Edgar Filing: WASHINGTON TRUST BANCORP INC

Form 10-Q 2015 Q2

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended JUNE 30, 2015 or



o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______.

Commission file number: 001-32991

WASHINGTON TRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)



RHODE ISLAND		05-0404671
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



23 BROAD STREET
WESTERLY, RHODE ISLAND		02891
(Address of principal executive offices)		(Zip Code)

(401) 348-1200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Mark one)



Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes x No

The number of shares of common stock of the registrant outstanding as of July 31, 2015 was 16,841,256.



FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended June 30, 2015

TABLE OF CONTENTS
	Page Number
	Page Number
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	3
Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2014	4
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2014	5
Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2015 and 2014	6
Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014	7
Condensed Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3. Quantitative and Qualitative Disclosures About Market Risk	65
Item 4. Controls and Procedures	65
PART II. Other Information
Item 1. Legal Proceedings	66
Item 1A. Risk Factors	66
Item 6. Exhibits	66
Signatures	68

- 2-

PART I. Financial Information

Item 1. Financial Statements



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



	June 30, 2015			December 31, 2014
Assets:
Cash and due from banks		$79,795			$76,386
Short-term investments	4,298			3,964
Mortgage loans held for sale (including $17,260 at June 30, 2015 and $30,321 at December 31, 2014 measured at fair value)	37,389			45,693
Securities:
Available for sale, at fair value	351,378			357,662
Held to maturity, at amortized cost (fair value $23,091 at June 30, 2015 and $26,008 at December 31, 2014)	22,523			25,222
Total securities	373,901			382,884
Federal Home Loan Bank stock, at cost	37,730			37,730
Loans:
Commercial	1,583,537			1,535,488
Residential real estate	1,001,263			985,415
Consumer	343,784			338,373
Total loans	2,928,584			2,859,276
Less allowance for loan losses	27,587			28,023
Net loans	2,900,997			2,831,253
Premises and equipment, net	28,124			27,495
Investment in bank-owned life insurance	64,502			63,519
Goodwill	58,114			58,114
Identifiable intangible assets, net	4,539			4,849
Other assets	55,088			54,987
Total assets		$3,644,477			$3,586,874
Liabilities:
Deposits:
Demand deposits		$457,755			$459,852
NOW accounts	357,922			326,375
Money market accounts	789,334			802,764
Savings accounts	300,108			291,725
Time deposits	834,000			874,102
Total deposits	2,739,119			2,754,818
Federal Home Loan Bank advances	471,321			406,297
Junior subordinated debentures	22,681			22,681
Other liabilities	52,189			56,799
Total liabilities	3,285,310			3,240,595
Commitments and contingencies
Shareholders’ Equity:
Common stock of $.0625 par value; authorized 30,000,000 shares; issued and outstanding 16,833,525 shares at June 30, 2015 and 16,746,363 shares at December 31, 2014	1,052			1,047
Paid-in capital	103,408			101,204
Retained earnings	263,790			252,837
Accumulated other comprehensive loss	(9,083		)	(8,809		)
Total shareholders’ equity	359,167			346,279
Total liabilities and shareholders’ equity		$3,644,477			$3,586,874

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



Consolidated Statements of Income (unaudited)	(Dollars and shares in thousands, except per share amounts)



