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 JUNE 30, 2017 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, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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)		Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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 July 31, 2017 was 17,210,750.



FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended June 30, 2017

TABLE OF CONTENTS
	Page Number
	Page Number
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016	3
Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016	4
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016	5
Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2017 and 2016	6
Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016	7
Condensed Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	45
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)



	June 30, 2017			December 31, 2016
Assets:
Cash and due from banks		$117,608			$106,185
Short-term investments	2,324			1,612
Mortgage loans held for sale, at fair value	32,784			29,434
Securities:
Available for sale, at fair value	749,486			739,912
Held to maturity, at amortized cost (fair value $14,231 at June 30, 2017 and $15,920 at December 31, 2016)	13,942			15,633
Total securities	763,428			755,545
Federal Home Loan Bank stock, at cost	44,640			43,129
Loans:
Commercial	1,698,389			1,771,666
Residential real estate	1,168,105			1,122,748
Consumer	333,606			339,957
Total loans	3,200,100			3,234,371
Less allowance for loan losses	26,662			26,004
Net loans	3,173,438			3,208,367
Premises and equipment, net	28,508			29,020
Investment in bank-owned life insurance	72,183			71,105
Goodwill	63,909			64,059
Identifiable intangible assets, net	9,642			10,175
Other assets	67,065			62,484
Total assets		$4,375,529			$4,381,115
Liabilities:
Deposits:
Demand deposits		$587,813			$585,960
NOW accounts	448,617			427,707
Money market accounts	666,047			730,075
Savings accounts	364,002			358,397
Time deposits	954,710			961,613
Total deposits	3,021,189			3,063,752
Federal Home Loan Bank advances	869,733			848,930
Junior subordinated debentures	22,681			22,681
Other liabilities	55,884			54,948
Total liabilities	3,969,487			3,990,311
Commitments and contingencies
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 60,000,000 shares; issued and outstanding 17,209,699 shares at June 30, 2017 and 17,170,820 shares at December 31, 2016	1,076			1,073
Paid-in capital	116,484			115,123
Retained earnings	306,151			294,365
Accumulated other comprehensive loss	(17,669		)	(19,757		)
Total shareholders’ equity	406,042			390,804
Total liabilities and shareholders’ equity		$4,375,529			$4,381,115

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						Six months
Periods ended June 30,		2017			2016			2017			2016
Interest income:
Interest and fees on loans			$31,642			$29,122			$61,994			$59,120
Interest on securities:	Taxable	4,844			2,487			9,553			4,857
	Nontaxable	72			280			184			607
Dividends on Federal Home Loan Bank stock		439			231			826			441
Other interest income		156			70			260			134
Total interest and dividend income		37,153			32,190			72,817			65,159
Interest expense:
Deposits		3,591			2,981			7,093			5,949
Federal Home Loan Bank advances		3,509			2,313			6,853			4,465
Junior subordinated debentures		149			119			287			231
Other interest expense		—			1			1			3
Total interest expense		7,249			5,414			14,234			10,648
Net interest income		29,904			26,776			58,583			54,511
Provision for loan losses		700			450			1,100			950
Net interest income after provision for loan losses		29,204			26,326			57,483			53,561
Noninterest income:
Wealth management revenues		9,942			9,481			19,419			18,655
Mortgage banking revenues		2,919			2,710			5,259			4,908
Service charges on deposit accounts		901			935			1,784			1,842
Card interchange fees		902			860			1,704			1,657
Income from bank-owned life insurance		542			1,090			1,078			1,589
Loan related derivative income		1,144			508			1,292			1,153
Equity in earnings (losses) of unconsolidated subsidiaries		(89		)	(89		)	(177		)	(177		)
Other income		545			419			957			921
Total noninterest income		16,806			15,914			31,316			30,548
Noninterest expense:
Salaries and employee benefits		17,358			17,405			34,153			33,785
Net occupancy		1,767			1,803			3,734			3,610
Equipment		1,313			1,503			2,780			3,004
Outsourced services		1,710			1,294			3,167			2,657
Legal, audit and professional fees		582			662			1,198			1,291
FDIC deposit insurance costs		469			491			950			984
Advertising and promotion		362			420			599			685
Amortization of intangibles		257			322			534			645
Debt prepayment penalties		—			—			—			431
Change in fair value of contingent consideration		—			16			(310		)	41
Other expenses		2,488			2,114			4,787			4,347
Total noninterest expense		26,306			26,030			51,592			51,480
Income before income taxes		19,704			16,210			37,207			32,629
Income tax expense		6,505			5,153			12,226			10,637
Net income			$13,199			$11,057			$24,981			$21,992

