110,074

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



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



Nine months ended September 30,	2016		2015
Noncash Investing and Financing Activities:
Loans charged off		$4,390		$1,401
Loans transferred to property acquired through foreclosure or repossession	1,045		491
In conjunction with the purchase acquisition detailed in Note 3 to the Unaudited Consolidated Financial Statements, assets were acquired and liabilities were assumed as follows:
Common stock issued for acquisition	—		5,430
Fair value of assets acquired, net of cash acquired	—		14,315
Fair value of liabilities assumed	—		7,214
Supplemental Disclosures:
Interest payments		$16,093		$16,690
Income tax payments	14,860		14,995

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 2016, Accounting Standards Update No. 2016-08, “Principal versus Agent Considerations” (“ASU 2016-08”), Accounting Standards Update No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”) and Accounting Standards Update No. 2016-12, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”) were issued. These ASUs 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 ASU 2016-08, ASU 2016-10 and ASU 2016-12 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.

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 measurement category and form (i.e. securities or loans); clarifying that entities must assess valuation allowances on a deferred

- 9-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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 is currently evaluating the impact that ASU 2016-01 will have on its consolidated financial statements.

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 is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.

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 is currently evaluating the impact that ASU 2016-09 will have on its consolidated financial statements.

Derivatives and Hedging - Topic 815

Accounting Standards Update No. 2016-05, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships” (“ASU 2016-05”), was issued in March 2016. ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 allows for either a prospective approach or modified retrospective approach for adoption. ASU 2016-05 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. ASU 2016-05 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Accounting Standards Update No. 2016-06, “Contingent Put and Call Options in Debt Instruments” (“ASU 2016-06”), was issued in March 2016. ASU 2016-06 clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts by providing a four-step decision sequence to assess whether the economic characteristics of the embedded call and put options are clearly and closely related to the economic characteristics of their debt hosts. ASU 2016-06 allows for a modified retrospective approach for adoption. ASU 2016-06 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. ASU 2016-06 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Credit Losses - Topic 326

Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses” (“ASU 2016-13”), was issued in June 2016. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 provides for a modified retrospective transition, resulting in a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective, except for debt securities for which an other-than-temporary impairment has previously been recognized. For these debt securities, a prospective transition approach will be adopted in order to maintain the same amortized cost prior to and subsequent to the effective date of ASU 2016-13. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted, for annual periods and interim periods within those annual periods, beginning after December 15, 2018. The Corporation is currently evaluating the impact that ASU 2016-13 will have on its consolidated financial statements.

- 10-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Statement of Cash Flows - Topic 230

Accounting Standards Update No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), was issued in August 2016. ASU 2016-15 provides classification guidance on certain cash receipts and cash payments, including, but not limited to, debt prepayment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance policies and distributions received from equity method investees. The adoption of ASU 2016-15 requires a retrospective transition method applied to each period presented. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The adoption of ASU 2016-15 is not expected to have a material impact on the Corporation’s consolidated financial statements.

(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 $11.2 million at September 30, 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 September 30, 2016 and December 31, 2015, cash and due from banks included interest-bearing deposits in other banks of $77.0 million and $48.2 million, respectively.

(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)
September 30, 2016	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$75,500		$49		($65	)		$75,484
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	434,430		8,564		(307		)	442,687
Obligations of states and political subdivisions	18,239		157		—			18,396
Individual name issuer trust preferred debt securities	29,842		—		(4,158		)	25,684
Corporate bonds	1,956		49		—			2,005
Total securities available for sale		$559,967		$8,819		($4,530	)		$564,256
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$16,848		$644		$—			$17,492
Total securities held to maturity		$16,848		$644		$—			$17,492
Total securities		$576,815		$9,463		($4,530	)		$581,748

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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)



(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

As of September 30, 2016 and December 31, 2015, securities with a fair value of $559.0 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.

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
September 30, 2016	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less		$70,876		$72,201		$4,019		$4,172
Due after one year to five years	187,480		190,915		8,835		9,173
Due after five years to ten years	185,358		187,402		3,394		3,524
Due after ten years	116,253		113,738		600		623
Total securities		$559,967		$564,256		$16,848		$17,492

Included in the above table are debt securities with an amortized cost balance of $122.5 million and a fair value of $118.5 million at September 30, 2016 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 5 months to 20 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.

- 12-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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



(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
September 30, 2016	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored enterprises	2		$29,935		($65	)	—		$—		$—		2		$29,935		($65	)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	8	136,398		(307		)	—	—		—			8	136,398		(307		)
Individual name issuer trust preferred debt securities	—	—		—			10	25,684		(4,158		)	10	25,684		(4,158		)
Total temporarily impaired securities	10		$166,333		($372	)	10		$25,684		($4,158	)	20		$192,017		($4,530	)



(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 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 September 30, 2016 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 September 30, 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 September 30, 2016, individual name issuer trust preferred debt securities with an amortized cost of $10.9 million and unrealized losses of $1.5 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 September 30, 2016 and the filing date of this report. Based on this review, 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 September 30, 2016.

- 13-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

U.S. Government Agency and U.S. Government-Sponsored Enterprise Securities, including Mortgage-Backed Securities

The gross unrealized losses on these securities, were primarily attributable to relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on the assessment of these factors, management believes that the unrealized losses on these debt security holdings are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, the Corporation does not intend to sell these securities and it is 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 September 30, 2016.

(5) Loans

The following is a summary of loans:



(Dollars in thousands)	September 30, 2016				December 31, 2015
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$1,086,175	34	%		$931,953	31	%
Construction & development (2)	98,735		3		122,297		4
Commercial & industrial (3)	572,305		18		600,297		20
Total commercial	1,757,215		55		1,654,547		55
Residential real estate:
Mortgages	1,052,829		33		984,437		33
Homeowner construction	27,058		1		29,118		1
Total residential real estate	1,079,887		34		1,013,555		34
Consumer:
Home equity lines	265,238		8		255,565		8
Home equity loans	38,264		1		46,649		2
Other (4)	40,751		2		42,811		1
Total consumer	344,253		11		345,025		11
Total loans (5)		$3,181,355	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 $2.8 million and $2.6 million, respectively, at September 30, 2016 and December 31, 2015 and net unamortized premiums on purchased loans of $641 thousand and $84 thousand, respectively, at September 30, 2016 and December 31, 2015.

At September 30, 2016 and December 31, 2015, there were $1.5 billion and $1.3 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

- 14-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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)	Sep 30, 2016		Dec 31, 2015
Commercial:
Mortgages		$10,357		$5,711
Construction & development	—		—
Commercial & industrial	1,744		3,018
Residential real estate:
Mortgages	10,140		10,666
Homeowner construction	—		—
Consumer:
Home equity lines	271		528
Home equity loans	1,322		1,124
Other	116		—
Total nonaccrual loans		$23,950		$21,047
Accruing loans 90 days or more past due		$—		$—

As of September 30, 2016 and December 31, 2015, loans secured by one- to four-family residential property amounting to $5.0 million and $2.6 million, respectively, were in process of foreclosure.

Nonaccrual loans of $5.2 million and $7.4 million, respectively, were current as to the payment of principal and interest at September 30, 2016 and December 31, 2015.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2016.

Past Due Loans

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



(Dollars in thousands)	Days Past Due
September 30, 2016	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$—		$2,497		$7,855		$10,352		$1,075,823		$1,086,175
Construction & development	—		—		—		—		98,735		98,735
Commercial & industrial	—		—		1,047		1,047		571,258		572,305
Residential real estate:
Mortgages	2,737		860		4,694		8,291		1,044,538		1,052,829
Homeowner construction	—		—		—		—		27,058		27,058
Consumer:
Home equity lines	110		—		—		110		265,128		265,238
Home equity loans	412		166		731		1,309		36,955		38,264
Other	35		2		109		146		40,605		40,751
Total loans		$3,294		$3,525		$14,436		$21,255		$3,160,100		$3,181,355

- 15-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)



(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 September 30, 2016 and December 31, 2015, were nonaccrual loans of $18.8 million and $13.6 million, respectively.

All loans 90 days or more past due at September 30, 2016 and December 31, 2015 were classified as nonaccrual.

- 16-

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
	Sep 30, 2016		Dec 31, 2015		Sep 30, 2016		Dec 31, 2015		Sep 30, 2016		Dec 31, 2015
No Related Allowance Recorded:
Commercial:
Mortgages		$3,980		$4,292		$4,903		$5,101		$—		$—
Construction & development	—		—		—		—		—		—
Commercial & industrial	1,945		1,849		2,056		1,869		—		—
Residential real estate:
Mortgages	13,029		8,441		13,200		8,826		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	271		6		271		64		—		—
Home equity loans	1,323		530		1,344		539		—		—
Other	112		—		112		—		—		—
Subtotal	20,660		15,118		21,886		16,399		—		—
With Related Allowance Recorded:
Commercial:
Mortgages		$7,567		$10,873		$9,427		$10,855		$972		$1,633
Construction & development	—		—		—		—		—		—
Commercial & industrial	460		2,024		511		2,248		15		771
Residential real estate:
Mortgages	1,047		2,895		1,073		2,941		201		156
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	—		522		—		522		—		2
Home equity loans	79		679		79		783		1		21
Other	34		145		33		144		5		—
Subtotal	9,187		17,138		11,123		17,493		1,194		2,583
Total impaired loans		$29,847		$32,256		$33,009		$33,892		$1,194		$2,583
Total:
Commercial		$13,952		$19,038		$16,897		$20,073		$987		$2,404
Residential real estate	14,076		11,336		14,273		11,767		201		156
Consumer	1,819		1,882		1,839		2,052		6		23
Total impaired loans		$29,847		$32,256		$33,009		$33,892		$1,194		$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.

- 17-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following tables present 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 September 30,	2016		2015		2016		2015
Commercial:
Mortgages		$13,159		$14,583		$40		$82
Construction & development	—		—		—		—
Commercial & industrial	2,342		3,376		21		29
Residential real estate:
Mortgages	13,962		4,484		86		27
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	297		157		2		1
Home equity loans	1,328		515		9		3
Other	145		354		3		2
Totals		$31,233		$23,469		$161		$144




(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Nine months ended September 30,	2016		2015		2016		2015
Commercial:
Mortgages		$13,856		$14,692		$220		$237
Construction & development	—		—		—		—
Commercial & industrial	3,141		3,164		42		89
Residential real estate:
Mortgages	11,985		3,735		253		67
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	427		227		10		1
Home equity loans	1,240		224		33		4
Other	147		231		7		7
Totals		$30,796		$22,273		$565		$405

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.

- 18-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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 $18.5 million at both September 30, 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 $1.1 million and $1.8 million, respectively, at September 30, 2016 and December 31, 2015.

As of September 30, 2016, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured.

The following tables present loans modified as a troubled debt restructuring:




(Dollars in thousands)			Outstanding Recorded Investment (1)
	# of Loans		Pre-Modifications		Post-Modifications
Three months ended September 30,	2016	2015	2016	2015	2016	2015
Commercial:
Mortgages	—