News Column

WASHINGTON TRUST BANCORP INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 8, 2014

The following discussion should be read in conjunction with the Corporation's consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2013, and in conjunction with the condensed unaudited consolidated financial statements and notes thereto included in Item 1 of this report. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results for the full-year ended December 31, 2014 or any future period. Forward-Looking Statements This report contains statements that are "forward-looking statements." We may also make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Corporation. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Corporation to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements. Some of the factors that might cause these differences include the following: continued weakness in national, regional or economies; reductions in net interest income resulting from a sustained low interest rate environment as well as changes in the balance and mix of loans and deposits; reductions in the market value of wealth management assets under administration; changes in the value of securities and other assets; reductions in loan demand; changes in loan collectibility, default and charge-off rates; changes in the size and nature of the Corporation's competition; changes in legislation or regulation and accounting principles, policies and guidelines and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as updated by our Quarterly Reports on Form 10-Q and other filings submitted to the SEC, may result in these differences. You should carefully review all of these factors and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes. Critical Accounting Policies and Estimates Accounting policies involving significant judgments, estimates and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income are considered critical accounting policies. The Corporation considers the following to be its critical accounting policies: the determination of the allowance for loan losses, the review of goodwill and intangible assets for impairment and the assessment of investment securities for impairment. There have been no significant changes in the Corporation's critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Recently Issued Accounting Pronouncements See Note 2 to the Unaudited Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Corporation's consolidated financial position, results of operations or cash flows.



Overview

Washington Trust offers a comprehensive product line of financial services to individuals and businesses including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut, its ATM networks, and its Internet website at www.washtrust.com. Our largest source of operating income is net interest income, the difference between interest earned on loans and securities and interest paid on deposits and borrowings. In addition, we generate noninterest income from a number of sources, including wealth management services, loan sales and commissions on loans originated for others, deposit services, card interchange fees and bank-owned life insurance ("BOLI"). Our principal noninterest expenses include salaries and employee benefits, occupancy and facility-related costs, technology and other administrative expenses. Our financial results are affected by interest rate fluctuations, changes in economic and market conditions, competitive conditions within our market area and changes in legislation, regulation and/or accounting principles. While the regional economic climate 40

-------------------------------------------------------------------------------- has been improving in recent quarters, adverse changes in future economic growth, consumer confidence, credit availability and corporate earnings could impact our financial results. Management believes that overall credit quality continues to be affected by the slow pace of recovery in national and regional economic conditions, including comparatively high unemployment levels in Rhode Island. We believe the Corporation's financial strength and stability, capital resources and reputation as the largest independent bank headquartered in Rhode Island were key factors in delivering solid results in the first quarter of 2014. We continue to leverage our strong, statewide brand to build market share in Rhode Island whenever possible and bring select business lines to new markets with high-growth potential while remaining steadfast in our commitment to provide superior service. In the second quarter of 2014, Washington Trust plans to open a new full-service branch in Johnston, Rhode Island, in Providence County. This branch will be Washington Trust's nineteenth branch office and its first in Johnston. Composition of Earnings Net income for the first quarter of 2014 amounted to $9.3 million, or 55 cents per diluted share, up from $7.4 million, or 45 cents per diluted share, reported for the first quarter of 2013. The returns on average equity and average assets for the first quarter of 2014 were 11.10% and 1.17%, respectively, compared to 9.91% and 0.98%, respectively, for the same quarter in 2013. The comparison of 2014 earnings to 2013 was significantly impacted by a $2.8 million other-than-temporary impairment loss recognized on a pooled trust preferred debt security in the first quarter of 2013. The net after-tax impact of this impairment loss was $1.9 million, or 11 cents per diluted share.



In addition, the following transactions in the first quarter of 2014 resulted in a net after-tax charge of 1 cent to diluted earnings per share: • On March 1, 2014, the Corporation sold its merchant processing service

business line to a third party. The sale resulted in a gain of $6.3 million, after-tax $4.0 million, or 24 cents per diluted share.



• In connection with this sale, the Corporation incurred divestiture related

costs of $355 thousand, after-tax $227 thousand, or 1 cent per diluted

share. These costs included $291 thousand in salaries and employee benefit

expenses and $64 thousand in legal expenses.

Washington Trust also prepaid FHLBB advances totaling $99.3 million,

resulting in debt prepayment penalty expense of approximately $6.3

million, after-tax $4.0 million, or 24 cents per diluted share. The

weighted average rate of these FHLBB advances was 3.01% with a weighted

average remaining term of thirty-six months. Other wholesale funding in the form of brokered time deposits, as well as existing on-balance sheet liquidity, were utilized as the funding source for the prepayment of these FHLBB advances. The replacement wholesale funding amounted to $80.0 million, with maturities ranging from 2015 through 2019, a weighted



average maturity of thirty-five months and an initial weighted average

cost of approximately 0.93%.

The combined impact of the divestiture of the merchant processing service business line and the reduction in interest expense due to the above mentioned borrowing transactions is expected to result in future ongoing pre-tax income enhancement of approximately $1.0 million in the remainder of 2014 and $1.3 million in 2015, with continuing benefits in future years. Net interest income for the three months ended March 31, 2014 amounted to $23.8 million, up by $1.4 million, or 6%, from the same period in 2013, reflecting growth in average loan balances and continued reduction in funding costs. The net interest margin (fully taxable equivalent net interest income as a percentage of average interest-earnings assets) was 3.34% for the three months ended March 31, 2014, compared to 3.32% for the same period in 2013.



The loan loss provision charged to earnings for the three months ended March 31, 2014 and 2013 amounted to $300 thousand and $600 thousand, respectively. Management believes that the level of provision for loan losses has been consistent with the trends in asset quality and credit quality indicators.

Noninterest income for the three months ended March 31, 2014 and 2013 totaled $19.4 million and $13.2 million, respectively. Excluding $6.3 million gain on sale of business line recognized in the first quarter of 2014 and the $2.8 million other-than-temporary impairment loss recognized in the first quarter of 2013, noninterest income decreased by $2.8 million, or 18%. Significant year-over-year changes, on this basis, included: • Net gains on loan sales and commissions on loans originated for others



("mortgage banking revenues") were down by $2.9 million, or 70%,

reflecting declines in mortgage loan refinancing and sales activity due to

higher market interest rates. 41

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• Wealth management revenues were up by $591 thousand, or 8%, due to an increase in asset-based wealth management revenues.



• Merchant processing fee revenue decreased by $686 thousand, or 35%, as the

sale of this business line was consummated on March 1, 2014. See

discussion below regarding a corresponding decrease in merchant processing

costs. Noninterest expenses for the three months ended March 31, 2014 and 2013 amounted to $29.3 million and $24.2 million, respectively. Excluding the above mentioned debt prepayment penalty expense of $6.3 million and divestiture costs of $355 thousand recognized in the first quarter of 2014, noninterest expenses decreased by $1.5 million, or 6%. Significant year-over-year changes, on this basis, included: • Salaries and employee benefit costs decreased by $1.2 million, or 8%,



reflecting lower defined benefit pension plan expenses and lower levels of

business development based compensation primarily in mortgage banking.

• Corresponding to the decrease in merchant processing fee revenue described

above, merchant processing costs decreased by $623 thousand, or 37%.