		Three months						Six months
Periods ended June 30,		2015			2014			2015			2014
Interest income:
Interest and fees on loans			$28,739			$26,169			$57,092			$51,758
Interest on securities:	Taxable	2,176			2,699			4,435			5,641
	Nontaxable	402			557			837			1,139
Dividends on Federal Home Loan Bank stock		164			138			329			280
Other interest income		29			28			54			63
Total interest and dividend income		31,510			29,591			62,747			58,881
Interest expense:
Deposits		3,348			3,120			6,737			6,089
Federal Home Loan Bank advances		1,891			1,758			3,793			3,999
Junior subordinated debentures		241			241			482			482
Other interest expense		2			4			5			7
Total interest expense		5,482			5,123			11,017			10,577
Net interest income		26,028			24,468			51,730			48,304
Provision for loan losses		100			450			100			750
Net interest income after provision for loan losses		25,928			24,018			51,630			47,554
Noninterest income:
Wealth management revenues		8,912			8,530			17,347			16,595
Merchant processing fees		—			—			—			1,291
Net gains on loan sales and commissions on loans originated for others		2,748			1,707			5,333			2,946
Service charges on deposit accounts		973			824			1,908			1,578
Card interchange fees		826			779			1,540			1,460
Income from bank-owned life insurance		492			441			982			886
Net gains (losses) on interest rate swap contracts		717			(37		)	1,362			223
Equity in earnings (losses) of unconsolidated subsidiaries		(69		)	(107		)	(155		)	(150		)
Net gain on sale of business line		—			—			—			6,265
Other income		662			677			964			1,090
Total noninterest income		15,261			12,814			29,281			32,184
Noninterest expense:
Salaries and employee benefits		15,506			14,771			31,000			29,329
Net occupancy		1,669			1,475			3,555			3,115
Equipment		1,376			1,235			2,716			2,471
Merchant processing costs		—			—			—			1,050
Outsourced services		1,277			1,015			2,524			2,059
Legal, audit and professional fees		610			598			1,286			1,216
FDIC deposit insurance costs		436			413			909			853
Advertising and promotion		578			540			845			772
Amortization of intangibles		156			164			311			328
Debt prepayment penalties		—			—			—			6,294
Other expenses		2,691			2,237			4,684			4,253
Total noninterest expense		24,299			22,448			47,830			51,740
Income before income taxes		16,890			14,384			33,081			27,998
Income tax expense		5,387			4,587			10,568			8,903
Net income			$11,503			$9,797			$22,513			$19,095

Weighted average common shares outstanding - basic		16,811			16,678			16,785			16,653
Weighted average common shares outstanding - diluted		16,989			16,831			16,977			16,817
Per share information:	Basic earnings per common share		$0.68			$0.59			$1.34			$1.14
	Diluted earnings per common share		$0.68			$0.58			$1.32			$1.13
	Cash dividends declared per share		$0.34			$0.29			$0.68			$0.58

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



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



	Three Months						Six Months
Periods ended June 30,	2015			2014			2015			2014
Net income		$11,503			$9,797			$22,513			$19,095
Other comprehensive income, net of tax:
Net change in fair value of securities available for sale	(1,701		)	1,817			(1,037		)	2,429
Cash flow hedges:
Change in fair value of cash flow hedges	(1		)	(14		)	(9		)	(30		)
Net cash flow hedge losses reclassified into earnings	90			93			183			185
Net change in fair value of cash flow hedges	89			79			174			155
Defined benefit plan obligation adjustment	354			81			589			169
Total other comprehensive (loss) income, net of tax	(1,258		)	1,977			(274		)	2,753
Total comprehensive income		$10,245			$11,774			$22,239			$21,848

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



Consolidated Statements of Changes in Shareholders' Equity (unaudited)	(Dollars and shares in thousands)



	Common Shares Outstanding	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balance at January 1, 2015	16,746		$1,047		$101,204		$252,837			($8,809	)		$346,279
Net income						22,513						22,513
Total other comprehensive loss, net of tax									(274		)	(274		)
Cash dividends declared						(11,560		)				(11,560		)
Share-based compensation				1,156								1,156
Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit	88	5		1,048								1,053
Balance at June 30, 2015	16,834		$1,052		$103,408		$263,790			($9,083	)		$359,167



	Common Shares Outstanding	Common Stock		Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total
Balance at January 1, 2014	16,614		$1,038		$97,566		$232,595			($1,553	)		$329,646
Net income						19,095						19,095
Total other comprehensive income, net of tax									2,753			2,753
Cash dividends declared						(9,772		)				(9,772		)
Share-based compensation				961								961
Exercise of stock options, issuance of other compensation-related equity instruments and related tax benefit	91	6		761								767
Balance at June 30, 2014	16,705		$1,044		$99,288		$241,918			$1,200			$343,450

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



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



Six months ended June 30,		2015			2014
Cash flows from operating activities:
Net income			$22,513			$19,095
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		100			750
Depreciation of premises and equipment		1,715			1,564
Net amortization of premium and discount		777			373
Amortization of intangibles		311			328
Share-based compensation		1,156			961
Income from bank-owned life insurance		(982		)	(886		)
Net gain on sale of business line		—			(6,265		)
Net gains on loan sales and commissions on loans originated for others		(5,333		)	(2,946		)
Equity in losses of unconsolidated subsidiaries		155			150
Proceeds from sales of loans		244,302			111,075
Loans originated for sale		(232,179		)	(119,373		)
Decrease (increase) in other assets		627			(1,012		)
Decrease in other liabilities		(4,288		)	(2,898		)
Net cash provided by operating activities		28,874			916
Cash flows from investing activities:
Purchases of:	Mortgage-backed securities available for sale	—			(9,987		)
	Other investment securities available for sale	(30,228		)	—
Proceeds from sale of:	Other investment securities available for sale	—			547
Maturities and principal payments of:	Mortgage-backed securities available for sale	26,274			51,724
	Other investment securities available for sale	8,162			26,507
	Mortgage-backed securities held to maturity	2,573			1,977
Net proceeds from the sale of business line		—			7,205
Net increase in loans		(66,792		)	(112,951		)
Purchases of loans, including purchased interest		(2,160		)	(6,088		)
Proceeds from the sale of property acquired through foreclosure or repossession		240			671
Purchases of premises and equipment		(2,344		)	(2,681		)
Net cash used in investing activities		(64,275		)	(43,076		)
Cash flows from financing activities:
Net (decrease) increase in deposits		(15,699		)	80,776
Proceeds from Federal Home Loan Bank advances		323,000			234,000
Repayment of Federal Home Loan Bank advances		(257,976		)	(200,026		)
Proceeds from stock options exercises and issuance of other equity instruments		586			376
Tax benefit from stock option exercises and other equity instruments		467			391
Cash dividends paid		(11,234		)	(9,485		)
Net cash provided by financing activities		39,144			106,032
Net increase in cash and cash equivalents		3,743			63,872
Cash and cash equivalents at beginning of period		80,350			85,317
Cash and cash equivalents at end of period			$84,093			$149,189



Noncash Investing and Financing Activities:
Loans charged off		$676		$1,490
Loans transferred to property acquired through foreclosure or repossession	491		1,016
Supplemental Disclosures:
Interest payments		$11,175		$10,440
Income tax payments	9,665		7,965

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

Condensed Notes to Unaudited Consolidated Financial Statements


(1)	General Information

Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company and financial holding company. The Bancorp owns all of the outstanding common stock of The Washington Trust Company, of Westerly (the “Bank”), a Rhode Island chartered commercial bank founded in 1800. Through its subsidiaries, the Bancorp offers a complete product line of financial services including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, eastern Massachusetts and Connecticut.

The consolidated financial statements include the accounts of the Bancorp and its subsidiaries (collectively, the “Corporation” or “Washington Trust”). All significant intercompany transactions have been eliminated.

The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices of the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change are the determination of the allowance for loan losses, the review of goodwill for impairment and the assessment of investment securities for impairment.

The unaudited consolidated financial statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying consolidated financial statements have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2014.


(2)	Recently Issued Accounting Pronouncements

Receivables - Troubled Debt Restructurings by Creditors - Topic 310

Accounting Standards Update No. 2014-04, “Reclassifications of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure” (“ASU 2014-04”), was issued in January 2014 and clarifies when banks and similar institutions (creditors) should reclassify mortgage loans collateralized by residential real estate properties from the loan portfolio to other real estate owned (“OREO”). ASU 2014-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Corporation elected the prospective transition method and the adoption of ASU 2014-04 did not have a material impact on the Corporation’s consolidated financial statements.