Weighted average common shares outstanding - basic		17,206			17,067			17,196			17,045
Weighted average common shares outstanding - diluted		17,316			17,194			17,312			17,185
Per share information:	Basic earnings per common share		$0.77			$0.65			$1.45			$1.29
	Diluted earnings per common share		$0.76			$0.64			$1.44			$1.28
	Cash dividends declared per share		$0.38			$0.36			$0.76			$0.72

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



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



	Three Months						Six Months
Periods ended June 30,	2017			2016			2017			2016
Net income		$13,199			$11,057			$24,981			$21,992
Other comprehensive income, net of tax:
Net change in fair value of securities available for sale	1,828			1,378			2,229			1,742
Net change in fair value of cash flow hedges	(448		)	(24		)	(350		)	(90		)
Net change in defined benefit plan obligations	(4		)	165			209			331
Total other comprehensive income, net of tax	1,376			1,519			2,088			1,983
Total comprehensive income		$14,575			$12,576			$27,069			$23,975

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, 2017	17,171		$1,073		$115,123		$294,365			($19,757	)		$390,804
Net income	—	—		—		24,981			—			24,981
Total other comprehensive income, net of tax	—	—		—					2,088			2,088
Cash dividends declared	—	—		—		(13,195		)	—			(13,195		)
Share-based compensation	—	—		1,198		—			—			1,198
Exercise of stock options, issuance of other compensation-related equity awards	39	3		163		—			—			166
Balance at June 30, 2017	17,210		$1,076		$116,484		$306,151			($17,669	)		$406,042



	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	—	—		—		21,992			—			21,992
Total other comprehensive income, net of tax	—	—		—		—			1,983			1,983
Cash dividends declared	—	—		—		(12,400		)	—			(12,400		)
Share-based compensation	—	—		1,109		—			—			1,109
Exercise of stock options, issuance of other compensation-related equity awards and related tax benefit	61	4		256		—			—			260
Balance at June 30, 2016	17,081		$1,068		$112,314		$282,666			($7,716	)		$388,332

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



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



Six months ended June 30,		2017			2016
Cash flows from operating activities:
Net income			$24,981			$21,992
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,100			950
Depreciation of premises and equipment		1,759			1,790
Net amortization of premium and discount		1,616			977
Amortization of intangibles		534			645
Goodwill impairment		150			—
Share-based compensation		1,198			1,109
Tax benefit from stock option exercises and other equity awards		350			286
Income from bank-owned life insurance		(1,078		)	(1,589		)
Net gains on loan sales and commissions on loans originated for others		(5,052		)	(4,938		)
Net gain on sale of portfolio loans		—			(135		)
Equity in (earnings) losses of unconsolidated subsidiaries		177			177
Proceeds from sales of loans		215,239			222,098
Loans originated for sale		(213,929		)	(217,682		)
Change in fair value of contingent consideration liability		(310		)	41
Increase in other assets		(6,064		)	(21,194		)
Increase in other liabilities		1,110			16,409
Net cash provided by operating activities		21,781			20,936
Cash flows from investing activities:
Purchases of:	Mortgage-backed securities available for sale	(35,213		)	(62,497		)
	Other investment securities available for sale	(19,963		)	(40,495		)
Maturities and principal payments of:	Mortgage-backed securities available for sale	38,861			23,696
	Other investment securities available for sale	8,955			54,681
	Mortgage-backed securities held to maturity	1,614			2,008
Purchases of Federal Home Loan Bank stock		(1,511		)	(9,987		)
Net decrease (increase) in loans		33,596			(53,972		)
Net proceeds from sale of portfolio loans		—			510
Purchases of loans		—			(17,079		)
Proceeds from the sale of property acquired through foreclosure or repossession		213			254
Purchases of premises and equipment		(1,247		)	(1,816		)
Proceeds of bank-owned life insurance		—			2,054
Net cash provided by (used in) investing activities		25,305			(102,643		)
Cash flows from financing activities:
Net decrease in deposits		(42,563		)	(144,905		)
Proceeds from Federal Home Loan Bank advances		657,500			640,000
Repayment of Federal Home Loan Bank advances		(636,697		)	(378,963		)
Net proceeds from stock option exercises and issuance of other equity awards		(184		)	(26		)
Cash dividends paid		(13,007		)	(12,117		)
Net cash (used in) provided by financing activities		(34,951		)	103,989
Net increase in cash and cash equivalents		12,135			22,282
Cash and cash equivalents at beginning of period		107,797			97,631
Cash and cash equivalents at end of period			$119,932			$119,913



Noncash Investing and Financing Activities:
Loans charged off		$721		$2,335
Loans transferred to property acquired through foreclosure or repossession	410		1,045
Supplemental Disclosures:
Interest payments		$14,111		$10,467
Income tax payments	11,849		9,872

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 that has elected to be a financial holding company. The Bancorp’s subsidiaries include The Washington Trust Company, of Westerly (the “Bank”), a Rhode Island chartered commercial bank founded in 1800, and Weston Securities Corporation (“WSC”). Through its subsidiaries, the Bancorp offers a comprehensive product line of banking and 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; its automated teller machines (“ATMs”); telephone banking; mobile banking and its internet website (www.washtrust.com).

The Unaudited 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 the 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 Unaudited 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, 2016.

(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. As issued, ASU 2014-09 was 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. Washington Trust's largest source of revenue is net interest income on financial assets and liabilities, which is explicitly excluded from the scope of this ASU. Management has assembled a project team to address the changes pursuant to Topic 606. The project team has made an initial scope assessment and commenced contract review for in-scope revenue streams. The Corporation has not yet determined the impact this ASU will have on its 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 tax asset related to available for sale debt securities in combination with their other deferred tax assets; and eliminating the

- 8-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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 adoption of ASU 2016-01 is not expected to have a material impact on the Corporation’s 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. Washington Trust expects to adopt the provisions of ASU 2016-02 effective January 1, 2019. Management has assembled a project team to evaluate the provisions of this ASU, identify additional data requirements necessary and determine an approach for implementation. The Corporation has not yet determined the impact 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. Management adopted the provisions of this ASU on January 1, 2017 using the appropriate transition method as required by ASU 2016-09. For Washington Trust, the most significant provision of this ASU pertained to the accounting of excess tax benefits or tax deficiencies on share based award exercises and vestings. ASU 2016-09 requires that excess tax benefits or tax deficiencies be recognized as income tax benefit or expense in the Consolidated Statements of Income in the period that they occur. Management adopted this specific provision of the ASU on a prospective basis. The ASU also requires that the excess tax benefits or tax deficiencies be reported as an operating activity in the Consolidated Statement of Cash Flows and, in accordance with the ASU, management elected the retrospective transition method in adopting this specific provision. The adoption of ASU 2016-09 did not have a material impact on the 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. Washington Trust is evaluating the effect that this ASU will have on consolidated financial statements and disclosures. Management has assembled a project team that meets regularly to evaluate the provisions of this ASU, identify additional data requirements necessary and determine an approach for implementation. The Corporation has not yet determined if it will early adopt ASU 2016-13 or the impact it will have on its consolidated financial statements.

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.

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Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Accounting Standards Update No. 2016-18, “Restricted Cash” (“ASU 2016-18”), was issued in November 2016. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash. Restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of ASU 2016-18 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 2016-18 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Intangibles - Goodwill and Other - Topic 350

Accounting Standards Update No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), was issued in January 2017 and eliminates Step 2 of the annual goodwill impairment test. Step 2 is a more detailed analysis, which involves measuring the excess of the fair value of the reporting unit, as determined in Step 1, over the aggregate fair value of the individual assets, liabilities, and identifiable intangibles as if the reporting unit was being acquired in a business combination. Under ASU 2017-04, an impairment charge would be recognized for the amount by which the carrying amount exceeded the reporting unit’s fair value under Step 1. ASU 2017-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 and the provisions should be applied on a prospective basis. Effective April 1, 2017, management early adopted the provisions of this ASU, as permitted. The adoption of ASU 2017-04 did not have a material impact on the Corporation’s consolidated financial statements.

Compensation - Retirement Benefits - Topic 715

Accounting Standards Update No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”), was issued in March 2017. ASU 2017-07 requires that employers include the service cost component of net periodic benefit cost in the same line item as other employee compensation costs and all other components of net periodic benefit cost in a separate line item(s) in the statement of income. In addition, the line item in which the components of net periodic benefit cost other than the service cost are included shall be identified as such on the statement of income or in the notes to the financial statements. ASU 2017-07 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of ASU 2017-07 is not expected to have a material impact on the Corporation’s consolidated financial statements.

Receivables - Nonrefundable Fees and Other Costs - Subtopic 310-20

Accounting Standards Update No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”), was issued in March 2017. ASU 2017-08 shortens the amortization period for certain callable debt securities purchased at a premium by requiring that the premium be amortized to the earliest call date. Effective January 1, 2017, management early adopted the provisions of this ASU, as permitted. The adoption of ASU 2017-08 did not have a material impact on the Corporation’s consolidated financial statements.

Compensation - Stock Compensation - Topic 718

Accounting Standards Update No. 2017-09, “Scope of Modification Accounting” (“ASU 2017-09”), was issued in May 2017 to provide clarity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and the provisions should be applied on a prospective basis. Early adoption is permitted. The adoption of ASU 2017-09 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 $13.5 million at June 30, 2017 and $11.5 million at December 31, 2016 and were included in cash and due from banks in the Unaudited Consolidated Balance Sheets.

As of June 30, 2017 and December 31, 2016, cash and due from banks included interest-bearing deposits in other banks of $52.6 million and $60.3 million, respectively.

- 10-

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)
June 30, 2017	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$131,484		$4		($2,558	)		$128,930
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	587,814		4,763		(7,928		)	584,649
Obligations of states and political subdivisions	5,468		16		—			5,484
Individual name issuer trust preferred debt securities	27,888		—		(1,498		)	26,390
Corporate bonds	4,127		22		(116		)	4,033
Total securities available for sale		$756,781		$4,805		($12,100	)		$749,486
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$13,942		$289		$—			$14,231
Total securities held to maturity		$13,942		$289		$—			$14,231
Total securities		$770,723		$5,094		($12,100	)		$763,717



(Dollars in thousands)
December 31, 2016	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$111,483		$7		($3,050	)		$108,440
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	592,833		4,923		(9,671		)	588,085
Obligations of states and political subdivisions	14,423		62		—			14,485
Individual name issuer trust preferred debt securities	29,851		—		(3,115		)	26,736
Corporate bonds	2,155		16		(5		)	2,166
Total securities available for sale		$750,745		$5,008		($15,841	)		$739,912
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$15,633		$287		$—			$15,920
Total securities held to maturity		$15,633		$287		$—			$15,920
Total securities		$766,378		$5,295		($15,841	)		$755,832

As of June 30, 2017 and December 31, 2016, securities with a fair value of $670.4 million and $736.2 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 8 for additional disclosure on FHLBB borrowings.

- 11-

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
June 30, 2017	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less		$64,607		$64,271		$2,422		$2,472
Due after one year to five years	249,039		246,979		6,586		6,723
Due after five years to ten years	251,102		247,891		3,876		3,956
Due after ten years	192,033		190,345		1,058		1,080
Total securities		$756,781		$749,486		$13,942		$14,231

Included in the above table are debt securities with an amortized cost balance of $167.8 million and a fair value of $163.6 million at June 30, 2017 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 11 months to 20 years, with call features ranging from 1 month to 4 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
June 30, 2017	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored enterprises	11		$108,930		($2,558	)	—		$—		$—		11		$108,930		($2,558	)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	35	379,226		(7,928		)	—	—		—			35	379,226		(7,928		)
Individual name issuer trust preferred debt securities	—	—		—			9	26,390		(1,498		)	9	26,390		(1,498		)
Corporate bonds	2	402		(3		)	1	1,868		(113		)	3	2,270		(116		)
Total temporarily impaired securities	48		$488,558		($10,489	)	10		$28,258		($1,611	)	58		$516,816		($12,100	)



