News Column

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

August 7, 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 and six months ended June 30, 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 international 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 44

-------------------------------------------------------------------------------- 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 six months 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 opened a new full-service branch in Johnston, Rhode Island, in Providence County. This branch is Washington Trust's nineteenth branch office and its first in Johnston. Composition of Earnings Net income for the second quarter of 2014 amounted to $9.8 million, or $0.58 per diluted share, up from $9.0 million, or $0.54 per diluted share, reported for the second quarter of 2013. The returns on average equity and average assets for the second quarter of 2014 were 11.52% and 1.22%, respectively, compared to 11.84% and 1.18%, respectively, for the same quarter in 2013. For the six months ended June 30, 2014, net income totaled $19.1 million, or $1.13 per diluted share, up from $16.4 million, or $0.99 per diluted share, reported for the same period in 2013. The returns on average equity and average assets for the six months ended June 30, 2014 were 11.31% and 1.13%, respectively, compared to 10.88% and 1.08%, respectively, for the same period in 2013.



2014 results included the following transactions in the first quarter: 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.

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.



2013 results included the following transactions: During the second quarter of 2013, certain junior subordinated debentures

were redeemed and as a result, unamortized debt issuance costs of $244

thousand, after-tax $156 thousand, or 1 cent per diluted share, were

expensed.

Executive severance related expenses of $270 thousand, after-tax $173, or

1 cent per diluted share, were recognized in the second quarter of 2013.

In the first quarter of 2013, other-than-temporary impairment charges of

$2.8 million were recognized on a pooled trust preferred debt security due

to an announcement of liquidation by the trustee. The net after-tax impact

of this impairment loss was $1.9 million, or 11 cents per diluted share.

Excluding the above mentioned transactions, as well as the merchant processing fee revenue and expenses recognized prior to the consummation of the business line sale, results for the first six months of 2014 reflected growth in net interest income, higher wealth management revenues, lower salaries and employee benefit costs and a decrease in the provision for loan losses, which were partially offset by declines in mortgage banking revenues (net gains on loan sales and commissions on loans originated for others.) Net interest income for the three and six months ended June 30, 2014 amounted to $24.5 million and $48.3 million, respectively, up by 9% and 8%, respectively, from the same periods 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 3.35% and 3.34%, respectively, for the three and six months ended June 30, 2014, compared to 3.26% and 3.29%, respectively, for the same periods in 2013. The provision for loan losses for the three and six months ended June 30, 2014 amounted to $450 thousand and $750 thousand, respectively, down by $250 thousand and $550 thousand, respectively, from the same periods in 2013. Management believes that the level of provision for loan losses has been consistent with the trends in asset quality and credit quality indicators. 45 --------------------------------------------------------------------------------



Wealth management revenues for the three and six months ended June 30, 2014 totaled $8.5 million and $16.6 million, respectively, up by 8% from the same periods in 2013, due to an increase in asset-based wealth management revenues.

Mortgage banking revenues for the three and six months ended June 30, 2014 amounted to $1.7 million and $2.9 million, respectively, down by $1.8 million and $4.7 million, respectively, from the same periods in 2013, reflecting declines in mortgage loan refinancing and sales activity due to relatively higher market interest rates.

Salaries and employee benefit costs, the largest component of noninterest expenses, totaled $14.8 million and $29.3 million, respectively, for the three and six months ended June 30, 2014. The 5% year over year decline reflected a reduction in defined benefit pension costs and lower levels of business development based compensation primarily in the mortgage banking area. 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 $1.8 million and $3.0 million, respectively, for the three and six months ended June 30, 2014, compared to $637 thousand and $295 thousand, respectively, for the same periods in 2013. The Corporate unit's net interest income for the three and six months ended June 30, 2014 increased by $2.0 million and $3.2 million, respectively, from the comparable 2013 periods, 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 $6.3 million and $12.8 million, respectively, for the three and six months ended June 30, 2014, compared to $6.7 million and $13.3 million, respectively, for the same periods in 2013. Net interest income for this operating segment for the three and six months ended June 30, 2014 increased by $68 thousand and $296 thousand, respectively, compared to the same periods in 2013, reflecting growth in average loan balances and a decline in cost of funds on deposits. The provision for loan losses for the three and six months ended June 30, 2014 decreased by $250 thousand and $550 thousand, respectively, from the comparable 2013 periods, reflecting favorable trends in asset quality and credit quality indicators. Noninterest income derived from the Commercial Banking segment totaled $3.9 million and $8.4 million, respectively, for the three and six months ended June 30, 2014, down by $4.1 million and $7.5 million, respectively, from the comparable 2013 periods. The decline in noninterest income was due to lower mortgage banking revenues, which are sensitive to market interest rates, and a decrease in merchant processing fee revenue, due to the sale of this business line 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 and six months ended June 30, 2014 were down by $3.1 million and $4.7 million, respectively, from the same periods in 2013. The 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 $1.8 million and $3.2 million, respectively, for the three and six months ended June 30, 2014, compared to $1.6 million and $2.8 million, respectively, for the same periods in 2013. Noninterest income derived from the Wealth Management Services segment was $8.5 million and $16.6 million, respectively, for the three and six months ended June 30, 2014, up by 8% compared to the same periods in 2013, primarily due to an increase in asset-based wealth management revenues. Wealth Management assets under administration stood at $5.01 billion at June 30, 2014, up by 5% from December 31, 2013 and by 13% from June 30, 2013. Noninterest expenses for this operating segment totaled $5.8 million and $11.5 million, respectively, for the three and six months ended June 30, 2014, up by $407 thousand and $666 thousand, respectively, from the same periods a year ago, reflecting an increase in salaries and benefit costs and outsourced services. 46 -------------------------------------------------------------------------------- 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 and six months ended June 30, 2014 amounted to $25.1 million and $49.5 million, respectively, up from $22.9 million and $45.9 million, respectively, for the same periods in 2013. The net interest margin was 3.35% and 3.34%, respectively, for the three and six months ended June 30, 2014, compared to 3.26% and 3.29%, respectively, for the same periods in 2013. Included in these results were the following transactions: In early March 2014, FHLBB advances totaling $99.3 million that had a weighted average rate of 3.01% and a weighted average remaining term of



thirty-six months were prepaid. Brokered time deposits of $80.0 million

and existing on-balance sheet liquidity were utilized for the prepayment

of these advances. The brokered time deposits had an initial weighted

average cost of 0.93% and weighted average maturity of thirty-five months.