Revenue from Contracts with Customers - Topic 606

Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), was issued in May 2014 and provides a revenue recognition framework for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other accounting standards. ASU 2014-09 is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period with early adoption not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Corporation is currently evaluating the impact that ASU 2014-09 will have on the its consolidated financial statements and related disclosures. The Corporation has not yet selected a transition method nor has it determined the effect of ASU 2014-09 on its ongoing financial reporting.


(3)	Cash and Due from Banks

The Bank maintains certain average reserve balances to meet the requirements of the Board of Governors of the Federal Reserve System (“FRB”). Some or all of these reserve requirements may be satisfied with vault cash. Reserve balances amounted to $8.7 million at June 30, 2015 and $8.0 million at December 31, 2014 and were included in cash and due from banks in the Consolidated Balance Sheets.

As of June 30, 2015 and December 31, 2014, cash and due from banks included interest-bearing deposits in other banks of $35.8 million and $42.7 million, respectively.

- 8-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


(4)	Securities

The following tables present the amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of securities by major security type and class of security:



(Dollars in thousands)
June 30, 2015	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$61,430		$49		($225	)		$61,254
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	208,539		8,091		(10		)	216,620
Obligations of states and political subdivisions	39,487		1,187		—			40,674
Individual name issuer trust preferred debt securities	30,772		16		(4,064		)	26,724
Corporate bonds	6,118		12		(24		)	6,106
Total securities available for sale		$346,346		$9,355		($4,323	)		$351,378
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$22,523		$568		$—			$23,091
Total securities held to maturity		$22,523		$568		$—			$23,091
Total securities		$368,869		$9,923		($4,323	)		$374,469



(Dollars in thousands)
December 31, 2014	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises		$31,205		$21		($54	)		$31,172
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	235,343		10,023		—			245,366
Obligations of states and political subdivisions	47,647		1,529		—			49,176
Individual name issuer trust preferred debt securities	30,753		—		(4,979		)	25,774
Corporate bonds	6,120		57		(3		)	6,174
Total securities available for sale		$351,068		$11,630		($5,036	)		$357,662
Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises		$25,222		$786		$—			$26,008
Total securities held to maturity		$25,222		$786		$—			$26,008
Total securities		$376,290		$12,416		($5,036	)		$383,670

At June 30, 2015 and December 31, 2014, securities available for sale and held to maturity with a fair value of $350.6 million and $350.5 million, respectively, were pledged as collateral for Federal Home Loan Bank of Boston (“FHLBB”) borrowings and letters of credit, potential borrowings with the FRB, certain public deposits and for other purposes. See Note 8 for additional discussion of FHLBB borrowings.

- 9-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The schedule of maturities of debt securities available for sale and held to maturity is presented below. Mortgage-backed securities are included based on weighted average maturities, adjusted for anticipated prepayments. All other debt securities are included based on contractual maturities. Actual maturities may differ from amounts presented because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. Yields on tax exempt obligations are not computed on a tax equivalent basis.



(Dollars in thousands)
June 30, 2015	Within 1 Year			1-5 Years			5-10 Years			After 10 Years			Totals
Securities Available for Sale:
Obligations of U.S. government-sponsored enterprises:
Amortized cost		$—			$41,000			$20,430			$—			$61,430
Weighted average yield	—		%	1.83		%	2.34		%	—		%	2.00		%
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises:
Amortized cost	36,933			94,871			53,099			23,636			208,539
Weighted average yield	3.75			3.28			2.75			1.65			3.04
Obligations of state and political subdivisions:
Amortized cost	5,166			20,851			13,470			—			39,487
Weighted average yield	3.80			3.96			3.99			—			3.95
Individual name issuer trust preferred debt securities:
Amortized cost	—			—			—			30,772			30,772
Weighted average yield	—			—			—			1.13			1.13
Corporate bonds:
Amortized cost	5,712			203			203			—			6,118
Weighted average yield	3.04			1.63			3.21			—			3.00
Total debt securities available for sale:
Amortized cost		$47,811			$156,925			$87,202			$54,408			$346,346
Weighted average yield	3.67		%	2.99		%	2.85		%	1.35		%	2.79		%
Fair value		$49,385			$161,110			$89,606			$51,277			$351,378
Securities Held to Maturity:
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises:
Amortized cost		$2,842			$8,809			$6,948			$3,924			$22,523
Weighted average yield	3.11		%	3.03		%	2.75		%	0.82		%	2.57		%
Fair value		$2,914			$9,031			$7,123			$4,023			$23,091

Included in the above table are debt securities with an amortized cost balance of $125.5 million and a fair value of $122.3 million at June 30, 2015 that are callable at the discretion of the issuers. Final maturities of the callable securities range from 4 months to 22 years, with call features ranging from 1 month to 2 years.

Other-Than-Temporary Impairment Assessment

The Corporation assesses whether the decline in fair value of investment securities is other-than-temporary on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates impairments in value both qualitatively and quantitatively to assess whether they are other‑than‑temporary.

- 10-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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



(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
June 30, 2015	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored enterprises	4		$20,004		($225	)	—		$—		$—		4		$20,004		($225	)
Mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises	2	844		(10		)	—	—		—			2	844		(10		)
Individual name issuer trust preferred debt securities	—	—		—			10	25,734		(4,064		)	10	25,734		(4,064		)
Corporate bonds	3	2,394		(24		)	—	—		—			3	2,394		(24		)
Total temporarily impaired securities	9		$23,242		($259	)	10		$25,734		($4,064	)	19		$48,976		($4,323	)



(Dollars in thousands)	Less than 12 Months						12 Months or Longer						Total
December 31, 2014	#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses			#	Fair Value		Unrealized Losses
Obligations of U.S. government-sponsored enterprises	3		$20,952		($54	)	—		$—		$—		3		$20,952		($54	)
Individual name issuer trust preferred debt securities	—	—		—			11	25,774		(4,979		)	11	25,774		(4,979		)
Corporate bonds	—	—		—			1	199		(3		)	1	199		(3		)
Total temporarily impaired securities	3		$20,952		($54	)	12		$25,973		($4,982	)	15		$46,925		($5,036	)

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

Unrealized losses on temporarily impaired securities as of June 30, 2015 and December 31, 2014 were concentrated in variable rate trust preferred debt securities.

Trust Preferred Debt Securities of Individual Name Issuers

Included in debt securities in an unrealized loss position at June 30, 2015 were 10 trust preferred security holdings issued by 7 individual companies in the banking sector. Management believes the unrealized loss position in these holdings was attributable to the general widening of spreads for this category of debt securities issued by financial services companies since the time these securities were purchased. Based on the information available through the filing date of this report, all individual name issuer trust preferred debt securities held in our portfolio continue to accrue and make payments as expected with no payment deferrals or defaults on the part of the issuers. As of June 30, 2015, individual name issuer trust preferred debt securities with an amortized cost of $11.9 million and unrealized losses of $1.6 million were rated below investment grade by Standard & Poors, Inc. (“S&P”). Management reviewed the collectibility of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, credit ratings, including ratings in effect as of the reporting period date as well as credit rating changes between the reporting period date and the filing date of this report, and other information. We noted no additional downgrades to below investment grade between December 31, 2014 and the filing date of this report. Based on these analyses, management concluded that it expects to recover the entire amortized cost basis of these securities. Furthermore, Washington Trust does not intend to sell these securities and it is not more‑likely‑than‑not that Washington Trust will be required to sell these securities before recovery of their cost basis, which may be maturity. Therefore, management does not consider these investments to be other-than-temporarily impaired at June 30, 2015.