(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
December 31, 2016	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored enterprises	10		$98,433		($3,050	)	—		$—		$—		10		$98,433		($3,050	)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	35	407,073		(9,671		)	—	—		—			35	407,073		(9,671		)
Individual name issuer trust preferred debt securities	—	—		—			10	26,736		(3,115		)	10	26,736		(3,115		)
Corporate bonds	2	400		(5		)	—	—		—			2	400		(5		)
Total temporarily impaired securities	47		$505,906		($12,726	)	10		$26,736		($3,115	)	57		$532,642		($15,841	)

- 12-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

Further deterioration in credit quality of the underlying issuers of the securities, further deterioration in the condition of the financial services industry, worsening of the current economic environment, or additional declines in real estate values, among other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods, and the Corporation may incur write-downs.

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

The gross unrealized losses on U.S. government agency and U.S government-sponsored debt securities, including mortgage-backed securities, were primarily attributable to relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. 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, 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 June 30, 2017.

Trust Preferred Debt Securities of Individual Name Issuers

Included in debt securities in an unrealized loss position at June 30, 2017 were 9 trust preferred security holdings issued by 6 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 June 30, 2017, individual name issuer trust preferred debt securities with an amortized cost of $10.9 million and unrealized losses of $663 thousand 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 June 30, 2017 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 June 30, 2017.

- 13-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

(5) Loans

The following is a summary of loans:



(Dollars in thousands)	June 30, 2017				December 31, 2016
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$1,009,096	32	%		$1,074,186	33	%
Construction & development (2)	112,177		4		121,371		4
Commercial & industrial (3)	577,116		17		576,109		18
Total commercial	1,698,389		53		1,771,666		55
Residential Real Estate:
Mortgages	1,143,416		36		1,094,824		34
Homeowner construction	24,689		1		27,924		1
Total residential real estate	1,168,105		37		1,122,748		35
Consumer:
Home equity lines	263,934		8		264,200		8
Home equity loans	35,173		1		37,272		1
Other (4)	34,499		1		38,485		1
Total consumer	333,606		10		339,957		10
Total loans (5)		$3,200,100	100	%		$3,234,371	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 $3.7 million and $3.0 million, respectively, at June 30, 2017 and December 31, 2016 and net unamortized premiums on purchased loans of $854 thousand and $783 thousand, respectively, at June 30, 2017 and December 31, 2016.

As of June 30, 2017 and December 31, 2016, there were $1.6 billion and $1.4 billion, respectively, of loans pledged as collateral for FHLBB borrowings and potential borrowings with the FRB. See Note 8 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 generally for a period of six 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.

- 14-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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



(Dollars in thousands)	Jun 30, 2017		Dec 31, 2016
Commercial:
Mortgages		$6,422		$7,811
Construction & development	—		—
Commercial & industrial	1,232		1,337
Residential Real Estate:
Mortgages	11,815		11,736
Homeowner construction	—		—
Consumer:
Home equity lines	118		—
Home equity loans	502		1,058
Other	109		116
Total nonaccrual loans		$20,198		$22,058
Accruing loans 90 days or more past due		$—		$—

As of June 30, 2017 and December 31, 2016, loans secured by one- to four-family residential property amounting to $3.4 million and $5.7 million, respectively, were in process of foreclosure.

Nonaccrual loans of $5.7 million and $3.5 million, respectively, were current as to the payment of principal and interest at June 30, 2017 and December 31, 2016.

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at June 30, 2017.

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
June 30, 2017	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$—		$1		$6,421		$6,422		$1,002,674		$1,009,096
Construction & development	—		—		—		—		112,177		112,177
Commercial & industrial	3,194		321		494		4,009		573,107		577,116
Residential Real Estate:
Mortgages	3,524		1,371		3,962		8,857		1,134,559		1,143,416
Homeowner construction	—		—		—		—		24,689		24,689
Consumer:
Home equity lines	335		—		—		335		263,599		263,934
Home equity loans	995		317		159		1,471		33,702		35,173
Other	25		—		1		26		34,473		34,499
Total loans		$8,073		$2,010		$11,037		$21,120		$3,178,980		$3,200,100

- 15-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)



(Dollars in thousands)	Days Past Due
December 31, 2016	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$901		$—		$7,807		$8,708		$1,065,478		$1,074,186
Construction & development	—		—		—		—		121,371		121,371
Commercial & industrial	409		—		745		1,154		574,955		576,109
Residential Real Estate:
Mortgages	5,381		652		6,193		12,226		1,082,598		1,094,824
Homeowner construction	—		—		—		—		27,924		27,924
Consumer:
Home equity lines	655		26		—		681		263,519		264,200
Home equity loans	776		76		658		1,510		35,762		37,272
Other	32		1		110		143		38,342		38,485
Total loans		$8,154		$755		$15,513		$24,422		$3,209,949		$3,234,371

Included in past due loans as of June 30, 2017 and December 31, 2016, were nonaccrual loans of $14.5 million and $18.6 million, respectively.

All loans 90 days or more past due at June 30, 2017 and December 31, 2016 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
	Jun 30, 2017		Dec 31, 2016		Jun 30, 2017		Dec 31, 2016		Jun 30, 2017		Dec 31, 2016
No Related Allowance Recorded:
Commercial:
Mortgages		$782		$4,676		$778		$9,019		$—		$—
Construction & development	—		—		—		—		—		—
Commercial & industrial	5,256		6,458		5,427		6,550		—		—
Residential real estate:
Mortgages	14,669		14,385		14,785		14,569		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	118		—		118		—		—		—
Home equity loans	502		1,137		502		1,177		—		—
Other	—		116		7		116		—		—
Subtotal	21,327		26,772		21,617		31,431		—		—
With Related Allowance Recorded:
Commercial:
Mortgages		$7,603		$5,104		$11,091		$6,087		$485		$448
Construction & development	—		—		—		—		—		—
Commercial & industrial	1,706		662		1,765		699		718		3
Residential real estate:
Mortgages	1,062		1,285		1,087		1,310		135		151
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	—		—		—		—		—		—
Home equity loans	—		—		—		—		—		—
Other	135		28		136		29		7		4
Subtotal	10,506		7,079		14,079		8,125		1,345		606
Total impaired loans		$31,833		$33,851		$35,696		$39,556		$1,345		$606
Total:
Commercial		$15,347		$16,900		$19,061		$22,355		$1,203		$451
Residential real estate	15,731		15,670		15,872		15,879		135		151
Consumer	755		1,281		763		1,322		7		4
Total impaired loans		$31,833		$33,851		$35,696		$39,556		$1,345		$606

(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.




(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Three months ended June 30,	2017		2016		2017		2016
Commercial:
Mortgages		$9,549		$13,677		$26		$87
Construction & development	—		—		—		—
Commercial & industrial	6,864		3,290		76		10
Residential Real Estate:
Mortgages	15,915		10,903		150		98
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	95		315		2		6
Home equity loans	602		1,216		8		11
Other	140		151		2		2
Totals		$33,165		$29,552		$264		$214




(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Six months ended June 30,	2017		2016		2017		2016
Commercial:
Mortgages		$9,664		$14,208		$52		$180
Construction & development	—		—		—		—
Commercial & industrial	6,914		3,545		152		21
Residential Real Estate:
Mortgages	16,076		10,986		272		167
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	86		493		4		8
Home equity loans	746		1,195		16		24
Other	142		148		6		4
Totals		$33,628		$30,575		$502		$404

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.

- 18-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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 $19.1 million and $22.3 million, respectively, at June 30, 2017 and December 31, 2016. These amounts included insignificant balances of accrued interest. The allowance for loan losses included specific reserves for these troubled debt restructurings of $641 thousand and $567 thousand, respectively, at June 30, 2017 and December 31, 2016.

As of June 30, 2017, 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 June 30,	2017	2016	2017		2016		2017		2016
Commercial:
Mortgages	—	—		$—		$—		$—		$—
Construction & development	—	—	—		—		—		—
Commercial & industrial	—	1	—