During the second quarter of 2013, $10.3 million of junior subordinated

debentures were redeemed and as a result, unamortized debt issuance costs of $244 thousand were expensed and classified as interest expense in that quarter. The rate on this debt was approximately 5.69% at the time of redemption, which included the cost of a related interest rate swap that matured upon the redemption event. Average interest-earning assets for the three and six months ended June 30, 2014 were up by 7% and 6%, respectively, from the average balances for the same periods in 2013, due to loan growth, partially offset by reductions in the securities portfolio. The yield on average interest-earning assets for both the three and six months ended June 30, 2014 declined by 14 basis points from the comparable periods in 2013, reflecting the impact of a sustained low interest rate environment. Total average loans for the three and six months ended June 30, 2014 increased by $151.0 million and $148.1 million, respectively, from the average balances for the comparable 2013 periods. The yield on total loans for the three and six months ended June 30, 2014 was 4.20% and 4.23%, respectively, down by 14 basis points and 16 basis points, respectively, from the same periods in 2013. The contribution of loan prepayment fees and other fees to the yield on total loans was 3 basis points and 8 basis points, respectively, for the three and six months ended June 30, 2014. Comparable amounts for the same periods in 2013 were 2 basis points and 3 basis points, respectively. 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 interest-earning assets may continue to decline. Total average securities for the three and six months ended June 30, 2014 increased by $19.8 million and $16.0 million, respectively, from the average balances for the same periods a year earlier, reflecting purchases of debt securities offset, in part, by maturities, calls and pay-downs. The FTE rate of return on securities for the three and six months ended June 30, 2014 decreased by 23 basis points and 19 basis points, respectively, from the comparable periods in 2013, due to maturities, calls and pay-downs of higher yielding securities combined with purchases of lower yielding securities. Average interest-bearing liabilities for the three and six months ended June 30, 2014 increased by 5% and 4%, respectively, from the average balances for the same periods in 2013, due to deposit growth offset, in part, by decreases in FHLBB advances and junior subordinated debentures. The cost of funds for the three and six months ended June 30, 2014 declined by 26 basis points and 22 basis points, respectively, from the comparable 2013 periods, largely due to declines in the rate paid on time deposits and junior subordinated debentures. See additional discussion above regarding the March 2014 funding transactions and the second quarter of 2013 redemption of junior subordinated debentures. The average balances of FHLBB advances for the three and six months ended June 30, 2014 were down by $106.8 million and $91.1 million, respectively, compared to the average balances for the same periods in 2013. The average rate paid on such advances for the three and six months ended June 30, 2014 was 3.20% and 3.29%, respectively, compared to 3.29% and 3.25%, respectively, for the comparable periods in 2013. 47

-------------------------------------------------------------------------------- Total average interest-bearing deposits for the three and six months ended June 30, 2014 increased by $230.8 million and $197.0 million, respectively, from the average balances for the same periods in 2013. This 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 and six months ended June 30, 2014 decreased by 7 basis points and 8 basis points, respectively, compared to the same periods in 2013, due to lower rates on time deposits.



The average balance of noninterest-bearing demand deposits for the three and six months ended June 30, 2014 increased by $44.1 million and $53.1 million, respectively, compared to the average balances for the same periods 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. Three months ended June 30, 2014 2013 (Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Assets: Commercial loans $1,339,310$14,509 4.35 % $1,291,244$14,747 4.58 % Residential real estate loans, including mortgage loans held for sale 856,955 8,811 4.12 % 762,363 7,877 4.14 % Consumer loans 333,881 3,171 3.81 % 325,539 3,090 3.81 % Total loans 2,530,146 26,491 4.20 % 2,379,146 25,714 4.34 % Cash, federal funds sold and short-term investments 59,507 28 0.19 % 44,690 24 0.22 % FHLBB stock 37,730 138 1.47 % 37,730 39 0.42 % Taxable debt securities 322,418 2,699 3.36 % 293,586 2,576 3.52 % Nontaxable debt securities 57,422 847 5.92 % 66,468 985 5.94 % Total securities 379,840 3,546 3.74 % 360,054 3,561 3.97 % Total interest-earning assets 3,007,223 30,203 4.03 % 2,821,620 29,338 4.17 % Noninterest-earning assets 207,426 213,336 Total assets $3,214,649$3,034,956 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $9,067 $- - % $135 $- - % NOW accounts 311,948 47 0.06 % 289,858 45 0.06 % Money market accounts 759,704 713 0.38 % 535,107 381 0.29 % Savings accounts 291,671 45 0.06 % 286,547 47 0.07 % Time deposits 813,558 2,315 1.14 % 843,462 2,623 1.25 % FHLBB advances 220,088 1,758 3.20 % 326,839 2,679 3.29 % Junior subordinated debentures 22,681 241 4.26 % 31,405 612 7.82 % Other 162 4 9.90 % 205 3 5.87 % Total interest-bearing liabilities 2,428,879 5,123 0.85 % 2,313,558 6,390 1.11 % Demand deposits 409,851 365,747 Other liabilities 35,684 52,249 Shareholders' equity 340,235 303,402 Total liabilities and shareholders' equity $3,214,649$3,034,956 Net interest income $25,080$22,948 Interest rate spread 3.18 % 3.06 % Net interest margin 3.35 % 3.26 % 48