- 11-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)


(5)	Loans

The following is a summary of loans:



(Dollars in thousands)	June 30, 2015				December 31, 2014
	Amount		%		Amount		%
Commercial:
Mortgages (1)		$876,589	30	%		$843,978	30	%
Construction & development (2)	110,989		4		79,592		3
Commercial & industrial (3)	595,959		20		611,918		21
Total commercial	1,583,537		54		1,535,488		54
Residential real estate:
Mortgages	971,705		33		948,731		33
Homeowner construction	29,558		1		36,684		1
Total residential real estate	1,001,263		34		985,415		34
Consumer:
Home equity lines	249,845		9		242,480		8
Home equity loans	47,437		2		46,967		2
Other (4)	46,502		1		48,926		2
Total consumer	343,784		12		338,373		12
Total loans (5)		$2,928,584	100	%		$2,859,276	100	%


(1)	Loans primarily secured by income producing property.


(2)	Loans for construction of commercial properties, loans to developers for construction of residential properties and loans for land development.


(3)	Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.


(4)	Consumer installment loans and loans secured by general aviation aircraft and automobiles.


(5)	Includes net unamortized loan origination costs of $2.5 million and $2.1 million, respectively, and net unamortized premiums on purchased loans of $91 thousand and $94 thousand, respectively, at June 30, 2015 and December 31, 2014.

At June 30, 2015 and December 31, 2014, there were $1.24 billion and $1.21 billion, respectively, of loans pledged as collateral to the FHLBB under a blanket pledge agreement and to the FRB for the discount window. See Note 8 for additional disclosure regarding borrowings.

Nonaccrual Loans

Loans, with the exception of certain well-secured loans that are in the process of collection, are placed on nonaccrual status and interest recognition is suspended when such loans are 90 days or more overdue with respect to principal and/or interest, or sooner if considered appropriate by management. Well-secured loans are permitted to remain on accrual status provided that full collection of principal and interest is assured and the loan is in the process of collection. Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued but not collected on such loans is reversed against current period income. Subsequent interest payments received on nonaccrual loans are applied to the outstanding principal balance of the loan or recognized as interest income depending on management’s assessment of the ultimate collectibility of the loan. Loans are removed from nonaccrual status when they have been current as to principal and interest for approximately six months, the borrower has demonstrated an ability to comply with repayment terms, and when, in management’s opinion, the loans are considered to be fully collectible.

- 12-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

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



(Dollars in thousands)	Jun 30, 2015		Dec 31, 2014
Commercial:
Mortgages		$4,915		$5,315
Construction & development	—		—
Commercial & industrial	1,039		1,969
Residential real estate:
Mortgages	7,411		7,124
Homeowner construction	—		—
Consumer:
Home equity lines	526		1,217
Home equity loans	960		317
Other	280		3
Total nonaccrual loans		$15,131		$15,945
Accruing loans 90 days or more past due		$—		$—

As of June 30, 2015 and December 31, 2014, nonaccrual loans of $2.7 million and $3.2 million, respectively, were current as to the payment of principal and interest.

At June 30, 2015, there were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status.

Past Due Loans

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



(Dollars in thousands)	Days Past Due
June 30, 2015	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$14		$—		$4,915		$4,929		$871,660		$876,589
Construction & development	—		—		—		—		110,989		110,989
Commercial & industrial	2,581		2,299		638		5,518		590,441		595,959
Residential real estate:
Mortgages	5,120		913		4,871		10,904		960,801		971,705
Homeowner construction	—		—		—		—		29,558		29,558
Consumer:
Home equity lines	1,098		74		50		1,222		248,623		249,845
Home equity loans	527		315		348		1,190		46,247		47,437
Other	9		8		249		266		46,236		46,502
Total loans		$9,349		$3,609		$11,071		$24,029		$2,904,555		$2,928,584

- 13-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)



(Dollars in thousands)	Days Past Due
December 31, 2014	30-59		60-89		Over 90		Total Past Due		Current		Total Loans
Commercial:
Mortgages		$—		$—		$5,315		$5,315		$838,663		$843,978
Construction & development	—		—		—		—		79,592		79,592
Commercial & industrial	2,136		1,202		181		3,519		608,399		611,918
Residential real estate:
Mortgages	2,943		821		3,284		7,048		941,683		948,731
Homeowner construction	—		—		—		—		36,684		36,684
Consumer:
Home equity lines	570		100		841		1,511		240,969		242,480
Home equity loans	349		240		56		645		46,322		46,967
Other	35		5		—		40		48,886		48,926
Total loans		$6,033		$2,368		$9,677		$18,078		$2,841,198		$2,859,276

Included in past due loans as of June 30, 2015 and December 31, 2014, were nonaccrual loans of $12.4 million and $12.7 million, respectively. All loans 90 days or more past due at June 30, 2015 and December 31, 2014 were classified as nonaccrual.