Income tax expense amounted to $4.3 million and $3.4 million, respectively for the three months ended March 31, 2014 and 2013. The Corporation's effective tax rate for the three months ended March 31, 2014 and 2013 was 31.7% and 31.6%, respectively. The effective tax rates differed from the federal rate of 35% due largely to the benefits of tax-exempt income, income from BOLI and federal tax credits. Results of Operations Segment Reporting Washington Trust manages its operations through two business segments, Commercial Banking and Wealth Management Services. Activity not related to the segments, such as the investment securities portfolio, wholesale funding activities, net gain on sale of business line, income from BOLI and administrative expenses not allocated to the operating segments are considered Corporate. The Corporate unit also includes the residual impact of methodology allocations such as funds transfer pricing offsets. Methodologies used to allocate income and expenses to business lines are periodically reviewed and revised. See Note 14 to the Unaudited Consolidated Financial Statements for additional disclosure related to business segments. Net income attributed to the Corporate unit amounted to $1.2 million for the three months ended March 31, 2014, compared to a net loss of $1.1 million for the same period in 2013. The Corporate unit's net interest income for the three months ended March 31, 2014 increased by $1.2 million, largely due to declining funding costs and an increase in dividend income on the Corporation's investment in FHLBB stock. Noninterest income for the Corporate unit included the $6.3 million gain on sale of business line in the first quarter of 2014 and the $2.8 million other-than-temporary impairment loss recognized on a pooled trust preferred debt security in the first quarter of 2013. Noninterest expenses for the first quarter of 2014 included $6.3 million in debt prepayment penalty expense. See additional discussion regarding these noninterest income and expense items in the "Overview" section under the caption "Composition of Earnings." The Commercial Banking segment reported net income of $6.6 million for the three months ended March 31, 2014, compared to $7.2 million for the same period in 2013. Net interest income for this operating segment for the three months ended March 31, 2014 increased by $228 thousand, or 1%, from the same period in 2013, principally due to growth in average loan balances and declining cost of funds on deposits. The provision for loan losses for the three months ended March 31, 2014 decreased by $300 thousand compared to first quarter of 2013, reflecting improvements in asset quality and credit quality indicators. Noninterest income derived from the Commercial Banking segment totaled $4.5 million for the three months ended March 31, 2014, down by $3.4 million, or 43%, from the comparable 2013 period. This decline in noninterest income was largely due to lower mortgage banking revenues, which are sensitive to market interest rates. Also contributing to the decline in this operating segment's noninterest income was a decrease in merchant processing fee revenue, as the sale of this business line was consummated on March 1, 2014. The decrease in merchant processing fee revenue corresponded to a decline in merchant processing costs included in this operating segment's noninterest expenses. Commercial Banking noninterest expenses for the three months ended March 31, 2014 were down by $1.6 million, or 10%, from the same period in 2013. This decline in noninterest expenses reflected decreases in salaries and employee benefit costs and a decline in merchant processing costs. The Wealth Management Services segment reported net income of $1.5 million for the three months ended March 31, 2014, compared to $1.3 million for the same period in 2013. Noninterest income derived from the Wealth Management Services segment was $8.1 million for the three months ended March 31, 2014, up by 8% compared to the same period in 2013, primarily due to an increase in asset-based wealth management revenues. Wealth Management assets under administration stood at $4.81 billion at March 31, 2014, up by 9% from the balance at March 31, 2013. Noninterest expenses for this operating segment 42 --------------------------------------------------------------------------------



totaled $5.7 million for the three months ended March 31, 2014, up by $259 thousand, or 5%, from the same period a year ago, reflecting an increase in salaries and benefit costs and outsourced services.

Net Interest Income Net interest income continues to be the primary source of Washington Trust's operating income. Net interest income is affected by the level of interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Included in interest income are loan prepayment fees and certain other fees, such as late charges. The following discussion presents net interest income on a fully taxable equivalent ("FTE") basis by adjusting income and yields on tax-exempt loans and securities to be comparable to taxable loans and securities. For more information, see the section entitled "Average Balances / Net Interest Margin - Fully Taxable Equivalent (FTE) Basis" below.



FTE net interest income for the three months ended March 31, 2014 and 2013 amounted to $24.5 million and $23.0 million. The increase in FTE net interest income reflects growth in average loan balances and continued reduction in funding costs. The net interest margin was 3.34% for the three months ended March 31, 2014, compared to 3.32% for the same period in 2013.

In the recent interest rate environment, market yields on new loan originations have been below the average yield of the existing loan portfolio. Due to the combined effect of new loan growth and the runoff of higher yielding loan balances, interest rates on total earning assets may continue to decline. Average interest-earning assets for the three months ended March 31, 2014 were up by $163.7 million, or 6%, from the average balance for the same period in 2013. Total average loans for the three months ended March 31, 2014 increased by $145.1 million, or 6%, compared to the average balance for the comparable 2013 period, due to growth in the commercial loan portfolio and in residential real estate loans. The yield on total loans for the three months ended March 31, 2014 decreased by 18 basis points from the comparable 2013 period, reflecting the impact of a sustained low interest rate environment on loan yields. The contribution of loan prepayment fees and other fees to the yield on total loans was 5 basis points and 2 basis points, respectively, for the three months ended March 31, 2014 and 2013. Total average securities for the three months ended March 31, 2014 increased by $12.2 million, or 3%, from the average balance for the same period a year earlier, reflecting purchases of debt securities made in the latter part of 2013 offset, in part, by principal payments received on mortgage-backed securities. The FTE rate of return on securities for the three months ended March 31, 2014 decreased by 14 basis points compared to the same period in 2013, due to maturities and calls of higher yielding securities combined with purchases of lower yielding securities. Average interest-bearing liabilities for the three months ended March 31, 2014 increased by $76.2 million, or 3%, from the average balance for the comparable period in 2013, largely reflecting growth in average money market account balances partially offset by decreases in average FHLBB advance balances and time deposits. See additional discussion under the section "Sources of Funds." The weighted average cost of funds for the three months ended March 31, 2014 declined by 18 basis points compared to the same period in 2013, largely due to declines in the rate paid on time deposits. The average balances of FHLBB advances for the three months ended March 31, 2014 were down by $75.3 million, or 22%, compared to the average balance for the same period in 2013. The average rate paid on such advances for the three months ended March 31, 2014 increased 15 basis points from the first quarter of 2013. Total average interest-bearing deposits for the three months ended March 31, 2014 increased by $162.8 million, or 8%, compared to the average balance for the first quarter of 2013. This increase reflected growth in average lower-cost deposit balances, partially offset by a decrease in average time deposit balances. The average rate paid on interest-bearing deposits for the three months ended March 31, 2014 decreased by 9 basis points compared to the same period in 2013, reflecting lower rates on time deposits. The average balance of noninterest-bearing demand deposits for the three months ended March 31, 2014 increased by $62.1 million, or 17%, compared to the average balances for the same period in 2013. Average Balances / Net Interest Margin - Fully Taxable Equivalent (FTE) Basis The following tables present average balance and interest rate information. Tax-exempt income is converted to a FTE basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. For dividends on corporate stocks, the 70% federal dividends received deduction is also used in the calculation of tax equivalency. Average balances and yields for securities available for sale are based on amortized cost. Nonaccrual and renegotiated loans, as well as interest earned on these loans (to the extent recognized in the Consolidated Statements of Income) are included in amounts presented for loans. 43

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Three months ended March 31, 2014 2013 (Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Assets: Commercial loans $1,336,798$14,601 4.43 % $1,243,716$14,421 4.70 % Residential real estate loans, including mortgage loans held for sale 802,412 8,208 4.15 % 755,528 7,937 4.26 % Consumer loans 327,793 3,097 3.83 % 322,668 3,053 3.84 % Total loans 2,467,003 25,906 4.26 % 2,321,912 25,411 4.44 % Cash, federal funds sold and short-term investments 62,246 35 0.23 % 53,734 28 0.21 % FHLBB stock 37,730 142 1.53 % 39,790 38 0.39 % Taxable debt securities 344,009 2,942 3.47 % 323,730 2,845 3.56 % Nontaxable debt securities 59,958 884 5.98 % 68,064 1,004 5.98 % Total securities 403,967 3,826 3.84 % 391,794 3,849 3.98 % Total interest-earning assets 2,970,946 29,909 4.08 % 2,807,230 29,326 4.24 % Noninterest-earning assets 203,335 210,338 Total assets $3,174,281$3,017,568 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $10,767 $- - % $- $- - % NOW accounts 304,201 47 0.06 % 283,004 45 0.06 % Money market accounts 685,142 609 0.36 % 495,453 351 0.29 % Savings accounts 292,809 45 0.06 % 279,536 46 0.07 % Time deposits 797,458 2,268 1.15 % 869,576 2,752 1.28 % FHLBB advances 269,989 2,241 3.37 % 345,270 2,738 3.22 % Junior subordinated debentures 22,681 241 4.31 % 32,991 390 4.79 % Other 173 3 7.03 % 1,146 4 1.42 % Total interest-bearing liabilities 2,383,220 5,454 0.93 % 2,306,976 6,326 1.11 % Demand deposits 422,975 360,851 Other liabilities 33,057 50,305 Shareholders' equity 335,029 299,436 Total liabilities and shareholders' equity $3,174,281$3,017,568 Net interest income $24,455$23,000 Interest rate spread 3.15 % 3.13 % Net interest margin 3.34 % 3.32 % Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: (Dollars in thousands) Three months ended March 31, 2014 2013 Commercial loans $317$188 Nontaxable debt securities 302 345 Total $619$533 44

-------------------------------------------------------------------------------- Volume / Rate Analysis - Interest Income and Expense (Fully Taxable Equivalent Basis) The following table presents certain information on a FTE basis regarding changes in our interest income and interest expense for the period indicated. The net change attributable to both volume and rate has been allocated proportionately. (Dollars in thousands) Three months March 31, 2014 vs. 2013 Increase (Decrease) Due to Volume Rate Net Change Interest on Interest-Earning Assets: Commercial loans $1,039