-------------------------------------------------------------------------------- Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: (Dollars in thousands) Three months ended June 30, 2014 2013 Commercial loans $322$201 Nontaxable debt securities 290 338 Total $612$539 Six months ended June 30, 2014 2013 (Dollars in thousands) Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Assets: Commercial loans $1,338,061$29,109 4.39 % $1,267,612$29,168 4.64 % Residential real estate loans, including mortgage loans held for sale 829,834 17,019 4.14 % 758,964 15,814 4.20 % Consumer loans 330,854 6,268 3.82 % 324,111 6,143 3.82 % Total loans 2,498,749 52,396 4.23 % 2,350,687 51,125 4.39 % Cash, federal funds sold and short-term investments 60,869 63 0.21 % 49,186 52 0.21 % FHLBB stock 37,730 280 1.50 % 38,755 77 0.40 % Taxable debt securities 333,154 5,641 3.41 % 308,576 5,421 3.54 % Nontaxable debt securities 58,683 1,731 5.95 % 67,261 1,989 5.96 % Total securities 391,837 7,372 3.79 % 375,837 7,410 3.98 % Total interest-earning assets 2,989,185 60,111 4.06 % 2,814,465 58,664 4.20 % Noninterest-earning assets 205,391 211,845 Total assets $3,194,576$3,026,310 Liabilities and Shareholders' Equity: Interest-bearing demand deposits $9,912 $- - % $68 $- - % NOW accounts 308,096 94 0.06 % 286,450 90 0.06 % Money market accounts 722,629 1,322 0.37 % 515,390 732 0.29 % Savings accounts 292,237 90 0.06 % 283,059 93 0.07 % Time deposits 805,553 4,583 1.15 % 856,447 5,375 1.27 % FHLBB advances 244,900 3,999 3.29 % 336,004 5,416 3.25 % Junior subordinated debentures 22,681 482 4.29 % 32,194 1,002 6.28 % Other 168 7 8.40 % 673 8 2.40 % Total interest-bearing liabilities 2,406,176 10,577 0.89 % 2,310,285 12,716 1.11 % Demand deposits 416,377 363,313 Other liabilities 34,377 51,282 Shareholders' equity 337,646 301,430 Total liabilities and shareholders' equity $3,194,576$3,026,310 Net interest income $49,534$45,948 Interest rate spread 3.17 % 3.09 % Net interest margin 3.34 % 3.29 % 49

-------------------------------------------------------------------------------- Interest income amounts presented in the preceding table include the following adjustments for taxable equivalency: (Dollars in thousands) Six months ended June 30, 2014 2013 Commercial loans $638$389 Nontaxable debt securities 592 683 Total $1,230$1,072 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 Six months June 30, 2014 vs. 2013 June 30, 2014 vs. 2013 Increase (Decrease) Due to Increase (Decrease) Due to Volume Rate Net Change Volume Rate Net Change Interest on Interest-Earning Assets: Commercial loans $529 ($767 ) ($238 ) $1,566 ($1,625 ) ($59 ) Residential real estate loans, including mortgage loans held for sale 972 (38 ) 934 1,437 (232 ) 1,205 Consumer loans 81 - 81 125 - 125 Cash, federal funds sold and other short-term investments 8 (4 ) 4 11 - 11 FHLBB stock - 99 99 (2 ) 205 203 Taxable debt securities 244 (121 ) 123 423 (203 ) 220 Nontaxable debt securities (135 ) (3 ) (138 ) (255 ) (3 ) (258 ) Total interest income 1,699 (834 ) 865 3,305 (1,858 ) 1,447 Interest on Interest-Bearing Liabilities: Interest-bearing demand deposits - - - - - - NOW accounts 2 - 2 4 - 4 Money market accounts 191 141 332 350 240 590 Savings accounts 1 (3 ) (2 ) 5 (8 ) (3 ) Time deposits (88 ) (220 ) (308 ) (306 ) (486 ) (792 ) FHLBB advances (849 ) (71 ) (920 ) (1,483 ) 66 (1,417 ) Junior subordinated debentures (141 ) (230 ) (371 ) (251 ) (269 ) (520 ) Other (1 ) 1 - (9 ) 8 (1 ) Total interest expense (885 ) (382 ) (1,267 ) (1,690 ) (449 ) (2,139 ) Net interest income $2,584 ($452 ) $2,132$4,995 ($1,409 ) $3,586 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 for the three and six months ended June 30, 2014 amounted to $450 thousand and $750 thousand, respectively, compared to $700 thousand and $1.3 million for the same periods in 2013. Net charge-offs for the three and six months ended June 30, 2014 totaled $224 thousand and $1.4 million, respectively. Year-to-date 2014 charge-offs included an $853 charge-off recognized in the first quarter on one commercial mortgage relationship. Net charge-offs for the three and six months ended June 30, 2013 totaled $4.0 million and $4.3 million, respectively, and included a $4.0 million charge-off recognized in the second quarter on one commercial mortgage loan. 50 -------------------------------------------------------------------------------- The allowance for loan losses was $27.3 million, or 1.06% of total loans, at June 30, 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 stable and favorable trends in asset quality and credit quality metrics. See additional discussion under the caption "Asset Quality" below for further information on the Allowance for Loan Losses. 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) Three months Six months Change Change Periods ended June 30, 2014 2013 $ % 2014 2013 $ % Noninterest income: Wealth management revenues 8,530 7,912 618



8 % $16,595$15,386$1,209 8 % Merchant processing fees

- 2,613 (2,613 ) (100 )% 1,291 4,590 (3,299 ) (72 )% Net gains on loan sales and commissions on loans originated for others 1,707 3,485 (1,778 )