Impaired Loans

Impaired loans consist of nonaccrual commercial loans, troubled debt restructured loans and other loans classified as impaired that are individually evaluated for impairment. Impaired loans are loans for which it is probable that the Corporation will not be able to collect all amounts due according to the contractual terms of the loan agreements and loans restructured in a troubled debt restructuring. 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.

- 14-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following is a summary of impaired loans:



(Dollars in thousands)	Recorded Investment (1)				Unpaid Principal				Related Allowance
	Jun 30, 2015		Dec 31, 2014		Jun 30, 2015		Dec 31, 2014		Jun 30, 2015		Dec 31, 2014
No Related Allowance Recorded:
Commercial:
Mortgages		$205		$432		$205		$432		$—		$—
Construction & development	—		—		—		—		—		—
Commercial & industrial	1,454		1,047		1,479		1,076		—		—
Residential real estate:
Mortgages	1,596		1,477		1,893		1,768		—		—
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	—		—		—		—		—		—
Home equity loans	—		—		—		—		—		—
Other	—		—		—		—		—		—
Subtotal	3,255		2,956		3,577		3,276		—		—
With Related Allowance Recorded:
Commercial:
Mortgages		$14,183		$14,585		$14,564		$14,564		$1,177		$927
Construction & development	—		—		—		—		—		—
Commercial & industrial	1,795		1,878		2,113		2,437		69		177
Residential real estate:
Mortgages	1,509		2,226		1,552		2,338		233		326
Homeowner construction	—		—		—		—		—		—
Consumer:
Home equity lines	311		250		317		250		72		141
Home equity loans	88		45		107		62		—		12
Other	397		112		397		114		102		—
Subtotal	18,283		19,096		19,050		19,765		1,653		1,583
Total impaired loans		$21,538		$22,052		$22,627		$23,041		$1,653		$1,583
Total:
Commercial		$17,637		$17,942		$18,361		$18,509		$1,246		$1,104
Residential real estate	3,105		3,703		3,445		4,106		233		326
Consumer	796		407		821		426		174		153
Total impaired loans		$21,538		$22,052		$22,627		$23,041		$1,653		$1,583

(1)

The recorded investment in impaired loans consists of unpaid principal balance net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and costs. For impaired accruing loans (troubled debt restructurings for which management has concluded that the collectibility of the loan is not in doubt), the recorded investment also includes accrued interest.

- 15-

Condensed Notes to Unaudited Consolidated Financial Statements – (continued)

The following tables present the average recorded investment balance of impaired loans and interest income recognized on impaired loans segregated by loan class:




(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Three months ended June 30,	2015		2014		2015		2014
Commercial:
Mortgages		$14,556		$25,093		$76		$240
Construction & development	—		—		—		—
Commercial & industrial	3,077		2,492		41		15
Residential real estate:
Mortgages	3,251		4,452		24		36
Homeowner construction	—		—		—		—
Consumer:
Home equity lines	278		60		—		—
Home equity loans	78		157		1		2
Other	191		118		2		2
Totals		$21,431		$32,372		$144		$295



(Dollars in thousands)	Average Recorded Investment				Interest Income Recognized
Six months ended June 30,	2015		2014		2015		2014
Commercial:
Mortgages		$14,748		$26,707		$155		$405
Construction & development	—		—		—		—
Commercial & industrial	3,057		2,429		60		38
Residential real estate:
Mortgages	3,354		4,100		40		50
Homeowner construction	—		—		—		—
Consumer: