Employee Benefits

Defined Benefit Pension Plans

Washington Trust maintains a qualified pension plan for the benefit of certain eligible employees who were hired prior to October 1, 2007. Washington Trust also has non-qualified retirement plans to provide supplemental retirement benefits to certain employees, as defined in the plans. The defined benefit pension plans were previously amended to freeze benefit accruals after a 10-year transition period ending in December 2023.

The qualified pension plan is funded on a current basis, in compliance with the requirements of ERISA.

Pension benefit costs and benefit obligations incorporate various actuarial and other assumptions, including discount rates, mortality, rates of return on plan assets and compensation increases. Washington Trust evaluates these assumptions annually.

The following table presents the plans’ projected benefit obligations, fair value of plan assets and funded (unfunded) status:



(Dollars in thousands)	Qualified Pension Plan						Non-Qualified Retirement Plans
At December 31,	2018			2017			2018			2017
Change in Benefit Obligation:
Benefit obligation at beginning of period		$80,723			$72,951			$15,203			$13,154
Service cost	2,244			2,149			108			129
Interest cost	2,715			2,673			475			428
Actuarial (gain) loss	(7,830		)	7,017			(252		)	2,275
Benefits paid	(4,344		)	(3,936		)	(908		)	(783		)
Administrative expenses	(128		)	(131		)	—			—
Benefit obligation at end of period	73,380			80,723			14,626			15,203
Change in Plan Assets:
Fair value of plan assets at beginning of period	87,364			75,787			—			—
Actual return on plan assets	288			12,644			—			—
Employer contributions	3,000			3,000			908			783
Benefits paid	(4,344		)	(3,936		)	(908		)	(783		)
Administrative expenses	(128		)	(131		)	—			—
Fair value of plan assets at end of period	86,180			87,364			—			—
Funded (unfunded) status at end of period		$12,800			$6,641			($14,626	)		($15,203	)

As of December 31, 2018 and 2017, the funded status of the qualified defined benefit pension plan amounted to $12.8 million and $6.6 million, respectively, and was included in other assets in the Consolidated Balance Sheets. The unfunded status of the non-qualified defined benefit retirement plans was $14.6 million and $15.2 million, respectively, at December 31, 2018 and December 31, 2017 and was included in other liabilities in the Consolidated Balance Sheets.

The non-qualified retirement plans provide for the designation of assets in rabbi trusts. Securities available for sale and other short-term investments designated for this purpose, with the carrying value of $14.6 million and $13.3 million are included in the Consolidated Balance Sheets at December 31, 2018 and 2017, respectively.

The following table presents components of accumulated other comprehensive income related to the qualified pension plan and non-qualified retirement plans, on a pre-tax basis:



(Dollars in thousands)	Qualified Pension Plan						Non-Qualified Retirement Plans
	Qualified Pension Plan						Non-Qualified Retirement Plans
At December 31,	2018			2017			2018		2017
Net actuarial loss		$9,453			$13,795			$5,785		$6,448
Prior service credit	(16		)	(39		)	—		(1		)
Total pre-tax amounts recognized in accumulated other comprehensive income		$9,437			$13,756			$5,785		$6,447

The accumulated benefit obligation for the qualified pension plan was $67.4 million and $72.9 million at December 31, 2018 and 2017, respectively. The accumulated benefit obligation for the non-qualified retirement plans amounted to $13.2 million and $14.0 million at December 31, 2018 and 2017, respectively.

The following table presents components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss), on a pre-tax basis:



(Dollars in thousands)	Qualified Pension Plan									Non-Qualified Retirement Plans
Years ended December 31,	2018			2017			2016			2018			2017			2016
Net Periodic Benefit Cost:
Service cost (1)		$2,244			$2,149			$2,148			$108			$129			$122
Interest cost (2)	2,715			2,673			2,576			475			428			432
Expected return on plan assets (2)	(5,272		)	(4,942		)	(4,633		)	—			—			—
Amortization of prior service credit (2)	(23		)	(23		)	(23		)	(1		)	(1		)	(1		)
Recognized net actuarial loss (2)	1,496			1,114			828			411			347			247
Net periodic benefit cost	1,160			971			896			993			903			800
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (on a pre-tax basis):
Net (gain) loss	(4,342		)	(1,798		)	2,904			(663		)	1,928			127
Prior service cost	23			23			23			1			1			1
Recognized in other comprehensive (loss) income	(4,319		)	(1,775		)	2,927			(662		)	1,929			128
Total recognized in net periodic benefit cost and other comprehensive (loss) income		($3,159	)		($804	)		$3,823			$331			$2,832			$928


(1)	Included in salaries and employee benefits expense in the Consolidated Statements of Income.


(2)	Included in other expenses in the Consolidated Statements of Income.

For the qualified pension plan, an estimated prior service credit of $16 thousand and net losses of $792 thousand will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost during the year 2019. For the non-qualified retirement plans, net losses of $408 thousand will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost during the year 2019. There are no estimated prior service credits to be amortized in 2019 for the non-qualified retirement plans.

Assumptions

The following table presents the measurement date and weighted-average assumptions used to determine benefit obligations at December 31, 2018 and 2017:



	Qualified Pension Plan		Non-Qualified Retirement Plans
	2018	2017	2018	2017
Measurement date	Dec 31, 2018	Dec 31, 2017	Dec 31, 2018	Dec 31, 2017
Discount rate	4.38%	3.69%	4.30%	3.60%
Rate of compensation increase	3.75	3.75	3.75	3.75

The following table presents the measurement date and weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31, 2018, 2017 and 2016:



	Qualified Pension Plan			Non-Qualified Retirement Plans
	2018	2017	2016	2018	2017	2016
Measurement date	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015
Equivalent single discount rate for benefit obligations	3.69%	4.18%	4.48%	3.58%	3.96%	4.20%
Equivalent single discount rate for service cost	3.76	4.29	4.63	3.79	4.25	4.59
Equivalent single discount rate for interest cost	3.42	3.73	3.88	3.22	3.36	3.44
Expected long-term return on plan assets	6.75	6.75	6.75	N/A	N/A	N/A
Rate of compensation increase	3.75	3.75	3.75	3.75	3.75	3.75

The expected long-term rate of return on plan assets is based on what the Corporation believes is realistically achievable based on the types of assets held by the plan and the plan’s investment practices. The assumption is updated annually, taking into account the asset allocation, historical asset return trends on the types of assets held and the current and expected economic conditions. Future decreases in the long-term rate of return assumption on plan assets would increase pension costs and, in general, may increase the requirement to make funding contributions to the plans. Future increases in the long-term rate of return on plan assets would have the opposite effect.

The discount rate assumption for defined benefit pension plans is reset on the measurement date. Discount rates are selected for each plan by matching expected future benefit payments stream to a yield curve based on a selection of high-

quality fixed-income debt securities. Future decreases in discount rates would increase the present value of pension obligations and increase our pension costs, while future increases in discount rates would have the opposite effect.

The "spot rate approach" was utilized in the calculation of interest and service cost. The spot rate approach applies separate discount rates for each projected benefit payment in the calculation of interest and service cost. This approach provides a more precise measurement of service and interest cost by improving the correlation between projected benefit cash flows and their corresponding spot rates.

Plan Assets

The following tables present the fair values of the qualified pension plan’s assets:



(Dollars in thousands)
	Fair Value Measurements Using						Assets at Fair Value
December 31, 2018	Level 1		Level 2		Level 3		Assets at Fair Value
Assets:
Cash and cash equivalents		$25,986		$—		$—		$25,986
Obligations of U.S. government-sponsored enterprises	—		21,787		—		21,787
Obligations of states and political subdivisions	—		2,597		—		2,597
Corporate bonds	—		10,361		—		10,361
Common stocks	9,957		—		—		9,957
Mutual funds	15,492		—		—		15,492
Total plan assets		$51,435		$34,745		$—		$86,180



(Dollars in thousands)
	Fair Value Measurements Using						Assets at Fair Value
December 31, 2017	Level 1		Level 2		Level 3		Assets at Fair Value
Assets:
Cash and cash equivalents		$3,760		$—		$—		$3,760
Obligations of U.S. government-sponsored enterprises	—		5,926		—		5,926
Obligations of states and political subdivisions	—		2,971		—		2,971
Corporate bonds	—		13,112		—		13,112
Common stocks	38,508		—		—		38,508
Mutual funds	23,087		—		—		23,087
Total plan assets		$65,355		$22,009		$—		$87,364

The qualified pension plan uses fair value measurements to record fair value adjustments to the securities held in its investment portfolio.

When available, the qualified pension plan uses quoted market prices to determine the fair value of securities; such items are classified as Level 1. This category includes cash equivalents, common stocks and mutual funds which are exchange-traded.

Level 2 securities in the qualified pension plan include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose values are determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category includes obligations of U.S. government-sponsored enterprises, obligations of states and political subdivisions and corporate bonds.

In certain cases where there is limited activity or less transparency around inputs to the valuation, securities may be classified as Level 3. As of December 31, 2018 and 2017, the qualified pension plan did not have any securities in the Level 3 category.

The following table presents the asset allocations of the qualified pension plan, by asset category:



December 31,	2018		2017
Asset Category:
Cash and cash equivalents	30.2	%	4.3	%
Fixed income securities	40.3		30.0
Equity securities	29.5		65.7
Total	100.0	%	100.0	%

The assets of the qualified defined benefit pension plan trust (the “Pension Trust”) are managed to ensure that all present and future benefit obligations are met as they come due. It seeks to achieve this goal while trying to mitigate volatility in plan funded status, contributions and expense by better matching the characteristics of the plan assets to that of the plan liabilities. As benefit accruals under the qualified plan will be frozen on December 31, 2023, asset allocations have been and will continue to be refined.

Cash inflow is typically comprised of investment income from portfolio holdings and Bank contributions, while cash outflow is for the purpose of paying plan benefits and certain plan expenses. As early as possible each year, the trustee is advised of the projected schedule of employer contributions and estimations of benefit payments.

The investment philosophy used for the Pension Trust emphasizes consistency of results over an extended market cycle, while reducing the impact of the volatility of the security markets upon investment results. The assets of the Pension Trust should be protected by substantial diversification of investments, providing exposure to a wide range of quality investment opportunities in various asset classes, with a high degree of liquidity.

Fixed income bond investments should be limited to those in the top four categories used by the major credit rating agencies. High yield bond funds may be used to provide exposure to this asset class as a diversification tool. In order to reduce the volatility of the annual rate of return of the bond portfolio, attention will be given to the maturity structure of the portfolio in the light of money market conditions and interest rate forecasts. The assets of the Pension Trust will typically have a laddered maturity structure, avoiding large concentrations in any single year. Equity holdings provide opportunities for dividend and capital appreciation returns. Holdings will be appropriately diversified by maintaining broad exposure to large-, mid- and small-cap stocks as well as international equities. Investment selection and mix of equity holdings should be influenced by forecasts of economic activity, corporate profits and allocation among different segments of the economy while ensuring efficient diversification. The fair value of equity securities of any one issuer will not be permitted to exceed 10% of the total fair value of equity holdings of the Pension Trust. Investments in publicly traded real estate investment trust securities and low-risk derivatives securities such as callable securities, variable-rate notes, mortgage-backed securities and treasury inflation protected securities, are permitted.

Cash Flows

Contributions

The Internal Revenue Code permits flexibility in plan contributions so that normally a range of contributions is possible. The Corporation does not expect to make a contribution to the qualified pension plan in 2019. In addition, the Corporation expects to contribute $907 thousand in benefit payments to the non-qualified retirement plans in 2019.

Estimated Future Benefit Payments

The following table presents the benefit payments, which reflect expected future service, as appropriate, expected to be paid:



(Dollars in thousands)	Qualified Pension Plan		Non-Qualified Retirement Plans
2019		$4,034		$907
2020	3,817		898
2021	3,823		886
2022	4,088		878
2023	4,091		878
Years 2024 - 2028	28,295		4,355

401(k) Plan

The Corporation’s 401(k) Plan provides a match up to a maximum of 3% of employee contributions for substantially all employees. In addition, substantially all employees hired after September 30, 2007, who are ineligible for participation in the qualified defined benefit pension plan, receive a non-elective employer contribution of 4% of compensation. Total employer matching contributions under this plan amounted to $2.5 million, $2.3 million and $2.3 million in 2018, 2017 and 2016, respectively.

Other Incentive Plans

The Corporation maintains several non-qualified incentive compensation plans. Substantially all employees participate in one of the incentive compensation plans. Incentive plans provide for annual or more frequent payments based on individual, business line and/or corporate performance targets. Total incentive based compensation in 2018, 2017 and 2016 amounted to $16.1 million, $16.9 million and $16.0 million, respectively. In general, the terms of incentive plans are subject to annual renewal and may be terminated at any time by the Compensation Committee of the Board of Directors.

Deferred Compensation Plan

The Amended and Restated Nonqualified Deferred Compensation Plan provides supplemental retirement and tax benefits to directors and certain officers. The plan is funded primarily through pre-tax contributions made by the participants. The assets and liabilities of the Deferred Compensation Plan are recorded at fair value in the Corporation’s Consolidated Balance Sheets. The participants in the plan bear the risk of market fluctuations of the underlying assets. The accrued liability related to this plan amounted to $15.7 million and $14.2 million, respectively, at December 31, 2018 and 2017, and is included in other liabilities on the accompanying Consolidated Balance Sheets. The corresponding invested assets are reported in other assets in the Consolidated Balance Sheets.