(51 )% 2,946 7,651 (4,705 ) (61 )% Service charges on deposit accounts

824 790 34 4 % 1,578 1,581 (3 ) - % Card interchange fees 779 683 96 14 % 1,460 1,282 178 14 % Income from bank-owned life insurance 441 461 (20 ) (4 )% 886 928 (42 ) (5 )% Net realized gains on securities - - - - % - - - - %



Net gains (losses) on interest rate swap contracts (37 ) 152 (189 ) (124 )% 223

171 52 30 % Equity in earnings (losses) of unconsolidated subsidiaries (107 ) (57 ) (50 ) (88 )% (150 ) (18 ) (132 ) (733 )% Gain on sale of business line - - - - % 6,265 - 6,265 100 % Other income 677 355 322 91 % 1,090 761 329 43 % Noninterest income, excluding other-than-temporary impairment losses 12,814 16,394 (3,580 ) (22 )% 32,184 32,332 (148 ) - % 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 $12,814$16,394 ($3,580 ) (22 )% $32,184$29,560$2,624 9 %

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. 51

-------------------------------------------------------------------------------- The categories of wealth management revenues are shown in the following table: (Dollars in thousands) Three months Six months Change Change



Periods ended June 30, 2014 2013 $ % 2014 2013 $

% Wealth management revenues: Trust and investment management fees $6,828$6,230$598 10 % $13,513$12,296$1,217 10 % Mutual fund fees 1,086 1,077 9 1 2,167 2,099 68 3 Asset-based revenues 7,914 7,307 607 8 15,680 14,395 1,285 9 Transaction-based revenues 616 605 11 2 915 991 (76 ) (8 ) Total wealth management revenues $8,530$7,912$618 8 % $16,595$15,386$1,209 8 % The following table presents the changes in wealth management assets under administration for the periods indicated: (Dollars in thousands) Three months Six months Periods ended June 30, 2014 2013 2014 2013 Wealth management assets under administration: Balance at the beginning of period $4,806,381$4,420,076$4,781,958$4,199,640 Net investment appreciation (depreciation) & income 131,269 (20,956 ) 175,604 193,023 Net client cash flows 72,938 34,454 53,026 40,911 Balance at the end of period $5,010,588$4,433,574



$5,010,588$4,433,574

Wealth management revenues for the three and six months ended June 30, 2014 were $8.5 million and $16.6 million, respectively, up by 8%, due to an increase in asset-based revenues. Wealth management assets under administration totaled $5.01 billion at June 30, 2014, up by $228.6 million, or 5%, from December 31, 2013, and up by $577.0 million, or 13%, from a year-ago, largely due to net investment appreciation and income. As disclosed in the Overview section under the caption "Composition of Earnings," the Corporation sold its merchant processing services business line on March 1, 2014, resulting in a net gain on sale of business line of $6.3 million. Prior to the consummation of this business line sale, merchant processing fee revenues of $1.3 million were recognized in the first quarter of 2014. See discussion below regarding corresponding merchant processing costs under the caption "Noninterest Expenses." 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 and six months ended June 30, 2014, this revenue source decreased by $1.8 million, or 51%, and $4.7 million, or 61%, compared to the same periods in 2013, largely due to decreased refinancing and sales activity in response to relatively higher market interest rates. Residential real estate loans sold to the secondary market, including brokered loans, totaled $77.0 million and $134.0 million, respectively, for the three and six months ended June 30, 2014. Comparable amounts for the same periods in 2013 were $132.2 million and $285.0 million, respectively. There were no impairment losses recognized on securities in the three and six months ended June 30, 2014. In the first half of 2013, net impairment losses amounted to $2.8 million and were recognized in earnings in the first quarter of that year . See additional discussion in the "Overview" section above under the caption "Composition of Earnings." Other noninterest income for the three and six months ended June 30, 2014 amounted to $677 thousand and $1.1 million, respectively, compared to $355 thousand and $761 thousand, respectively, for the same periods in 2013. Included in other income in the second quarter of 2014 was $160 thousand received as a result of a successful claim against a third-party and approximately $70 thousand of merchant referral fee revenue recognized. As described in Note 18 to the Unaudited Consolidated Financial Statements, Washington Trust has the opportunity to earn referral revenues during the ten-year period following the March 2014 sale of the merchant processing services business line. The year over year increase in other income also reflects an increase in loan servicing fees resulting from an increase in loans sold with servicing retained. 52 -------------------------------------------------------------------------------- Noninterest Expense The following table presents noninterest expense comparisons for the periods indicated: (Dollars in thousands) Three months Six months Change Change Periods ended June 30, 2014 2013 $ % 2014 2013 $ % Noninterest expenses: Salaries and employee benefits $14,771$15,542 ($771 ) (5 )% $29,329$30,984 ($1,655 ) (5 )% Net occupancy 1,475 1,364 111 8 % 3,115 2,878 237 8 % Equipment 1,235 1,192 43 4 % 2,471 2,436 35 1 % Merchant processing costs - 2,211 (2,211 ) (100 )% 1,050 3,884 (2,834 ) (73 )% Outsourced services 1,015 871 144 17 % 2,059 1,712 347 20 % Legal, audit and professional fees 598 554 44 8 % 1,216 1,162 54 5 % FDIC deposit insurance costs 413 451 (38 ) (8 )% 853 882 (29 ) (3 )% Advertising and promotion 540 476 64 13 % 772 831 (59 ) (7 )% Amortization of intangibles 164 173 (9 ) (5 )% 328 346 (18 ) (5 )% Foreclosed property costs (recovery) 43 137 (94 ) (69 )% 21 184 (163 ) (89 )% Debt prepayment penalties - - - - % 6,294 - 6,294 - % Other 2,194 2,034 160 8 % 4,232 3,890 342 9 % Total noninterest expense $22,448$25,005 ($2,557 ) (10 )% $51,740$49,189$2,551 5 % Noninterest Expense Analysis For the three and six months ended June 30, 2014, salaries and employee benefit costs decreased by 5% compared to the same periods in 2013. Included in salaries and employee benefits were $291 thousand of divestiture costs expensed in the first quarter of 2014 and $270 thousand of executive severance related costs recognized in the second quarter of 2013. The year over year declines in salaries and employee benefit costs reflected a reduction in defined benefit pension costs as well as lower levels of business development based compensation in the mortgage banking area resulting from declines in mortgage origination activity. The year over year reduction in defined benefit plan costs was principally due to a plan amendment adopted in the third quarter of 2013 and a higher discount rate in 2014 compared to 2013. Net occupancy costs for the three and six months ended June 30, 2014 increased by 8% from the comparable 2013 periods, largely due to increased rental expense and other occupancy costs associated with our de novo branch that opened in 2014 and residential mortgage lending offices that opened in the latter portion of 2013. As disclosed in the Overview section under the caption "Composition of Earnings," the Corporation incurred $355 thousand of divestiture costs in the first quarter of 2014 in connection with the sale of its merchant processing services business line. These costs included $291 thousand of salaries and employee benefit expenses and $64 thousand of legal expenses. In addition, prior to the consummation of this business line sale, merchant processing costs of $1.1 million were recognized in the in the first quarter of 2014. See discussion above regarding corresponding merchant processing fee revenue under the caption "Noninterest Income." Outsourced services for the three and six months ended June 30, 2014 increased by $144 thousand, or 17%, and by $347 thousand, or 20%, from the same periods in 2013, 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 half of 2013. Other noninterest expenses three and six months ended June 30, 2014 increased by $160 thousand and $342 thousand, compared to the same periods in 2013. The increases include higher costs associated with business development efforts and other matters. 53