($859 ) $180 Residential real estate loans, including mortgage loans held for sale

481 (210 ) 271 Consumer loans 51 (7 ) 44 Cash, federal funds sold and other short-term investments 4 3 7 FHLBB stock (2 ) 106 104 Taxable debt securities 171 (74 ) 97 Nontaxable debt securities (120 ) - (120 ) Total interest income 1,624 (1,041 ) 583 Interest on Interest-Bearing Liabilities: Interest-bearing demand deposits - - - NOW accounts 2 - 2 Money market accounts 158 100 258 Savings accounts 3 (4 ) (1 ) Time deposits (218 ) (266 ) (484 ) FHLBB advances (620 ) 123 (497 ) Junior subordinated debentures (113 ) (36 ) (149 ) Other (6 ) 5 (1 ) Total interest expense (794 ) (78 ) (872 ) Net interest income $2,418 ($963 ) $1,455 Provision and Allowance for Loan Losses The provision for loan losses is based on management's periodic assessment of the adequacy of the allowance for loan losses which, in turn, is based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics; the level of nonperforming loans and net charge-offs, both current and historic; local economic and credit conditions; the direction of real estate values; and regulatory guidelines. The provision for loan losses is charged against earnings in order to maintain an allowance for loan losses that reflects management's best estimate of probable losses inherent in the loan portfolio at the balance sheet date. The provision for loan losses charged to earnings for the three months ended March 31, 2014 and 2013 amounted to $300 thousand and $600 thousand, respectively. Net charge-offs for the three months ended March 31, 2014 were $1.1 million and included an $853 charge-off recognized on one commercial mortgage relationship. Net charge-offs for the three months ended March 31, 2013 totaled $334 thousand. The allowance for loan losses was $27.0 million, or 1.09% of total loans, at March 31, 2014, compared to $27.9 million, or 1.13% of total loans, at December 31, 2013. The decline in the ratio of the allowance for loan losses to total loans reflects charge-offs and a decrease in specific reserves on impaired loans. See additional discussion under the caption "Asset Quality" below for further information on the Allowance for Loan Losses. 45 -------------------------------------------------------------------------------- Noninterest Income Noninterest income is an important source of revenue for Washington Trust. The principal categories of noninterest income are shown in the following table: (Dollars in thousands) Change Three months ended March 31, 2014 2013 $ % Noninterest income: Wealth management revenues $8,065$7,474$591 8 % Merchant processing fees 1,291 1,977 (686 ) (35 )% Net gains on loan sales and commissions on loans originated for others 1,239 4,166 (2,927 ) (70 )% Service charges on deposit accounts 754 791 (37 ) (5 )% Card interchange fees 681 599 82 14 % Income from bank-owned life insurance 445 467 (22 ) (5 )% Net realized gains on securities - - - - % Net gains on interest rate swap contracts 260 19 241 1,268 % Equity in earnings (losses) of unconsolidated subsidiaries (43 ) 39 (82 ) (210 )% Gain on sale of business line 6,265 - 6,265 - % Other income 413 406 7 2 %



Noninterest income, excluding other-than-temporary impairment losses

19,370 15,938 3,432 22 % Total other-than-temporary impairment losses on securities - (613 ) 613 100 % Portion of loss recognized in other comprehensive income (before tax) - (2,159 ) 2,159 100 % Net impairment losses recognized in earnings - (2,772 ) 2,772 100 % Total noninterest income $19,370$13,166$6,204 47 % Noninterest Income Analysis Revenue from wealth management services is our largest source of noninterest income. A substantial portion of wealth management revenues is largely dependent on the value of wealth management assets under administration and is closely tied to the performance of the financial markets. This portion of wealth management revenues is referred to as "asset-based" and includes trust and investment management fees and mutual fund fees. Wealth management revenues also include "transaction-based" revenues, such as financial planning, commissions and other service fees that are not primarily derived from the value of assets. The categories of wealth management revenues are shown in the following table: (Dollars in thousands) Change Three months ended March 31, 2014 2013 $ %



Wealth management revenues: Trust and investment management fees $6,685$6,066$619 10 % Mutual fund fees

1,081 1,022 59 6 Asset-based revenues 7,766 7,088 678 10 Transaction-based revenues 299 386 (87 ) (23 )



Total wealth management revenues $8,065$7,474$591 8 %

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The following table presents the changes in wealth management assets under administration for the periods indicated: (Dollars in thousands)

Three months ended March 31, 2014



2013

Wealth management assets under administration: Balance at the beginning of period $4,781,958



$4,199,640

Net investment appreciation & income 44,335



213,979

Net client cash flows (19,912 )



6,457

Balance at the end of period $4,806,381



$4,420,076

Wealth management revenues for the three months ended March 31, 2014 and 2013 were $8.1 million and $7.5 million, respectively, up by $591 thousand, or 8%, reflecting an increase in asset-based wealth management revenues. Wealth management assets under administration totaled $4.81 billion at March 31, 2014, up by $24.4 million, or 1%, from December 31, 2013, and up by $386.3 million, or 9%, from a year-ago, due to net investment appreciation and income. Merchant processing fees are down by $686 thousand, or 35%, due to the sale of this business line, which was consummated on March 1, 2014. This decline corresponds to the decline in merchant processing costs discussed below under the caption "Noninterest Expenses." See additional disclosure regarding this sale in the "Overview" section under the caption "Composition of Earnings." Mortgage banking revenues (net gains on loan sales and commissions on loans originated for others) are dependent on mortgage origination volume and are sensitive to interest rates and the condition of housing markets. For the three months ended March 31, 2014, this revenue source decreased by $2.9 million, or 70%, compared to the three months ended March 31, 2013, largely due to decreased refinancing and sales activity in response to increased market interest rates. Residential real estate loans sold to the secondary market, including brokered loans, totaled $57.0 million and $152.8 million, respectively, for the three months ended March 31, 2014 and 2013. Net gains on interest rate swap contracts for the three months ended March 31, 2014 increased by $241 thousand from the same period in 2013. The increase was largely due to new customer-related interest rate swap contracts executed in 2014. As previously mentioned, the Corporation sold its merchant processing services business line in the first quarter of 2014 resulting in a net gain on sale of business line of $6.3 million. See additional discussion in the "Overview" section under the caption "Composition of Earnings." There were no impairment losses recognized on securities in the quarter ended March 31, 2014. For the three months ended March 31, 2013, net impairment losses recognized in earnings on investment securities totaled $2.8 million. See additional discussion in the "Overview" section above under the caption "Composition of Earnings." 47

-------------------------------------------------------------------------------- Noninterest Expense The following table presents noninterest expense comparisons for the periods indicated: (Dollars in thousands) Change Three months ended March 31, 2014 2013 $



%

Noninterest expenses: Salaries and employee benefits $14,558$15,442 ($884 ) (6 )% Net occupancy 1,640 1,514 126 8 % Equipment 1,236 1,244 (8 ) (1 )% Merchant processing costs 1,050 1,673 (623 ) (37 )% Outsourced services 1,044 841 203 24 % Legal, audit and professional fees 618 608 10 2 % FDIC deposit insurance costs 440 431 9 2 % Advertising and promotion 232 355 (123 ) (35 )% Amortization of intangibles 164 173 (9 ) (5 )% Foreclosed property costs (recovery) (22 ) 47 (69 ) (147 )% Debt prepayment penalties 6,294 - 6,294 - % Other 2,038 1,856 182 10 % Total noninterest expense $29,292$24,184$5,108 21 % Noninterest Expense Analysis Salaries and employee benefit costs for the three months ended March 31, 2014 and 2013 were $14.6 million and $15.4 million, respectively, down by $884 thousand, or 6%. Included in salaries and employee benefits in the first quarter of 2014 was $291 thousand of divestiture costs incurred in connection with the March 2014 sale of the merchant processing services business line. Excluding these divestiture costs, salaries and employee benefit costs decreased by $1.2 million, or 6%, reflecting a reduction in defined benefit pension costs and lower levels of business development based compensation primarily in the mortgage banking area. Corresponding to the decrease in merchant processing fee revenue noted above under the caption "Noninterest Income," merchant processing costs for the three months ended March 31, 2014 were down by $623 thousand, or 37%, from the same period in 2013. Outsourced services for the three months ended March 31, 2014 increased by $203 thousand, or 24%, reflecting an expansion of services utilized in our wealth management area and services utilized in support of deposit products. The prepayment of FHLBB advances in the first quarter of 2014 resulted in debt prepayment penalty expense of $6.3 million. See additional discussion regarding the prepayments in the "Overview" section above under the caption "Composition of Earnings." There was no debt prepayment penalty expense in the first quarter of 2013. Income Taxes Income tax expense amounted to $4.3 million for the three months ended March 31, 2014, compared to $3.4 million for the same period in 2013. The Corporation's effective tax rate for the three months ended March 31, 2014 and 2013 were 31.7%, and 31.6%, respectively. Financial Condition Summary Total assets amounted to $3.19 billion at March 31, 2014, a modest increase of $5.3 million, or 0.2%, from the end of 2013. This included an increase of $22.8 million, or 28%, in cash and due from banks, net loan growth of $15.7 million, or 1%, and a decrease of $32.9 million, or 8% in the securities portfolio. 48 -------------------------------------------------------------------------------- Nonperforming assets as a percent of total assets amounted to 0.45% at March 31, 2014, down by 17 basis points from the end of 2013, largely due to payoffs of commercial loans and charge-offs. While the overall credit quality continues to be affected by relatively weak economic conditions, we have experienced improvements in many of our asset and credit quality indicators. Total deposits increased by $86.3 million, or 3%, in the first quarter of 2014, including a net increase of $73.3 million of out-of-market wholesale brokered time certificates of deposit, which were utilized as replacement funding for the prepayment of FHLBB advances in the first quarter of 2014. FHLBB advances declined by $84.7 million, or 29%, from the end of 2013. See additional discussion regarding the prepayments of FHLBB advances in the "Overview" section above under the caption "Composition of Earnings." Shareholders' equity totaled $335.9 million at March 31, 2014, up by $6.2 million from the balance at the end of 2013. Capital levels continue to exceed the regulatory minimum levels to be considered well-capitalized, with a total risk-based capital ratio of 13.56% at March 31, 2014, compared to 13.29% at December 31, 2013.



Securities

Washington Trust's securities portfolio is managed to generate interest income, to implement interest rate risk management strategies, and to provide a readily available source of liquidity for balance sheet management. Securities are designated as either available for sale, held to maturity or trading at the time of purchase. The Corporation does not currently maintain a portfolio of trading securities. Securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of tax, until realized. Securities held to maturity are reported at amortized cost. Determination of Fair Value The Corporation uses an independent pricing service to obtain quoted prices. The prices provided by the independent pricing service are generally based on observable market data in active markets. The determination of whether markets are active or inactive is based upon the level of trading activity for a particular security class. The Corporation reviews the independent pricing service's documentation to gain an understanding of the appropriateness of the pricing methodologies. The Corporation also reviews the prices provided by the independent pricing service for reasonableness based upon current trading levels for similar securities. If the prices appear unusual they are re-examined and the value is either confirmed or revised. In addition, the Corporation periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of March 31, 2014 and December 31, 2013, the Corporation did not make any adjustments to the prices provided by the pricing service. Generally, our fair value measurements utilize Level 2 inputs, which utilize quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and model-derived valuations in which all significant input assumptions are observable in active markets. Our Level 2 financial instruments consist primarily of available for sale debt securities.



See Notes 4 and 11 to the Unaudited Consolidated Financial Statements for additional information regarding the determination of fair value of investment securities.

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Securities Portfolio The carrying amounts of securities held are as follows: (Dollars in thousands)

March 31, 2014



December 31, 2013

Amount % Amount % Securities Available for Sale: Obligations of U.S. government-sponsored enterprises $39,878 11 % $55,115 14 % Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 227,546 63 238,355 61 Obligations of states and political subdivisions 61,936 17 62,859 16 Individual name issuer trust preferred debt securities 25,380 7 24,684 6 Pooled trust preferred debt securities - - 547 - Corporate bonds 6,260 2 11,343 3 Total securities available for sale $361,000 100 % $392,903 100 % (Dollars in thousands) March 31, 2014 December 31, 2013 Amount % Amount % Securities Held to Maturity: Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises $28,889 100 % $29,905 100 % Total securities held to maturity $28,889 100 %



$29,905 100 %

As of March 31, 2014, the investment portfolio totaled $389.9 million, down by $32.9 million from the balance at December 31, 2013, largely due to a call of a U.S. government agency debt security and principal payments received on mortgage-backed securities, which were not reinvested in the securities portfolio. At March 31, 2014 and December 31, 2013, the net unrealized gain position on securities available for sale and held to maturity amounted to $6.2 million and $5.0 million, respectively, and included gross unrealized losses of $5.4 million and $6.6 million, respectively. These gross unrealized losses were temporary in nature and concentrated in variable rate trust preferred securities issued by financial services companies. State and Political Subdivision Holdings The carrying amount of state and political subdivision holdings included in our securities portfolio at March 31, 2014 totaled $61.9 million. The following table presents state and political subdivision holdings by geographic location. (Dollars in thousands) Fair March 31, 2014 Amortized Cost Unrealized Gains Unrealized Losses Value New Jersey $30,028$1,278 $- $31,306 New York 10,600 371 - 10,971 Pennsylvania 6,521 179 - 6,700 Illinois 7,313 110 - 7,423 Other 5,364 172 - 5,536 Total $59,826$2,110 $- $61,936 50

-------------------------------------------------------------------------------- The following table presents state and political subdivision holdings by category. (Dollars in thousands) Unrealized Fair March 31, 2014 Amortized Cost Gains Unrealized Losses Value General obligations $53,683$1,945 $- $55,628 Revenue obligations (a) 6,143 165 - 6,308 Total $59,826$2,110 $- $61,936



(a) Includes water and sewer districts, tax revenue obligations and other.

Washington Trust owns trust preferred security holdings of seven individual name issuers in the financial industry. The following tables present information concerning these holdings, including credit ratings. The Corporation's Investment Policy contains rating standards that specifically reference ratings issued by Moody's and S&P.



Individual Name Issuer Trust Preferred Debt Securities (Dollars in thousands)

March 31, 2014 Credit Ratings March 31, 2014 Form 10-Q Filing Date Named Issuer (parent holding company) (a) Amortized Cost Fair Value Unrealized Loss Moody's S&P Moody's S&P JPMorgan Chase & Co. 2 $9,760$7,931 ($1,829 ) Baa2 BBB Baa2 BBB Bank of America Corporation 3 5,763 4,700 (1,063 ) Ba1 BB+ (b) Ba1 BB+ (b) Wells Fargo & Company 2 5,138 4,359 (779 ) A3/Baa1 A-/BBB+ A3/Baa1 A-/BBB+ SunTrust Banks, Inc. 1 4,172 3,449 (723 ) Baa3 BB+ (b) Baa3 BB+ (b) Northern Trust Corporation 1 1,984 1,660 (324 ) Baa1 A- Baa1 A- State Street Corporation 1 1,974 1,642 (332 ) A3 BBB+ A3 BBB+ Huntington Bancshares Incorporated 1 1,933 1,639 (294 ) Baa3 BB+ (b) Baa3 BB+ (b) Totals 11 $30,724$25,380 ($5,344 )



(a) Number of separate issuances, including issuances of acquired institutions.

(b) Rating is below investment grade.

The Corporation's evaluation of the impairment status of individual name trust preferred securities includes various considerations in addition to the degree of impairment and the duration of impairment. We review the reported regulatory capital ratios of the issuer and, in all cases, the regulatory capital ratios were deemed to be in excess of the regulatory minimums. Credit ratings were also taken into consideration, 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. We noted no additional downgrades to below investment grade between the reporting period date and the filing date of this report. Where available, credit ratings from multiple rating agencies are obtained and rating downgrades are specifically analyzed. Our review process for these credit-sensitive holdings also includes a periodic review of relevant financial information for each issuer, such as quarterly financial reports, press releases and analyst reports. This information is used to evaluate the current and prospective financial condition of the issuer in order to assess the issuer's ability to meet its debt obligations. Through the filing date of this report, each of the individual name issuer securities was current with respect to interest payments. Based on our evaluation of the facts and circumstances relating to each issuer, management concluded that all principal and interest payments for these individual issuer trust preferred securities would be collected according to their contractual terms and 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 at maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at March 31, 2014 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, amount other things, may further affect the fair value of these securities and increase the potential that certain unrealized losses to be designation as other-than-temporary in future periods, and the Corporation may incur write-downs. 51 --------------------------------------------------------------------------------



Loans

Total loans amounted to $2.48 billion at March 31, 2014, up by $15.7 million, or 1%, in the first three months of 2014. Growth in the residential real estate loan portfolio was partially offset by declines in the commercial loan portfolio. Commercial Loans Commercial loans fall into two major categories, commercial real estate and other commercial loans (commercial and industrial). A significant portion of the Bank's commercial and industrial loans are also collateralized by real estate, but are not classified as commercial real restate loans because such loans are not made for the purpose of acquiring, developing, constructing, improving or refinancing the real estate securing the loan, nor is the repayment source income generated directly from such real property. Commercial Real Estate Loans Commercial real estate loans amounted to $813.5 million at March 31, 2014, a decrease of $19.0 million, or 2%, from $832.5 million at December 31, 2013. Included in these amounts were commercial construction loans of $24.7 million and $36.3 million, respectively. The decline in the commercial real estate portfolio reflected payoffs of several larger loans. Commercial real estate loans are secured by a variety of property types, with approximately 84% of the total composed of office buildings, retail facilities, commercial mixed use, lodging, multi-family dwellings and industrial and warehouse properties.



The following table presents a geographic summary of commercial real estate loans, including commercial construction, by property location. (Dollars in thousands)

March 31, 2014



December 31, 2013

Amount % of Total Amount % of Total Rhode Island, Connecticut, Massachusetts $768,970 95 % $791,682 95 % New York, New Jersey 35,884 4 % 32,126 4 % New Hampshire 8,678 1 % 8,730 1 % Total $813,532 100 % $832,538 100 % Other Commercial Loans Commercial and industrial loans amounted to $523.8 million at March 31, 2014, a decrease of $7.0 million, or 1%, from the balance at December 31, 2013. This portfolio includes loans to a variety of business types. Approximately 83% of the total is composed of owner occupied and other real estate, health care/social assistance, retail trade, manufacturing, accommodation and food services, public administration, entertainment, recreation and construction businesses, and wholesale trade. Residential Real Estate Loans Washington Trust originates residential real estate mortgages within our general market area of Southern New England for portfolio and for sale in the secondary market. In recent years, the mortgage origination business has been expanded beyond our bank branch network, which is primarily located in Rhode Island, through the addition of residential mortgage lending offices, in Massachusetts and Connecticut. We also originate residential real estate mortgages for various investors in a broker capacity, including convention mortgages and reverse mortgages. The residential real estate mortgage loan portfolio amounted to $810.4 million at March 31, 2014, up by $37.7 million, or 5%, from the balance at December 31, 2013. Total residential real estate loan originations for retention in portfolio were $122.2 million and $183.7 million for the three months ended March 31, 2014 and 2013. Total residential real estate loan originations for sale into the secondary market, including loans originated in a broker capacity, were $55.7 million and $132.0 million, respectively, for the three months ended March 31, 2014 and 2013. Origination volume declined in 2014, reflecting a decline in refinancing activity due to increased market interest rates, as well as seasonal activity declines. Prior to March 2009, Washington Trust had periodically purchased one- to four-family residential mortgages originated in other states as well as southern New England from other financial institutions. All residential mortgage loans purchased from other 52

--------------------------------------------------------------------------------



financial institutions were individually underwritten using standards similar to those employed for Washington Trust's self-originated loans. Purchased residential mortgage balances totaled $41.4 million and $42.6 million, respectively, as of March 31, 2014 and December 31, 2013.

The following is a geographic summary of residential mortgages by property location. (Dollars in thousands)

March 31, 2014



December 31, 2013

Amount % of Total Amount % of Total Rhode Island, Connecticut, Massachusetts $788,659 97.2 % $751,932 97.3 % New Hampshire 9,066 1.1 % 7,900 1.0 % New York, Virginia, New Jersey, Maryland, Pennsylvania, District of Columbia 6,898 0.9 % 6,972 0.9 % Ohio 2,426 0.3 % 2,509 0.3 % Washington and Oregon 1,350 0.2 % 1,356 0.2 % Georgia 1,077 0.1 % 1,083 0.1 % New Mexico 466 0.1 % 468 0.1 % Other 451 0.1 % 454 0.1 % Total residential mortgages $810,393 100.0 % $772,674 100.0 % Consumer Loans Consumer loans amounted to $330.9 million at March 31, 2014, an increase of $4.1 million, or 1%, from December 31, 2013. Our consumer portfolio is predominantly home equity lines and home equity loans, representing 83% of the total consumer portfolio at March 31, 2014. Consumer loans also include personal installment loans and loans to individuals secured by general aviation aircraft and automobiles. 53

-------------------------------------------------------------------------------- Asset Quality Nonperforming Assets Nonperforming assets include nonaccrual loans, nonaccrual investment securities and property acquired through foreclosure or repossession. The following table presents nonperforming assets and additional asset quality data for the dates indicated: (Dollars in thousands) Mar 31, Dec 31, 2014 2013 Nonaccrual loans: Commercial mortgages $2,293$7,492 Commercial construction and development -



-

Other commercial 1,198



1,291

Residential real estate mortgages 8,975 8,315 Consumer 1,108 1,204 Total nonaccrual loans 13,574 18,302 Nonaccrual investment securities -



547

Property acquired through foreclosure or repossession, net 750

932

Total nonperforming assets $14,324



$19,781

Nonperforming assets to total assets 0.45 % 0.62 % Nonperforming loans to total loans 0.55 % 0.74 % Total past due loans to total loans 0.73 % 0.89 % Accruing loans 90 days or more past due $-



$-

Nonperforming assets decreased to $14.3 million, or 0.45% of total assets, at March 31, 2014, from $19.8 million, or 0.62% of total assets, at December 31, 2013. This decrease in nonperforming assets primarily reflects payoffs and charge-offs on commercial loans.



Nonaccrual loans totaled $13.6 million at March 31, 2014, down by $4.7 million from the balance at December 31, 2013.

Nonaccrual Loans During the three months ended March 31, 2014, the Corporation made no changes in its practices or policies concerning the placement of loans or investment securities into nonaccrual status. There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at March 31, 2014. The following table presents additional detail on nonaccrual loans as of the dates indicated: (Dollars in thousands) March 31, 2014 December 31, 2013

Days Past Due Days Past Due Over 90 Under 90 Total % (1) Over 90 Under 90 Total % (1) Commercial: Mortgages $2,238$55$2,293 0.29 % $7,492 $- $7,492 0.94 % Construction and development - - - - - - - - Other commercial 428 770 1,198 0.23 % 731 560 1,291 0.24 % Residential real estate mortgages 5,634 3,341 8,975 1.11 % 5,633 2,682 8,315 1.08 % Consumer 701 407 1,108 0.33 % 656 548 1,204 0.37 % Total nonaccrual loans $9,001$4,573$13,574 0.55 % $14,512$3,790$18,302 0.74 %



(1) Percentage of nonaccrual loans to the total loans outstanding within the

respective category. 54

-------------------------------------------------------------------------------- The March 31, 2014 balance of nonaccrual commercial mortgage loans was net of charge-offs of $1.8 million and has a remaining loss allocation of $196 thousand. All of the nonaccrual commercial mortgage loans were located in Rhode Island.



Nonaccrual commercial mortgage loans decreased by a net $5.2 million from the balance at the end of 2013, principally due to the payoffs, paydowns and charge-offs described below.

The largest nonaccrual relationship in the commercial mortgage category totaled $1.2 million at March 31, 2014, down from $4.7 million at December 31, 2013. In the first quarter of 2014, payoff proceeds of $2.6 million were received and final charge-offs of previously determined loss exposure of $853 thousand were recognized on two of the loans in this relationship. The relationship is largely secured by light industrial and office space and is collateral dependent. Based on the estimated fair value of the underlying collateral, a $146 thousand loss allocation was deemed necessary at March 31, 2014. The Bank has additional accruing residential mortgage loans, which are related to the borrower by common guarantor, totaling $816 thousand at March 31, 2014. These additional loans have performed in accordance with the terms of the loans and were not past due at March 31, 2014. In addition, during the first quarter of 2014, a paydown of $1.6 million was received on a nonaccrual commercial mortgage loan that had a carrying value of $1.7 million at December 31, 2013. Nonaccrual residential mortgage loans increased by $660 thousand from the balance at the end of 2013. Management believes that the increase is partly due to the lengthening of time to resolve problem credits, including foreclosure efforts, resulting from a higher level of regulatory and judicial requirements. As of March 31, 2014, the $9.0 million balance of nonaccrual residential mortgage loans consisted of 38 loans, with $8.0 million located in Rhode Island, Connecticut and Massachusetts. The loss allocation on total nonaccrual residential mortgages was $1.7 million at March 31, 2014. Included in total nonaccrual residential mortgages at March 31, 2014 were eighteen loans purchased for portfolio and serviced by others amounting to $3.9 million. Management monitors the collection efforts of its third party servicers as part of its assessment of the collectibility of nonperforming loans. Past Due Loans The following table presents past due loans by category as of the dates indicated: (Dollars in thousands) March 31, 2014 December 31, 2013 Amount % (1) Amount % (1) Commercial: Mortgages $2,253 0.29 % $7,492 0.94 % Construction and development - - % - - % Other commercial loans 3,906 0.75 % 1,309 0.25 % Residential real estate mortgages 9,131 1.13 % 10,958 1.42 % Consumer loans 2,724 0.82 % 2,144 0.66 % Total past due loans $18,014 0.73 % $21,903 0.89 %



(1)Percentage of past due loans to the total loans outstanding within the respective category.

As of March 31, 2014, total past due loans amounted to $18.0 million, or 0.73% of total loans, down by $3.9 million from December 31, 2013.

The decrease in total delinquencies in the first quarter of 2014 was concentrated in commercial loan delinquencies and was largely attributable to the payoffs and paydowns on the largest nonaccrual commercial relationships described above under the caption "Nonaccrual Loans".

All loans 90 days or more past due at March 31, 2014 and December 31, 2013 were classified as nonaccrual.

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 include modifications

55 -------------------------------------------------------------------------------- of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Corporation by increasing the ultimate probability of collection. 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 six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term. 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. As of March 31, 2014, there were no significant commitments to lend additional funds to borrowers whose loans had been restructured. The following table sets forth information on troubled debt restructured loans as of the dates indicated. The carrying amounts below consist of unpaid principal balance, net of charge-offs and unamortized deferred loan origination fees and costs. Accrued interest is not included in the carrying amounts set forth below. (Dollars in thousands) Mar 31, Dec 31, 2014 2013 Accruing troubled debt restructured loans: Commercial mortgages $22,796$22,800 Other commercial 989 1,265 Residential real estate mortgages 1,467 1,442 Consumer 233 236



Accruing troubled debt restructured loans 25,485 25,743 Nonaccrual troubled debt restructured loans: Commercial mortgages

- - Other commercial 369 542 Residential real estate mortgages 447 - Consumer 29 38



Nonaccrual troubled debt restructured loans 845 580 Total troubled debt restructured loans $26,330$26,323

As of March 31, 2014, loans classified as troubled debt restructurings totaled $26.3 million, essentially unchanged from the balance at December 31, 2013.

The largest troubled debt restructured relationship at March 31, 2014 consisted of an accruing commercial mortgage relationship with a carrying value of $9.5 million, secured by mixed use properties. The restructuring took place in the second quarter of 2013 and included a modification of certain payment terms and a below market rate concession for a temporary period. At March 31, 2014, the second largest troubled debt restructured relationship consisted of an accruing commercial mortgage relationship with a carrying value of $8.1 million, secured by a hotel industry property. The restructuring took place in the third quarter of 2012 and included a modification of certain payment terms and a below market interest rate reduction for a temporary period on approximately $3.1 million of the total balance. In connection with this restructuring, additional collateral was also provided by the borrower during the third quarter of 2012. The third largest troubled debt restructured relationship consisted of a commercial mortgage with a carrying value of $4.9 million, secured by commercial property. The restructuring took place in the third quarter of 2013 and included a modification of certain payment terms and a below market rate concession for a temporary period. In connection with this restructuring, a principal pay-down of $1.2 million was provided by the borrower during the third quarter of 2013. 56 -------------------------------------------------------------------------------- Potential Problem Loans The Corporation classifies certain loans as "substandard," "doubtful," or "loss" based on criteria consistent with guidelines provided by banking regulators. Potential problem loans consist of classified accruing commercial loans that were less than 90 days past due at March 31, 2014 and other loans for which known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future. These loans are not included in the amounts of nonaccrual or restructured loans presented above. Management cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require increased allowance coverage and provision for loan losses. The Corporation has identified approximately $1.5 million in potential problem loans at March 31, 2014, compared to $931 thousand at December 31, 2013. The increase from December 31, 2013 was due to the change in credit quality on two commercial and industrial loan relationships. Potential problem loans are assessed for loss exposure using the methods described in Note 5 to the Unaudited Consolidated Financial Statements under the caption "Credit Quality Indicators." Allowance for Loan Losses Establishing an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient allowance for loan losses. For a more detailed discussion on the allowance for loan losses, see additional information in Item 7 under the caption "Critical Accounting Policies and Estimates" of Washington Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 2013. The allowance for loan losses is management's best estimate of probable loan losses inherent in the loan portfolio as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans. The status of nonaccrual loans, delinquent loans and performing loans were all taken into consideration in the assessment of the adequacy of the allowance for loans losses. In addition, the balance and trends of credit quality indicators, including the commercial loan categories of Pass, Special Mention and Classified, are integrated into the process used to determine the allocation of loss exposure. See Note 5 to the Unaudited Consolidated Financial Statements for additional information under the caption "Credit Quality Indicators." While management believes that the level of allowance for loan losses at March 31, 2014 is adequate and consistent with asset quality and delinquency indicators, management will continue to assess the adequacy of the allowance for loan losses in accordance with its established policies. The Bank's general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely. The Bank recognizes full or partial charge-offs on collateral dependent impaired loans when the collateral is deemed to be insufficient to support the carrying value of the loan. The Bank does not recognize a recovery when an updated appraisal indicates a subsequent increase in value. The estimation of loan loss exposure inherent in the loan portfolio includes, among other procedures, (1) identification of loss allocations for individual loans deemed to be impaired, (2) loss allocation factors for non-impaired loans based on credit grade, historical loss experience, delinquency factors and other similar credit quality indicators, and (3) an unallocated allowance maintained for measurement imprecision and to reflect management's consideration of other environment factors. We periodically reassess and revise the loss allocation factors used in the assignment of loss exposure to appropriately reflect our analysis of migrational loss experience. We analyze historical loss experience in the various portfolios over periods deemed to be relevant to the inherent risk of loss in the respective portfolios as of the balance sheet date. Revisions to loss allocation factors are not retroactively applied. The methodology to measure the amount of estimated loan loss exposure includes an analysis of individual loans deemed to be impaired. Impaired loans are loans for which it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreements and all loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans. Impairment is measured on a discounted cash flow method based upon the loan's contractual effective interest rate, or at the loan's observable market price, or if the loan is collateral dependent, at the fair value of the collateral. For collateral dependent loans for which repayment is dependent on the sale of the collateral, management adjusts the fair value for estimated costs to sell. For collateral dependent loans for which repayment is dependent on the operation of the collateral, such as accruing troubled debt restructured loans, estimated costs to sell are not incorporated 57 -------------------------------------------------------------------------------- into the measurement. Management may also adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the property.



The following is a summary of impaired loans by measurement type: (Dollars in thousands)

Mar 31, Dec



31,

2014



2013

Collateral dependent impaired loans (1) $16,325



$21,940

Impaired loans measured on discounted cash flow method (2) 14,800 15,553 Total impaired loans

$31,125$37,493



(1) Net of partial charge-offs of $2.2 million and $2.4 million, respectively, at

March 31, 2014 and December 31, 2013.

(2) Net of partial charge-offs of $130 thousand and $141 thousand, respectively,

at March 31, 2014 and December 31, 2013.

Impaired loans consist of nonaccrual commercial loans, troubled debt restructured loans and other loans classified as impaired. The loss allocation on impaired loans amounted to $1.0 million and $1.5 million, respectively, at March 31, 2014 and December 31, 2013. Various loan loss allowance coverage ratios are affected by the timing and extent of charge-offs, particularly with respect to impaired collateral dependent loans. For such loans, the Bank generally recognizes a partial charge-off equal to the identified loss exposure; therefore, the remaining allocation of loss is minimal. Other individual commercial loans and commercial mortgage loans not deemed to be impaired are evaluated using the internal rating system and the application of loss allocation factors. The loan rating system is described under the caption "Credit Quality Indicators" in Note 5 to the Unaudited Consolidated Financial Statements. The loan rating system and the related loss allocation factors take into consideration parameters including the borrower's financial condition, the borrower's performance with respect to loan terms, and the adequacy of collateral. Portfolios of more homogeneous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators, as well as our historical loss experience for each type of credit product. We continue to periodically reassess and revise the loss allocation factors and estimates used in the assignment of loss exposure to appropriately reflect our analysis of migrational loss experience. Appraisals are generally obtained with values determined on an "as is" basis from independent appraisal firms for real estate collateral dependent commercial loans in the process of collection or when warranted by other deterioration in the borrower's credit status. Updates to appraisals are generally obtained for troubled or nonaccrual loans or when management believes it is warranted. The Corporation has continued to maintain appropriate professional standards regarding the professional qualifications of appraisers and has an internal review process to monitor the quality of appraisals. For residential mortgages and real estate collateral dependent consumer loans that are in the process of collection, valuations are obtained from independent appraisal firms with values determined on an "as is" basis. The provision for loan losses charged to earnings for the three months ended March 31, 2014 amounted to $300 thousand, compared to $600 thousand for the same period in 2013. Net charge-offs for the three months ended March 31, 2014 totaled $1.1 million compared to $334 thousand for the first quarter of 2013. Included in net charge-offs in the first quarter of 2014, was an $853 thousand charge-off on the largest nonaccrual commercial mortgage relationship described under the caption "Nonaccrual Loans." As of March 31, 2014, the allowance for loan losses was $27.0 million, or 1.09% of total loans, compared to $27.9 million, or 1.13% of total loans, at December 31, 2013. The decline in the ratio of the allowance for loan losses to total loans reflects charge-offs and a decrease in specific reserves on impaired loans. See Note 5 to the Unaudited Consolidated Financial Statements for additional information under the caption "Credit Quality Indicators." 58 --------------------------------------------------------------------------------



The following table presents additional detail on the Corporation's loan portfolio and associated allowance for loan losses as of the dates indicated: (Dollars in thousands)

March 31, 2014 December 31, 2013 Related Allowance / Related Allowance / Loans Allowance Loans Loans Allowance Loans Impaired loans individually evaluated for impairment $31,125$1,027 3.30 % $37,493$1,481 3.95 % Loans collectively evaluated for impairment 2,447,478 18,642 0.76 % 2,425,391 18,494 0.76 % Unallocated - 7,374 - - 7,911 - Total $2,478,603$27,043 1.09 % $2,462,884$27,886 1.13 % The following table presents the allocation of the allowance for loan losses as of the dates indicated: (Dollars in thousands) March 31, 2014 December 31, 2013 Amount % (1) Amount % (1) Commercial: Mortgages $6,547 32 % $6,969 32 % Construction and development 269 1 362 2 Other 5,201 21 5,433 22 Residential real estate: Mortgage 4,948 32 4,571 30 Homeowner construction 139 1 129 1 Consumer 2,565 13 2,511 13 Unallocated 7,374 7,911 Balance at end of period $27,043 100 % $27,886 100 %



(1) Percentage of loans within the respective category to the total loans

outstanding. Sources of Funds Our sources of funds include deposits, brokered certificates of deposit, FHLBB borrowings, other borrowings and proceeds from the sales, maturities and payments of loans and investment securities. Washington Trust uses funds to originate and purchase loans, purchase investment securities, conduct operations, expand the branch network and pay dividends to shareholders. Management's preferred strategy for funding asset growth is to grow low-cost deposits, including demand deposit, NOW and savings accounts. Asset growth in excess of low-cost deposits is typically funded through higher-cost deposits (including certificates of deposit and money market accounts), brokered certificates of deposit, FHLBB borrowings, and securities portfolio cash flow.



Deposits

Washington Trust offers a wide variety of deposit products to consumer and business customers. Deposits provide an important source of funding for the Bank as well as an ongoing stream of fee revenue.

Washington Trust is a participant in the Insured Cash Sweep ("ICS") program, Demand Deposit Marketplace ("DDM") program, and the Certificate of Deposit Account Registry Service ("CDARS") program. Washington Trust uses these deposit sweep services to place customer funds into interest-bearing demand accounts, money market accounts, and/or certificates of deposits issued by other participating banks. Customer funds are placed at one or more participating bank to ensure that each deposit customer is eligible for the full amount of FDIC insurance. As a program participant, we receive reciprocal amounts of deposits from other participating banks. ICS, DDM and CDARS deposits are considered to be brokered deposits for bank regulatory purposes. We consider these reciprocal deposit balances to be in-market deposits as distinguished from traditional out of- market brokered deposits. Total deposits amounted to $2.59 billion at March 31, 2014, up by $86.3 million, or 3%, from the balance at December 31, 2013. This included a net increase of $73.3 million of out-of-market wholesale brokered time certificates of deposit, which were 59

--------------------------------------------------------------------------------



utilized as replacement funding for the prepayment of FHLBB advances in the first quarter of 2014. Excluding out-of-market brokered certificates of deposits, in-market deposits were up by by $13.1 million, or 1%, in 2014.

Demand deposits totaled $445.6 million at March 31, 2014, up by $4.8 million, or 1%, from December 31, 2013. Also included in demand deposits at March 31, 2014 and December 31, 2013 were DDM reciprocal demand deposits of $12.0 million and $11.3 million, respectively.



NOW account balances increased by $1.7 million, or 1%, and totaled $311.5 million at March 31, 2014.

Savings accounts totaled $293.3 million at March 31, 2014, down by $4.0 million, or 1%, from December 31, 2013.

Money market accounts totaled $704.4 million at March 31, 2014, up by $37.8 million, or 6%, from the balance at December 31, 2013. Included in total money market deposits were ICS reciprocal money market deposits totaling $229.0 million at March 31, 2014, up by $26.6 million from the balance at December 31, 2013.

Time deposits amounted to $836.9 million at March 31, 2014, up by $46.1 million, or 6%, from the balance at December 31, 2013. Included in time deposits at March 31, 2014 were brokered certificates of deposit of $171.3 million, up by $73.3 million from the balance at December 31, 2013 as described above. Excluding out-of-market brokered certificates of deposits, in-market time deposits totaled $665.6 million at March 31, 2014 down by $27.2 million from December 31, 2013. Included in in-market time deposits were CDARS reciprocal time deposits of $135.9 million and $157.0 million, respectively, at March 31, 2014 and December 31, 2013.



Borrowings

The Corporation utilizes advances from the FHLBB as well as other borrowings as part of its overall funding strategy. FHLBB advances are used to meet short-term liquidity needs, to purchase securities and to purchase loans from other institutions. FHLBB advances amounted to $203.4 million at March 31, 2014, down by $84.7 million from the balance at the end of 2013. As disclosed in the "Overview" section under the caption "Composition of Earnings," Washington Trust prepaid FHLBB advances totaling $99.3 million in early March 2014, These advances had a weighted average rate of 3.01% and a weighted average remaining term of thirty-six months. Other wholesale funding in the form of brokered time certificates of deposits as well as existing on balance sheet liquidity were utilized as the funding source for the prepayments. The replacement wholesale funding amounted to $80.0 million, with maturities ranging from 2015 through 2019, a weighted average maturity of thirty-five months and an initial weighted average cost of approximately 0.93%. The net impact of these funding transactions was a reduction in interest expense of approximately $170 thousand in the first quarter of 2014. Liquidity and Capital Resources Liquidity Management Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand. Washington Trust's primary source of liquidity is deposits, which funded approximately 79% of total average assets in the three months ended March 31, 2014. While the generally preferred funding strategy is to attract and retain low cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLBB term advances and brokered certificates of deposit), cash flows from the Corporation's securities portfolios and loan repayments. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs although management has no intention to do so at this time. For a more detailed discussion on Washington Trust's detailed liquidity funding policy and contingency funding plan, see additional information in Item 7 under the caption "Liquidity and Capital Resources" of Washington Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Liquidity remained well within target ranges established by the Corporation's Asset/Liability Committee ("ALCO") during the three months ended March 31, 2014. Based on its assessment of the liquidity considerations described above, management believes the Corporation's sources of funding will meet anticipated funding needs. For the three months ended March 31, 2014, net cash used in financing activities amounted to $2.3 million. FHLBB advances decreased by $84.7 million, while total deposits increased by $86.3 million in the first three months of 2014. See additional disclosure in the "Sources of Funds" section under the caption "Borrowings." Net cash used in investing activities totaled $23.7 million for the three months ended March 31, 2014. The most significant elements of cash flow within investment activities 60 -------------------------------------------------------------------------------- were principal payments received and maturities of mortgage backed securities and other securities, proceeds from sale of our merchant processing service business line and net outflows related to growth in the loan portfolio. Net cash provided by operating activities amounted to $1.4 million for the three months ended March 31, 2014. Net income totaled $9.3 million in the first three months of 2014 and the most significant adjustments to reconcile net income to net cash provided by operating activities pertained to mortgage banking activities and the gain on the sale of our merchant processing service business line. See the Corporation's Consolidated Statements of Cash Flows for further information about sources and uses of cash. Capital Resources Total shareholders' equity amounted to $335.9 million at March 31, 2014, up by $6.2 million from December 31, 2013, including $9.3 million of earnings retention and a reduction of $4.9 million for dividend declarations. The ratio of total equity to total assets amounted to 10.51% at March 31, 2014. This compares to a ratio of 10.34% at December 31, 2013. Book value per share at March 31, 2014 and December 31, 2013 amounted to $20.19 and $19.84, respectively.



The Bancorp and the Bank are subject to various regulatory capital requirements. As of March 31, 2014, the Bancorp and the Bank are categorized as "well-capitalized" under the regulatory framework for prompt corrective action.

See Note 9 to the Unaudited Consolidated Financial Statements for additional discussion of capital requirements.

Contractual Obligations and Commitments The Corporation has entered into numerous contractual obligations and commitments. The following tables summarize our contractual cash obligations and other commitments at March 31, 2014: (Dollars in thousands) Payments Due by Period Less Than 1 Total Year (1) 1-3 Years 3-5 Years After 5 Years Contractual Obligations: FHLBB advances (2) $203,429$17,518$44,744$105,590$35,577 Junior subordinated debentures 22,681 - - - 22,681 Operating lease obligations 23,314 2,511 4,061 3,255 13,487 Software licensing arrangements 4,266 2,397 1,869 - - Other borrowings 167 45 103 19 -



Total contractual obligations $253,857$22,471$50,777$108,864

$71,745



(1) Maturities or contractual obligations are considered by management in the

administration of liquidity and are routinely refinanced in the ordinary

course of business.

(2) All FHLBB advances are shown in the period corresponding to their scheduled

maturity. Some FHLBB advances are callable at earlier dates. 61

--------------------------------------------------------------------------------

(Dollars in thousands) Amount of Commitment Expiration - Per Period Less Than 1 Total Year 1-3 Years 3-5 Years After 5 Years Other Commitments: Commercial loans $282,716$155,481$71,069$24,745$31,421 Home equity lines 196,744 - - - 196,744 Other loans 36,139 28,409 4,235 3,495 - Standby letters of credit 2,903 2,756 147 - - Forward loan commitments: Interest rate lock commitments 26,779 26,779 - - - Commitments to sell residential mortgage loans 36,931 36,931 - - - Customer related derivative contracts: Interest rate swaps with customers 111,986 28,775 22,565 23,278 37,368



Mirror swaps with counterparties 111,986 28,775 22,565 23,278

37,368 Interest rate risk management contract: Interest rate swap contracts 22,681 - 22,681 - - Total commitments $828,865$307,906$143,262$74,796$302,901



Off-Balance Sheet Arrangements For information on financial instruments with off-balance sheet risk and derivative financial instruments see Notes 10 and 17 to the Unaudited Consolidated Financial Statements.

Asset/Liability Management and Interest Rate Risk Interest rate risk is the primary market risk category associated with the Corporation's operations. Interest rate risk is the risk of loss to future earnings due to changes in interest rates. The ALCO is responsible for establishing policy guidelines on liquidity and acceptable exposure to interest rate risk. Periodically, the ALCO reports on the status of liquidity and interest rate risk matters to the Bank's Board of Directors. The objective of the ALCO is to manage assets and funding sources to produce results that are consistent with Washington Trust's liquidity, capital adequacy, growth, risk and profitability goals. The ALCO manages the Corporation's interest rate risk using income simulation to measure interest rate risk inherent in the Corporation's on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 12-month horizon, the 13- to 24-month horizon and a 60-month horizon. The simulations assume that the size and general composition of the Corporation's balance sheet remain static over the simulation horizons, with the exception of certain deposit mix shifts from low-cost core savings to higher-cost time deposits in selected interest rate scenarios. Additionally, the simulations take into account the specific repricing, maturity, call options, and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios. The characteristics of financial instrument classes are reviewed periodically by the ALCO to ensure their accuracy and consistency. The ALCO reviews simulation results to determine whether the Corporation's exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. As of March 31, 2014 and December 31, 2013, net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the Corporation. The Corporation defines maximum unfavorable net interest income exposure to be a change of no more than 5% in net interest income over the first 12 months, no more than 10% over the second 12 months, and no more than 10% over the full 60-month simulation horizon. All changes are measured in comparison to the projected net interest income that would result from an "unchanged" rate scenario where both interest rates and the composition of the Corporation's balance sheet remain stable for a 60-month period. In addition to measuring the change in net interest income as compared to an unchanged interest rate scenario, the ALCO also measures the trend of both net interest income and net interest margin over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios.



The ALCO regularly reviews a wide variety of interest rate shift scenario results to evaluate interest risk exposure, including scenarios showing the effect of steepening or flattening changes in the yield curve of up to 500 basis points as well as parallel

62 -------------------------------------------------------------------------------- changes in interest rates of up to 400 basis points. Because income simulations assume that the Corporation's balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts. The following table sets forth the estimated change in net interest income from an unchanged interest rate scenario over the periods indicated for parallel changes in market interest rates using the Corporation's on- and off-balance sheet financial instruments as of March 31, 2014 and December 31, 2013. Interest rates are assumed to shift by a parallel 100, 200 or 300 basis points upward or 100 basis points downward over a 12-month period, except for core savings deposits, which are assumed to shift by lesser amounts due to their relative historical insensitivity to market interest rate movements. Further, deposits are assumed to have certain minimum rate levels below which they will not fall. It should be noted that the rate scenarios shown do not necessarily reflect the ALCO's view of the "most likely" change in interest rates over the periods indicated. March 31, 2014 December 31, 2013 Months 1 - 12 Months 13 - 24 Months 1 - 12 Months 13 - 24 100 basis point rate decrease (1.07 )% (4.40)% (1.66)% (6.02)% 100 basis point rate increase 1.56 % 2.42% 2.22%



3.91%

200 basis point rate increase 3.33 % 4.84% 4.44%



7.16%

300 basis point rate increase 3.70 % 4.03% 5.30%



6.98%

The ALCO estimates that the negative exposure of net interest income to falling rates as compared to an unchanged rate scenario results from a more rapid decline in earning asset yields compared to rates paid on deposits. If market interest rates were to fall from their already low levels and remain lower for a sustained period, certain core savings and time deposit rates could decline more slowly and by a lesser amount than other market rates. Asset yields would likely decline more rapidly than deposit costs as current asset holdings mature or reprice, since cash flow from mortgage-related prepayments and redemption of callable securities would increase as market rates fall. The positive exposure of net interest income to rising rates as compared to an unchanged rate scenario results from a more rapid projected relative rate of increase in asset yields than funding costs over the near term. For simulation purposes, deposit rate changes are anticipated to lag other market rates in both timing and magnitude. The ALCO's estimate of interest rate risk exposure to rising rate environments, including those involving changes to the shape of the yield curve, incorporates certain assumptions regarding the shift in deposit balances from low-cost core savings categories to higher-cost deposit categories, which has characterized a shift in funding mix during the past rising interest rate cycles. The relative decrease in positive exposure of net interest income to rising rates from December 31, 2013 to March 31, 2014 was largely attributable to changes in balance sheet composition and the shape of the yield curve. While the ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the repricing, maturity and prepayment characteristics of financial instruments and the composition of the Corporation's balance sheet may change to a different degree than estimated. Simulation modeling assumes a static balance sheet, with the exception of certain modeled deposit mix shifts from low-cost core savings deposits to higher-cost time deposits in rising rate scenarios as noted above. Due to the current low level of market interest rates, the banking industry has experienced relatively strong growth in low-cost core deposits over the past several years. The ALCO recognizes that a portion of these increased levels of low-cost balances could shift into higher yielding alternatives in the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled increased amounts of deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above. Deposit balances may also be subject to possible outflow to non-bank alternatives in a rising rate environment, which may cause interest rate sensitivity to differ from the results as presented. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The relationship between short-term interest rate changes and core deposit rate and balance changes may differ from the ALCO's estimates used in income simulation. It should be noted that the static balance sheet assumption does not necessarily reflect the Corporation's expectation for future balance sheet growth, which is a function of the business environment and customer behavior. Lastly, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as 63 -------------------------------------------------------------------------------- well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income. The Corporation also monitors the potential change in market value of its available for sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to the Corporation's capital position. Results are calculated using industry-standard analytical techniques and securities data.



The following table summarizes the potential change in market value of the Corporation's available for sale debt securities as of March 31, 2014 and December 31, 2013 resulting from immediate parallel rate shifts: (Dollars in thousands)

Down 100 Up 200 Basis Security Type Basis Points



Points

U.S. government-sponsored enterprise securities (noncallable) $62 ($124 ) U.S. government sponsored enterprise securities (callable) 170 (1,071 ) Obligations of states and political subdivisions 1,045



(2,059 ) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises

4,461 (15,429 ) Trust preferred debt and other corporate debt securities 34



649

Total change in market value as of March 31, 2014$5,772



($18,034 )

Total change in market value as of December 31, 2013$6,863



($20,841 )


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