-------------------------------------------------------------------------------- Income Taxes Income tax expense amounted to $4.6 million and $8.9 million, respectively, for the three and six months ended June 30, 2014, compared to $4.1 million and $7.5 million, respectively, for the same periods in 2013. The Corporation's effective tax rate was 31.9% and 31.8%, respectively, for the three and six months ended June 30, 2014, up modestly from 31.4% and 31.5%, respectively, for the comparable 2013 periods. 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. Financial Condition Summary Total assets amounted to $3.32 billion at June 30, 2014, up by $128.2 million, or 4%, from the end of 2013. This included an increase of $63.5 million, or 77%, in cash and due from banks, net loan growth of $118.2 million, or 5%, and reductions of $67.4 million, or 16% in the securities portfolio. Nonperforming assets as a percent of total assets amounted to 0.42% at June 30, 2014, down by 20 basis points from the end of 2013, largely due to payoffs and charge-offs on commercial loans. While the overall credit quality continues to be affected by relatively weak economic conditions, we have noted stable and favorable trends in many of our asset and credit quality indicators. Total deposits increased by $80.8 million, or 3%, in the first six months of 2014, including a net increase of $73.2 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 amounted to $322.1 million and $288.1 million, respectively, as of June 30, 2014 and December 31, 2013. The year-to-date increase in FHLBB advances was concentrated in the second quarter of 2014 as short-term advances were used primarily to fund loan growth. See additional discussion regarding the prepayments of FHLBB advances in the "Overview" section above under the caption "Composition of Earnings" and Note 8 to the Unaudited Consolidated Financial Statements. Shareholders' equity totaled $343.5 million at June 30, 2014, up by $13.8 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 13.24% at June 30, 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 securities to ensure proper valuation and to verify our understanding of how securities are priced. As of June 30, 2014 and December 31, 2013, the Corporation did not make any adjustments to the prices provided by the pricing service.



Our fair value measurements generally utilize Level 2 inputs, representing 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.

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

54 --------------------------------------------------------------------------------



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

June 30, 2014



December 31, 2013

Amount % Amount % Securities Available for Sale: Obligations of U.S. government-sponsored enterprises $10,012 3 % $55,115 14 % Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises 228,285 70 238,355 61 Obligations of states and political subdivisions 56,391 17 62,859 16 Individual name issuer trust preferred debt securities 26,635 8 24,684 6 Pooled trust preferred debt securities - - 547 - Corporate bonds 6,255 2 11,343 3 Total securities available for sale $327,578 100 % $392,903 100 % (Dollars in thousands) June 30, 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 $27,814 100 % $29,905 100 % Total securities held to maturity $27,814 100 %



$29,905 100 %

As of June 30, 2014, the investment portfolio totaled $355.4 million, down by $67.4 million from the balance at December 31, 2013, reflecting maturities, calls and principal repayments of debt securities.

At June 30, 2014 and December 31, 2013, the net unrealized gain position on securities available for sale and held to maturity amounted to $9.6 million and $5.0 million, respectively, and included gross unrealized losses of $4.1 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 June 30, 2014 totaled $56.4 million. The following table presents state and political subdivision holdings by geographic location. (Dollars in thousands) June 30, 2014 Fair Amortized Cost Unrealized Gains Unrealized Losses Value New Jersey $30,025$1,365 $- $31,390 New York 8,075 394 - 8,469 Pennsylvania 4,996 175 - 5,171 Illinois 6,023 116 - 6,139 Other 5,042 180 - 5,222 Total $54,161$2,230 $- $56,391 55

-------------------------------------------------------------------------------- The following table presents state and political subdivision holdings by category. (Dollars in thousands) June 30, 2014 Unrealized Fair Amortized Cost Gains Unrealized Losses Value General obligations $48,019$2,055 $- $50,074 Revenue obligations (a) 6,142 175 - 6,317 Total $54,161$2,230 $- $56,391



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

Washington Trust owns trust preferred security holdings of 7 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)

June 30, 2014 Credit Ratings June 30, 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 $9,762$8,425 ($1,337 ) Baa2 BBB Baa2 BBB Bank of America Corporation 3 5,765 4,994 (771 ) Ba1 BB+ (b) Ba1 BB+ (b) Wells Fargo & Company 2 5,139 4,515 (624 ) A3/Baa1 A-/BBB+ A3/Baa1 A-/BBB+ SunTrust Banks, Inc. 1 4,173 3,591 (582 ) Baa3 BB+ (b) Baa3 BB+ (b) Northern Trust Corporation 1 1,985 1,720 (265 ) Baa1 A- Baa1 A- State Street Corporation 1 1,975 1,720 (255 ) A3 BBB+ A3 BBB+ Huntington Bancshares Incorporated 1 1,935 1,670 (265 ) Baa3 BB+ (b) Baa3 BB+ (b) Totals 11 $30,734$26,635 ($4,099 )



(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 June 30, 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 may be designated as other-than-temporary in future periods, and the Corporation may incur write-downs. 56 --------------------------------------------------------------------------------



Loans

Total loans amounted to $2.58 billion at June 30, 2014, up by $118.2 million, or 5%, in the first six months of 2014, largely due to growth in the residential real estate 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 $811.3 million at June 30, 2014, down by $21.2 million, or 3%, from $832.5 million at December 31, 2013. Included in these amounts were commercial construction loans of $38.6 million and $36.3 million, respectively. A significant factor in the decline in commercial real estate loans was the early payoff of several larger loans in the portfolio. 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)

June 30, 2014



December 31, 2013

Amount % of Total Amount % of Total Rhode Island, Connecticut, Massachusetts $773,099 95 % $791,682 95 % New York, New Jersey 29,620 4 % 32,126 4 % New Hampshire 8,627 1 % 8,730 1 % Total $811,346 100 % $832,538 100 % Other Commercial Loans Commercial and industrial loans amounted to $554.8 million at June 30, 2014, up by $24.0 million, or 5%, from the balance at December 31, 2013. The increase primarily consisted of loans to new customers, additional extensions of credit to existing borrowers and additional advances on lines of credit with existing borrowers. This portfolio includes loans to a variety of business types. Approximately 81% 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 and recreation, construction, wholesale trade businesses and other services. 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 $876.6 million at June 30, 2014, up by $104.0 million, or 13%, from the balance at December 31, 2013. Total residential real estate loan originations for retention in portfolio were $171.2 million and $132.6 million for the six months ended June 30, 2014 and 2013. Total residential real estate loan originations for sale into the secondary market, including loans originated in a broker capacity, were $144.3 million and $268.9 million, respectively, for the six months ended June 30, 2014 and 2013. Origination volume declined in 2014, reflecting a decline in refinancing activity due to relatively higher market interest rates. 57

-------------------------------------------------------------------------------- Loans are sold with servicing retained or released. In recent years, we began to retain servicing on a higher proportion of loans sold to the secondary market. In general, loans sold with the retention of servicing yield a larger gain on sale due to the capitalization of servicing rights, which are subsequently amortized over the estimated period of servicing. The net balance of capitalized servicing rights amounted to $2.9 million and $2.7 million, respectively, as of June 30, 2014 and December 31, 2013. The balance of residential mortgage loans serviced for others, which are not included in the Consolidated Balance Sheets, amounted to $345.9 million and $311.7 million, respectively, as of June 30, 2014 and December 31, 2013. 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 financial institutions were individually underwritten using standards similar to those employed for Washington Trust's self-originated loans. Purchased residential mortgage balances totaled $38.5 million and $42.6 million, respectively, as of June 30, 2014 and December 31, 2013.



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

June 30, 2014



December 31, 2013

Amount % of Total Amount % of Total Rhode Island, Connecticut, Massachusetts $854,596 97.3 % $751,932 97.3 % New Hampshire 10,605 1.2 % 7,900 1.0 % New York, Virginia, New Jersey, Maryland, Pennsylvania, District of Columbia 5,872 0.7 % 6,972 0.9 % Ohio 2,237 0.3 % 2,509 0.3 % Washington and Oregon 1,344 0.2 % 1,356 0.2 % Georgia 1,072 0.1 % 1,083 0.1 % New Mexico 464 0.1 % 468 0.1 % Other 449 0.1 % 454 0.1 % Total residential mortgages $876,639 100.0 % $772,674 100.0 % Consumer Loans Consumer loans amounted to $338.3 million at June 30, 2014, up by $11.4 million, or 3%, from December 31, 2013. Our consumer portfolio is predominantly home equity lines and home equity loans, representing 84% of the total consumer portfolio at June 30, 2014. Consumer loans also include personal installment loans and loans to individuals secured by general aviation aircraft and automobiles. 58

-------------------------------------------------------------------------------- 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) Jun 30, Dec 31, 2014 2013 Nonaccrual loans: Commercial mortgages $2,290$7,492 Commercial construction and development -



-

Other commercial 1,615



1,291

Residential real estate mortgages 7,417 8,315 Consumer 1,213 1,204 Total nonaccrual loans 12,535 18,302 Nonaccrual investment securities -



547

Property acquired through foreclosure or repossession, net 1,309

932

Total nonperforming assets $13,844



$19,781

Nonperforming assets to total assets 0.42 % 0.62 % Nonperforming loans to total loans 0.49 % 0.74 % Total past due loans to total loans 0.82 % 0.89 % Accruing loans 90 days or more past due $-



$-

Nonperforming assets decreased to $13.8 million, or 0.42% of total assets, at June 30, 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 $12.5 million at June 30, 2014, down by $5.8 million from the balance at December 31, 2013.

Nonaccrual Loans During the six months ended June 30, 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 June 30, 2014. The following table presents additional detail on nonaccrual loans as of the dates indicated: (Dollars in thousands) June 30, 2014 December 31, 2013

Days Past Due Days Past Due Over 90 Under 90 Total % (1) Over 90 Under 90 Total % (1) Commercial: Mortgages $2,250$40$2,290 0.30 % $7,492 $- $7,492 0.94 % Construction and development - - - - - - - - Other commercial 417 1,198 1,615 0.29 % 731 560 1,291 0.24 % Residential real estate mortgages 4,335 3,082 7,417 0.85 % 5,633 2,682 8,315 1.08 % Consumer 512 701 1,213 0.36 % 656 548 1,204 0.37 % Total nonaccrual loans $7,514$5,021$12,535 0.49 % $14,512$3,790$18,302 0.74 % (1) Percentage of nonaccrual loans to the total loans outstanding within the respective category. 59

-------------------------------------------------------------------------------- The June 30, 2014 balance of nonaccrual commercial mortgage loans was net of charge-offs of $359 thousand and has a remaining loss allocation of $244 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 and charge-offs described below.

The largest nonaccrual relationship in the commercial mortgage category totaled $1.3 million at June 30, 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 $227 thousand loss allocation was deemed necessary at June 30, 2014. The Bank has additional accruing residential mortgage loans, which are related to the borrower by common guarantor, totaling $811 thousand at June 30, 2014. These additional loans have performed in accordance with the terms of the loans and were not past due at June 30, 2014.



In addition, a nonaccrual commercial mortgage loan that had a carrying value of $1.7 million at December 31, 2013 was paid off in 2014.

Nonaccrual residential mortgage loans decreased by $898 thousand from the balance at the end of 2013, largely reflecting payoffs. As of June 30, 2014, the $7.4 million balance of nonaccrual residential mortgage loans consisted of 34 loans, with $6.4 million located in Rhode Island, Connecticut and Massachusetts. The loss allocation on total nonaccrual residential mortgages was $1.1 million at June 30, 2014. Included in total nonaccrual residential mortgages at June 30, 2014 were sixteen loans purchased for portfolio and serviced by others amounting to $3.7 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) June 30, 2014 December 31, 2013 Amount % (1) Amount % (1) Commercial: Mortgages $4,144 0.54 % $7,492 0.94 % Construction and development - - % - - % Other commercial loans 2,975 0.54 % 1,309 0.25 % Residential real estate mortgages 10,439 1.19 % 10,958 1.42 % Consumer loans 3,503 1.04 % 2,144 0.66 % Total past due loans $21,061 0.82 % $21,903 0.89 %



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

As of June 30, 2014, total past due loans amounted to $21.1 million, or 0.82% of total loans, down by $842 thousand from December 31, 2013.

The decrease in commercial mortgage delinquencies in the first half of 2014 was largely attributable to the payoffs and paydowns on the largest nonaccrual commercial mortgage relationship described above under the caption "Nonaccrual Loans."



All loans 90 days or more past due at June 30, 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 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. 60

-------------------------------------------------------------------------------- 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 June 30, 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) Jun 30, Dec 31, 2014 2013 Accruing troubled debt restructured loans: Commercial mortgages $22,603$22,800 Other commercial 969 1,265 Residential real estate mortgages 1,459 1,442 Consumer 167 236



Accruing troubled debt restructured loans 25,198 25,743 Nonaccrual troubled debt restructured loans: Commercial mortgages

- - Other commercial 872 542 Residential real estate mortgages 448 - Consumer - 38



Nonaccrual troubled debt restructured loans 1,320 580 Total troubled debt restructured loans $26,518$26,323

As of June 30, 2014, loans classified as troubled debt restructurings totaled $26.5 million, essentially unchanged from the balance at December 31, 2013.

The largest troubled debt restructured relationship at June 30, 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 June 30, 2014, the second largest troubled debt restructured relationship consisted of an accruing commercial mortgage relationship with a carrying value of $8.0 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. 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 June 30, 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 61 -------------------------------------------------------------------------------- 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 $1.4 million in potential problem loans at June 30, 2014, compared to $931 thousand at December 31, 2013. 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 June 30, 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 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. 62 --------------------------------------------------------------------------------



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

Jun 30, Dec



31,

2014



2013

Collateral dependent impaired loans (1) $21,859



$21,940

Impaired loans measured on discounted cash flow method (2) 10,366 15,553 Total impaired loans

$32,225$37,493



(1) Net of partial charge-offs of $800 thousand and $2.4 million, respectively,

at June 30, 2014 and December 31, 2013.

(2) Net of partial charge-offs of $121 thousand and $141 thousand, respectively,

at June 30, 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 $1.5 million at June 30, 2014, essentially unchanged from the balance at 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 for the three and six months ended June 30, 2014 amounted to $450 thousand and $750 thousand, respectively, compared to $700 thousand and $1.3 million for the same periods in 2013. Net charge-offs for the three and six months ended June 30, 2014 totaled $224 thousand and $1.4 million, respectively. Year-to-date 2014 charge-offs included an $853 charge-off recognized in the first quarter on one commercial mortgage relationship. Net charge-offs for the three and six months ended June 30, 2013 totaled $4.0 million and $4.3 million, respectively, and included a $4.0 million charge-off recognized in the second quarter on one commercial mortgage loan. As of June 30, 2014, the allowance for loan losses was $27.3 million, or 1.06% 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 stable and favorable trends in asset quality and credit quality metrics. See Note 5 to the Unaudited Consolidated Financial Statements for additional information under the caption "Credit Quality Indicators." 63 --------------------------------------------------------------------------------



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)

June 30, 2014 December 31, 2013 Related Allowance / Related Allowance / Loans Allowance Loans Loans Allowance Loans Impaired loans individually evaluated for impairment $32,225$1,525 4.73 % $37,493$1,481 3.95 % Loans collectively evaluated for impairment 2,548,899 18,805 0.74 % 2,425,391 18,494 0.76 % Unallocated - 6,939 - - 7,911 - Total $2,581,124$27,269 1.06 % $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) June 30, 2014 December 31, 2013 Amount % (1) Amount % (1) Commercial: Mortgages $6,973 30 % $6,969 32 % Construction and development 494 1 362 2 Other 5,454 22 5,433 22 Residential real estate: Mortgage 4,696 33 4,571 30 Homeowner construction 144 1 129 1 Consumer 2,569 13 2,511 13 Unallocated 6,939 7,911 Balance at end of period $27,269 100 % $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 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 June 30, 2014, up by $80.8 million, or 3%, from the balance at December 31, 2013. This included a net increase of $73.2 million of out-of-market wholesale brokered time certificates of deposit, which were 64

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



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 $7.6 million in 2014.

Demand deposits totaled $411.6 million at June 30, 2014, down by $29.2 million, or 7%, from December 31, 2013. Included in demand deposits at June 30, 2014 and December 31, 2013 were DDM reciprocal demand deposits of $14.0 million and $11.3 million, respectively.



NOW account balances increased by $4.3 million, or 1%, and totaled $314.1 million at June 30, 2014.

Savings accounts totaled $292.1 million at June 30, 2014, down by $5.2 million, or 2%, from December 31, 2013.

Money market accounts totaled $772.1 million at June 30, 2014, up by $105.4 million, or 16%, from the balance at December 31, 2013. Included in total money market deposits were ICS reciprocal money market deposits totaling $265.0 million at June 30, 2014, up by $62.7 million from the balance at December 31, 2013.

Time deposits amounted to $796.3 million at June 30, 2014, up by $5.5 million, or 1%, from the balance at December 31, 2013. Included in time deposits at June 30, 2014 were brokered certificates of deposit of $171.2 million, up by $73.2 million from the balance at December 31, 2013 as described above. Excluding out-of-market brokered certificates of deposits, in-market time deposits totaled $625.0 million at June 30, 2014 down by $67.7 million from December 31, 2013. Included in in-market time deposits were CDARS reciprocal time deposits of $101.5 million and $157.0 million, respectively, at June 30, 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 $322.1 million at June 30, 2014, up by $34.0 million from the balance at the end of 2013. The year-to-date increase in FHLBB advances was concentrated in the second quarter of 2014 as short-term advances were used primarily to fund loan growth. In early March 2014, Washington Trust prepaid FHLBB advances totaling $99.3 million. 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. See additional disclosure in the Results of Operations section under the caption "Net Interest Income." 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 80% of total average assets in the six months ended June 30, 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 six months ended June 30, 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 six months ended June 30, 2014, net cash provided by financing activities amounted to $106.0 million. Total deposits increased by $80.8 million and FHLBB advances increased by $34.0 million in the first six months of 2014. See additional disclosure in the "Sources of Funds" section under the caption "Borrowings." Net cash used in investing activities totaled $43.1 million for the six months ended June 30, 2014. The most significant elements of cash flow within investment activities were maturities, calls and principal repayments of debt 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 $938 65 -------------------------------------------------------------------------------- thousand for the six months ended June 30, 2014. Net income totaled $19.1 million in the first six 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 $343.5 million at June 30, 2014, up by $13.8 million from December 31, 2013, including net income of $19.1 million and a reduction of $9.8 million for dividend declarations.



The ratio of total equity to total assets amounted to 10.35% at June 30, 2014. This compares to a ratio of 10.34% at December 31, 2013. Book value per share at June 30, 2014 and December 31, 2013 amounted to $20.56 and $19.84, respectively.

The Bancorp and the Bank are subject to various regulatory capital requirements. As of June 30, 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 June 30, 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) $322,056$136,537$51,100$104,843$29,576 Junior subordinated debentures 22,681 - - - 22,681 Operating lease obligations 27,135 2,511 4,329 3,536 16,759 Software licensing arrangements 3,731 2,322 1,409 - - Other borrowings 156 46 105 5 -



Total contractual obligations $375,759$141,416$56,943$108,384

$69,016



(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. 66

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

(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 $319,422$162,560$76,625$24,761$55,476 Home equity lines 198,343 - - - 198,343 Other loans 47,827 42,481 2,355 2,991 - Standby letters of credit 3,147 3,000 147 - - Forward loan commitments: Interest rate lock commitments 28,509 28,509 - - - Commitments to sell residential mortgage loans 50,272 50,272 - - - Customer related derivative contracts: Interest rate swaps with customers 110,821 32,618 15,873 25,710 36,620



Mirror swaps with counterparties 110,821 32,618 15,873 25,710

36,620 Interest rate risk management contract: Interest rate swap contracts 22,681 - 22,681 - - Total commitments $891,843$352,058$133,554$79,172$327,059



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 June 30, 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. 67 -------------------------------------------------------------------------------- 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 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 June 30, 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. June 30, 2014 December 31, 2013 Months 1 - 12 Months 13 - 24 Months 1 - 12 Months 13 - 24 100 basis point rate decrease (0.70 )% (3.86)% (1.66)% (6.02)% 100 basis point rate increase 0.83 % 1.07% 2.22%



3.91%

200 basis point rate increase 1.95 % 2.39% 4.44%



7.16%

300 basis point rate increase 3.06 % 3.53% 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 from December 31, 2013 to June 30, 2014 in positive exposure of net interest income to rising rates was attributable to several factors, including a net increase of $104.0 million in the residential real estate mortgage portfolio during this period, the largest portion of which was in adjustable rate mortgages with an initial interest rate reset date in year seven; and, to a lesser extent, a reduction in longer term market interest rates. 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 68 -------------------------------------------------------------------------------- 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 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 June 30, 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 (callable) $23

($1,023 ) Obligations of states and political subdivisions 884



(1,708 ) Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises

4,299 (15,109 ) Trust preferred debt and other corporate debt securities 32



673

Total change in market value as of June 30, 2014$5,238



($17,167 )

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



($20,841 )


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters